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Intrepid Potash Inc. (NYSE:IPI)

Q1 2009 Earnings Call

May 8, 2009 11:00 am ET


Bob Jornayvaz - Chairman and CEO

Hugh Harvey - CTO

David Honeyfield - EVP, CFO and Treasurer

R.L. Moore - SVP of Marketing and Sales

William Kent - Director of Investor Relations


Vincent Andrews - Morgan Stanley

Steve Burn - Bank of America

Constantinos Karathanos - Goldman Sachs

David Silver - UBS

Mark Gulley - Soleil Securities

Don Carson - UBS Securities


Good morning, and welcome to the Intrepid Potash Incorporated first quarter 2009 Earnings Call. (Operator Instructions).

It is my pleasure to turn the conference over to Mr. William Kent, Director of Investor Relations. Mr. Kent, please go ahead.

William Kent

Good morning. Thank you all for joining us for our first quarter 2009 earnings conference call. I'd like to start by introducing today's participants from the company. We have with us Bob Jornayvaz, the Chairman and Chief Executive Officer; Hugh Harvey, Chief Technology Officer; David Honeyfield, Executive Vice President, Chief Financial Officer and Treasurer; and R.L. Moore, Senior Vice President of Marketing and Sales.

I would also like to remind everyone that statements made in this call which express a belief, expectation or intention, as well as those that are not historical fact are forward-looking statements within the meaning of the United States securities laws.

A number of assumptions, which we believe are reasonable were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties, which could cause actual results to differ from our expectations.

For material information with respect to the risks and uncertainties and factors which could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued last night and the risk factor described in our filings with the SEC.

All forward-looking statements are qualified in their entirety by such facts. The news release, which is posted on our website includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures. All references to tons are short tons of 2,000 pounds.

I'll now turn the call over to Bob Jornayvaz.

Bob Jornayvaz

Thanks, Will. Thanks for taking the time this morning to learn more about our first quarter results. I'd like to begin by reviewing a couple of highlights from the quarter.

Our balance sheet remains very solid with cash of $102 million, no debt, and $125 million of availability under our credit facility. The average net realized sales price for potash in the first quarter 2009 was $727 per ton. This was a decrease from the $762 per ton realized in the fourth quarter of 2008. Our first quarter of 2009, EBITDA was $43.6 million, which is a 20% increase over the same quarter last year.

The first quarter, although challenging, generally met our expectations. We've been diligent during the current period of depressed demand in managing our production volumes, and being selective as to the sales price we're willing to accept, all in an effort to maximize margins.

The factors contributing to difficulties in the first quarter including pressure on commodity prices, farm input pricing volatility, buyer hesitation to purchase potash and uncertainty due to the economy have carried over from the fourth quarter of last year and into the first half of 2009.

On a positive note, we did begin to see the start of the dealer destocking process in the first quarter and it has continued as we have entered the planting season, albeit at a slower pace than initially expected. The wet spring weather in April and early May for many planting regions in the United States, has delayed fertilizer applications by several weeks and exacerbated what was already a challenging spring.

We continue to believe that dealer destocking needs to occur before Intrepid will be able to mark higher volumes at appropriate margins to Intrepid. It is at this point in the cycle that we should be in a greater position of strength from which to market our product.

The reflection of this strategy of choosing when and how to market is evident in our first quarter sales volumes. Our potash sales volumes were 99,000 tons in the first quarter, a decline of 54% compared to the first quarter of last year.

On these sales we generated net income of $24.7 million. Offsetting this decline in volumes however, was the increase in our realized price per ton and our continued net sales price advantage over our competitors.

In the first quarter, our net sales price advantage expanded to $227 per ton, as we realized the best net sales price per ton of potash amongst the North American producers. Our sales price realized in the first quarter was largely driven by tons that were committed in late 2008. As to our margins we continue to benefit from a more favorable royalty and production tax structure.

We expect that potash application rates will be down this year compared to 2008. Based on what we know today, we also expect that our sales volumes in the second quarter of this year will lag our first quarter sales volumes.

