Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Q2 2021 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 to ask questions. [Operator Instructions]. I would now like to turn the conference over to Matt Preston, Vice President of Finance. Please go ahead.

Thanks, Sherin, and good morning, everyone. Thanks for joining us to discuss Intrepid's second quarter 2021 results. With me on the call today is Intrepid's Co-Founder, Executive Chairman and CEO, Bob Jornayvaz. Also available to answer questions during the Q&A session, following our prepared remarks, will be our President, Brian Stone and our Vice President of Sales and Marketing, Zachry Adams. 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 the 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 here 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, everyone. Our second quarter was highlighted by another strong performance in our Fertilizer segments as strong demand and increasing prices resulted in strong bottom line results. We recorded second quarter adjusted net income of $7.4 million and adjusted EBITDA of $16.9 million, significant improvements above the prior-year and the first quarter of 2021. As expected, cash flow from operations was impressive. With $32.3 million in cash flow in our second quarter alone, and $51.4 million for the first six months of 2021, already exceeding our cash flow from operations for the full-year 2020. In addition to strong results, we received notice of full forgiveness on our Paycheck Protection Program loan from the SBA and paid down the remaining $15 million on our senior notes. Our balance sheet is clean and strong and will allow us to execute on the significant opportunities in front of us in the oilfield market. Second quarter results also benefited from $6 million received for the sale of another small 320 acre tract of land, located adjacent to our 60,000 acre Intrepid South Ranch and the associated salt water disposal permits with it, generating satisfactory gain considering we purchased the assets about two years ago for $3 million. We ended the quarter with $55 million in cash on hand and approximately $30 million outstanding on our revolving credit facility and expect to pay that down in the third quarter. Earnings for our nutrient business improved dramatically in the quarter, as we continue to layer in sales at increasing price levels. Potash pricing has continued to improve in both the U.S. and global markets since our third quarter price announcement and we're currently layering in spot agricultural sales at $250 per ton above the 2020 summer fuel price levels. We expect…

Thank you, Bob. As Bob noted earlier, strong fertilizer demand and rising prices kept the momentum going in the second quarter driving significant improvements in our consolidated results in across all segments. The Potash segment generated $10.1 million of gross margin in the second quarter as higher net realized sales price and increased volumes drove significant increases compared to the prior year. Second quarter production saw the benefit of an above average 2020 evaporation season as increased pond production allowed us to extend the harvest season compared to the prior year and enabled us to sell additional tons. The last few months saw steady increases in potash pricing as strong commodity prices across all industries and good weather led to above average demands as farmers were eager to make up for below average application seasons in the past two years. We announced a $20 increase to potash price in May and booked historic volumes for third quarter delivery as distributors' restocked warehouses after a busy spring. Since the May announcement, potash pricing has moved up considerably in the barge and inland warehouse markets as buyers compete over limited supply for third quarter delivery. We expect third quarter average net realized sales price will be between $355 and $365 per ton with additional upside into the fourth quarter 2021. Our Trio segment recorded a great quarter generating $3.2 million in gross margin on higher volumes and price compared to the second quarter of 2020. First half Trio sales volume exceeded the prior year by 5,000 tons as strong customer relationships and robust demand led to record domestic deliveries, which more than offset reduced international volumes. We increased Trio price $20 per ton in May and another $35 per ton in June as the potash market continued to move higher. We began…

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

Hi, this is Bria Murphy on for Joel. Thanks for taking my questions. We're obviously seeing a surge in potash benchmarks recently including now around $600 per ton in the Midwest. But it seems a lot of global producers aren't transacting at these levels. How liquids do you think these benchmark prices are? And are you booking business with these levels in the fourth quarter?

That's a great question. I'll let Zach answer that. We've been very methodical in which -- in the timing of the orders that we take. We're seeing in our region, very strong demand, but I'll let Zach give some color to that.

Yes, thanks for the question. I think as far as the first part around the liquidity of the current levels, most buyers in the market in the Midwest half the times in place or on order already for what they're going to need to get started this fall. So we don't see a lot of liquidity at those levels today. We certainly have transacted on some spot tons from our demand side to that point. Looking ahead to Q4, we've not booked any tons for Q4 yet on the potash side. We're going to hold off from booking tons there and the market remains tight and we feel comfortable with what we have for Q3 and we'll address Q4 later.

Okay. Thank you. And then in Oilfield Solutions revenue was obviously down year-over-year in the first half, but you've pointed to the potential for steady growth in the second half. It's -- I believe in anticipation of higher margin sales in the second half. What level of growth do you expect to see?

Yes. It's a good question. Certainly Q2 was down considerably from Q1 of 2020 as we really just held backwater and opportunistically scheduled that for the back half of the year. We expect to sell out of our acre feet of water on the South Ranch. Sorry, I can't give you a margin number, but yes, we will see significant growth in revenue towards the second half of the year. We're really hopefully in line kind of with where we had been pre-COVID.

Okay. Thanks. That's helpful. And then just the last one back on, I guess, potash and Trio, obviously pricing is expected to rise in the third quarter. How do you expect margins to trend your cost also rise or do you expect margins to expand?

