Rentech Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar.19.13 | About: Rentech, Inc (RTK)


Q4 2012 Earnings Call

March 19, 2013 2:00 pm ET


Julie Dawoodjee Cafarella - Vice President of Investor Relations & Communications

D. Hunt Ramsbottom - Chief Executive Officer, President and Executive Director

Dan J. Cohrs - Chief Financial Officer, Executive Vice President, Treasurer and Principal Financial Officer for Rentech Nitrogen Partners LP


Matthew Farwell - Imperial Capital, LLC, Research Division

Lucas Pipes - Brean Capital LLC, Research Division


Welcome to Rentech Fourth Quarter and Year End 2012 Conference Call. My name is Larissa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I'll now turn the call over to Julie Cafarella, Vice President of Investor Relations and communications. Julie, you may begin

Julie Dawoodjee Cafarella

Thank you. Welcome to Rentech's conference call for the 3 and 12 months ended December 31, 2012. During this call, Hunt Ramsbottom, President and CEO of Rentech, will summarize the company's activities during the year and provide our financial outlook. Dan Cohrs, our Chief Financial Officer, will give a financial review of the period. Also in the room with us today are members of Rentech Nitrogen's management team, including John Diesch

[Audio Gap]

and forward-looking statements. They can identified by the use of terminology such as may, will, expect, believe and other comparable terms. You are cautioned that while forward-looking statements reflect our good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties and risk factors, detailed from time to time in the company's periodic reports and registration statements filed with the Securities and Exchange Commission. The forward-looking statements in this call are made as of March 19, 2013, and Rentech does not undertake to revise or update these forward-looking statements, except to the extent that it is required to do so under applicable laws.

In addition, today's presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2012 fourth quarter earnings press release that is available on our website.

Now, I'd like to turn the call over to Hunt Ramsbottom, President and CEO of Rentech.

D. Hunt Ramsbottom

Good morning, everyone, and thank you for joining us today. 2012 marked a very successful year for Rentech and our fertilizer business, Rentech Nitrogen. We returned capital to shareholders and identified new business opportunities with attractive returns and growth profiles, while reducing our corporate expenses.

We're very excited about the future of both companies, and I'll go into more detail later in the call about our businesses. But first, I'll discuss results and activities during the past year.

At Rentech Nitrogen, we delivered strong results, generating $3.30 per unit in cash distributions for the year, which exceeded our guidance. Among Rentech Nitrogen's significant accomplishments for the year are the acquisition of the largest producer of synthetic ammonium sulfate in North America and the completion of the urea/DEF expansion at the East Dubuque facility. The acquisition of the Pasadena facility is expected to be accretive to cash distributions beginning this year. It also provides some similar growth opportunities and diversifies the products, markets, location and raw materials of the East Dubuque facility.

The DEF project allows us to expand our product offerings at the East Dubuque facility to include high-margin diesel exhaust fluid and increase urea production capacity of the plant by 21,900 tons annually.

2012 results benefited from 2 months of contribution from the Pasadena facility and from higher margin ammonium and UAN product prices at the East Dubuque facility. In addition, we locked in natural gas costs more than $1 lower per MMBtu than in 2011. Our ammonia and sulfur purchases averaged $658 and $154 per ton, respectively, at the Pasadena facility.

At Rentech, we continue the transformation of our business, following the formation of the MLP in late 2011, by growing Rentech Nitrogen and reducing our alternative energy activities in 2012. We returned $58.6 million of cash to shareholders in 2012. We paid a special cash distribution to shareholders of $0.19 per common share, which represented approximately $42.2 million in payments to holders at the end of the year. Approximately 75% of the distribution was a return in capital. In addition, we repurchased approximately 9.1 million shares in 2012 at an average purchase price of $1.81.

We redeemed all of our convertible senior notes with a principal amount of $57.5 million on December 31, 2012, in advance to their April 15 maturity. The early redemption resulted in interest savings of approximately $700,000. Upon redemption of these notes, we have no outstanding debt obligations at Rentech.

