Intrepid Potash Q4 Earnings Call Transcript

123jump.com Staff
08 Mar, 2010
New York City

Intrepid Potash fourth quarter revenue came in at $73.06 million down by 8% from prior year quarter and net income fell sharply by 70% to $6.71 million hurt by steep fall in prices of potash. Earnings per share were $.09 against $0.30 in the prior year quarter.

Intrepid Potash Inc. ((IPI))
Q4 2009 Earnings Call Transcript
March 1, 2010 1:00 p.m. ET

Executives

William Kent – Director Investor Relations
Bob Jornayvaz – Chief Executive Officer
David Honeyfield – Executive VP, Chief Financial Officer & Treasurer
Hugh Harvey – Chief Technical Officer
R.L. Moore – Senior VP Marketing & Sales
John Mansanti – Vice President Operations

Analysts

Robert Koort - Goldman Sachs
Edlain Rodriguez - Broadpoint.AmTech
Don Carson -- UBS
Vincent Andrews - Morgan Stanley
Dave Silver – Bank of America/Merrill Lynch
Douglas Flutie – No Company Listed
Elaine Yip – Credit Suisse
Mark Gulley - Soleil Securities
Horst Hueniken - Thomas Weisel Partners
Fai Lee - RBC Capital Markets

Presentation

Operator

Good morning and welcome to the Intrepid Potash fourth quarter 2009 earnings conference call. (Operator Instructions) At this time all call participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. If you’d like to ask a question during that time you may press * then the number 1 on your telephone keypad. I’d like to remind everyone that this conference is being recorded today, Monday, March 1st 2010 at 11:00 A.M local time. It is my pleasure to turn the conference over to William Kent, Director of Investor Relations. Mr. Kent, please go ahead.

William Kent – Director of Investor Relations

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

I would also like to remind everyone that statements made on this call which express a belief, expectation or intention as well as those that are not historical fact are forward-looking statements within the meeting 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, uncertainties and factors which would cause our actual results to differ from our forward-looking statements, we direct you to our news release issued this morning and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors. Our earnings news release, which is posted on our website at Intrepidpotash.com, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures including EBITDA which will be used on this call. All references to tons are to short tons of 2,000 pounds.

I will now turn the call over to Bob Jornayvaz.

Bob Jornayvaz - Chief Executive Officer

Thanks Bill and thanks to all those who have taken the time this morning to learn more about our fourth quarter results. We really appreciate your time. On balance the fourth quarter closed out a year that was marked by a number of successes and many challenges for Intrepid. Despite the difficulties we faced during 2009 the fourth quarter began to show signs of recovery in the potash sector. We sold 150,000 tons of potash during the fourth quarter, the highest sales level achieved since the third quarter of 2008. We earned $0.09 per diluted share on a net income of $6.7 million, generated EBITDA of $14.5 million and ended the quarter with $107 million of cash and investments. The fourth quarter was distinctly different than the prior nine months of 2009. Demand for potash improved with farmers applying product when the weather window allowed them to get into the field.

In October and December much of the corn growing region in the United States was either unseasonably wet or under snow which negatively affected the ability of farmers to harvest crops and apply nutrients. November provided for soil application opportunities with favorable harvest and fertilizer application conditions. The activity we saw in November when we sold almost 66,000 tons of potash gave us confidence that farmers were beginning to apply potash at more normal rates after reducing rates in 2008 and early 2009. Potash distributors in the fourth quarter, however, acted as they had in the prior quarters of 2009, taking very little price risk by continuing to hold a limited amount of uncommitted inventory.

We continued to work with a small number of customers in 2010 on our forward warehousing program in selective, strategic locations where we believe it should prove beneficial. It appears that the reluctance of dealers to take on inventory risk has begun to abate in the early part of the 2010 spring season. We are seeing dealers willing to build product inventories in order to have product available for sale when the customer needs it. With dealers actively stepping back into the market for the spring season our red granular inventory is now fully committed to the end of March.

Before I wrap up my comments I want to reflect on some of the decisions that Intrepid made in 2009 that allowed us to navigate the unprecedented market we faced. We stayed true to our goal of being a margin driven company by managing how we deploy capital specifically targeting projects that would increase our long-term efficiency and lower our per ton costs and by matching our production to meet the market demand. These decisions allowed us to end 2009 in a similar liquidity position to where we started the year.

