Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Inc. Q2 2020 Results 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 ask questions. [Operator Instructions] I would now like to turn the conference over to Matt Preston, Vice President of Finance. Please go ahead.

Thanks. Good morning, everyone. Thanks for joining us to discuss Intrepid's second quarter 2020 results. With me on the call today is Intrepid's Co-Founder, Executive Chairman, President and CEO, Bob Jornayvaz, also available to answer questions during the Q&A session following our prepared remarks will be our Chief Operating Officer, Brian Stone and our Vice President of Sales and Marketing, Mark McDonald. Please be advised that our remarks today including answers to your questions include forward-looking statements as defined by U.S. securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. These statements are based on the information available to us today, and we assume no obligation to update them. These risks and uncertainties are described in our periodic reports filed with the Securities and Exchange Commission which are incorporated by reference. During today's call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. I'll now turn the call over to Bob.

Thank you, Matt. And good morning to everyone. The second quarter hopefully with a definition of unique in light of the considerable pressures presented by the pandemic in its economic impacts. We ended the quarter in a solid cash position, which enabled us to voluntarily and fully repay the Series C tranche of our senior notes in July. This set the effect of lowering our effective interest rate, while providing us with considerable more flexible, considerably more flexibility as we execute on our strategic plan and seek opportunities to capitalize on the generational opportunities currently available in the oil and gas space with available borrowing capacity of $44 million, in a $75 million accordion feature under our existing credit facility in $14 million in cash on hand after the July repayment. We believe we're in solid leveraged position, as we continue to prudently manage our existing assets while considering unique acquisition opportunities during these unprecedented times. Our ability to execute during these uncertain times is testament to the strategic moves we've made to diversify our revenue streams. Maximize our saleable assets, improve our leverage position, and infuse our business with cost and labor efficiencies, which enable us to be responsive to ever changing conditions. Having entered this challenging period, in a stronger position, and by continuing to improve our leverage position, we're better able to execute well as we navigate the roller coaster in the oil and gas markets, while providing essential services to the agricultural, animal feed in oil and gas markets themselves. Considering the COVID-19 pandemic, we delivered a solid first half in our nutrients business, while the earlier spring application shifted volumes to earlier in the year. For Potash, we continue to see strong volumes into our agricultural and animal feed segments, particularly early in the quarter.…

Thanks Bob. Second quarter sales are down 26% as an early spring season shifted fertilizer sales for the first quarter, and water and byproduct sales were impacted by pandemic related pressures. For Potash second quarter sales volumes were down 22% well pricing pressures from summer and winter fill programs and lower industrial sales resulted in a 14% decline in average net realized sales price. Potash segment gross margins were down 6.2 million in the quarter compared to the prior year. First half agricultural and feed volumes increased compared to the prior year due to good weather and strong demand in our feed markets. For Trio the record domestic sales volumes we delivered in the second quarter drove a 6% year-over-year increase in our second quarter net realized sales prices. Our focused on our higher price domestic market resulted in fewer international sales compared to the prior year. Decreased oil and gas activity due to the pandemic also reduce our byproduct sales, resulting in a 10% year-over-year decline in total sales for the segment. This as well as increased lower cost or net realizable value adjustments and lower recovery rates in our production process. Pressure segment margins in the second quarter. Byproduct sales across our nutrients segments continue to be pressured and were down 26% compared with a year ago second quarter, while increase market availability of salts and lower demand for byproduct water due to the pandemic continued impact sales in the second half of 2020, magnesium chloride production in sales return to historic rates towards the end of the second, assuming average evaporation rates at our Wendover facility, we expect magnesium chloride sales to remain at historic levels through the balance of the year. During the second quarter, our oilfield solutions segment saw 51% year-over-year decline in sales as…

We'll now begin the question-and-answer session. [Operator Instructions] The first question comes from Joe Jackson with BMO Capital Markets. Please go ahead.