In 2012, our R&D expenses declined by 27% from the prior year, and we've begun eliminating spending on research and development activities, and significantly reducing other expenses related to alternative energy technologies for the foreseeable future.

We've ceased operations, commenced the workforce reduction of 65 employee and contractor positions, and are currently mothballing our R&D demonstration -- Product Demonstration Unit in Commerce City, Colorado. This decision was not one we took lightly, as we believe our technologies have value in the future and outside the U.S., where there are greater market opportunities. Our employees dedicated themselves -- dedicated tremendous effort to successfully develop innovative and workable technologies for alternative energy production. However, the market for alternative energy changed, so we adapted our business accordingly.

This decision was a significant step in signaling Rentech's commitment to nearer-term profitable opportunities, which have targeted after-tax returns in the mid-teens and higher. We believe that establishing ourselves in a business with attractive growth and return profiles, and which is not significantly exposed to fluctuations in commodity prices, will offset impacts from the agricultural cycles inherent in Rentech Nitrogen's business. Doing so, we'll create a much stronger, valuable company at Rentech in the short-, medium- and long-term.

We believe that the new business line we have been focused on for the last several months will provide this diversification, cash flows and earnings growth potential for Rentech. We expect this business line to generate qualifying income for another potential MLP, separate from Rentech Nitrogen. In 2012, we received approximately $76.7 million in cash distributions from Rentech Nitrogen. As of the end of 2012, we have approximately $104 million of net operating loss carryforwards to help offset future federal income taxes.

I'll now turn the call over to Dan to discuss financial results. Dan?

Dan J. Cohrs

Thank you, Hunt, and good morning, everybody. We've delivered solid results for this year with lower R&D expenses and a strong year in our Nitrogen business, with higher product prices and lower natural gas costs, and we had 2 months of contribution from the Pasadena facility that we acquired late last year. Let's look first at the fourth quarter book changes compared to the fourth quarter of last year.

Revenues were up almost 50%. $37.4 million of that increase came from the acquisition of the Pasadena facility, which was included for 2 months at the end of 2012. Gross margin showed a decline from 41% down to 31%. That's because the contribution from Pasadena is at lower margin. We expect the sales at Pasadena to have lower margins. If we look just at the East Dubuque facility, gross margins increased from 41% to 55%. A lot of that was due to the benefits of lower natural gas costs.

On a consolidated basis, SG&A was up about $4.3 million, most of that increase was at Rentech Nitrogen. Within the alternative energy segment, SG&A was up by about $900,000. Half of that was due to increases in noncash compensation expense and the other half was a small increase in cash spending for SG&A within alternative energy. In the Nitrogen Products segment, SG&A was up for several reasons, most of them had to do with the acquisition. We had business development expense of $2.4 million, almost all of that $2.4 million related to the acquisition of Agrifos. We also had increases within the nitrogen product segment of our noncash compensation. Our equity-based compensation there increased by $400,000, and there were additional $400,000 of SG&A expenses due to the addition of the Pasadena facility for the quarter.

R&D expenses for the quarter increased compared to last year, from $4.2 million to $6.3 million. Remember that we operated the PDU at the end of 2012, whereas it was not operating at the end of 2011. We had construction going on at the end of 2011, whereas, in 2012, construction was finished. So we received $3.6 million less reimbursement from the DOE for costs related to the construction of that gasifier. Also in this quarter, we recorded almost $16 million of impairment on SilvaGas patents and the goodwill from the acquisition of ClearFuels. That brings us down to an earnings per share of a negative $0.11 this quarter. If we took that before that impairment, it would be a smaller loss of about $0.02 per share.