We exited 2009 with a balance sheet that has over $107 million in cash and investments which provides us the flexibility we need to operate our business in a prudent manner and the stability to make long-term decisions. In the face of the market difficulties that we experienced during 2009 we remain confident in the long-standing drivers of our business and the potash industry as a whole. The fundamental need for potash has not changed over the past year. The world’s population continued to increase. Per capita arable land continued to turn lower and farmers now emboldened by supportive crop prices have resumed using potash to seek improved yields through balanced fertilization.

There is no question we are seeing hopeful signs in the potash market. We remain committed to making business decisions for the long-term that are margin focused while also allowing us to maintain a healthy level of cash on our balance sheet. Our confidence in the long-term prospects for potash remains and we believe that 2010 should see a return to more historical fertilization rates in the United States.

John Mansanti, who joined our company in November 2009 and is our Vice President of Operations, will take the call over from here. John?

John Mansanti – Vice President of Operations

Thanks Bob. We produced 124,000 tons of potash and sold 150,000 tons of potash during the fourth quarter of 2009. This compares to 201,000 tons produced and 94,000 sold in the fourth quarter of 2008. We produced 45,000 tons of langbeinite which we market under the name of Trio. We also sold 25,000 tons of Trio in the quarter. During 2009 we made a concerted effort to target mine panels with higher relative langbeinite grades in order to keep up with domestic demand for granular Trio. Capital investment in our operating facilities was approximately $24 million in the fourth quarter. The investments were used to fund a number of opportunity and de-bottlenecking projects that were already in progress as well as for sustaining and improving capital projects.

During 2009 we invested $104 million in the business. As you will remember we made the decision in the third quarter to scale back capital spending for the duration of 2009 yet we still were able to successfully advance our more important, larger scale projects. We installed the stacker reclaim at our west mine which is currently in service and we are eager to test it at designed production rates when the west mine is operating at higher rates later this year. The new thickeners at the east mine are assembled and should be in service by the second quarter. These thickeners are designed to increase potash recovery and should provide us with the ability to treat ores with higher clay content. Further, we made substantial progress in upgrading our facilities including installing and expanding the use of process control systems in our Carlsbad facilities.

In 2010 we intend to focus on final engineering of improvements to our current langbeinite recovery circuit. We are currently evaluating several alternatives as we as we attempt to optimize the deployment of capital, product recoveries and market needs. We expect to make a final decision on the scope and timing of this project in the next few months. In terms of total capital spending for Intrepid in 2010, we are targeting approximately $125 million to $155 million. Of these dollars we intend to allocate approximately $45 million to $65 million to sustaining and improvement projects including new mining equipment to develop additional mining panels and we intend to allocate $55 million to $75 million to increase productive capacity, specifically langbeinite recovery and additional compaction in our Moab facility. We also plan to invest approximately $12 million in rebuilding warehouse capacity at the east plant and anticipate a majority of this cost should be reimbursed through an existing insurance claim.

As with all capital programs since we went public we expect the 2010 capital program to be funded out of cash flow and existing cash on hand.

Now I will turn the call over to R.L. Moore, our Senior Vice President of Marketing and Sales.

R.L. Moore – Senior Vice President of Marketing and Sales

Thank you, John. As Bob noted the late fall harvest and winter fertilizer season was characterized by good weather driven demand in November and has turned towards a more typical spring field profile in early 2010. As we have previously discussed, reduced applications of potash fertilizer in the United States in 2008 and 2009 should lead farmers to return to more normal application rates in 2010 in order to maintain yields. During the fourth quarter dealers remained very price risk sensitive and continued the just in time purchasing trends. With the settlement of the Chinese contract at the end of December 2009, a general sentiment began to emerge that the market had reached a level that would allow U.S. dealers to start purchasing their spring potash requirements. With dealers holding limited inventories at the beginning of the year we have seen a marked improvement in truck demand from our facilities. Considering the sales activity that we have already witnessed we believe that distributors, dealers and ultimately farmers have acknowledged their need to purchase products.

Our posted price of $360 per ton for red granular potash which went into effect on December 28, 2009 was increased to $390 per ton effective today, March 1. With that being said we recognize the need to stay competitive with the pricing being offered in specific markets that we have historically served. In the industrial portion of our business the North American drilling rig count has grown by 45% since July of last year and we are seeing some measured level of improvement in this market. Our industrial sales have continued to lag 2008 levels but we anticipate that sales should begin to increase as we move into the second quarter of 2010. As with previous quarters the animal feed component in our various markets has seen consistent demand.

