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Edited Transcript of IPI earnings conference call or presentation 3-Mar-20 3:00pm GMT

Q4 2019 Intrepid Potash Inc Earnings Call

DENVER Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Intrepid Potash Inc earnings conference call or presentation Tuesday, March 3, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Brian Stone

Intrepid Potash, Inc. - COO

* John Richardson

Intrepid Potash, Inc. - Director of IR

* Mark A. McDonald

Intrepid Potash, Inc. - VP of Sales & Marketing

* Matthew D. Preston

Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer

* Robert P. Jornayvaz

Intrepid Potash, Inc. - Executive Chairman, President & CEO

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Conference Call Participants

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* DeForest R. Hinman

Walthausen & Co., LLC - Research Analyst

* Jason M. Ursaner

Bumbershoot Holdings Corp. - Research Analyst

* Jeremy Noah Rosenberg

Morgan Stanley, Research Division - Research Associate

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Robin Fiedler

BMO Capital Markets Equity Research - Senior Associate

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Fourth Quarter and Year-End 2019 Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to John Richardson, Investor Relations. Please go ahead.

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John Richardson, Intrepid Potash, Inc. - Director of IR [2]

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Thanks, Ariel. Good morning, everyone. This is John Richardson, Intrepid's Director of Investor Relations. Thanks for joining us to discuss Intrepid's fourth quarter results for the period ended December 31, 2019. With me today is Intrepid's Co-Founder, Executive Chairman, President and CEO, Bob Jornayvaz; and Intrepid's Vice President of Finance, Matt Preston. 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 the 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 see no obligation to update them. Those 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 last night's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Following the prepared remarks, we'll open the call to your questions. Now I'll turn the call over to Bob.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [3]

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Thank you, John. Good morning, everyone, and thank you for joining us. I first want to take this opportunity to thank Lanny Martin from the entire Intrepid family for his 15 years of partnership and service on our Board. We wish him well in his retirement and hope to visit him on the sunny golf courses of Arizona. We truly thank you.

We executed well again last quarter with a year-over-year increase in water sales from our oilfield solutions segment and improving cash cost for Intrepid South and Pecos water. The fourth quarter results demonstrate a more stable cash flow profile than would have been possible prior to development of our oilfield solutions segment. Our ability to quickly pivot and create additional value from a relatively small capital investment is a key differentiator, and I'm proud of the agility our team has demonstrated. The oilfield solutions business continues to grow as we had anticipated with fourth quarter water revenue increasing 58% from the same period last year.

Total revenue for the segment increased 86% from the fourth quarter of 2018. Thanks to contributions from other products and services offered within the segment.

For our E&P customers, completion activity consumes more than 60% of capital invested in an oil and gas well. In an effort to remain within their guided 2019 capital budgets, we saw fourth quarter completion activity and the associated water consumption slow across all shale basins in the United States. If you follow the large pressure pumping service providers in the U.S. and listen to their fourth quarter calls, you would have heard them talk about this reduction in completion activity at the end of the year.

However, since the end of the year, we have seen net completion activity begin to bounce back in the Northern Delaware Basin as capital budgets have been reset. We expect to have the majority of our infrastructure upgrade projects on Intrepid South finished by midyear, which will enable us to more efficiently serve our customers and should lead to improving gross margins throughout the year for oilfield solutions. We have already seen up to a 20% decrease in the cost of moving water for our lowest-margin jobs on the South Ranch and have recently commissioned another 10-pound brine station on the property, which we expect to be well received, given the popularity of our 10-pound brine station at Intrepid's HB facility.

Looking ahead to 2020, we have a full order book for water at our South Ranch and are optimizing that book by actively moving lower margin sales to our Caprock water rights, where we have excess water and have the ability to service through our partnership with Select Energy. We continue to expect full year water sales between $32 million and $45 million, and we are pleased with the anticipated contributions from our recently acquired Dinwiddie Ranch assets now referred to as Intrepid South.

