Intrepid Potash's (IPI) CEO Bob Jornayvaz on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: Intrepid Potash, (IPI)

Intrepid Potash, Inc. (NYSE:IPI)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 ET

Executives

Gary Kohn - VP, Investor Relations, Treasurer

Bob Jornayvaz - Executive Chairman, President, CEO

David Honeyfield - President, CFO

Kelvin Feist - SVP, Sales and Marketing

Brian Frantz - Interim CFO, CAO, VP, Finance, Controller

Analysts

Christine Monroe - Scotiabank

Mark Connelly - CLSA

Chris Parkinson - Credit Suisse

Brett Wong - Piper Jaffray

Don Carson - Susquehanna Financial

Vincent Andrews - Morgan Stanley

Joel Jackson - BMO Capital Markets

Andrew Wong - RBC Capital Markets

Mark Gulley - BGC

Operator

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash 2014 Second Quarter Conference Call. As a reminder all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

At this time, I’d like to turn the conference over to Gary Kohn, Vice President, Investor Relations. Please go ahead.

Gary Kohn

Thanks Brock. Good morning everyone. Thank you for joining us for our second quarter conference call. Presenting on today’s call will be Bob Jornayvaz, our Executive Chairman, Dave Honeyfield President and Chief Financial Officer and Kelvin Feist Senior Vice President of Sales and Marketing. Also in the room with us today are Hugh Harvey, Executive Vice Chairman of the Board, Martin Litt, Executive Vice President and General Counsel, Brian Frantz, Vice President-Finance, Controller and Chief Accounting Officer.

I would like to remind everyone that statements made on this call that are not historical fact or they’re express of belief, expectation or intention including statements about our financial and operational outlook are forward looking statements within the meaning of the United States Security Laws. These statements are not guarantees of future performance and are based on a number of assumptions which we believe are reasonable. Forward-looking statements involve risks and uncertainties that could cause actual results to differ from our expectations. You can find more information about these risks and uncertainties in our Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC. We will be filing our second quarter Form 10-Q later today.

During today’s call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday’s pres release. Our SEC filings and press releases are available on our Web site at intrepidpotash.com.

I will now turn the call over to Bob.

Bob Jornayvaz

Good morning and welcome everyone. Thank you for joining us. As you read yesterday Dave Honeyfield will be leaving Intrepid on August 29th in order to pursue an opportunity with the new venture in the oil and gas industry. I on behalf of the Board and the employees want to personally thank Dave for his outstanding leadership and his unparalleled dedication to Intrepid during his six year career with us. He was instrumental in the execution of the strategy to invest in our assets and has driven an emphasis in process improvement that has significantly strengthened our company.

I appreciate Dave’s thoughtfulness and his timing of his decision. His departure comes at a time when we are through the major capital investment phase the trends in our business are moving in a much more positive direction, our cash and liquidity position is extremely solid and we have in place a world class well functioning management team in Denver and at all of our sites.

We have an orderly succession and transition plan in place. Dave will be with us through the end of August at which time Brian Frantz, who has held essential senior finance roles and has been an important member of Dave’s team since 2010 will assume the role of Interim CFO and I will reassume the duties of President and Chief Executive Officer. Since I founded the original Intrepid Production Corporation in 1984 nearly 30 years ago which is still an ongoing and significant oil and gas company. And Hugh Harvey and I founded the mining company back in 2000. I’ve spent many years with direct responsibility for day-to-day activities and I’m eager and invigorated to step back into the role of growing this great company. So thank you, Dave, and we wish you great success in your new venture.

Now turning to our results, through our focus on operations and our multiyear capital investment program, we are delivering on our plan of improved financial and operational performance. In fact, we returned to profitability in the second quarter and generated improved cash flows. We accomplished this by successfully lowering our per ton cash operating costs for the last two quarters by delivering on our sales plans and through stronger pricing for potash and Trio.

We have created a more favorable trajectory in our business the last two quarters and I'm confident in our ability to continue these positive trends. Looking to the second half, our expectations are clear. We will continue to make progress in reducing our cash, operating cost per ton per potash and Trio. We will increase production and optimize our operations and we will plan for robust sales volume at the highest net average realized sales price in North America through our many advantages including our distribution strategy in our diverse customer base and markets.

The ingredients to driving cash operating cost down remain unchanged. Increasing production of our lower cost solar solution tons and reducing operating cost of our conventionally mined tons. We have successful initial harvest from our HB Solar Solution Mine, good production of 31,000 tons during the first half of this year. This has us well on our way to achieving our HB production goals. Importantly, as we continue to ramp up according to plan, we are seeing the expected step down in HB’s per ton cash operating cost.

On the conventional mining side, the ongoing work at our west facility remains a key component in our plan. The West plant accounts for about half of our total potash production so it has a significant impact on our overall per ton cost structure. The project is underway at West are designed to stabilize and ultimately increase production with a corresponding reduction in cash operating cost per ton.