I will now hand the call over to David Honeyfield, our Chief Financial Officer to wrap things up.

David Honeyfield – Chief Financial Officer

Thanks R.L. The cash production costs per ton of potash sold in the fourth quarter of 2009 net of byproduct credits was $186 per ton, a decrease over the $240 per ton in the fourth quarter of 2008. As we have discussed in the press release that we issued on January 21, we directly expensed $9.4 million of production costs in the fourth quarter of 2009. This was a result of our decision to operate our west facility and our Wendover facility at lower rates in the fourth quarter but was also driven by the impact of the substantial weather related production disruption at our Carlsbad east surface facility.

The effect of expensing these production costs directly was that we did not include these costs in inventory and therefore the costs did not get captured in the corresponding cost of goods sold amounts. We are working to resume full production at our west mine and we anticipate that it should take until sometime in mid-2010 to ramp up to historically comparable production levels. Based on this assumption we believe that a modest portion of production costs will likely continue to be expensed as abnormal in the first quarter of 2010, albeit at much lower levels than we have seen in recent quarters.

Similarly, cost per ton amounts should likely continue to remain somewhat consistent until all production for the facilities are back operating at historic levels of capacity utilization. Our average net realized sales price for potash was $408 per ton in the fourth quarter. And it is important to understand that first quarter realized prices are expected to be lower because of the price reductions in the market and our decision to adjust prices to be competitive. On a positive note, if you look at Green Market’s publication coarse murate of potash pricing for the Midwest over the last four weeks has stabilized and even begun to increase.

I want to briefly touch on capital investment. I am pleased that our decision to defer some capital investment in 2009 allowed us to exit the year with a cash and investment balance of approximately $107 million. As we stated on our last earnings call we intended to enter 2010 with a healthy level of liquidity. Our strong balance sheet should allow us to execute on the robust capital investment plans that we have for 2010.

As I have noted in the past, the pace of this capital investment may be impacted by the cash flows we generate from operations and may change depending on market conditions or other factors. We expect sales volumes in the first quarter of 2010 to increase over the volumes that we saw in the fourth quarter of 2009 as January and February have been strong months. As R.L. touched on, distributors are stepping back into the market and farmers seem to be embracing the agronomic need to apply potash.

2009 was a challenging year for Intrepid and through balanced decision making and prudent use of capital we were able to work through 2009 and enter 2010 in solid financial shape. 2010 is setting up to be much improved in terms of volumes over last year with distributors and end users beginning to buy product in a more typical fashion, supported by good crop economics. Intrepid intends to continue to focus on margins as we move forward and keep a keen eye on how we deploy our capital investment dollars.

Our long-term view of the potash market remains unchanged. By taking the appropriate steps to invest opportunistically in our business and maintaining a healthy balance sheet we believe we are well positioned for continued success.

We will now open the lines for any questions.

Question and Answer Session

Operator

(Operator Instructions) At this time if you’d like to ask a question press * and then the number 1 on your telephone keypad. Again that is * and then the number 1. We have a question comes from the line of Robert Koort.

Robert Koort - Goldman Sachs

Hi good morning guys. You mentioned something about the list price hike effective March 1 but then an acknowledgement to be competitive where required. Does that imply some producers aren’t supporting that market increase?

R.L. Moore

I can’t speak to what the other producers are doing but we do have markets that we sell into that come up against the river locations and we have to compete against barge business. Those are the areas where we look at having to be competitive.

Robert Koort - Goldman Sachs

Can you talk a little bit about your forward positioning program and how that looks any differently going into this spring than it might have last year or last fall?

R.L. Moore

Going into this spring we have cut it back to just really a couple of our key customers that we work with that have warehouses located on railroads where we have some freight advantages. There were locations in the eastern part of the United States where we had some forward warehouse programs with and with the change in the pricing as it went down we found that those locations were no longer favorable for us to support. We have a good relationship with those customers because most of them buy our Trio from us and have other sources to where they can purchase their potash.

Robert Koort - Goldman Sachs

Great, thank you.

Operator

Your next question comes from the line of Edlain Rodriguez.