I'm Bria Murphy on for Joe. Thanks for taking my questions. I know you spoke about the summer show program weighing on Potash and Trio pricing in Q3 but based on your just go -- fair to assume Potash pricing will be down around 10, 20 per ton quarter-to-quarter in Q3 and Trio pricing down 15, 20 per ton?

Yeah, I think you've got those numbers right here. I think we -- in our queue we'll certainly walk through this in more detail. It gets a little confusing as we talk list prices versus effective prices. But I'll turn it over to Mark to go into a little more detail on each of those summer filled programs. But effectively, our Trio price will be down $5 to $10 compared to our first quarter price levels in 2020. And then I'll, Mark, I'll turn it over to you for the potash side.

Sure. And I think the takeaway here, would be that, I think, as Bob and Matt mentioned in the prepared remarks is that there's been a reset on the pricing. So certainly some of the Q3 pricing will be evident in the field values that we're discussed, but after that ordered period expired, pricing has increased. And I think we've seen on some spot and the new business, some traction on those price levels. So certainly as the harvest in the market transitions into the third quarter, I think that we're looking towards the fourth quarter for potential uplift.

And then potash productions obviously lower in the second quarter. How should we think about the full year expected production and inventory levels as a company?

Yeah, so we're really right on track to start to fall season on time. We're getting ready to start at our HP and facility here this week and ramping up over the over the next 10 days and we'll start our own law facility on time in September as well as went over the middle of August. So you can see kind of normal production rates for two of our three facilities by mid August and then the other one started in September, which is really just our normal cycle given the evaporation season.

And then just quickly on water or oilfield services. Can you talk about your expected trajectories and sales for the rest of the year and '21? Do you think Q2 represents the floor for water revenue?

Well, we hope so if you look at several analysts, Bob, thank you for the question. We've seen activity in July grow month over month. And so the entire Permian has grown 30% in terms of frac activity month over month. We're also seeing just a solid uptick. So everywhere that we look in the Permian and the Delaware and I want to be very clear that we're just talking about the Permian Basin and the Delaware Basin. We're seeing July grow over June. And we're saying August demand that we're talking about go up over July. So I think just about every oil and gas analyst has picked up on the increased frac activity, and we're seeing it out in the field. So we see 2021 as being in a much more normalized situation. As we see, once again July grow over June, August grow over July, and we have every indication that September will go over August, based on the orders that we're taking today. I hope that answers your question.

The next question comes from Mark Connelly from Stephens.

Hey, good morning. This is John Rider on from Mark. Our first question is, how much room do you have in terms of potash capacity before you'll need to open up new underground panels or make other incremental investments?

Well, on the potash side, as you know, 100% of our potash production is solution mining. The only underground conventional mining we have is on the Trio side. So right now we're producing a thoroughly saturated potash brine. So we would have to add additional pawns if that’s what you are asking to increase our potash capacity, with plenty of land available for additional ponds. Was that question around potash?

Yeah, I'm sorry, we got that little mixed up there, but that's helpful color. And then on potash again, so we've heard pretty bullish comments on the potash volume outlook for the second half. And some of that fall application and some being international demand. Do you have a view on tall application needs relative to normal domestic demand?

Well, as you know, going into last spring, we had three consecutive, very poor application seasons. So the soils are still deficient in terms of minerals. So I think there's every reason to anticipate very bullish demand. And the good news in terms of inventories along the river is that we're not seeing a lot of imports that have come in. So the inventories along the river are pretty low. So unless we see pretty quick deliveries into the river system, then its just going to be primarily the Canadians, providing the majority of the potash in the United States. So I think we have a unique opportunity to see very, very strong volume as well as firm pricing. Hope that answers your question.

Yeah, that's really helpful. Thank you very much.

The next question comes from John Roberts from UBS. Please go ahead.

Thank you. Did your oilfield solutions business declined in line with the overall fracing activity in the basins or does market share shift when we get a sharp correction like this?