The North facility is fully operational now. With our completely new North plan, we are manufacturing the highest quality granular product that enhances our ability to deploy are close to the customer’s strategy. The new plant has the capacity to granulate all of our West and HB production which gives us the flexibility to pursue sales opportunities with the most attractive margin, be it for standard or granular product. Furthermore, the improved capabilities at the North plant make it possible – make possible the process modifications and recovery improvements at West not available with our prior dated compaction system.

These positive operational steps we have taken are complemented by another quarter of strong sales performance and improved pricing. Kelvin will now provide more insight on these accomplishments. Kelvin?

Kelvin Feist

Thank Bob.

The strong retail demand for potash and Trio in the second quarter left warehouse with little or no inventory. Farmers saw good value in potassium this spring and applied our products to maximize their return per acre. Summer purchasing activity was also very strong. Typically summer fill pricing is discounted to spring price purchasing levels to encourage the recharge of warehouses. In contrast to this historical pattern we saw solid potash pricing for summer fill in response to good demand and tight inventory levels of granular potash in the market.

We sold 235,000 tons of potash in the second quarter bringing the total sales volume for the first half of the year to 478,000 tons. This is a 30% increase from the first half of 2013. We’re able to significantly increase our load out rates and offset many of the logistical issues from the challenging rail service in the spring. Through our actions, we were able to deliver sales, sustain a price advantage and strengthen customer relationships. We are seeing a market environment that supports continued strength in our sales in the second half of the year as our outlook suggests.

We had a strong order book for the second half of the year and consistent with our strategy we expect to be selling into the market based on our production schedule. We had a net realized price for potash of $329 per short ton in the second quarter, $12 more per ton that we earned in the first quarter. This marks the first quarterly price increase we have realized in over three years. We expect pricing for potash to remain stable for the remainder of this year.

We had an even more successful sales quarter and first half for Trio. We sold 62,000 tons in the second quarter and a total of 98,000 tons during the first half of 2014, a full 32% increase compared to last year’s first half. The demand in the domestic market for our granular and Premium Trio continues to be strong. With this strength, we have focused our efforts on producing more of the high value Trio products for the domestic market and are seeing a positive result in sales volume, pricing and margin. This resulted in an increase in net realized and net average realized sales price for the second quarter to $350 per ton for Trio demonstrating the value of improving production flexibility that we have built into the system.

Thanks and I will now turn the call over to Dave.

Dave Honeyfield

Thanks Kelvin. Our return to profitability and strengthened cash position this quarter were attributable to our continued focus on the three main objectives that I highlighted is essential for our success at the beginning of the year. First, we’re executing on lowering our per ton cash operating cost, building on the trend that we started at the beginning of this year we lowered our cash operating cost per ton 8% for potash and 11% for Trio from the first quarter.

Secondly, we’re maintaining the appropriate sized SG&A cost structure resulting in reduced SG&A expense of 24% in the first half of this year from the comparable period last year. And third, we’re managing our capital investment level. Our planned capital investments this year are in the range of $40 million to $50 million a significant reduction from the approximate $250 million in each of the last two years. The trend in the second half of 2014 is for per ton potash cash operating cost to be lower than the first half with the fourth quarter being the lowest single quarter for the year.

There will be small quarter-to-quarter fluctuations on the way and we’re expecting that the standalone per ton cash operating cost for potash in the third quarter will be slightly higher than what we reported this quarter. This is a direct result of the planned maintenance per ounce scheduled at our East and West operations in the third quarter and the seasonality associated with our solar operations.

The planned maintenance work should take about a week at each facility. The reason for mentioning this is only to make you aware that this work and the impact have always been in our plan. Our long-term trends of lowering our per ton cash operating cost remain firmly intact as the harvest of the solar solution mined tons from our operations commences in the mid to late part of the third quarter following the prime summer evaporation season.

Also as a technical accounting note, I want to acknowledge that we have increased our second half cash operating cost outlook for potash by $5 per ton. It’s important to understand that this change does not reflect an increase in anticipated gross cost nor does it impact gross margin, profitability or cash flows rather this is a change in the classification on the income statement.

As the sales price expectations for potash improved since we last provided our outlook on April 30th, we have less cost going through the lower cost to market adjustment line in the second half of the year than previously expected. As these costs will now flow through normal cash operating cost.

Getting back to the business discussion, I just want to remind folks of a couple specific items related to the trends to lower cash operating cost per ton. The first is related to the new HB Solar Solution Mine production. The continued addition of the low cost HB tons in the second half and into the future years will continue to have a positive influence on our company wide per ton cash operating costs. When HB is running at its full production rate of 150,000 to 200,000 tons annually in late 2015, its cash operating cost is expected to be in the $80 to $100 per ton range.