In the near-term we believe that the sales of potash into the agricultural market will remain below rates needed to replace the nutrients removed by farming. However, we do not expect this demand decline to be permanent as it has been shown through decades of agronomic research that fertilizer plays a vital role in the crop yields necessary to ensure that world agricultural production meets the needs of a growing population.

We believe that once dealer inventories deplete over next few months, the dealers will likely be cautious in their restocking decisions to keep their inventories low. We are working to advance our product into logistically appropriate warehouse locations, so that we are ready to respond when demand resumes to more normal levels.

I want to briefly cover the continued conversation in the market about the ability of certain farmers to mine their soil for nutrients. We fully understand the ability of some farmers to reduce or even potentially skip potash application if their soils currently have high potassium levels. However, we don't believe this is sustainable on a long-term basis. We believe farmers have a limited opportunity to do this continuously without detrimentally affecting crop yields, which in turn affects farmers' profitability.

Additionally, based on data from the international Plant Nutrition Institute, IPNI, approximately 45% of the farmers in the United States will suffer an immediate yield impact by skipping the application of potash, because they already are at a medium to low potassium level in their soil.

To put this into perspective, based on the data from IPNI, in soils that currently test medium to low in potassium content. A typical corn grower has the opportunity to realize a 2.5 to 3 times return on his potash investment this year with proper application.

The economics simply speak for themselves. We believe that those farmers who test high in potassium and choose to skip this year understand the risk they are taking and recognize how hard it is to get back to adequate levels of K in their soil if their potassium levels fall below the recommended test levels.

On the longer-term front, we have evaluated historic apparent annual potash consumption rates in the United States based on data from the USGS. The consumption rate in the United States has averaged 10 million tons with an annual volatility of less than 10% over the last 25 years.

The 10 million tons of average annual potash consumption has been during periods of very low agricultural commodity prices, negative farmer margins, droughts, low points in oil and gas drilling activities and a variety of other negative economic situations. This consistent level of demand exists because potash works and provides an economic return.

If farmers use potash during periods of negative margins, we expect demand to return to more normalized profile in periods when they have a positive margin opportunity. We expect that 2009 will be challenging, at least through the remainder of the first half of the year, if not the full-year, but given the under application that seems to be occurring, and the yield detriment that will likely occur if farmers do not apply potash, we are managing 2009 to be prepared for a significant 2010 demand recovery.

We are continuing to move forward our capital investment program to enhance the reliability and productivity of our mine operations, although the cost of engineering services and alike have not necessarily decreased. The availability of top engineering and construction talent has improved substantially.

For projects that have not yet commenced, we are actively rebidding those projects where appropriate. Despite all of this near-term market turbulence, Intrepid remains focused on delivering results over the long-term. The long-term industry fundamentals have not changed since the last time we spoke. Population growth continues and we have to feed the world on a fixed amount of land to satisfy this growth.

Finally, we just can't lose perspective on what we accomplished during the first quarter. We were able to sell more tons sequentially than in the fourth quarter, achieve higher net income than a year ago and realize substantial EBITDA all on maintaining the strength of our balance sheet.

I'd like to turn this over to Hugh Harvey, our Chief Technology Officer, my long-term partner and Intrepid co-founder. He'll take the call from here.

Hugh Harvey

Thank you, Bob. We produced 137,000 tons of potash and sold 99,000 tons of potash during the first quarter of 2009. This compares to 224,000 tons produced and 213,000 tons sold in the first quarter of 2008.

Production declined in the first quarter of 2009 relative to the prior year first quarter due primarily to our election in January to lower production at the East and West Mine by having two weeks shutdowns at each facility and also by reducing the number of operating shifts at these facilities from four shifts to three shifts.

All of this was done in an effort to match our supply with current market demand. We also elected to make modifications to the processing circuit at our Wendover facility during the first quarter of 2009, which deferred some production into later quarters.

On the langbeinite portion of our business, we produced 42,000 tons of langbeinite. Our langbeinite production was 25% lower than the first quarter of 2008. The decrease in langbeinite production was largely driven by their previously mentioned production curtailments at our East Mine.

Capital investment in our operating facilities was approximately $23.8 million in the first quarter. The dollars invested in the first quarter of 2009 were used to fund projects already in progress and for sustaining capital projects.