In the quarter, Rentech Nitrogen EBITDA declined slightly by about $1.6 million. But remember, there was $4.1 million of expense in there due to the acquisition of Agrifos. Looking at the full year, revenues were up about 31%. Again, $37 million of that came from the increase in Pasadena, but there was also a significant increase of revenues from the East Dubuque plant. Gross profit margin for the full year increased from 43% up to 50%, and we had an increase in SG&A.

At alternative energy segment, SG&A was up $6.8 million, almost all of that, $6.5 million was because of an increase in noncash compensation. As our stock price goes up, the cost of our noncash equity-based compensation also goes up. So that was virtually all of the increase in SG&A for the alternative energy segment. Cash SG&A was virtually flat.

Within the Nitrogen Products segment, we also had an increase in SG&A of $10.6 million. Let me break that down for you. Of that $10.6 million, almost all of that was due to business development expense, public -- the expenses of being a public company and our financing program, as well as the acquisition of Agrifos. So we have $10.6 million total increase in SG&A. Business development was $4.5 million, almost all of that business development expense was due to the acquisition of Agrifos. For the expenses of being a public company and financing, we had about $5.6 million due to increases in noncash comp, some increases in payroll, professional fees and expenses related to our credit facility. And then we had an increase of $400,000 in SG&A due to the acquisition of Agrifos. So if you add that up, that's virtually all of the increase in SG&A within the Nitrogen Products segment.

R&D declined year-over-year, we had a decline from about $29 million last year to about $21 million this year, and as we've announced recently, we're on a path to eliminate our R&D activities and take that spending down significantly in the future.

In the year 2012, we recorded a loss on the extinguishment of debt of $4.8 million. Combined with that loss on impairments of $16 million that I already mentioned, that brings us down to a loss per share for the year of $0.06. If we adjusted for the impairments and the loss on debt extinguishment, we would've reported a profit of $0.03 per share.

EBITDA in our nitrogen segment, was up year-over-year from $88.6 million last year to $124 million this year. We ended the year with consolidated cash of $142 million, $86 million of that sits at Rentech, the parent, $56 million within Rentech Nitrogen. And following the end of the year, we received about $17 million in distributions from Rentech Nitrogen.

So with that, I'll turn it back to Hunt, and then we'll take questions.

D. Hunt Ramsbottom

Thanks, Dan. Turning our focus now to 2013. We believe we'll benefit from strong nitrogen market dynamics, but we have some planned downtime at our plants due to turnarounds. We expect Rentech Nitrogen's 2013 consolidated cash available for distribution to be approximately $101 million or $2.60 per unit.

The 2013 guidance includes the impact of 2 scheduled outages at our facilities this year. Excluding these outages, as well as the $6 million impact in the 2013 from the unscheduled December 2012 outage at the East Dubuque facility, our forecast of 2013 cash available for distribution would have been approximately $0.65 per unit higher.

I encourage you to review the press release Rentech Nitrogen issued today for the calculation of the forecasted cash available for distribution and the key operating metrics we provided for each facility. Based on Rentech Nitrogen's current guidance and assuming Rentech's current ownership of 60% of Rentech Nitrogen, we would receive approximately $60 million in cash distributions in 2013.

As the general partner of the MLP, we're focused on increasing Rentech Nitrogen's incremental cash available for distribution.

There are 4 growth opportunities underway Rentech Nitrogen's facilities. Assuming product price -- or assuming product and input prices equal to those expected in 2013, the annual incremental contribution from increased production from Rentech Nitrogen expansion projects, scheduled to come online by the end of 2013, would be approximately $0.90 per unit of cash distributions and approximately $41 million in EBITDA.

Beyond these growth projects, we have an M&A team working on a prioritized list of opportunities to further enhance Rentech Nitrogen's growth prospects.

On the alternative energy front, we'll attempt to sell the PDU and approximately 450 acres of land in Natchez, Mississippi we acquired for the development of an alternative energy facility. This year's operating expenses reflect the fact that we're staffed to execute and grow the new business line and wind down R&D activities safely and successfully. Our current annualized cash SG&A run rate is approximately $20 million. Add to that approximately $5 million in costs that were formerly classified as R&D, and our total cash SG&A projection for '13 is approximately $25 million.