The second item is the impact of the capital investment work that’s nearing completions at the West mine. Through these investments and the execution of our operating plan, we have lowered our per ton potash cash operating cost at West from the high point of cost we saw in the fourth quarter of 2013. Our improved operating cost is the result of our pro active investments that we purposely designed and committed to in order to address the expected variability of the ore body.

The last major component of the West upgrade plan is the completion of the thickener project. When completed in August, this final piece will complement the increased mining capacity that we have invested in during the previous years. We are pleased with the trends in our business and what we have built upon in the first half of this year. We have either completed or nearing completion of our major capital projects and are beginning to realize the benefits.

Our cash operating cost per ton are trending in the right direction. Pricing is stabilized and even rebounded from the floor. We’ve achieved strong sales volumes by executing on our thoughtful and flexible marketing strategy; we’ve strengthened our cash position and overall balance sheet. And importantly, we’re capitalizing on the margin and cash flow opportunity that we have created. We expect the positive trajectory to continue as we build momentum and further realized the benefits from our competitive advantages of being well-situated with distribution capabilities in key markets of serving a diverse customer base with high quality products and operating our facilities at full production rates and selling of what we produce to realize the best average net realized sales prices in North America.

With that we’re ready to turn it over for questions.

Question and Answer Session

Operator

Thank you. We will now being the question-and-answer session. (Operator Instructions) The first question today comes from Ben Isaacson of Scotiabank. Please go ahead.

Christine Monroe - Scotiabank

Hi, this is Christine Monroe here stepping in for Ben Isaacson. I just wanted to ask a question about the capital projects; as they're winding down, what the plans are over the next few years. We’re just trying to get an understanding of how you think about capital allocation going forward?

Bob Jornayvaz

I’ll start with that. Fortunately, we are on the tail end of every one of the major components and I think we’ll easily be in the range that we’ve guided to between $40 million and $50 million. I guess, or are you asking about new capital projects, are you asking about the wind down of the existing projects?

Christine Monroe - Scotiabank

I think we're – I mean we're asking a little bit about both, and then sort of thinking about what your thoughts are going forward for capital allocation in terms of whether there are new projects or not?

Bob Jornayvaz

Well, we’ve got a lot of great ideas in the pipeline that we’ve been studying on an R&D basis. So that’s one of the great things about Intrepid is that we’ve had so many organic opportunities. Our primary focus definitely through the rest of this year and the early months of 2015 are optimizing these great assets that we’ve built and taking the time without the 100s and 100s of contractors that have been on site to run these new plants at an optimal level. Once again there is no shortage of good solid ideas that are pretty solid investment returns that we’ve been studying that we’ve been working on from an R&D component. So I think in the future you will hear about some pretty exciting ideas. Dave would you like to add anything to that?

Dave Honeyfield

Yes. I think maybe just on the wind down of the current year capital program. As you guys can see in the numbers the focus has really been on wrapping up the work at HB and all but a very small amount of that work was completed and wrapped up in the second quarter. The North plant as Bob touched on we’ve completed the installation, we have all three lines of that new compactor plant up and running at this point and that work is finished and then we expect to complete the work on the construction of the new thickener tank really here in August and we’ll be commissioning that and bringing it online.

We also have some sustaining projects some of those were deferred into the back half of the year as you’ve seen in the numbers pretty modest capital expenditure level in the first couple of quarters. So all that work scheduled it will take place in a very orderly fashion and just continuing to make sure that the ongoing optimization work is taking place.

Christine Monroe - Scotiabank

Thank you very much.

Operator

The next question comes from Mark Connelly of CLSA. Please go ahead.

Mark Connelly - CLSA

Thank you. David seems like now that all the hard work is done, Bob has jumped back in to take all the credit. Two questions. This is the second quarter that you've sold more product than you produced in both segments. Should we assume that your inventories are now closer to where you want them?

And then a second question on logistics. You talked about being able to take advantage of your approach to distributing product. Has that meaningfully changed your geographic distribution this quarter and should we expect that to change again as logistics go back to more normal?

Dave Honeyfield

Mark, why don’t I take the inventory level question and Kelvin or Bob if you guys want to touch on the logistic piece? Yes, certainly on the inventory level Mark you are right. We really had a great run here in the second quarter and if you think about the number of different products we have in the different locations, I’d actually think that we’d like to build a little bit of inventory here right now because we’ve got some fairly low levels particularly on the granular side.

That said, we’re making sure that we’re working closely with our customers to time deliveries around that coordinate with production schedule. So we’re, I’d say we’re probably a little bit lower than we’d like to be on finished product inventory, but feel good about our ability to take care of the book that Kelvin’s built out here through the third and fourth quarter.

Mark Connelly - CLSA

Okay.