Looking forward to the rest of 2009, we expect to invest between $90 million and $130 million for the full year. The pace of capital investment will be somewhat dependent on the cash flows generated from operations and we may adjust the level of investment if market conditions do not materially improve.

Although we continue to make investments in our facilities every month, we are actively managing our capital investment as to not detrimentally impact our cash position. As Bob has already alluded to, the strength of our balance sheet is a key competitive advantage during the current market conditions and affords us great flexibility.

Our long-term view of the potash market continues to be positive and we believe that increasing productive capacity of our operating facilities is essential to satisfying the demand that we expect will resume over time.

I will now turn the call over to R.L. Moore, our Senior Vice-President of Sales.

R.L. Moore

Thank you, Hugh. The spring season has been unlike anything that I've seen in my career and the industry. Many dealers had significant inventories at the beginning of the quarter. Our expectation was originally that the majority of dealer inventory would have moved through the system by now, but this has not been the case. Continued buyer hesitation coupled with unfavorable planning conditions has slowed the destocking process.

Market prices for potash continue to be under near-term pressure that has taken longer for the inventory at the dealer level to clear the system. The process for potash varied by region and is highly dependent on location and product type.

The fertilizer distributors continue to compete amongst themselves for sales to the retailer and farmer and it appears that the distributors seem to be doing just fine on margin if you look at it on a replacement cost basis.

The destocking process just needs to happen, so that dealers and non-traditional potash distributors sell through their inventory at which point Intrepid as a producer can get back to selling product in a more rational historical volume at true market prices.

Industrial demand for our standard product remains weak. Demand for our industrial product is highly affected by the declining oil and gas rig count. Given the ongoing weakness in oil and gas prices the likelihood of a meaningful recovery in 2009 for the industrial market remains remote.

In light of this, we can convert a portion of the potash produced for the industrial market and the product available for sales into the agricultural market. This is accomplished by compacting our standard industrial product into granular form.

One area where we're seeing consistent demand has been in our sales into the animal feed market. Feed has historically accounted for approximately 80% of our business and during the first quarter of this year it accounted for 17%.

Consistent with earlier comments, the current year's decrease and expected potash application rates, is something we just need to take in stride. In my 37 years in this business, I've seen the same consumption trends that Bob described that are supported by the 25 years of USGS data, and we believe we will return to historical average.

I will now hand the call off to Dave Honeyfield, our Chief Financial Officer, to wrap up our prepared comments.

David Honeyfield

Thanks, R.L. I've mentioned this in previous calls and we continue to have prior period information reported on a pro forma basis in order to present 2008 data on a comparable basis to the current year. The types of adjustments to the prior period pro forma statements relate to accounting for stock compensation expense considering the fact that all debt was repaid at the time of the IPO, accounting for income taxes and applying a weighted average share calculation for the EPS number.

Moving to the actual results now. The cash operating cost of potash sold in the first quarter of 2009 was $266 per ton. Due to our largely fixed cost structure at lower production rates, like what we had in the first quarter, that were a result of the rolling two-week shutdowns that we took at East and West and the associated shift reductions, our cash operating cost per ton of manufacturing increased.

We will continue to manage costs, but as I mentioned last quarter, until we see production operating rates and corresponding consumption return to a more historically normal range, you should expect our costs per ton to remain close to this level. We remain focused on margins and even with the increased cash operating cost per ton our margins were very healthy considering our net realized sales price.

Due to the fact that de-stocking of the dealer network has taken longer than anticipated, we are evaluating our previously budgeted production rates to determine if we need to make any adjustments based on customer demand. We need to balance our need to have adequate inventories of product available for when the market recovers, with the storage capacity we have within our system, and the customer demand.

With this in mind, and considering the anticipated sales lag in the second quarter that Bob described earlier, we believe that production will be deferred and that our annual production will likely be somewhat below 600,000 tons.

Once again, let me remind you that we are not making this statement as guidance, rather we want to continue to emphasize how unpredictable the market for potash sales will be for the remainder of the year, and that the second half of 2009 may not be as robust as some people seem to be predicting in their models.

All things considered, though, we have the capability to respond quickly to an uptick in demand should the market opportunity arise. Suffice it to say given the current market uncertainty, this will be a very dynamic year and we'll adapt accordingly.