The growth in oilfield solutions in the fourth quarter partially offset a slowdown in domestic potash sales and lower netbacks for Trio compared to the prior year. For our potash segment, we experienced softer sales and lower gross margin in the quarter, which is driven by poor weather for fall applications and customers choosing to delay potash purchases in anticipation of a winter fill program. Potash sales volumes decreased by 12% year-over-year in 2019, while volumes in the fourth quarter of 2019 decreased by 39% versus the fourth quarter of 2018. The fourth quarter comparison is difficult in that an October 2018 fill program lifted demand in that quarter, and there was no corresponding fill program announced in the fourth quarter of 2019.

Potash netbacks in the fourth quarter improved both year-over-year and sequentially because of our focus on marketing segment diversity, allowing us to increase our mix of sales in the higher-priced feed and industrial markets to replace lower demand in the ag market.

Full year 2019 netbacks improved 11% compared to the full year 2018. Despite production curtailments of approximately 4 million tons by our competitors in the second half of 2019, significant inventories of potash remained in early 2020. In response to these inventories, our competitors announced a winter fill program in January of 2020, reducing potash prices by $25 per ton. Intrepid took advantage of this opportunity as well and offered potash to our agricultural customers with good results at similar values. Immediately after the subscription window closed, prices have moved back up $20. So we have managed our order book very well, allowing us to transact current orders at that increased value.

Trio sales volume increased 20% in the quarter versus the prior year primarily due to rising export volumes. However, these volumes represented lower gross margins for the segment.

For the full year, Trio sales volumes were relatively unchanged when compared to 2018, while sales in the quarter were supported by strong exports to Southeast Asia, which offset lower volumes domestically. We expect Trio sales volumes to follow normal seasonal patterns in the first half of 2020, and we have seen strong domestic subscription for our Trio products in the first quarter of 2020, which will carry into the second quarter. Trio netbacks in the fourth quarter of 2019 trended down compared to the third quarter because of the higher proportion of export sales volumes. In addition, for both potash and Trio, our commitment to diversifying our sales portfolio has produced continued improvement in by-product sales, which were up $2.5 million or 42% compared with the fourth quarter of last year.

Before wrapping up, I'd like to remind everyone on the call today of the meaningful strategic moves we executed in 2019. The expansion of our oilfield solutions segment throughout 2019 is paying off by reducing the volatility of our cash flows. Intrepid is well positioned geographically to provide necessary midstream services to producers in one of the most prolific and cost-effective oil and gas basins in the United States. Although potash and Trio continued to be core assets, this diversity in our revenue stream enhances the value of Intrepid. Although 2019 had its challenges with political turmoil and unfavorable weather patterns, our strong balance sheet and diverse revenue streams allowed us to manage through a soft patch in both fertilizer and oilfield services in great shape.

We've begun the new year on solid footing with potash and Trio sales exhibiting resilience early in the year and we are cautiously optimistic about the rest of 2020. Given the recent strength in commodities like sugar, rice, cocoa and palm oil, we're hopeful that corn and soybeans won't be far behind. Following 3 consecutive sub-optimal application seasons, farmers are indicating a strong desire to replenish soil nutrients during the spring of 2020. This, combined with expectations of substantial acreage dedications for both corn and soybean planting in North America, should produce tailwinds for potash sales into the agricultural markets.

Finally, our oilfield solutions segment will continue to develop as we complete the infrastructure upgrades and expansions to our freshwater infrastructure discussed on last quarter's call. We are also excited about the start-up of our produced water disposal partnership with NGL Energy Partners, which is expected to commence operations around the midyear of 2020. Significant progress has been made with respect to the build-out of these facilities, and there is strong demand for water disposal services in the Northern Delaware Basin for the foreseeable future. NGL has been a stellar partner and has done a great job in securing long-term commitments for our new facilities. We're enthusiastic about the growth of this partnership and the growth that it will provide.

I'll now turn the call over to Matt, who will discuss our financial results.

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [4]

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Thank you, Bob. Good morning, everyone, and thanks for joining. Full year sales improved by 6% compared to the prior year, driven by our oilfield solutions segment. Fourth quarter sales declined by 10% due to lower potash and domestic Trio sales volumes as customers delayed purchases in anticipation of a winter fill program. The majority of domestic Trio sales in the quarter was a carryover from the third quarter, while total Trio segment sales was influenced by export volumes that pushed the average net realized price for Trio lower. Increased sales from the oilfield solutions segment helped to offset lower nutrient sales during the quarter.