Bob Jornayvaz

The other piece is a very integral piece of this. Since the North completion, we’re now making some of the highest quality product in North America and it has a much longer shelf life and it has an ability to really have a very comprehensive logistic and distribution strategy that we really just didn’t have the ability to enact before. We’ve taken on customer that really from a product quality standpoint weren’t satisfied with us and now that we have some of the highest product quality out there. We’ve got a very diverse and complete customer base and allows us to sell product literally as fast as we make it. So inventory is an issue to make sure that we service everyone that we do take on. So inventory has both pluses and minuses and that you are turning your product into cash as quickly as you can, but you also want to have the right amount of inventory to service all of your customers. We’re not having to reach out geographically as far as you might think.

The great news is that rains that have occurred on the southern plains and throughout the State of Texas have done a great job in terms of returning some of our more normal truck markets that have existed for decades into much more robust markets. So that we’re seeing a normalization of some of the local markets that we’ve add. Kelvin you want to add a little bit to that.

Kelvin Feist

I think you’ve covered most of it. But Mark I’ll maybe just add that to your questioning or asking the question of our logistics and if we’re closer to the market. And I would say that, it’s fair to say that we’ve taken on more warehousing positions and probably moved some inventory from flat positions to closer to the farmer. We see these farmers buying bigger equipment and able to put more product on in a shorter period of time. So we’re trying to react to that and be ready for their demand. So that’s fair to say that in terms of geography as Bob stated it’s very similar and still very netback focused organization.

Mark Connelly - CLSA

Super. Thank you.

Operator

The next question comes from Chris Parkinson of Credit Suisse. Please go ahead.

Chris Parkinson - Credit Suisse

Perfect, thank you. You mentioned additional potash opportunities in the industrial and feed markets. Can you quickly quantify the magnitude of these opportunities and your expectations going forward into the second half, please?

Dave Honeyfield

Chris, this is Dave, let me just touch on where we’re at in terms of product mix or sales mix here. So for the second quarter and really for the first half of the year the numbers are almost identical. Our ag – pardon me, our ag sales were about 75% for the full year, industrial was about 20% and the feed is about 5%. So those numbers are up a little bit as a percentage over 2013, I think the piece that’s interesting to note is that our overall volumes are up as well. So I think it’s good strength in those markets industrial continues to be very resilient and we’re seeing as you can read there is plenty of activity in that sector right now so. We’re just in a good position to serve it and making sure that we’re balancing our production schedule to really focus on where we can get the best margins.

Chris Parkinson - Credit Suisse

Perfect, thank you. And a quick follow up. Given your current run rates in Trio, can you just remind us of your longer-term assertations for production going forward, as well as the geographic market opportunities? Thank you.

Dave Honeyfield

Sure, why don’t I touch a little bit on that and if you just want to add a little bit more on the future fees? I think the – well, we continue to focus on predominantly right now on the Trio plant is the production of the pellet product. And what you’ll see when the Q comes out is that much more of our product went into the domestic market than it has in the past. And what we have seen is the strength has been on the granular and the premium product moving that into the U.S. market has just simply resulted in us realizing more value for the product so the conversion of standard product, the premium has really allowed us to make sure that we’re getting the highest net realized price and really growing the margin overall on it.

So the expectation in terms of productivity we continue to look for ways to increase our recoveries out of that plant. I think the guidance that we have right now for the year is, I think that, that information is still very fair. I think there is some upside as we continue to improve our pelletization capabilities that exists and that’s really where our opportunity is in the near term.

Bob Jornayvaz

The other thing I would add to that is that we’ve seen surprising geographic diversity in terms of the demand for that product. So just about everywhere in the United States that we offer some of that product we’ve seen demand developing. So once again our theme of once we got into the langbeinite of growing the market rather than trying to buy the market has served us quite well. And that you’ll see, you’ll continue to see continued geographic diversity in where we market that product in the United States.

Chris Parkinson - Credit Suisse

Thank you.

Operator

The next question comes from Brett Wong of Piper Jaffray. Please go ahead.

Brett Wong - Piper Jaffray

Hi thanks guys. Thanks for taking my questions, and congrats on the nice quarter. I was just wondering on the strong expected demand that you see in the back half, is that driven by restocking or application? Obviously, we've heard that inventory levels are significantly low, so just kind of wondering your thoughts there.

David Honeyfield

Kelvin you want to start with that. And Brett, I’ll try and put some color to this one. I guess the first piece is restocking that’s got to start before the demand kicks in from the farm gate. What we’re really seeing is empty facilities across large geography that we serve. A big part of that was the strong demand always through the back end of the season. We’re seeing more demand on the pasture and hay land than we’ve seen in the past. We’ve got a stronger southern plain market that’s now has some moisture so they’re actually applying more potassium.

So I think we’ve had trouble kind of getting caught up at the end of spring season. We saw excellent demand for the sale if you will and now we’re just executing on the logistics for that. We believe that there is going to be a pretty strong application season this fall by all accounts there is a very good crop out there, there is lots of nutrient removal happening and I guess the anticipation is that they’re going to apply.