Yes. So we're in kind of middle back half of the evaporation season right now. Our cost structure should say pretty similar those tons are in inventory right now that we'll be selling and we're going to start up our production here at HB this week and our Utah facilities late August, early September. So the cost side is going to stay pretty consistent, obviously with some adjustments just based on where we're selling out of. And when we see higher pricing, and we see a lot of that fall to the bottom line, roughly 5%, 5.5% royalties. So with the $10 increase, we see 95% of that fall to the bottom line in most cases. And so we expect that in Q3.

The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Hi guys, this is Will Tang on for Vincent. Thanks for taking my question. I'm wondering if you guys can comment on your potash inventories and how you're thinking about sales versus production as we go through the year and exit all season?

I'll let Matt address the inventory issue, but as you know, we're a relatively small producer, regional producer. So we've always had the ability to sellout our inventory. I'll let Matt address the current levels and how we've tried to manage our book, seeing the strength of the agricultural commodity markets. There is no reason to believe that we're not going to see continued strength in the fertilizer markets. So we've been trying to manage our sales book in anticipation of the really strong agricultural economy. So Matt, I'll let you talk to this specific inventory levels.

Yes, sure. We're certainly coming off a very strong 2020 evaporation season. We had above average tons in inventory, combine with those down application years that we've been able to sell over the past 12 months as demand is just really kept going since really October of 2020. Certainly, I'd say we're in the kind of the middle half to back half of evaporation in 2021. And so we don't have any updates as far as production and inventory for next year, but you certainly -- we continued to be pretty smart about holding back tons, supplying historic volumes to our high netback customers and holding back tons for a fall season and hopefully early 2021 or 2022, excuse me, which we expect we'll continue to see some price appreciation from where we are today.

Got it. And then one more question, if I may, I'm wondering if there's any concern with given how high potash prices are now that farmers might turn to mine the soil and move the applications this fall and next spring. I guess, in other words, do you guys foresee any like demand disruption happening related to the worst thing affordability?

We all live through the price increases above $708 in 2009, and once the demand destruction that occurred when potash prices got up in the $800, $900 range. I don't think we're remotely near pricing where we're going to see demand destruction. I think when you look at farmer economics; they're doing extremely well right now globally. We tend to look at all commodities that use significant amounts of potash and we're seeing strength across the board. So if you look at coffee prices hitting the prices, they have sugar, cotton, all too often people focus on corn and we like to remind people to look at everything else, because it provides such a solid foundation for where we are. So given the strength across the entire spectrum, we believe that we're finally at what is reasonable market pricing. I think we look at farmers economics, we've got plenty of room and we should not see any demand destruction at these levels. Zach, I'll let you add some color.

Yes. I think Bob covered it well. I mean, I think as long as we're at these levels of economics for growers, even at these heightened input levels for potash specifically still makes financial sense from a rate of return perspective for potash on the ground and bushels and I think we're seeing that, just the increase we saw for this fall around the fall demand from growers and just things we're picking up from business with our customers as well. We're not seeing a downtick in demand yet from growers.

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

Thanks and congratulations to Brian on promotion. You also added a energy board member during the quarter as well. Does Brian's background and the addition of energy knowhow to the board signal any kind of step change plans here in advancing the water and oilfield strategy?

Absolutely. This is Bob. And John, thank you for the question. And I'll let Brian take his victory lap here in a minute. We're really proud of the addition of Lori Lancaster and really want to stress her financial expertise in the oil and gas energy space. So it's not just the energy experience, but the financial experience. We've clearly been describing and trying to articulate our pivot into full-cycle water remit management, our increased emphasis on recycling the units that we picked up, the units that were processed and putting to work, we're working on some interesting projects on the disposal side. And so we just continued that that pivot that we've been describing over the past several quarters and lining up the expertise to execute on that. Brian, if you want to add anything to that?

No. I think you said that very well, Bob. I just think this pivot to full-cycle water management, we think that there's a willing market there from an ESG standpoint, we think it's politically and from a regulatory standpoint, what the market's asking for and we think is highly synergistic with our business in Carlsbad with a workforce of 300 plus employees. And so we think we're really well-positioned in that market.

And then on the land sale in Texas, does that mean that all water growth is going to be recycled water or would you be expecting to just grow the disposal wells elsewhere and you'll grow both disposed water as well as recycled water?

We clearly grow it, probably not through SWDs. We'll talk about that in the upcoming quarters. But we clearly have plans to grow our ability to handle disposal opportunities.

And also why the land sale in Texas has been?

Well, it was adjacent. I guess we just have better opportunities when we look at the disposal market. So it was 320 acres adjacent to our 60,000 acres that we have bigger plans for. And so if -- if you look at Southeast New Mexico, like a giant jigsaw puzzle, there are people that are trading pieces so that their jigsaw puzzle makes more sense to them that they have more continuous pieces of their specific puzzle. And so if you look at all the different operators, all the different pieces of infrastructure, trading one piece of infrastructure, one piece of land, for something else is just a useful allocation of capital. I wouldn't read anything into it other than it was literally trading jigsaw pieces.