Gross margin in oilfield solutions improved 28% in the fourth quarter and 12% for the full year when compared to prior year periods. Our combined nutrient segments experienced a decline in gross margin of 49% in the fourth quarter compared to the prior year due to reduced domestic sales volumes but an improvement of 15% for the full year 2019 compared to 2018. Net income for the fourth quarter was $2.1 million or $0.02 per diluted share and $13.6 million or $0.10 per diluted share for the full year.

Moving to our potash segment. Our fourth quarter gross margin was impacted by lower sales volume in anticipation of the fill program that was announced in January 2020. Full year sales were further impacted by poor weather in North America that reduced application rates and limited our by-product production and sale of magnesium chloride. Potash production decreased 4% and 5% in the fourth quarter and full year 2019, respectively, compared to the same periods in 2018 due to increased salt production at the Moab facility and timing of harvest from our solar ponds.

Our Trio segment fourth quarter gross margin decreased $0.7 million compared to 2018 due to reduced domestic demand. However, this decline was partially offset by increased by-product water sales. For the full year, Trio gross margins benefited from higher domestic pricing earlier in the year as well as an increase in by-product water sales throughout 2019. Similar to potash, our full year domestic Trio sales were impacted by wet weather that reduced spring 2019 nutrient application. However, this was offset by increased by-product sales and export sales in the fourth quarter.

For our oilfield solutions segment, the addition of Intrepid South water rights and other products and services contributed to the 85% growth in sales for the quarter and 60% growth for the full year. When compared to prior periods, margins were impacted by third-party water transfer on Intrepid South and some start-up expenses that should have less of an impact over time. 2019 results also had more water sales classified as by-product water, which are recorded in either the Trio or potash segment instead of oilfield solutions.

Turning to liquidity. We ended the year with $20.6 million in cash and $54.2 million available to borrow under the $75 million cash flow revolver. We continue to manage our balance sheet conservatively through this down cycle in fertilizer and feel that our net debt-to-EBITDA of less than 1x at year-end 2019 gives us considerable flexibility as we work through a lower than normal cash flow first quarter due to the slow sales from Q4. We remain in a comfortable position to pay down the $20 million of senior notes that come due in April. Cash provided by operations for the full year was $49 million and cash spent on investing activities was $81 million primarily due to the Intrepid South acquisition in May.

Capital investment, excluding acquisitions for 2019, was $25 million, which includes opportunity capital investment related to our newly acquired assets. We expect to spend between $25 million and $35 million in capital in 2020 with $10 million to $15 million for sustaining capital items and the remainder for opportunity capital across our 3 business segments.

That concludes our prepared remarks, operator, and we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Vincent Andrews of Morgan Stanley.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [2]

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This is Jeremy Rosenberg on for Vincent. I want to start out on the winter fill program. Just wondering -- just to follow up on that. If you could just comment on -- at this point, where your potash inventory levels are? And just kind of how comfortable you are in terms of inventory?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [3]

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You mean in terms of being able to meet the demand for the spring? Or do we have too much inventory?

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [4]

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The latter, whether you have too much?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [5]

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Matt, I'll let you...

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [6]

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I think we're in a very comfortable spot as far as our inventories. We're certainly seeing great subscription here under the winter fill program. And we're holding some back to maybe see some higher prices here in the second quarter, and we've already started to see some spot sales at the $20 up. I'll let Mark add on anything else to that.