What happened last spring is pretty current in a lot of customer’s mind where they really got a tight window for application for various reasons. So I think they’re looking to spread that out and spread some of that work load across a lot more months of the year so. So our expectation is that we’re going to see a good application season as well and then moving to I guess a winter fill after that.

Bob Jornayvaz

I just want to stress that having broken the drought in the southwestern part of the United States especially the panhandle of Texas and Oklahoma, Northern New Mexico, Kansas has a big impact when you have such a small cattle herd and the amount of hay that’s been raised and the multiple cuttings that they’re getting with the moisture and the amount of potassium that that hay requires.

If you were to go back and look at some of our delivery numbers back in the mid 2000s going into the hay crops and going into those geographic areas those are great truck markets for us and we’ve seen a real rebound there and so we continue to believe we’re going to see the strong part of that market that – this thing get talked about, the hay and forage market system get described and discussed as much as the corn and the bean markets but they’re very significant markets for us.

Brett Wong - Piper Jaffray

Great, that's excellent color. Thanks a lot, guys. You talked a little bit about this in terms of the project pipeline, but just wondering if you can provide any more color on kind of the low-hanging fruit cost reduction opportunities out there. Obviously, you mentioned some R&D projects, and of course the completion of HB Solar commissioning and the West mine. But anything that you kind of see right off the bat that could help lower those costs?

Bob Jornayvaz

Well, the big picture is having several 100 contractors not trying to build things side by side with our operators. And so it’s really hard to describe what’s like to have plans that now have individuals operating and optimizing these new plants without having contractors on top of them.

So in terms of low hanging fruit having well trained operators with new machinery, new systems, learning how to run those and learning how to run those in a very concentrated fashion without contractors on top of them has provided probably the lowest hanging fruit to start with and we really expect that to continue to build and build.

The thickener at west which is – we’ve basically been operating with two very old thickeners running at less than 50% of capacity we built a brand new thickener that will then restore the old thickeners will rehabilitate those so instead of having 50% or 40% of two thickeners will now have a 100% of three thickeners that will give us a real opportunity to handle a higher slime ore if you will.

And as we continue moving to some of our stacked ore bodies that have significantly higher ore grades that’s one of the great things about Intrepid is that we are now moving towards some ore bodies and ore zones that we’ve been anticipating gain to for a couple of years as it took a lot of development work to head in that direction and now we’ll have the thickener capacity to handle the slimes that are in there so that’s a real opportunity from a recovery standpoint.

Our North plant just continues to operate better and better more effectively the pan on the pelletizer at the East plant, we continue to see weekly and monthly improvements on there so. Those are all low hanging operational opportunities. In terms of the R&D part, I just want to say that there are a lot of things that we’re looking at that really complement our knowledge of our brine systems.

The amount of – the minerals that occur in our brines and our ability to design and build plants around recovering minerals there are opportunities out there in the future in terms of Dave is there anything I missed that you want to talk about in terms of additional low hanging fruit?

Dave Honeyfield

No, I really think that you point you made at the beginning of that Bob is the key one that giving the operators a chance to have a much more singular focus really drives those operational improvements and you get the opportunity to try a little old tests here and there. So Brett I think the items Bob walked through there really are where you’re going to see that trend and focus here over the next year to two years.

Brett Wong - Piper Jaffray

That makes a whole lot of sense. Yes, yes that's great. That makes a whole lot of sense. I'm sure it's nice to have your facilities back in your own hands. I guess the last question from me is kind of going back to the capital allocation strategy going forward. Apart from the CapEx piece obviously we're going to see a significant but decline there, what else, or kind of can you talk to that strategy maybe potential return to shareholders, if you’re talking about that? Any color there would be helpful.

Bob Jornayvaz

Brett I guess, this is Bob as the largest shareholder, return of capital to shareholders is always at the top of my list. So you and I are pretty well aligned there. We do have a lot of opportunities that we’re looking at that are high rate of return opportunities and so we will, as we go forward and continue to evaluate those we’ll just simply look at them in terms of making sure that they have very significant rate of return opportunities.

You will see continued investment in our distribution strategy. It allows us to move our tons in a very timely fashion and it allows us to continue achieve the margins that we’re achieving and the higher netbacks that we’ve been able to achieve thereby generating the highest margins in North America. So those are going to be small investments but very consistent and well thought out strategic investments there won’t be large investments but they’ll make a difference. Dave once again…

Dave Honeyfield

I think the Amax development, HB Amax that we’re continuing to look out as well Brett on the longer term basis is just a continuation of driving more tons into the system that are produced using Solar Solution mining and lots of work going on in the background on that. I think as we get a little bit more clarity around some timeline pieces that’s just something to keep an eye on here into the future as well.

Brett Wong - Piper Jaffray

All right, great. Bob, glad we're on the same page, and thanks again for all the color, guys.

Bob Jornayvaz

Thank you.

Operator

The next question comes from Don Carson of Susquehanna Financial. Please go ahead.