In closing, our belief in the long-term fundamentals of the potash industry remains unchanged and we fully believe that demand will return to its historic norms. Our capital projects remain the first call on our cash, as we believe we can generate excellent returns investing in our operations and with the expansion of our existing facilities and bringing back idle potash capacity.

We'll continue to focus on costs and balance our capital investments with our desire to maintain a strong balance sheet, keeping a close eye on the broader potash and fertilizer markets, in order to maximize margin and produce strong results for our stockholders.

You've heard us say it before, that a strong balance sheet is fundamental to our ability to market our product in a sound and thoughtful manner.

We would now like to open the lines for any questions.

Question-and-Answer Session


(Operator Instructions). Your first question is from the line of Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley

In regards to the discussion about reducing application rates, and so forth, do you have any data or any benchmark or rule of thumb that you're using to forecast if a farmer goes below the recommended application rate for potash, what the potential negative yield response will be?

Bob Jornayvaz

Well, what we're seeing right now, is based on the IPI data that we've looked at, many, many decades of data. Farmers fall into three basic categories, people that have low, medium and high levels of potassium in their soils, and the responses are each different depending upon which category you fall into.

So if you have a high level of K in your soil and you choose to have a reduced application rate, or even choose to skip, you're going to have a very mild yield impact this year. If you fall into the low or medium category, you're going to begin to have a more significant impact. And that depends on whether or not you're talking about a corn farmer, a hay farmer or a wheat farmer.

We've tried to break down those economics for each of those different pieces, if you will, because our market is more than just a corn market. And so without giving you specific percentages right now for each level, we've tried to do it, each crop, if that makes sense. What we will tell you though is it if you look at a typical corn farmer that's in the low to medium category, in terms of his current potassium levels in his soil.

This year, at today's potash prices, today's corn prices, he can achieve a two and a half to three times return on his potash investment. So what we're seeing is what I've referred to before as emotional demand destruction, not economic demand destruction. We really try to differentiate between those two.

Vincent Andrews - Morgan Stanley

Can you give us some insight into what particular areas you're moving the most product into. Is it the corn belt or is it the regions around your natural geography?

Bob Jornayvaz

It's around our natural geography. In one small case we've reached out a little bit, but it's a very minor sale. But we're still focused on our core market where we've always had our best margins.

Vincent Andrews - Morgan Stanley

Lastly, you said the dealer levels are below or you thought they would be at this time, can you give us some sort of color on where you think the dealer levels will be and any view on the current run rate, what month or at what point?

Bob Jornayvaz

Let me back up. We've said that, we think that inventories are higher than where we thought they would be right now. I apologize, if you heard us wrong. We're tracking every major customer that we have, as well as a lot of other retailers, dealers and distributors, and talking with them several times a day to try to get a handle on the dealer inventories throughout the United States.

They differ very, very significant, whether you're talking about the Pacific Northwest or the lower river. We're seeing that most dealer inventories concentrated on what we'd call the upper river, where we have some non-traditional potash players in the market, if you will, that have some hold over tons.

So it really depends on where we are. In the Pacific Northwest, inventory levels are at very, very low levels. The lower river is at low levels and the upper river is at higher levels.

So, once again, it just depends on where you are in the United States, but what we're seeing is some of those non-traditional potash distributors with tons on the upper river, are impacting the rest of the market around the United States.


Your next question comes from the line of Steve Burn with Bank of America.

Steve Burn - Bank of America

Your volumes definitely held up much better than your Canadian competitors. You indicated to Vincent that you are continuing to sell in your core geographies. Are you saying that you didn't extend your geographic reach, or was demand in your core geographies better than in other regions? How do you account for your out performance in your volumes, because it doesn't appear that you are aggressive on price?

Bob Jornayvaz

A couple of different things. First, we fulfilled all of the old orders from the fourth quarter that were at higher prices, so there was one piece of that. Secondly, you've got to remember that we are in a more southern location, so that we have different crop planting going on across the south that we participate in.

As I did say to Vince, we reached out in one case on a very small basis, but our core area, I think, strong is too strong a word, but there was enough demand for us to meet our numbers at the prices that we were willing to accept.