Edlain Rodriguez - Broadpoint.AmTech

Good afternoon guys. I am trying to get a better sense of the production cost issue. Because if you look at the cash production number for Q4 at $186 per ton it is higher than the $177 you reported in 3Q despite higher production in the quarter. Can you talk about what is going on there? Also at full operating rates should we expect that number to be back to the levels we saw in 2007 when it hit the other in 2008?

David Honeyfield

Hi Edlain this is Dave. I think the way to think a little bit about costs going forward is you have really hit it right on the head. As production rates increase because a big portion of our cost base, particularly in Carlsbad, is somewhat fixed in nature you will start to see those costs come down. So we are continuing to move forward in terms of bringing productivity on at our west mine. That implies getting some additional folks on the ground. So when we look at where we think costs will be at a point in time where we are at full production rates I think you can look at probably the mid part of 2008 as likely a better indication and certainly recognize that the mining sector continues to have wage escalation and cost escalation from vendors on chemicals and such. Absolutely that is the direction we are headed. I don’t know if I answered all your questions or John do you have anything else to add here?

John Mansanti

Maybe just differentiating 2010 from other years, adjusting to the market last year we had the reduction in force. As we move forward strategically we are looking at less contractor involvement and a higher percentage of our own people. That requires staffing, training and there are some inefficiencies associated with getting people up to speed. Part of that is built into 2010.

Edlain Rodriguez - Broadpoint.AmTech

Okay that’s great. Another quick question on the industrial market, when you look at your sales there they continue to lag. Has there been a structural change in that market that would make it almost impossible or very challenging for sales to go back to the previous levels we have seen before?

Bob Jornayvaz

I will touch on that a little bit and then let R.L. touch on it. We are definitely not seeing the increased drilling rates in the Rocky Mountains. So when we look at the industrial usage out of our Moab and Wendover facilities because of the gas price differential that we see in the Rocky Mountains we are not seeing the kind of drilling activity up here that we have previously seen. That rig count is slowly coming back but not at the pace that we are seeing in Texas or Louisiana and Oklahoma. I don’t think there has been so much a complete structural change but we have to acknowledge where we have seen differences in the various rig counts and how that affects industrial sales from our Moab and Wendover facilities. With that being said we are spending the money in 2010 approximately $14 million to build a compaction facility at our Moab facility that will allow us to compact 100% of the production at Moab so that if that rig count doesn’t come back to where we think it will we will have that ability to compact everything and sell it into the ag market. So, we believe we are adjusting and reacting to market forces, market changes as quickly as we can. Once again that will be two redundant. I wouldn’t say there has been so much a structural change in the industrial market as just a recognition that rig counts are picking up in different parts of the country at different times. R. L, is there anything you would like to add there?

R.L. Moore

I think you have covered it Bob.

[Bob Jornayvaz]

Edlian does that answer your question?

Edlain Rodriguez - Broadpoint.AmTech

Yes it does. Thank you.

Operator

Your next question comes from Don Carson.

Don Carson -- UBS

Thank you. Couple of questions Bob just to answer your pricing and volume outlook for 2010, I know in your slide deck you have talked about North American consumption of Potash getting back to about 8 million product tons. That would still be a nice recovery, pretty low relative to 2007, 2008. So, is that still kind of your thinking on the volume recovery and I know that you have talked about early farmers being more price sensitive now. What is your sense of how much growth you want to put down at these prices and just as a type of pricing, are you finding the Canadians more aggressive given that their actual prices haven’t really come up all that much and they get much better spring in the U.S market.

Bob Jornayvaz

Well let us start with volumes. The movement that we are seeing, that we saw in November, and that we are seeing in the first two months indicates that we are definitely seeing all of our market as it relates to the ag picture move on a much steady state demand, more normalized kind of a demand profile. So, we have got limited data points but what we are seeing is very robust and we are very happy with and would give us reasonable reason that we are going to return to more normal rates. From a pricing of potash to the farmer perspective I think that demand is indicative of farmers willing to pay current prices and I’d suggest the price was even higher in November and we saw such good movement in November that farmers were willing to pay the going price in November. So, we saw a lot of farmer movement in November. The third part of your question was….

Don Carson -- UBS

Canadian compensation given that U.S prices are pretty attractive relative to their offshore netbacks currently.

Bob Jornayvaz

Well I think inventory are needed to move. I think that 2009 is behind us. I think 2009 was about as abnormal as the universe has seen and lets hope that is what that was all about. I don’t really have anything to add about the Canadian’s marketing other than that.