I would say it's definitely proportionate. If anything, we've picked up a few things given our local presence, which you going to remember that starting around the middle of March, through the third week in June, things basically came to a dead stop. And then the third week in June, things picked up a touch, and then we saw good, July, -- July was up, I want to say it was about 8% over June, and then additional 13% to 14% of what we're seeing in August, terms of the order book, so we're certainly not going to lose any market share, if anything given our ability to do full water management. I think our opportunity to pick up market share is pretty good. So I feel very comfortable with that. Once again, I hope, I'm answering your question.

Sure, yeah and perhaps what's happened to the price of acquiring new water rights, or does the market become illiquid or freeze up in a correction like this? So there's really no market price for new water, right?

Yeah. I think it's what you're seeing in the entire oil field is that the spread between the bid and the ask whether you're looking at actual producing assets for a willing seller and a willing buyer, there's a pretty big bid ask, whereas those have gone into bankruptcy. There's some very, very unique opportunities. And as you know, we've seen record bankruptcies. So those that can afford to hold on to their assets are holding on to them. So it's a very unique market that we're seeing, given that you've got record bankruptcies across all sectors. So the oil and gas industry you've got some that are getting ready to to get into loan based redetermination that are, we think we're going to see it another way of problems. But all of those assets are being managed. And then the well financed ones that are remaining are, as I said, are continuing to frac. We're working on a 2 million barrel frac as we speak on this call. So it really is across the board. And we think it's, this roller coaster provides a very unique opportunity.

Then on the reverse stocks split, we've got a range of one 1 for 3 up to 1 for 15. Why you going to automatically like 1 for 15? That's still not a really high stock price. So why do you have a range that goes down to something sold always 1 for 3?

Well we followed the way that hundreds of companies have done it over the past several decades in terms of how the SEC attorneys prepare the paperwork, and so I hate to sound to ignorant. But we used to highly rated SEC firms that prepared all the paperwork in the document. That was their recommendation we followed. So I think at the end of the day, we'll meet on the 10th. And we'll pick the appropriate split number in terms of the target range and make it effective as quickly after that is practical. So I like to say that we had great counsel that said this the way you're doing.

[Operator Instructions] The next question comes from Jason Ursaner from Bumbershoot Holding.

Just on the MOP potash business, could you walk through the sale programs and obviously you can't speak for the industry? Or can you maybe just explain in your view what is going on there because it kind of seems like, distributor inventory should be getting worked down, but then we're kind of continually offering them a discount to replenish that. And it almost seems like a double negative in terms of them having less risk to not hold inventory, and then giving them lower pricing?

Jason I think you are right on, we certainly, we did not initiate fill program. And so unfortunately, we had to participate in it. I think it was, given the demand out there and the need for the mineral deficiency. I don't have a rational explanation for why the fill program occurred this summer. I'll let Mark weigh in, but I didn't think it was necessary. So I'll let Mark weigh in.

And I think maybe the takeaway Jason is that we looked at this program, I think, as Bob indicated. We were a little perplexed in terms of the timing of it, as well as the mechanics, and so we made a conscious choice to look prudently at our sales and our distribution channel business and really try to focus in on what we felt were businesses that we wanted to participate with some of our loyal and core customers, but certainly didn't want to extend beyond that and really focus in on some of our better netbacks sales opportunities.

And just second question for me, can you walk through the decision to pay back the Series C Notes. Obviously, this was the longest stage of maturity you guys had and it wasn't particularly at a very high interest rate. Obviously, just given the situation with COVID and everything else where you're managing the liquidity position pretty closely. It doesn't make a whole ton of sense relative to the idea of holding cash or relative to these opportunities that could come up in other parts of your business. So you did mention more flexibility with lenders. Could you maybe detail specifically what that is?