There is a lot of sideway selling from dealer to dealer, where we are seeing dealers really trying to turn older inventory into cash, and we're choosing not to go out. We chose in the first quarter not to go out and compete against those guys, because they really need the cash. We also have seen continued strength in our feed markets where we have the ability to service that in adjusting time basis.

Steve Burn - Bank of America

Did you sell more into the feed market than you did into the oil and gas drilling end market in the quarter?

Bob Jornayvaz

We did.

Steve Burn - Bank of America

So is that a trend you expect to continue this year?

Bob Jornayvaz

Well, once again, we're putting together the same data on the rig count that we did on the agricultural markets to look at historic usage and we get to a point where the rig count is going to be at some certain sustained level, and I don't know what that number is going to wind up being. But if we go back and look at 25 or 30 years of drilling rig rates, there's a corresponding level of potash consumption that I think we're going to see along those same lines. And I would expect in some of our upcoming investor conferences we'll start to share that data, so that we can get a more consistent review of what we think the demand profile is going to look like.

David Honeyfield

Steve, this is Dave. Just to clarify that, we sold more feed relative to the ratios that we had last year. For example, the same quarter last year we sold 8% of our sales into the feed market, this quarter it was 17%. Last year our industrial sales were 29% and this year it was 22% of our sales for the quarter.

Steve Burn - Bank of America

I was wondering if, Hugh. Could you give us an update on anything you've learned in the last few months regarding the feasibility study at the North Mine and where you are in the increased langbeinite recovery project?

Hugh Harvey

Sure I can update you on both those on our north plant; we have engaged a design build contractor to carry the thing forward through what would be traditionally called maybe a prefeasibility study. We're looking at the underground mine design, the plant design, tailings disposals, systems et cetera. So it's simply work-in-progress. I expect that it will take us substantially the rest of this year to finish the phase of the study that we're in now.

Regarding langbeinite expansion, yes, we're making significant progress on that also. We've also engaged a design engineering group on that project. We've done a number of pilot plant studies at our East facilities, testing various technologies to make sure we pick the right one. We're currently in the process of putting together the preliminary flow sheets for that facility as it will be modified. I don't have a timeframe for you on the finishing of that study, because we still have pilot testing ongoing, and awaiting results.

Bob Jornayvaz

The pilot testing is really to pick a technology that we're going to build from, not whether or not we can recover more langbeinite.

Hugh Harvey

Yes, that's correct. It is an optimization process.


Your next question comes from the line of Robert Koort with Goldman Sachs.

Constantinos Karathanos - Goldman Sachs

Good morning, actually this is [Constantinos Karathanos] on behalf of Bob. Bob a couple of questions. How much product do you believe is in the river right now?

Bob Jornayvaz

I'll let R.L. answer that.

R. L. Moore

In keeping up with inventories over the last month, we would say the river system, and these are primarily non-traditional suppliers of potash into our industry, plus people that normally carry the product. We would say they are somewhere between 650,000 and 700,000 tons up and down the river, and that doesn't include product that's in the producer warehouses, the Canadians.

Constantinos Karathanos - Goldman Sachs

Has this number been increasing, or decreasing?

R. L. Moore

It's decreasing. We've seen from two weeks ago we've seen about a 23% drop in inventories from where they were at the middle of April. These are tons that are up and down the river system and in the warehouses that are located off of the river system. This isn't just barge tons that are out there.

Constantinos Karathanos - Goldman Sachs

Our sources are telling us that the product in the river right now, is selling below 600, still there are no takers at those prices. I mean, aren't you guys concerned on something like that? Or are you going to reduce your prices to those levels in order to spur some demand? Thank you.

Bob Jornayvaz

Well, I think we've told you several times before we're not going to go compete with kind of these non-traditional potash distributors, if you will, at the prices right now. That's why it is so important to do the math. If you look at the tonnages that were sold into the United States by the various potash producers in the first quarter, you look at the inventory that is in the system, if you will, throughout the United States, and you begin to see that any demand return to more normal profiles, what's out there is going to get used up very, very quickly.