Don Carson -- UBS

So, given that prices are lower now than when you were forecasting the 8 million ton market for the 2009/2010 year, would you see some upside to that volume forecast you had made earlier?

Bob Jornayvaz

I think it is very reasonable. I think it is very reasonable to see at these lower potash prices, significant volume demand.

Don Carson -- UBS

Okay thank you.

Operator

Our next question comes from the line of Vincent Andrews.

Vincent Andrews - Morgan Stanley

Thanks good afternoon everybody. Bob, I wonder if I could follow-up on something you just said which you noted you were seeing strong demand in November and higher prices than today. So in terms of the idea of getting back to those prices what do you think it takes and do you think it requires higher level of pricing in the export market, which I obviously know you don’t participate in. But is there a situation in the spring where things get tight either because of logistics or because of supply or what do you think the state of play is like for price?

Bob Jornayvaz

Well, things are already tight. As we mentioned, our red granular inventory and production is committed to the end of March and we are seeing strong demand going past that. Simple economics would tell you that strong demand does have an impact on pricing and that is certainly what we hope to see. All I can talk about is November we use that as a pretty reflective month of the state of the market. We were at higher pricing and we saw very significant demand. I am going to leave it there as it comes to trying to be a prognosticator of price. R.L you want to add?

R.L. Moore

I would only say that we have not seen demand drop off here in the first quarter. November was a very good month but we have moved more potash in January and February than we did the entire fourth quarter.

Vincent Andrews - Morgan Stanley

Your pace of orders for April delivery is at/above or below the pace for March? Obviously you are sold out in March but has there been any people…how far out are people buying?

R.L. Moore

We have actually booked some rail shipments to go out in April, not very many. We have tried to maintain our product we have available to cover the customers that participated with us in our forward warehousing program to cover our truck market out of Carlsbad which is and will always be our absolute best market. Then the product for our animal feed and industrial markets we still carry a premium over the ag.

Vincent Andrews - Morgan Stanley

My real question is are people buying any further in advance than you anticipated or than they would have in a normal year?

Bob Jornayvaz

I don’t think we have seen that kind of tightening in the market yet where people feel a need to do that. We are certainly having a lot more discussions. There is a lot more about the forward part of the market but we are not necessarily seeing it in the order book quite yet. Let’s be honest, this market has just now turned.

Vincent Andrews - Morgan Stanley

Okay but that’s very helpful. I’ll pass it along.

Operator

Your next question comes from the line of Dave Silver.

Dave Silver – Bank of America/Merrill Lynch

Hi good afternoon or morning. I know we are straddling the divide here. A quick question about the pricing trends in potash you are seeing. Your average potash selling price was $408 for the fourth quarter. Then you did talk about stabilization in the first quarter and you cited kind of the benchmark or the selling list price of $360 per short ton in Q1 or for the bulk of Q1. Could I kind of use that maybe plus distribution costs to kind of figure out or estimate where you think your selling prices are bottoming out here, in other words, $360 to $375 somewhere in that range. Is that a reasonable surmise given the quarter is not over yet?

Bob Jornayvaz

I think that is very reasonable.

David Honeyfield

Yeah this is Dave Honeyfield. The other piece when you build your models you might want to think about is when we talked about our net realized price that is a net price. So if there is a freight number or a distribution number on top of that you might end up with a higher gross price but I would ask you to probably model at that net realized price number. So I think the way Bob touched on that, it makes decent sense if you are adding the freight piece on top. Keep in mind when we are discussing net realized price we have already backed out freight and everything else so that is really the cash we see coming in the door to us.

Dave Silver – Bank of America/Merrill Lynch

So the apples-to-apples would be kind of maybe $360’s versus the $408 you reported?

David Honeyfield

Keep in mind for larger customers we always will have a little bit of a discount that moves. And then we are still competing with the river market. That market is a little bit tighter. So that is an indicative number it is fair to say but each market will have its own price point.

Dave Silver – Bank of America/Merrill Lynch

Very fast moving markets and a different mix and the mix is constantly changing no doubt. I had a couple of questions on the CapEx side. I appreciated John’s detail I guess on the breakdown this year in terms of sustaining versus discretionary CapEx. Could you do the same for 2009? In other words how much of the $103.6 million, would you characterize as sustaining? And then separately I guess in the cash flow statement I was having a little trouble building up to the $103.6 million. I am wondering if there is an adjustment there. Thank you.