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Mark A. McDonald, Intrepid Potash, Inc. - VP of Sales & Marketing [7]

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I think to reiterate the comments, we had good subscription in January, February on the sales. I think, as Matt commented and Bob in his prepared remarks mentioned, that we're well prepared. Our book is in good shape to take care of some of the spot business, and we're transacting at currently -- with some new business opportunities.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [8]

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Okay. Got it. And then just in terms of potash pricing, I know you mentioned a comment that netbacks were better in the quarter just because of the kind of the mix was better in feed and industrial. And I'm wondering for 2020, can you maybe just kind of talk about that mix? And just the mix between the ag tons and the industrial and feed tons? And just how we should be thinking about potash pricing for you in 2020?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [9]

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Well, once again, in 2019, we had a net realized price advantage of approximately 35% of our Canadian competitors. And so as we continue to diversify our potash into more specialized markets, we hope to continue to capture those premium prices. As to the ag markets, that's really a function of what our Canadian competitors and Russian competitors decide to do. There's no question we're going to see a strong demand season in the spring. And there's great opportunities for substantial potash applications. It's a function of what we see from our much larger competitors in terms of where they choose to take their price given the demand and the pricing that we're seeing in a variety of commodities that tend to be the leading indicators.

So when we look at the price of sugar, we look at rice, we look at cocoa, we look at a lot of other commodities that people don't pay as much of attention to here in North America, we're seeing strong recoveries in a lot of those commodities, which are generally leading indicators. And so we hope to see corn and soybeans rebound as well. We're clearly going to see big applications go down this spring. And it really is a function of how our larger competitors choose to treat this opportunity in the marketplace.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [10]

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Okay. Got it. And then just one last one. Just thinking -- I'm sticking on potash, just thinking about volumes. Obviously, 2019 was impacted by the weather. But if we're thinking about 2020 volumes, can we -- do you think we could get back to that 2018 level of about 364,000 tons? Or just any thoughts there on volumes.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [11]

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There's no question that if we have normal application season, so if we just have normal weather, we have every opportunity to sell out of our potash. So it's -- it really is a function if we have 2 normal application seasons, then we just don't see any issues with selling out. But if you look at the '19 application season, the weather just couldn't have been any worse.

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [12]

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Yes. I'll just add on a little bit today. We always have a difficult time forecasting full year sales. This, when you can see the fourth quarter swing by roughly 30,000 to 40,000 tons, depending on what happens. So I completely agree with Bob's comments, we'll just have to wait and see. But if average evaporation and normal application season, there's no reason we can't be at similar spots.

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Operator [13]

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Our next question comes from Mark Connelly of Stephens, Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [14]

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We had talked a quarter or 2 ago about the rain issues that affected Wendover? And you had said that the availability would be pretty good by Q4 again. I wonder -- but you also said that overall pond inventories were going to be below normal. So it sounds like you're all set for the spring. How does this play out across the second half of the year? And is -- does Wendover pull down your overall availability? Or are your other facilities able to offset that?

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [15]

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I think it's -- as far as overall pond inventories, we've certainly already seen the impact of a bad weather season on the potash side. On the mag chloride side, as we talked about in Q3, we did hold back some magnesium chloride to sell into our best markets, which is our [DIC] market. But as I said before, the impact has already happened. I think with the normal evap season, we should be right back to normal in the second half of 2020 on both potash and magnesium chloride.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [16]

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Okay. That's helpful. Was there any significant impact that we should be thinking about in terms of cost of production?

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [17]

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I think you're already seeing that come through in our results today. Lower pond inventory is certainly going to increase the per ton cost out of Wendover, but you saw that in Q3 somewhat and certainly in Q4 already.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [18]

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Right. Okay. Perfect. Just one last question. In that CapEx guidance, are there any notable K and Trio investments?

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [19]

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Sure. I mean we always have some small opportunity project, kind of bite size, recovery improvement projects, process flow improvement projects at our potash and Trio facilities but nothing that jumps out being...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [20]

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Nothing in the millions of dollars.

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [21]

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Yes. Nothing in the $5 million or $10 million range. It's kind of bite-size opportunity capital there on the potash and Trio segments.

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Operator [22]

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Our next question comes from John Roberts of UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [23]

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You mentioned that customer capital budgets in the Delaware Basin had been reset at the start of the year. Do you do any CapEx surveys of your customers or anything that gives you some insights into their capital spending for 2020 versus 2019?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [24]

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Yes, we meet with them every week. So in terms of contacting our customers, we're circling with them literally every week going through frac schedules. And the reason is because in order to deliver the water to the individual fracs, we've got to be totally in line with what their frac schedules look like. And so the answer to the question is an outstanding yes and that we're talking to them virtually every single week.