We're also seeing product as recently as this week, we've seen product come off the river being loaded for re-export down to the Caribbean rim, as well as Brazil. So I think some of those non-traditional potash suppliers. As I've tried to tell you, we're not going to go compete in kind of that downward spiral market. We would rather see that destocking occur, and get back to a more normalized demand profile.


Your next question comes from the line of Dave Silver with UBS Securities.

David Silver - UBS

I guess first off, in looking at your first quarter potash realizations, and, you know, the out performance that you had there relative to your Canadian competitors, could you maybe talk about, what the average price might have been if you excluded that slug of business that kind of rolled over from the fourth quarter, or could you maybe talk about maybe the monthly trend during the quarter? Where do you think, the month of March was relative to the 1Q average?

Dave Honeyfield

David, this is Dave Honeyfield. We actually didn't analyze it in that way. I think like R.L. and Bob, have both talked about, certainly we've seen some near-term price pressure in the market, but we're choosing which tons we're going to sell and at what price.

So, certainly the quarter-over-quarter decline in net realized sales price from the 762 to the 727, I think is indicative of what we were seeing. But I'm probably just not going to go down the path month-by-month.

Bob Jornayvaz

Dave, I'd also like to discuss that throughout the United States we're seeing very, very disparate pricing. The pricing that we're seeing in the Pacific Northwest is very different than what we're seeing at the river, which is different than what we're seeing in the feed market, which is different than what we're seeing in our Texas hay market.

So, in our experience, this price disparity that we're seeing is just something we haven't seen before. And we've just got to let that work itself through the system, so trying to come up with one consistent price that we can say, as we probably could last year at this time, that the price of potash is X. We're seeing pretty disparate pricing throughout the United States.

Dave Silver - UBS Securities

Yes. I'll just pick up on that. I mean, that was a question I was maybe going to ask R.L. a little later, but I'll just pick up on that. You guys are in region and you have some advantages over some of the larger guys who ship products from up north.

Someone asked if you're extending your marketing radius, that's one way. But are there also opportunities to maybe, sell smaller volumes to different customers? In other words, you can reach out to certain customers that the larger suppliers just as a rule don't try to serve? Or can you offer, are you offering some incremental service, quicker delivery or letting someone bring their truck up on short notice? Is that part of the volume and pricing dynamic that you're seeing?

Dave Honeyfield

It really is. We have the, we believe it is the unique ability to service a just-in-time truck market, where we have the warehousing facilities to provide just-in-time inventory. That allows us to have a price advantage from that aspect, if you will. So we've chosen not to really go out and reach too far, we've chosen to focus on our core customer base, a lot of which do have smaller needs.

So as we've tried to say over the years, we're in a unique situation in terms of our ability to market into a whole variety of crops, a whole variety geographically, with alternate modes of transportation. So we're very fortunate in that regard.

Dave Silver - UBS Securities

So you've kind of indicated that you don't anticipate 2Q, sales meeting 1Q. I'll just say you're not going to be especially busy at the mines this quarter. So if you could just talk us through kind of what opportunities or what kind of tactics you use in situations like this.

So, a couple of things. I mean, I know you have an extensive debottlenecking and expansion program and if I look at the list of projects, I mean there were a couple that were due to be completed in Q1, at the West Mine and at the East Mine. So do you accelerate work on some of these debottlenecking and efficiency projects?

Also I was wondering maybe, Hugh, this is your question, but do your labor contracts give you the right or the option to have them take unpaid vacation, if for whatever reason, you're just not busy enough to keep them working? So, just kind of some tactical thoughts on how you work through this maybe next few months of continued slow demand?

Bob Jornayvaz

Let me give you just little bit of philosophical overview and I'll let Hugh address the details. First, we don't have any labor contracts at our Carlsbad facilities. The only union that we have got is at Wendover and I think we have about 30, 35 members of that union up in Wendover.

So from a labor work force we have a lot of flexibility at our other facilities. We really focus on a matrix as it relates to capital and our debottlenecking high productivity type return projects and I'll let Hugh address a couple of those. But we're continuing to utilize kind of the capital evaluation matrix to make sure that everything has the kind of rate of returns that we want, which are very high, when we are dealing with recovery projects and debottlenecking projects. Hugh you want to answer so of that.