Don Carson - Susquehanna Financial

Couple questions. Just wondering what impact Mosaic’s pending closure, their MOP operations in Carlsbad, has. Bobby talked about some of these high netback truck markets nearby. Does that increase your volume potential there? And then just on your second half market outlook, clearly we’re seeing strong demand, but you talked of stable prices. Does that mean you don't think you can get an increase over this 390 summer fill posting?

Bob Jornayvaz

Let me answer your question in a couple of different stages. First, when ever a plant gets shut down there is going to be employees that are going to lose their job and so our sympathy goes out to those that it’s just – it’s always sad when a plant get shut down. I do think that we will be -- I hate to use this term beneficiary but there are some very positive impacts that will occur in the labor market as several 100 well trained highly skilled workers come into the marketplace that’s the first piece.

The second is just not having Mosaic’s presence in that truck market I think just makes our presence a bit stronger. It helps us from a variety of reasons with the regulators down there in terms of the amount of stress right now with the oil and gas activity down there we see various regulators having to spend a variety of time and having one less plant that they have to monitor makes it easier for us to get things permitted and turned around time wise.

It’s a much lesser demand on the water resources down there we own significant water rights and in some very small areas we actually purchase water. Because of the large geographic footprint that we have in Southeast New Mexico, we both sell water and buy a very small amount of water we’re much more net seller than purchaser. So it’s going to help us in the water market if you will.

As we’ve gone through it corporately it’s -- we really don’t see any negatives whatsoever on Intrepid only potential positives. We have made significant capital investments over the years on our product side of our business that they have chosen not to make and that’s why I think we’re in good shape to take advantage of the situation. Does that pretty much answer your question or any more depth on that? I think Kelvin has got a point he’d like to make.

Kelvin Feist

Sure, Don. Just a couple of thing, as I get to Bob’s point, it’s a relatively small impact. I mean we’re very well positioned to cover all that southern plains market and specifically the truck market that we talk to so. So we’re in good shape there and we anticipate that we’ll be able to continue to do that.

I think your second part of your question was regarding the market and to talk about it, it’s stable or does it have some upside. I think a couple of things going on there we know the inventory is very tight in terms of the supply, demand has been strong. We’ve sold our summer fill, so we’re moving through that and it’s really a logistics game today to make sure that we can cover everything that we’ve committed to.

So stable to some strength in the market is a way I’d position that and I guess we’re certainly we don’t set the pricing in the marketplace, so we react to it and I guess we feel like there is, the commodity price is kind of driving a little bit of negative right now at the farm gate but we’re also weighing the other items like inventory and logistics and so you got a bit of a balance right now.

Bob Jornayvaz

Yes, Don, one more piece that I failed to mention is, it’s going to have a big impact on -- positively on Intrepid’s logistics with the railroad. Once again, we won’t have the competition over power over cars for their potash shipments that are leaving their mine. So same thing with the truck logistics so as we evaluate the entire situation we’re having trouble coming up with a negative for Intrepid potash at that Carlsbad facility.

Don Carson - Susquehanna Financial

Thank you.

Operator

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

Vincent Andrews - Morgan Stanley

Thank you, and good morning, everyone. Wondering if you could talk a little bit more about the rail situation. I remember back at 1Q, you kind of highlighted there was a risk to shipments in 2Q, depending on availability. That obviously proved not to be an issue. But I'm also hearing a lot of the grain handlers talking about the big crop that's coming and that's going to put further stress on the rail car situation. So it just kind of feels like maybe this isn't a one-time issue; it's going to be an ongoing issue so. What can you do over the medium to long-term to mitigate this issue, and how can you benefit from it and where are the risks?

Dave Honeyfield

Hi, Vince. This is Dave. I’ll start out and Kelvin if you have some additional comments here that I don’t cover please jump in. I think the -- all the comments that you made there Vince, I think are spot on that we certainly needed to wave the flag as we were going into the second quarter as we were seeing rail velocities really come under pressure. What I will tell you is that we were able to manage that in large part because of frankly there was a lot of group force works that took place during the second quarter daily conversations with the scheduling logistics folks particularly within the BN.

Our sales and marketing team moving trains around based on what was happening in current weather situations. Us focusing on more unit train deliveries into warehouses that can handle larger loads. And really trying to move forward that strategy that we’ve been talking about for a while of just being closer to the market. So it was the combination of those items that maybe it’s a little bit of a duck swimming in water that I think the end result made it look pretty smooth and predictable but there was a lot of effort to get there.

I also think your comment on the fact that it will continue to be a challenge. I think it’s very fair and that certainly the sentiment that I’d say customers as we got back from the Southwest Fertilizer Conference echoed that not a lot of discussion or concern around price actually fairly confident there but more concerned about logistics and getting product in place and like Kelvin touched on earlier some of that tightness that customers felt last spring they’re trying to be very thoughtful about.