David Honeyfield

Sure. I will touch real quick on the 2009 numbers David and I will also let you know we are filing our 10-K this afternoon. So those will be detailed in the liquidity and capital resource sections. That approximate mix of CapEx is not that dissimilar. So we are probably in the, I think we are in the $45 million range on sustaining and then there were also some improvement dollars that got us to about $60 million and then the remainder of that were some of our core projects like the stacker reclaim at west and getting the tanks on site at the east mine. On the cash flow statement the piece that is always a little tricky to follow is it never quite matches the accrual base because you have to back out accruals on the cash flow statement. So over time those will level out. Certainly that is something we are happy to visit with you offline and help you try and reconcile back to it if need be.

Dave Silver – Bank of America/Merrill Lynch

Okay so no problem and so accruals and parole. And then just one more question on the Trio side of your business, that is the smaller of your two product lines. Listening here as an interested observer it struck me there seems to be substantial short-term emphasis on Trio in at least a couple of areas. First, I would say you continue to build inventory in that product line. I think expressing confidence in your forward order book. Then secondly, in your capital spending program if I kind of parse the emphasis you had it seems to be the project you view as kind of the low hanging fruit or the highest net return quickest payback of the projects in your portfolio for let us say for 2010. Is that a correct assumption? Could you maybe talk about the shorter term view on Trio demand and why the confidence you have in continuing to produce ahead of recent sales trends?

Bob Jornayvaz

Great question, let me break it into two components on Trio. One is granular and one is standard. When we look at our granular sales we were sold out several times during 2009 and there is significant demand for our granular product. Our standard product on the other hand didn’t see as much demand because the method by which it is applied is very different. We sell more of our standard product into the international market so a large part of that capital you are going to be seeing expended on the Trio side is to give us the ability to prill or compact, if you will, our Trio product to sell into that market that has such much greater demand. So we have great faith in the Trio granular market as evidenced by the fact we ran out of inventory several times during the course of 2009. We would really like people to understand the differentiation between standard and granular and the capital that we are going to spend to take our standard and turn it into granular. Does that make sense?

Dave Silver – Bank of America/Merrill Lynch

Yes. So, product mix within the Trio product line?

Bob Jornayvaz

Right.

Dave Silver – Bank of America/Merrill Lynch

Okay and then my supposition or my hypothesis that the recovery or the Trio recovery project is maybe the most attractive of your 2010 or shorter-term capital projects in terms of returns or payback or however you look at it?

Bob Jornayvaz

That is an accurate assessment. There are several advantages that come with the recovery. We are already processing that material so being able to elevate that to higher recovery to get more product is very attractive to us when we look at all the other projects we have.

Dave Silver – Bank of America/Merrill Lynch

Okay thank you very much.

Operator

Your next question comes from the line of Douglas Flutie – No Company Listed.

Douglas Flutie – No Company Listed

Good afternoon. It sounds like you saw favorable demand in January and February. Do you sense any component of the recent volume improvement reflect some pre-buying ahead of announced price increases?

Bob Jornayvaz

I think a little bit. I think I’ll let R.L address that.

R.L. Moore

Any time you have a price announcement you have that occurring before the announcement. A lot of what we had booked we had booked at that price before the announcement. With that being said our order activity has dropped off with this announcement but we haven’t been overly concerned about it because we have got enough orders on the books to take us through March and April.

Douglas Flutie – No Company Listed

Okay that’s helpful and I want to make sure, did I hear you correctly that January and February volumes exceeded the entire fourth quarter?

R.L. Moore

Yes Sir.

Douglas Flutie – No Company Listed

And then just one final question, what type of capital investment is required to shift your trio production from standard to a granular product?

Bob Jornayvaz

Again as I stated earlier we are in a process of evaluating that in relationship to all the other prices. That is something that we will quantify a little deeply, present that to the board and get approval and we will be in a position to announce that at that time.

John Mansanti

To back up on the Trio recovery, that project can be anywhere from about $70 million to $160 million depending upon how big and how far we want to go. Right now we are trying to engineer it in a compartmental fashion so we can add the prilling piece and a little bit of increased recovery piece in 2009. So I would say that on the capital side for Trio it is going to be at the lower end of that range I just gave you. And in the upcoming years we will be able to then add additional components onto that design. Is that helpful?