Brian -- I want to introduce Brian Stone, our new Chief Operating Officer. Brian, I don't know if you want to add to that.

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Edward Brian Stone, Intrepid Potash, Inc. - COO [25]

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No, I'd just echo what Bob said. We have regular meetings with producers. These are high-quality producers. We're very involved in their frac schedules. And it's important because we have to be able to deliver frac rate freshwater to them.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [26]

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Last year, you were able to provide some guidance on 2019 water sales expectations. Do you have any similar guidance for 2020?

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [27]

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We said the $32 million to $45 million in water sales for 2020 on our last call, and we just reiterated that for this call.

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Operator [28]

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Our next question comes from Joel Jackson of BMO Capital Markets.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [29]

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This is Robin on for Joel. My first is on Trio. I'm just wondering if Trio prices don't improve from Q4 levels, what are the mix impacts from lower expected international sales and for 2020?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [30]

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Well, we've pretty much backed away from most international sales. We had a very solid sale that we've been working on for a relationship in Africa that's going very well. We've pretty much backed out of the Central and South American markets so that we don't have to compete with Chinese keys, right? And so we've backed out of those lower netback markets and have really focused our activities on the domestic markets and the very limited international markets that give us the best netback opportunity. So I don't know if that gives you enough color. We're happy to answer it a little more if you'd like.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [31]

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Well, I guess if looking at Q4, Trio pricing and a breakeven gross margin level, I mean all -- I mean the prices were to stay the same, assuming that mix benefit. I guess is it fair to assume that Trio gross margin could shift back to positive territory in 2020?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [32]

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Very easily. I mean there's a $10 price increase announced on -- as of April 1. And so we have every expectation of seeing the price continue -- the fill program that came out took it down a touch or -- held it steady. And then it's got a price bump happening in April. And so we have every expectation of that, if not a little bit more so.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [33]

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Okay. Great. Shifting to oilfield solutions. How are some of the other system enhancements progressing, like pump automation? And after the new pipeline is complete in Intrepid South, I believe you said by midyear, how do you see oilfields solutions segment margins progressing across the year from these benefits?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [34]

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Well, the margin should increase substantially as you put in that infrastructure to service customers throughout the ranch as well as customers off the ranch. So we've now made the connections, and we'll be coming out with maps pretty quickly now that Select has completed their [Gera] pipeline and their Gera 3 pit, which is just on the very north side of our NGL AMI and the pipeline capacity that's now been built out throughout the entire NGL AMI area and allows us to now reach outside that AMI and just off the ranch as well as the first disposal well that's now been drilled and completed with NGL within that partnership and the pipelines that are built to handle the produced water, the long-term commitments that NGL has successfully negotiated to begin to supply that. So we see the disposal facilities, the pipelines, the wells that are already drilled kick in from a revenue standpoint hopefully in June of this year.

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Operator [35]

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Our next question comes from DeForest Hinman of Walthausen & Company.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [36]

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Just bouncing around a little bit on the balance sheet. You gave some commentary on lower-than-expected -- or lower-than-normal first quarter '20 operating cash flow. You have a debt payment in April. Can you just help us understand the mechanics of that? Do we have an ability to use the credit facility to fund that build payment if necessary?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [37]

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We absolutely do, and we have the cash in the bank to pay it. So we just don't see any issues regarding liquidity. We're obviously always working on other transactions that Intrepid South provides us. I think you're going to see, over the course of time, more diverse revenues that come out of the combination of the Intrepid South and the NGL partnership that exists down there and its connection to the Select [Gera] pipeline. So it's -- we're just not concerned. The lower first quarter cash flows are going to be a result of the fourth quarter decrease in potash sales, but we feel we've got other levers to pull to hopefully make up for it. That's the beauty of the diversification program we've been working on.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [38]

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Okay. And you spent some time talking about the water sales opportunity similar to what we had spoken about on the third quarter call. Can you give us some more color or understanding of the margins expectations within the water sales and then even touch on the margin expectations within oilfield services? When those revenues initially came online, they were very high incremental margins. And we've had good contribution on a dollar basis, but we haven't had levels anywhere near where they were in the past.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [39]

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Well, what you've seen is the progression of higher volume sales from different locations. So when we started our first water sales from our Caprock water that had existing infrastructure in place and no basis in that that was 95% margin. As we moved over to the Pecos River and we built substantial holding ponds and infrastructure to service the water on the Pecos water rights, our margins went down but we still had good margins on the Pecos. And then as we bought the Intrepid South ranch, that really needed almost a total revamp in the infrastructure. Those first 6 to 9 months of margins brought the entire margin structure down. But as we've said repeatedly, as we continue to build those up, we've already seen a decrease in our cost and an increase in our margin.