So we’ve talked to each of the railroads that serve us we know that the BN is bringing on 500 new power units, 5,000 new employees, it’s taking them time to get those delivered and people trained, same thing on the UP although that has a smaller impact on us. So I think people getting ahead of it is important and certainly that’s -- we’re just staying close to our customers to make sure we’re managing the timing on it. So Kelvin anything else to add there?

Kelvin Feist

I think just we were at the Southwest Fertilizer Conference recently and I think one of the bigger themes that came out of that was logistics and distribution concerns from the farmer and really its tied back to what Dave mentioned the concerns for power and railcars. We are seeing an uptick in our truck traffic as we talked about. Some of the things that customers are doing I think they’re reacting to the starting level, taking product a little bit earlier than we would have expected. The one thing that we do have going forward is primarily we ship on single one carrier to destination whereas our competitors tend to ship on multi carrier. so it’s a little less complicated for us to get a product move to the customer.

Vincent Andrews - Morgan Stanley

That's very helpful. Thanks very much.

Bob Jornayvaz

Thanks.

Operator

The next question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson - BMO Capital Markets

Hi, good morning. When, where would we see, you've talked about sort of how your costs for potash being somewhat flattish for the second half and bottoming a little bit in Q4. When would the next drop in your cost space be? Would it be more Q1 or Q3 of next year?

Dave Honeyfield

Joel, this is Dave. One thing we’d point you back to is in the press release. What you’ll see is that there is a step down in the second half of 2014 compared to the first half. I think the flattish piece will really just be here in the third quarter because that’s the point in time that we have that the plan turnarounds and the solution mine harvest starts for HB in mid August year and then Moab starts up right after Labor Day.

So the fourth quarter is really where you will see that pretty good size step down, just direct you back to the guidance numbers because that will show you the impact of what we’re expecting over the second half of the year and then as I touched on earlier when we get into full production on HB those lower cost tons will even have the more pronounced impact in 2015.

Joel Jackson - BMO Capital Markets

Your warehousing and handling costs have gone down a fair bit the last couple of quarters on a per-ton basis. Is that sort of any run rate going forward?

Dave Honeyfield

There is a little bit of fixed cost component that you need to think about in warehousing and handling Joel. So we do have -- there are variable cost to go along with applying some of the de-dust agent or anti-cake agent from time-to-time. But when we’re able to have full volumes going through the system like we have been this year you are going to get the advantage that we weren’t able to get the full leverage on last year when the shipping volume was a little bit lower.

Joel Jackson - BMO Capital Markets

Okay. And finally, one of your North American, non or actually a non-chloride potassium fertilizer producers has, starting to look in some product development where they’re looking at basically producing an SOP that’s blended in micronutrients down the road here, trying to maybe compete with some of the langbeinite or Trio business. Have you done any work of possibly looking at some product development where you could produce like a higher potassium grade of Trio?

Dave Honeyfield

I think the -- may be one of the points that you touch on there is that there continues to be demand for specialty products. And we certainly recognize that there may be opportunity there at some point. I’d say right now we’re focused on the recovery on the Trio side and really looking at what capabilities there might be in the mines. So I don’t know that we really have much to comment on that specifically.

Bob Jornayvaz

Yes. We’re extremely aware of the demand for the magnesium and the sulfur – I wouldn’t say any real reduction in non-chloride products and we’re aware of opportunities and I’m just going to leave it at that. We’re very aware.

Joel Jackson - BMO Capital Markets

Okay. Thank you.

Operator

The next question comes from Andrew Wong of RBC Capital Markets. Please go ahead.

Andrew Wong - RBC Capital Markets

Hi, thanks for having me on the call. So with the last of your major CapEx projects being completed this year, can you just talk about what we can expect for a sustaining CapEx going forward? I think you’ve touched on it in the past, but I’m just wondering if there’s any update on that.

Dave Honeyfield

Andrew this is Dave. I can give you a kind of a snapshot as we sit here today. We’re just in the initial stages of kicking off our budget planning for 2015 as well. So these numbers may change a little bit. So what we’ve suggested is that sustaining it will be somewhere around that $35 million level there maybe a little plus or minus on that. But, what we’ve really looked at over time is that we’ve got newer facilities, we have a maintenance planning schedule or program that is in place and actively being applied across all the mines.

So I think the one of the important takeaways from my perspective is that there is a predictability to it now that maybe we didn’t have five years ago and we also have more mining equipment. We have an additional plant with HB, so a little bit of a transition period here but I’d kind of start plus or minus $5 million to that number.

Andrew Wong - RBC Capital Markets

And that's helpful, thank you. Could you compare that to just in prior years? You’ve mentioned some of the changes that’s been going on with your operations. Maybe just where it’s trending and touch on that a little bit?