Douglas Flutie – No Company Listed

Yes. Okay that’s helpful.

Operator

Your next question comes from the line of Elaine Yip.

Elaine Yip – Credit Suisse

Hi good afternoon. You mentioned in the press release that it might take time or until mid-2010 to return to historical production levels because of not having a sufficient number of qualified employees. Can you comment on the issues that you are seeing there? I mean how difficult is it to hire qualified employees? How long does it take to properly train them?

Bob Jornayvaz

Let me just give you a quick overview and then I will let John handle the details. The Southeast and New Mexico labor market has been for the last several years a very robust labor market primarily because it has got various forms of mineral extraction, it has got oil and gas drilling, it has the whip site which is a federal kind of uranium waste handling project. So there are a lot of different components that make the Southeast New Mexico labor market a tougher market. Having said that, we are really trying to stay away from some of the actions we took in ‘07 where we brought on lots of contract employees that would come and go and weren’t as reliable as an employee that we can go out and recruit from a different part of the country, bring in, train, incentivize to stick around so that we can have a more productive worker. It is a little bit different strategy. Rather than just hiring a warm body we are trying to go out and recruit specific people with certain skills, train them and incentivize them to stick around. So John do you want to talk to the timing that takes?

John Mansanti

As Bob said the Carlsbad market is anomalous to national trends there and that represents some challenges. The key thing is to as we move to more of an employee based production as opposed to a contractor based production to get people onboard. Because the demand on people means you are reaching to people that have fewer industrial skills, need to be trained and need to be exposed to the environment. There is a safety issue and everything that goes with that. So there is just a timeline associated with bringing somebody in, getting them familiar with the potash industry and the industrial setting that we are asking them to work in.

Elaine Yip – Credit Suisse

Given that it is going to take longer to return to full rate does that impact your ability at all to realize the typical volume share that you see in the marketplace?

Bob Jornayvaz

As we mentioned earlier we are basically committed to the end of March and we would much prefer to be in a position where we have sold all of our inventory or sold the product that we anticipate producing. From a margin driven standpoint we think that is a better way to run the business. We will see. That is philosophically where we are coming from.

Elaine Yip – Credit Suisse

Thank you very much.

Operator

Your next question comes from the line of Mark Gulley.

Mark Gulley - Soleil Securities

I have a question regarding the industrial side of potash demand. Perhaps I should know this but is potash used in some of these brand new natural gas fields, the tight shales at Ft. Worth and places like that or just Rocky Mountain based?

Hugh Harvey

Sure. This is Hugh Harvey. I would say that there is a high likelihood that new shale plays will use potash because potash is basically a clay swelling inhibitor so whenever you go to complete a gas well it is always advantageous not to plug up the pore throats in the formation. I am not going to hold our company out as being experts in every gas play out there but from the physics side of it I would say yes potassium chloride would be used in their completion mix.

Mark Gulley - Soleil Securities

Is it being used now or is that something we have to wait for?

Hugh Harvey

If it is being used it would be used right from the start.

Mark Gulley - Soleil Securities

Okay and then I want to go back to the accounting treatment of the costs that you isolate with respect to potash production. Can you kind of run through again why you spike that out? Is the reason to give us a better idea of what your production costs are going forward? That item has always just been a little bit confusing to me.

David Honeyfield

Mark this is Dave Honeyfield. To start with there is a requirement in U.S. GAAP and it was formerly known as FAS 151. That requirement is that any costs associated with abnormally low production get expensed immediately. When we go through that calculation we look at what we think our range is of normal production. There is quite a bit of judgment that goes into that calculation. What happens mechanically is it gets carved out and it never runs through the inventory numbers and then accordingly never runs through the cost of sales line. But in terms of does that get you exactly to a “normalized” level of cost I would say it isn’t because we really just look at that over a range of possibilities in terms of production levels. We know that directionally as we produce more tons we will have a lower cost per ton and as we produce less tons the converse will be the case. So directionally it will get you there Mark, but I wouldn’t use it as a predictive number spot on. As I mentioned earlier in my comments I believe with Evan Rodriguez, I think looking back to those mid-2008 numbers and thinking a little bit about some minor inflationary items is probably a better way to think about it when we get to a full capacity level.