Hugh Harvey

Sure, you're absolutely right on when you say how we take advantage of this opportunity, if you will, as production slows down. Just as an example, one of the bottlenecks and underground construction is getting things down the shaft. We'll use the same shafts for production, hoisting tons as we do for lowering equipment.

So as we reduce the number of shifts of production, we have more opportunities to get equipment underground and we definitely jump on those opportunities to get everything from new belt drives, and new belting underground, new equipment, doing cleanout operations, as well as electrical upgrades.

So there is certainly not an issue in the short-term with keeping folks busy. As Bob mentioned, we don't have any labor contracts in place down in Carlsbad, so we can't shift people around as their skills permit to various jobs. We also shift around between plants. We'll have some underground mining crews moving from the west plant over to the east plant, as our demand for different products changes; we can change our product mix accordingly.

So, we do have a number of major projects that we're continuing forth with that huge contract labor. Our West tails recovery project is breaking ground this week. We've got contractors also at our East facility putting in our new thickener system, and we have an extensive list and portfolio of projects beyond those that we will be working on. Does that give you some color to answer your question?

Dave Silver - UBS Securities

Yes, and I guess I'm just wondering if, you envision taking steps to, you're taking steps to utilize, workers who might, production workers who may not be fully utilized and I was just wondering some sense of, cost controls or other saving measures that, or efficiency measures that your tactics that you're going to be using during the next, few months which you anticipate will be slower than normal. So that's fine.

I have a question for Dave on the deferred tax situation. If I look at your reported results, I think your tax accrual is about little over $15 million, and your deferred tax benefit for the quarter was I think, $6.7 million.

So, I'm just going to round, and let's just say that your deferred tax was equal to about 40% of your tax accrual for the quarter. You have a large deferred tax asset on your balance sheet and you've kind of talked about, utilizing that over time. But is that 40% rough metric, is that, is that the right number to think about in terms of the benefit from that this year, or how do you anticipate that large deferred tax asset might get utilized this year? How should we think about that?

David Honeyfield

Sure. I think you've analyzed it right Dave that the cash tax rate we think is about 60%, so, therefore, the deferred rate is about 40%. The largest driver of that is really just the fact that providing companies you get a 14% statutory depletion rate. So it knocks down your cash taxes and when we set up the tax asset at the IPO transaction, a lot of that was assigned to the mineral properties. So I would really expect that 60% cash tax rate, give or take a few percentages here and there for a variety of reasons, but that should be a pretty steady long-term rate going forward.


Your next question comes from the line of Mark Gulley with Soleil Securities.

Mark Gulley - Soleil Securities

First of all, with respect to application rates, is it your view that farmers will have to make up on a go-forward basis their under application of potash this year, or the alternative is it possible that they have been over applying in past years, so there will not be a catch-up effect?

Bob Jornayvaz

I think everything that we're seeing is they're going to have a catch-up effect in terms of over applications, we're not seeing any real indication of that at all.

Mark Gulley - Soleil Securities

Don’t talk about the previous years, maybe '07?

Bob Jornayvaz

No, I understand.

Mark Gulley - Soleil Securities

All right.

Bob Jornayvaz

We don't believe that has been the case historically.

Mark Gulley - Soleil Securities

I guess the second question I've got is, I'm a little bit confused as to your characterization of farmers buying patterns of potash and I kind of view them as profit maximizers. It would seem to me that they're making purchasing decisions, which will maximize their profits for this year. So I'm having a tough time understanding the so-called emotional side of it. It would seem to me that they're trying to make money this year, last year, next year, the same way all the time.

Bob Jornayvaz

I think that's a great observation. I think that's how we would view typical economic behavior, if you will. So when we look at all of the farmers' input cost whether we looking at their land cost, their nitrogen, their phosphate, their diesel, their rental cost, potash represents, depending upon the price of potash that you use, but let us say an approximate 5% of their total inputs. 5% generally isn't a driver in your process, especially when that will generate a return on the investment.

So I would agree with you, that historically farmers have been optimizers if you will. But when we look at the applications that we're seeing and when we talk to specific farmers and we've talked to a lot of farmers, we're hearing a lot more emotional frustration at the price of potash, than good economics.

