Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Third Quarter 2022 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.

Thank you, Lisa. Good morning, everyone. Thank you for joining us to discuss and review Intrepid's third quarter 2022 results. With me today is Intrepid's Co-Founder, Executive Chairman and CEO, Bob Jornayvaz; President, Brian Stone; and CFO, Matt Preston. Also with me today and available to answer questions during the Q&A session is 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 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 will now turn the call over to Bob.

Thank you, Evan. Intrepid continues to show strong execution in what has been an exceptional year for the company. In the third quarter, we delivered adjusted EBITDA of approximately $27 million and adjusted net income of approximately $13 million. This brings adjusted EBITDA for the first 9 months of the year to approximately $119 million and adjusted net income to $69 million. And when comparing both figures to total sales of $271 million for the first 9 months of the year results in respective margins of 44% and 25%, both of which are among the highest in Intrepid's history. The strong financial performance has primarily been driven by high fertilizer prices with our average net realized sales price for potash and Trio coming in at $734 per ton and $488 per ton, respectively, in the third quarter as well as $718 per ton and $482 per ton, respectively, for the first 9 months of the year. For those tracking potash, it's no surprise that we've seen a moderate pullback in pricing in the past few months with key drivers being the preference for just-in-time purchasing in the agricultural markets and seasonally higher global inventories, which in turn drove lower third quarter market transactions. While Intrepid wasn't completely sheltered from what turned out to be a slower-than-expected market in the third quarter, the strength of having diversified sales outlets into the feed and industrial markets was on full display. In the third quarter, feed and industrial sales comprised almost 40% of our total sales, helping offset delayed sales into agricultural markets. Moreover, our contracts for feed and industrial typically are longer term, which helps add stability to our company-wide average net realized sales price while the strategic geographic location of our operations also helped drive higher netbacks to Intrepid. Moving on…

Thanks, Bob. As Bob noted, high net realized sales prices for potash and Trio helped drive another strong quarter of financial performance for Intrepid despite sales volumes being slower to ramp up than we initially expected. In our potash segment, sales volumes in the third quarter totaled 46,000 tons, down from 62,000 tons in the prior year as distributors ended the 2022 spring season with more inventory than expected and buyers continue to focus on just-in-time purchases for potash. Total potash cost of goods sold per ton increased compared to the prior period as a slow start to fall sales led to more tons being sold from our HB facility, which carry a higher relative cost of sales. As we move into Q4, we expect overall cost of goods sold per ton to improve although we continue to be hampered by persistent inflation and related labor cost increases across our sites. Third quarter potash production was similar to the prior year as we begin our solar operations midway through the quarter. Year-to-date production is down compared to the same period in 2021 due to the below average evaporation rates we experienced across our facilities last year, which shortened our spring 2022 production season. We've seen slightly better evaporation in 2022 but have experienced decreased brine grades and extraction well availability at our HB facility during the last few months in addition to lower overall brine availability at our Wendover mine. Overall, we expect an improved production season from now through the spring of 2023 but we will not be back at the rates we saw in the 2020, 2021 production year. The good news is we are actively addressing these issues through the capital projects that Bob mentioned and the outlook for our potash facilities remains bright. Looking at the…

[Operator Instructions] The first question comes from the line of Joel Jackson with BMO Capital Markets.

This is Joseph Vaccaro on for Joel Jackson. We just wanted to ask on the Wall Street Journal article published earlier this week discussing how oil and gas drilling activity going on in New Mexico and your production sites are infringing on your mines. So how is this going to be impacting any of your production or expansion plans in the area going forward? And what would be your plans to mitigate those risks?

Well, we're working closely with the BLM. The Secretarial Order of 2012 gives the potash industry what I would call primacy. And so it's up to the BLM to engage and enforce the regulatory road map that clearly exists so that oil and gas companies do not infringe on our reserves. So we are very stringently fighting for that position to not only ensure the safety of our miners but to make sure that there is no destruction of our reserves.

The next question comes from the line of Vincent Andrews with Morgan Stanley.

This is Will Tang on for Vincent. So I mean it looks like your potash cost increased quite significantly on a sequential basis. I know you called out natural gas and more tons being sold at higher cost with the HB mines as being some of the reasons. But I'm wondering how much -- if you can help us understand how much of that contributed to the higher cost versus maybe under absorption of your fixed cost due to the lower volumes or, I guess, holdover of inventory from the weak evaporation rate in 2021? And then as well, kind of the magnitude of cost decreases you're expecting as we get into the fourth quarter here. Should we be thinking more like 1Q or Q2 levels or still kind of elevated similar to the third quarter?

Yes. A fair question and I appreciate it. So certainly, as I mentioned on the call, we've had some decreased overall brine grades and brine availability. You kind of look back at the -- I mentioned the 2020, 2021 production year. That was roughly 330,000 tons. The '21, '22 is about 250,000 tons. This is really taking a Q3 to Q2 look. This is when we're harvesting those tons. So we'll be slightly above that we expect going forward for the 2022, 2023 year but I said not back to that 330,000 level. And so it kind of gives you a sense of magnitude of kind of how far we fell off in the past year due to the bad evaporation. As far as overall COGS, I mean I want to remind you, we're still carrying obviously with higher prices, higher overall royalty expense in there, roughly 5% of our sales. As far as HB goes, we sold roughly 60% of our tons out of HB in Q3, which is above the normal, which is about usually 40% of our tons come out of our HB facility. So while certainly a small contributor, I'd say overall inflation and just overall production rates are the main drivers going forward.