Dave Honeyfield

Yes, I think that we’ve been – I mean the levels are a little bit higher than $40 million here for the last couple of years in 2012 and 2013 and part of that was just getting things to where they needed to be. So hopefully we’ll see a little bit of step down for the reasons I mentioned particularly around having newer facilities.

Andrew Wong - RBC Capital Markets

Okay, great. And then just one quick question, just circling back on pricing. Can you talk about the industrial and feed markets versus the agricultural markets right now?

Dave Honeyfield

I think it’s kind of interesting to have very specific discussions around that I don’t know that it’s always tremendously helpful because over time they will directionally follow one another. But there is a little bit of a lag in lead associated with them. So you kind of go back and look at what we have done on a net realized price basis over the years and we’ve continued to frankly deliver on higher net realized price. I think our historical numbers something like 24% and that’s been a period of time where we’ve had a higher percentage of ag relative to industrial and points where we’ve had a lower. So I think it really is helpful to look at it on a blended base.

All that said, I’ll tell you that Kelvin and the guys have done a very good job of pushing through the price increases that have been announced very quickly. And we talked about this being the first quarter where we’ve seen a little bit of a rebound. Really, we saw that happen mid first quarter and when we look at it looks what’s going on overall. I think we were able to react more quickly.

You look at the results that have been reported to-date and we’re something like $85 to $90 better on a short ton basis than what on a combined basis Mosaic and potash have reported here. So we continue to drive that I know you’ve heard Bob and I both emphasize it’s an integral part of our plan and we’ve got the flexibility and the plans to continue to drive that.

Bob Jornayvaz

Andrew, I guess I would just -- I would direct you back to our very solid nine year track record of achieving a much higher net realized price than our competitors. And that’s because we understand the diversity of our markets, the timing of our markets, how those markets are moving given our active participation in the oil and gas industry and knowledge of that as well as the feed market, it’s given us an opportunity and our track record very solidly proves that of determining which market is better win and when to make those switches.

Andrew Wong - RBC Capital Markets

That’s great. Thank you very much.

Gary Kohn

Hey Brock. Excuse me, this is Gary. We have time for one more question before you introduce, I’d like to apologize I understand for those of you listening on the webcast it may have been a brief break in the audio. I remind you that the recording will be available shortly after the call at intrepidpotash.com. So feel free to dial in and listen to that webcast. And we apologize for that brief, it sounds like there was a brief silent period but Brock if you would introduce the last question.

Operator

Thank you, sir. The last question today comes from Mark Gulley of EGC (sic) BGC. Please go ahead.

Mark Gulley - BGC

Hey, good morning. Two questions, if I can. One, a lot of discussion about lower cost of goods sold, particularly in the prepared remarks. Can you remind us what that target might be for 2015 on the potash side? And probably given all the progress with Trio, maybe an update as to what your target is for that product?

Dave Honeyfield

Mark, this is Dave. I’ll go ahead you want to ask them both first here?

Mark Gulley - BGC

Yes. The second question is with respect to, I’ll just say it, Compass Minerals, they have indicated that they would like to be able to purchase more KCL going forward. They have sulfur, you have the potassium ions. Seems like a pretty good match. And you are of course the most freight logical from the standpoint of sending MOP to them. Is that something that you can perhaps talk about a little bit?

Bob Jornayvaz

Mark I guess we have a very diverse and complete customer base and we’re very aware of who is buying potash in the United States and I kind of leave it at that. Once again, we’ll stand by our track record of achieving higher net realized pricing and knowing the market. I appreciate the insight and we’re just extremely aware of the market. Dave you want to…

Dave Honeyfield

Yes. I’ll touch on the other question here quickly Bob. The, Mark there is some information in our investor decks that might be worth pointing to with regards to what the impact of HB is on the system. I think overall, we said that it’s probably about 10% decrease once HB is up and running. And Bob went through a list of some of the other items that we continue to look at. So I think that’s a fair place to start when you look at the impact of the $80 to $100 per ton cost on the potash side.

And then on Trio little more specific on that what we’ve been doing is, you remember back to the first quarter we talked about some of the losses that we were having in our plant as we were manufacturing the pelletized product and so that the emphasis that we have been putting on the plant is really around reducing those losses. And what we’ve seen are some real nice improvements where we’re using less binding agent where our recycle rate has gone down and we continue to see improvements on that. So the trend will directionally be heading in the right place.

I think as we continue to make improvements in the plant it’s a little bit more challenging for us to have an exact prediction of what that will be. But I’d love to and I think we’ve got a very real capability that to pull out another $10, $20 per ton and certainly focusing on the recovery is where some of that upside is that I mentioned earlier. So directionally we’ll be continuing to push on it given the exact color on it we’re just going to need to see how each one of these step progresses.

Mark Gulley - BGC Partners

Thank you.

Dave Honeyfield

I think with that we’re wrapped up and really just want to thank everybody for taking the time to dial-in and appreciate your interest in Intrepid and we’ll look forward to speaking with everybody in the near future here.

Operator

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

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