So the reason that you saw it was we started with Caprock sales that had existing infrastructure and no basis that delivered you extremely high margins. You then saw the addition of additional water sales from Pecos and then finally saw the addition of water sales from Intrepid South that all have different margin regimes and cost structures. So as the infrastructure for each of those facilities continues to get built out, you'll see operating costs go down and margins increase.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [40]

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And do you have anything you want to share in terms of what the full year gross margin expectation is?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [41]

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Not right now. I think we'll continue to update. As we said in our prepared remarks, those costs went down 20% and continue to go down. I don't know how to better -- I know you're looking for an exact number as to our entire water sales, but because they're coming from 3 different places with 3 different bases in terms of our cost structure, giving a combined margin answer I know makes it hard to model us as a company. But I'm trying to give you the color as to why each of those geographic areas deliver a different margin.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [42]

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Okay. Maybe a different way. Can you help us understand some expectations around operating cash flow generation or free cash flow generation? You did give us your CapEx outlook.

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Matthew D. Preston, Intrepid Potash, Inc. - VP of Finance, Principal Financial Officer & Principal Accounting Officer [43]

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Yes, we certainly see a strong 2020. I mean certainly, the increase in water sales to $32 million to $45 million in revenue, a lot of that will fall straight to the -- to our operating cash flow. And then we'll kind of do a wait-and-see on potash. Like we said in our prepared remarks, we're cautiously optimistic about 2020. It feels like we're coming out of the bottom of the fertilizer cycle here and seeing some good early indications as far as capturing some increased price on potash and hopefully on the Trio side. And those things certainly point to a strong 2020 and cash flow generation.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [44]

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From a CapEx...

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [45]

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Okay. In terms of the...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [46]

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Go ahead.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [47]

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No. Go, please finish.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [48]

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I was just going to say on maintenance CapEx, we're in the $10 million to $12 million range. On opportunity capital, we've got the ability to ramp it up or slow it down, depending upon how we're seeing the oilfield market move forward. The great thing about the produced water piece is we don't build the infrastructure without the water commitment. And so NGL, as I said in my prepared remarks, has done a great job for the first pieces, getting 10-year commitments for those assets that we're building out. So the good news is the commitment comes first and then we spend the capital. So it's working extremely well, and we're just very proud of that partnership and that large AMI with NGL.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [49]

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Okay. And the last set of questions. Can you give us any color in terms of the legal item with the Pecos water arbitration or whatever we're going to call it? And then any update on the Mosaic litigation?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [50]

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I'd say on the Pecos water, we've got a court date set for August in the adjudication court. I think that there's been a lot of noise from some of the opposing attorneys trying to continually run around and change venues, but we've got a very defined date in August, court date. And we feel very, very confident in our legal position as to our water rights. I don't see any threat to losing our water rights.

As to the Mosaic issue, I really don't have any comment other than we just don't believe it has any merit. So I'll leave it at that.

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Operator [51]

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Our next question comes from Jason Ursaner of Bumbershoot Holdings.

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Jason M. Ursaner, Bumbershoot Holdings Corp. - Research Analyst [52]

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I guess a little bit following up on some of DeForest's questions there. Select Energy indicated that their New Mexico pipeline came out late in Q4. Could you talk at all about what you guys saw in the quarter versus what might be a slow run rate and based on some of their commentary around 50% average utilization for the year? What expectations do you guys have for next year that's built into the full year guidance on water sales?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [53]

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Well, the good news is we're working extremely well with Select. There is a -- if you were to look at a land map in terms of where the [Gera] pipeline stops and their Pit 3 stops and where NGL AMI stops. So where their pipeline stops going south and where our AMI stops going north, there's an area in between that we have the ability to service and hopefully add incremental capacity into the Gera pipeline from our Caprock water. And so we're working with the majority -- or with several operators that are sort of in that in-between area so that we can help Select ramp up the utilization of that pipeline.