Just to add to that. I really want to emphasize the intense focus on generating more brine at our solar evaporation facilities. So a significant investment, approximately a $30 million investment in our HB pipeline system that will be up and operational in the first quarter. At Moab, the beginning of an intense cavern drilling program as well as a program to drain low spots or what we call sumps in the original Moab potash mine as well as at Wendover. We've already drilled deep brine wells and are on track to drill more wells to increase our brine availability. So there's an intense focus on increasing high-grade brine supply, which in turn leads to additional product tons that lower your costs on a fixed cost basis. I just can't stress that focus enough that we started late in 2020 -- I'm sorry, late in 2021 with the acquisition of all the appropriate long lead time items and equipment so that we could make these various projects execute on time.

Got you. Okay. And then I believe earlier on the call, you commented that you kind of expected the fall application activity to remain pretty strong. But you guided for, I think, 45,000 to 55,000 tons of potash in the fourth quarter, which is pretty significantly below kind of your historical levels. I'm wondering how to reconcile those 2 statements. Is the lower volume kind of a function of the lower reduction rates that you've had, the recent production season that you just mentioned? Or is it something else there?

I think it's a combination of both. It's hard to tell folks to look at potash on an annualized basis. But when we look out in terms of the robust economics that exists for global farmers, they're extremely robust. And we urge people to go back and look at the difference between the potash price run-up we saw in 2008, in 2009, and the futures market outlook in those years compared to what we're facing today in terms of positive fundamentals. So it's hard to say look at us on an annualized basis but we definitely see farmers delaying their purchasing while being steadfast in the fact that they're going to farm for maximum yield. Well, by definition, if you're farming for maximum yield, you're utilizing as much balanced fertilization rates as you can. So I apologize for the mixed message or the message that says wait and see. But the fundamentals that occur in the marketplace and the volatility of supply, I think, is going to create the underlying fundamentals that create this positive outlook.

[Operator Instructions] Your next question comes from the line of Josh Spector with UBS.

I guess just a follow-up on potash. I mean your comments are similar to other peers that have reported already. But curious if you comment on what's the risk in your view of a wait-and-see attitude persisting into early next year, say, into the first quarter or into spring. Is there inventory to allow that? Or do you see this as inevitable when things turn?

When I look at -- first of all, I think you've got to look at farmer economics and farmer economics remain extremely robust. That takes you to what will farmers do. They will farm to the highest potential yield because their economics are historically strong. When we look at potash inventories, they're being drawn down as we speak. And given what the 2023 season looks like, I think we're going to see extremely robust demand despite the fact that farmers have a wait-and-see attitude. I don't want to say it's -- we're staring each other down but that's, I guess, a simple analogy that I would use.

Okay. That makes sense. And I just wanted to clarify your comment on the industrial and feed portion of your mix. I think typically, I think about those as being lower priced but more stable, longer duration. I think you mentioned that they were higher priced. Is that normal? Or is that something that's shifted given the price run-ups over the last year?

I'll let Zack answer that.

Yes. Thanks for the question. Typically, we see a premium on the price point for our industrial and feed sales. So that's not unusual. And as we noted, with those being 40% of our sales and in the quarter, they positively impacted our overall price for the quarter on potash.

Okay. If I could just ask one more just on the oilfield? I mean a surprise in the gross margin compression given the sales were pretty strong. I guess how should we be thinking about the performance of margins in that segment over the next, I don't know, quarter or year? Like do some of the pressures dissipate? Is it pricing? Is it unique? If you can expand there, that would be helpful.

Yes. I think we saw pretty steady margins in our oilfield segment going forward. As we mentioned in our Q that we'll file here shortly and in some of our remarks in our press release, we did experience some increased third-party water purchases. It increased overall COGS and sales in our third quarter compared to the prior year. But overall, I mean demand activity remains very strong. What we're generating from surface use agreements, brine sales, caliche sales, kind of other oilfield products and services remains pretty robust and a pretty strong cash flow generator from us even if the COGS that you're seeing in some of the margin can hamper some of the depreciation and just general amortization we have in our segment.

Okay. And just to clarify, I guess. When you say margin, I mean, obviously, your first half gross margin was closer to 40%. This quarter, it was close to 5%. Is 40% the right run rate? Is it much less than that? What would you think about?

Yes. I mean it really varies with that third-party water purchases. A lot of that ends up being slight pretty low margins with pass-through. So that sort of adjusts, depending on how much we sell of our own water versus third party. Those can really shift around. But I look towards either higher margins at lower overall sales levels or kind of that more compressed period if we're going to have higher third-party water purchases, if that makes sense, Josh.

Yes. And Josh, just to clarify, when we say third-party water, we're able to use our infrastructure to run back-to-back sales that have a positive margin. So in other words, we buy water that's got a balanced book. And the margin on that water is less than the water that we actually own. So it's the ability to maximize the usage of our existing infrastructure that you're seeing the compression in those margins but more in terms of revenue.

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

I want to thank you -- thank everybody for their time today and their interest in Intrepid. We really appreciate it. We look forward to talking to anyone with additional questions and follow-ups. Have a great day.

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