Yeah, if you remember that was a $15 million tranche that had a senior, there was a senior node that had a collateral claim on every asset, including newly acquired assets. And if we blinked, they wanted a waiver fee. And so if you look at our ability to use cash on hand and have the access to the Moab facility, we got a tremendous amount of flexibility in terms of what now needs to be collateralized, what is sort of senior nature. If you look at the difference in who makes up the Series B versus the Series C. And there's just a tremendous amount more rationale reasonableness flexibility in who those specific note holders were. And so I just can't stress that it was the right thing to do as we continue to look at different ways to expand our opportunities to access low cost credit. And having someone that was had a first position on everything, as well as everything to be acquired was difficult to manage around.

Okay. And in terms of, I guess, opportunities and acquisitions, you spoke a lot in the release about the long term potential for the Delaware Basin. Could you possibly talk about that strategy in more detail specifically from a capital structure perspective with leverage and priorities for cash flow?

Well, the good news is the majority of them are organic. And so as you've seen in our water presentation, we've explained many times we've got a great infrastructure that covers the entire southeastern portion of New Mexico. So our ability to not deliver source water, participate in the recycling and reblending that is going to occur more and more as we as we go through quarter by quarter, as well as on the disposal side which we'll talk about an upcoming quarters. It just gives us a very unique opportunity to build that out. We're just in a special position geographically. And with our headcount, take advantage of all of those. There's also byproducts and waste products that needs to be disposed off or in many cases, changed in from a waste product or a byproduct to an actual product, kind of leave it at that. There just are a tremendous amount of opportunities as people fall off the radar and leave things behind. And so I'm not going to go into any more specifics other than if you really take a look at Southeast New Mexico, look at the existing rig count, look at the existing fracs that are occurring, the economics of the basin. The people that have to leave the basin because of debt structures in other parts of the United States. There have been a lot of opportunities left behind.

Okay. Would you be at a competitive disadvantage if you don't pursue these things? For Dinwiddie keeping the financial aspects I guess aside for a second, if you like that did truly expand the capability of what the business you're building, there could be with the four corners strategy and that you would have been competitively disadvantaged in terms of selling water over time, if you didn't secure that position. This sounds more opportunistic and I don't get the sense that it's something that's out of necessity, but rather opportunity. So I guess the question is what point you made, I guess I understand that you could make more money over time if you pursue them, but at what point do you kind of let someone else have that margin versus focusing on compounding the existing capital base to get them more of a fair value?

Well, I guess if you're in full cycle, water management so I think you manage the source water, the recycling and blending that is going, it is occurring as we speak. So if you are able to take a barrel of water and capture margin off that same barrel of malt of water multiple times and it's handling, I'm not understanding your question, why you wouldn't gather every piece of margin off that same barrel of water, rather than let somebody else pick it up?

Like, I guess I'm advocating, because I get to do that relative to, your stock is trading at point three times tangible book. So, relative to doing nothing, if I pegged those normalized cash earnings are something of $30 million a year and I'm not asking for guidance on that number, that's my number. Well, it's not my number. That's half my numbers. I'm not trying to be overly optimistic, but, you'd be debt free in one to two years and you would earn back your entire market cap in four to five years. So the uncertainty I think of what you're doing is clearly weighing on how people are valuing the company. So that's what I'm trying to understand, getting to a fair value versus pursuing these margin opportunities.

I guess I really don't understand your question. If you really understand where full cycle water management is going in the Delaware Basin. And so you really can't be left out when you can control the entire system. So, I think you and I are speaking past each other in terms of the amount of capital that's required to enter into all phases. So once again, I just think we're speaking past each other. I don't think you really understand the opportunity, or the way water is managed since Delaware Basin.

How large capital requirements to get into that whole system, you think it will take?

You know, it's not a lot. I'm not going to really go into details on the backside. I appreciate the question, and I understand it. And so they're not major capital investments. They're bite sized organic capital investments that add margin to the bottom line. And so the key is to grow a diversified revenue stream that generates as much margin as we possibly can.

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 just want to thank everyone for their participation and thank you for your interest Intrepid and have great day and stay healthy.

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