There is good, strong water demand. As we said, we've got a sold-out book down at Intrepid South. And so to whatever degree we can supply water using the Select pipeline coming north and add to their incremental utilization, we're now seeing those synergies begin to develop. So I think we're all cautiously optimistic that given our ability to service water basically at the state line going up to Gera and their ability to service coming down from the northern part of the Delaware to that boundary, if you will, we're working well with Select to try to get maximum utilization of all the assets.

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Jason M. Ursaner, Bumbershoot Holdings Corp. - Research Analyst [54]

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Okay. I guess just maybe asking it differently. I looked at 50% utilization on 150,000 barrel capacity and kind of take some of the average rates you guys have put out there from the water story line deck. Are you predicting growth outside of that in the full year guidance? Is that -- versus the 25.7 you did in 2019? I mean that contract alone is kind of applying similar value to the large contracts you have, which would kind of be the full growth that's in your guidance?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [55]

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I don't want to step on Select's guidance that they've given. Those are their numbers. I would just state very emphatically that we're working hard to provide them with incremental opportunities. And so however they're choosing to report their numbers is how they believe them to be. And I just can't stress that we're working hard to provide them with incremental opportunities that exist out there in the marketplace.

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Jason M. Ursaner, Bumbershoot Holdings Corp. - Research Analyst [56]

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Okay. And then just for the past 2 years, EBITDA has been around $50 million each of the past 2 years. Free cash flow ex Dinwiddie I guess is in that $75 million to $80 million range, which would be cash converting -- 75% to 80%. It hasn't been a crazy environment especially when we talk about some of the tailwinds that you're seeing in MOP, some of the secular growth you're talking about in oilfield services.

So obviously, I understand there are elements that are out of your control. But when you look over the next 3 years or 5 years, I mean even with some of the opportunity capital that you're talking about, you're still looking at excess free cash flow of $100 million, $200 million, whatever number that is above and beyond any sustaining capital needs. So as you're kind of sitting here right now with the enterprise value of around $300 million, you talked about just long-term capital allocation plans. I mean it just seems like you're saying...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [57]

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Well, as we stated repeatedly, we don't see any significant acquisitions on the horizon. We've got the opportunity for great bite-size organic growth down at Intrepid. When you combine the entirety of the water assets, the water infrastructure, there's a lot of very small bite-size organic growth that adds significant margin opportunities.

So you're just not going to see us run off and buy something. But you're going to see the Dinwiddie acquisition, which we bought at a 5x cash flow is going to easily do better than that. The opportunities that continue to come up quarterly just from our relationships that we've built down there and what's happening. You're just going to say the Intrepid South provide more and more cash flow opportunities to Intrepid given that footprint and its location. It's just got an incredible location.

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Jason M. Ursaner, Bumbershoot Holdings Corp. - Research Analyst [58]

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So for the time being, I mean when you just anticipate cash flow adding to cash on the balance sheet, how are you thinking about, I guess, either paying down debt, buybacks or anything like that?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [59]

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Well, right now, we want to -- until we come out of this period of volatility in not only corn, soybeans, crude prices, stock market, et cetera, we'd rather focus on our balance sheet to make sure we have a strong balance sheet to get through some of these, I would call them, black swan occurrences until we can continue to build up our cash flow in a much more diversified fashion so that we have a firmer foundation. I mean I'll just stress that we believe 2020 is going to be better than 2019. And look at all the headwinds that we faced coming out of 2019 in terms of major volatility in all the commodity markets that we serve. So the diversification has clearly paid off and giving us a firm foundation of cash flow. Had we not done it and relied solely on potash and Trio, I think we'd be in a much worse shape.

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Operator [60]

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

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [61]

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I just want to thank everyone for their time and interest in Intrepid. We really appreciate it, and we look forward to speaking with everybody in the near future. Thank you again.

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Operator [62]

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