Mark Gulley - Soleil Securities

Okay that’s helpful. One final call, question on that. Would it be wrong to characterize that as a difference between standard cost and actual cost or is it beyond that?

David Honeyfield

I would say it is probably beyond that just because there is more judgment involved with the calculation. I think conceptually you are getting your hands around it. It is a manufacturing concept.

Mark Gulley - Soleil Securities

Thank you.

Operator

Your next question comes from the line of Horst Hueniken.

Horst Hueniken - Thomas Weisel Partners

Hi good afternoon everyone. Along the theme of the abnormal production costs, how many more volume would you need to see such that you would not have any such abnormal accounting treatment?

David Honeyfield

It is hard to put a spot on number on it Horst. I think the way I would try to respond to it is really just that we don’t expect to see much of that cost here going forward. As I said in my comments it will be significantly less. I think you can imply from that reasonably that that means that production levels are going to be increasing. We have announced, as John stated, that we are trying to get our production at the west facility back up to full capacity. All of that is helpful. Really the largest share of that was our decision as we commented earlier to reduce production at the west and the Wendover facilities. So I wouldn’t anticipate too much of that going forward but there will probably be a little bit here in the first quarter.

Horst Hueniken - Thomas Weisel Partners

Thank you. That’s helpful. My other questions have been answered.

William Kent – Director of Investor Relations

I think we have time for one more question and then we will try to close up at that point.

Operator

Our last question comes from the line of Fai Lee.

Fai Lee - RBC Capital Markets

Thank you. With respect to the commentary about being fully committed on the red granular inventory, is that fully committed on just volumes or how should we view the pricing on those commitments?

Bob Jornayvaz

R.L I’ll let you answer that.

R.L. Moore

We have fully committed is to go out there to some of our farmers who we work with through the warehouses. The orders they have to replenish their inventories where they have been moving out, that will depend on what competition does in those warehouse areas. If our competition follows the pricing they have put out we will be able to get a higher net back than we did in January and February. If not we will have to continue to meet competition. While we haven’t committed, we do have tons set aside to cover our truck demand which I commented earlier has probably been better in the last two months than it has in the last 18 months. Part of the tons we have going out will be at the new price and some will be at a competitive price.

Fai Lee - RBC Capital Markets

Okay and in terms of the posted price, I just wanted to clarify something to I think David’s question earlier, if you have a $360 posted price and let’s say it doesn’t change through the quarter should the net sales price be a little bit lower due to the potential discounts to larger customers? Is that the way to think about it?

David Honeyfield

Fai, this is Dave. I think that is an accurate way to think about it. As information to support that what I would ask you to do and we publish this in our Q’s and our K’s as well is our net realized sales price the highest we had was in the fourth quarter of 2008 and that was at $762 per ton. Our posted price was $800 per ton. So I think what that helps people understand is there is always going to be a little bit of a difference there. The net realized price for the most part will always be some percentage lower than what the posted price is for a variety of the reasons that we have talked about here today.

Fai Lee - RBC Capital Markets

Okay. Does that percentage change over time?

David Honeyfield

It changes by market. What I would ask you to do is continue to probably look at our posted price numbers relative to what the Green Market net realized prices have been. My sense is folks can probably build their own models of how they view pricing and our net realized price will shake out based on a lot of that historical data that is out in the market.

Fai Lee - RBC Capital Markets

Okay and the Trio, can you tell us what your posted price is for Trio right now and what it was in December?

Bob Jornayvaz

It went from $181 yesterday to $196 today.

Fai Lee - RBC Capital Markets

Okay great and just the last question, you mentioned you are fully committed on the red granular inventory. Do you have other inventory that may not be fully committed? The comment seemed very specific to red granular.

Bob Jornayvaz

The reason we always talk about red granular is because that is our most commoditized market that goes into the Midwest and goes along the river. When we look at our granular inventories throughout the company we are drawing them down and they are very low. At Moab where we always carry a higher standard inventory don’t forget the evaporation season begins in April. So we quit running our plant and we need that standard product to compact throughout the summer months. Throughout the company we are seeing much, much improved inventory levels in terms of drawing them down.

Fai Lee - RBC Capital Markets

Okay thank you.

William Ken

I think at that point since we don’t see any other questions in queue, we would like to say thank you for joining today’s call and for taking the time to learn more about Intrepid. Thanks so much and have a great day.

Operator

This does conclude today’s conference call. You may now disconnect.