Okay. Thanks.

Yes. Bob, I think I'd also add that full-cycle water management requires large scale on demand disposal, and we just felt this asset didn't meet those requirements. And we were able to sell it into 2x.

Thank you, John.

[Operator Instructions]. The next question comes from Matt Farwell with ROTH Capital Partners. Please go ahead.

Hi, thanks for taking my question. If you could just step back and on the oil services business and give us a picture of what the infrastructure and the business might look like in 2022 versus 2021 in the sense of, we've been talking about full-cycle water management to source water delivery, recycling, blending, disposal. What might it look like? How is the business going to evolve over the next 12 months?

That's a great question. Throughout the entire Southeast New Mexico portion, we now have the ability to deliver source water. Whether it's fresh water or brine or brackish water to operate or shut entirety of Southeast New Mexico. We've got three full recycle units ready to go up and running and are currently under negotiation with a significant customer that that we hope to announce literally any day. On the disposable side, we've got a very creative project that we've been working on with the state of New Mexico that we'll be talking about in the upcoming quarters. That'll put us smack in the middle of the disposal business, given our location and the location of our facilities within the footprint of some of the biggest units Poker Lake unit and the Big Eddy unit in Southeast New Mexico. So our goal hopefully by if not the fourth quarter, but the first quarter is to be able to deliver in the hundreds of thousands of barrels. I mean, right now we've got the capacity on the freshwater side or source water side to be delivering 300,000 to 400,000 barrels a day and recycling at those same levels and hopefully disposing at those same levels going into 2022. Did that answer your question?

Yes, it did. Yes, that's very helpful. Thank you. In terms of the -- how you're funding this a lot of the funding is I imagine the expense, but is -- is -- some of this funding going to flow through CapEx on the cash flow statement? And if so, what majority [ph] of them will look like in 2022.

The great news is a lot of the capital has been spent. So if you look at our pipeline infrastructure, if you look at the recycled units, a big chunk of the capital has been spent. And so we're talking about bite sized pieces that are easily paid for with cash flow or small drawdowns on a revolver. So we've -- as I try to describe earlier, it's like a giant jigsaw puzzle that's slowly coming together. So everything that we're looking at is very much in bite sized capital pieces. It should be able to happen out of either cash flow or small drawdowns on the revolver.

Okay, great. And is there any update on the litigation front as well as the -- there was a commentary in the 10-Q about a customer deposit on alleged default on a sales contract. I don't know if that's just a rent on to your disclosure, but any take you can provide on either one would be useful.

We're just -- we're eagerly awaiting the results from Judge Wechsler in the adjudication trial. We can only assume he's taking his time to write a thoughtful opinion. I wish we had an update for you. We're eagerly awaiting that as well. We've got several significant water permits that are in the process of being adjudicated. And we would love to be able to announce any days that they're complete. The good news is that all the large expenses around procuring those permits, fighting the protests, adjudicating the water rights, all those large legal expenses are behind us. And we're now just awaiting outcomes.

That's great and nice comment. And then the litigation -- the alleged default of the south contract is that also assumed in your commentary.

Yes. I got -- the words say what they say and I'll just leave it at that.

The next question comes from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

Kind of following -- Yes. Kind of following up on the last question, you have been asking about it for a long time. So I guess no reason to get shy at this point, but the answer on capital structure and capital allocation plans for a while has been that it's kind of just too premature to talk about meaning to execute first and then can focus on it. But just given that you brought it back to a strong net cash position now, and looking out to next year with continued strength in potash and even any improvement in the oilfield that cash position might grow pretty substantially to where you might come into the end of 2022. And you could be looking at a pretty significant percentage of your market cap in cash. So yes, it's not a problem. It would be a champagne problem to have, but at what point, is it going to be appropriate or maybe even unavoidable to start getting more details on the financial part of the strategy there. And are you willing to kind of do that at all today in terms of the balance sheet or maybe where buybacks sit as part of the strategy?

Jason, it's a great question. I would say if anything, that we are more inclined to some sort of a special dividend, if you will, we're looking at it, we're very aware of it. We would love nothing more than to return capital to shareholders as largest shareholder. I'm very much aligned with you. We're glad to be where we are. And so we're now having those discussions very earnestly. We feel like a buyback program would be much more tax efficient. And so we're working as hard as we can and eagerly so that the next time you ask that question, I can answer you with timing size and shape.

Okay, awesome. And just last one please, the land sale, just a quick follow-up on that. I'm assuming if you sold the 50% interest in the 652 acre, what -- did it actually get carved out on 326 or it's just the loving Texas that you bought?

The piece of that the 640 was partitioned into two 320 that we owned a 100% and the other company owned a 100%. And so what, as I said, it was a nice return and we virtually doubled our money in 2018. It was literally just a 320 track land right next to our 60,000 acre track land that made more sense to a trade puzzle pieces, if you will.

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

We just want to thank you for your interest in Intrepid and your continued willingness to be a shareholder. We strive to perform and do our best. And once again, thank you for your interest and hope everybody has a great day. Thank you.

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