In other words, the farmers that we sit down and go through their actual economics, some of which are choosing not to use potash, simply because they say the price is too high rather than going through the economics of what it actually costs them and the return that they're going to have. I would agree. We're not seeing it being totally rational behavior. I don't know if I've answered your question or not.

Mark Gulley - Soleil Securities

That's helpful. I think we'll probably have to see how the year plays out and how the numbers come out.

Bob Jornayvaz

Mark, to go back to one more point. That's why we've gone back and looked at the last 30 years of potash consumption history and it's been very consistent between 9 and 12 million tons averaging just over 10 million tons. So when we go back and we look at through, we look at all of the economic, agricultural economic distress, we had a very, very consistent potash demand profile over the last 30 years.

So that's why we're having trouble when we begin to do the math on the potash that has been purchased and then the potash that we know is actually being applied. We know what's going to be mined in the soil through the harvest process. There's going to be a pretty significant deficit at the end of the year.

Mark Gulley - Soleil Securities

Lastly, this is the second consecutive quarter that production has exceeded shipments. Is inventory billed into a level that is unacceptable at this juncture? Or you have to reverse that? Can you talk about maybe when do you think production and shipments will kind of equilibrate?

Hugh Harvey

This is Hugh Harvey. At this point we're still okay on inventory space. We've chosen to move some tons into outlying warehouses, which in essence increases our inventory capabilities. At our Utah facilities, traditionally during the summer months we don't run the plants anyway, and we're entering the evaporation season. Actually today will be the last day of harvesting at Moab, so we will not be building any inventory there for several months, and of course we do have ongoing sales.

We also have quite a number of warehouses at our Carlsbad facilities that still have substantial room in them, so right now we're not considering a point in time where we're going to have to start making adjustments related to inventory constraints.


Your next question comes from the line of Don Carson with UBS Securities?

Don Carson - UBS Securities

I want to get back to this issue of potash use and application rates. What sort of your call now that we're, almost at the end of the crop year. How much overall consumption will be down in the US of potash and what do you see shipments as being down, it does appear to be a big destocking as well.

I guess, my other question would be, we have seen improved plant genetics. In the last two years we've seen lower application rates and certainly no reduction in trend yields. So the grower, it would appear that he's kind of trimming his application rates and hasn't seen a yield impact, yet. Obviously the new factor here is improved genetics. If you have got to grow worm protected corn and a better root structure, obviously it has moisture benefits, but one could also have benefits in terms of accessing more nutrients in the soil. So I'm wondering if we're not seeing some impact of these improved genetics on these long-term application rates.

Bob Jornayvaz

I think it is a very valid question. When we look at 2007 though, 2007 was a very significant application year. So I guess, I would say that '08 and obviously '09 are going to be down from '07. But once again '07 was up very considerably from '06. So that's why we continue to look at averages. Try to look at multi-year averages to understand what the demand profile looks like. Trying to understand what some of these genetically modified seeds are actually doing in terms of necessary fertilizer rates. I just don't think we have got enough history yet to draw the appropriate conclusions as to whether or not they're having an impact, or not.

Don Carson - UBS Securities

Can you comment on your outlook for, we've heard other people forecast 20%, 25% declines in consumption, obviously shipments are running even further behind that. What's sort of your call for the '08-'09 year that ends soon?

Bob Jornayvaz

I think it's too early to make that call. I think that the kind of numbers, that you're hearing are very realistic and appropriate given the low level of shipments that we've seen. I mean when we go back and we look at everyone's first quarter results in terms of shipments in the United States, we're looking at some very, very low numbers. So I think it's just too early to make a call on the entire year, but we're all very aware of what that first quarter looked like.

Don Carson - UBS Securities

I was talking more about the crop year that ends June 30, because you now, here we are almost at the end of planting season.

Bob Jornayvaz

I agree, Don, I don't know how else to give you an answer other than it's going to be significantly lower than it's ever been historically.


At this time I'll turn the call back over to the speakers for any closing comments.

Bob Jornayvaz

We sure appreciate you joining us today and hope you all have a good day. Thank you.


Ladies and gentlemen, this does conclude the Intrepid Potash, Incorporate, first quarter 2009 earnings conference call. You may now disconnect.

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