R&D expenses for the year are expected to be approximately $5 million, which should be incurred in the first quarter. In 2014, R&D expenses are expected to be 0. The $5 million of former R&D cost booked in SG&A this year will decline to an annualized run rate of $2 million to $3 million, assuming we've not sold the PDU or we continue to incur expenses to protect our patents or seek partners.

In 2012, total cash operating capital expenditures for alternative energy business was $42.1 million, which was below our guidance of approximately $45 million. The net benefit of the efforts we've made to reduce expenses is also seen in the 30% reduction in cash operating expenses we're projecting this year. We will also continue to monitor these expenses as we enter the new business line.

As we've indicated before, we're focused on new businesses that meet the following criteria: Unlevered after tax returns in the mid-teens or higher, certainty of revenue with long-term contracts or off take, providing stability of cash flows, no reliance on new technology, and opportunities to leverage Rentech's expertise. We believe we'll be in a position to make an announcement regarding our entry point into this business line within the coming months. We're very excited about the potential of this business and its significant global growth prospects.

I'll now turn the call over to the operator for Q&A. Operator?

Question-and-Answer Session


[Operator Instructions] Matthew Farwell form Imperial Capital is online with a question.

Matthew Farwell - Imperial Capital, LLC, Research Division

My questions were answered on the last call, but just -- you mentioned your NOLs, $104 million, I'm looking at the guidance and my estimates, and I figure, you probably have about 2 years of NOLs left? And could you confirm that, at that point, you begin to pay taxes on the net income at the partnership? And then second question would be, related to that, if you were to acquire a company, would you factor in any -- I don't know, would you be able to acquire any NOLs? Would you be able to do some sort of acquisition that would reduce the tax burden at corporate once it's completed?

Dan J. Cohrs

Yes, Matt. This is Dan. You're right. We have NOLs of $104 million. And if nothing else happens, once we use up that $104 million, we would expect to start paying taxes on income from our ownership in Rentech Nitrogen or other profits. We will continue to look for ways to adjust our tax position or manage our tax position. But it's impossible to predict what would happen if we were acquiring something -- what will happen to our tax position? We'll have to deal with that at that time.

Matthew Farwell - Imperial Capital, LLC, Research Division

Okay. And then in order to finance such an acquisition, would you be able to sell additional units? And with that, it sounds like that would be a taxable event if you were to sell units or sell the units owned by corporate to finance the acquisition. Is that fair to say that it would be a taxable event? If so, how would you...

Dan J. Cohrs

Well, hypothetically, if we sold units of RNF today, we would have $104 million of shelter that we could use on that gain. And then beyond that, it would be a taxable event.

D. Hunt Ramsbottom

And we have -- and just to add to what Dan said. We said at the end of the year, when we did the distribution to shareholders and paid off our converts, we forecasted forward for the year, so we've got the wherewithal to enter this business line without selling units. And -- but we'll adjust the market from time to time, but we can enter into this business line.

Matthew Farwell - Imperial Capital, LLC, Research Division

Okay. And then last question is that I think that there's some sort of billing to the limited partnership for certain business development overhead expenses that are incurred at Rentech corporate? Is that -- am I reading this correctly? And I guess that if you were to acquire a new company, would you be able to amortize or leverage some of the existing overhead in the new business?

D. Hunt Ramsbottom

Yes, I'll start of, the answer is yes. I mean -- we would -- that would be exactly the goal. The larger we get, we can leverage the overhead that we have in place today. And so the budget that we have put in place internally allows us to acquire and grow this business with the overhead. So leverage over more revenues and more cash flows is the goal.

Dan J. Cohrs

And Just to clarify, Matt, the first part of your question. Today, there are expenses that we just pay at Rentech and then we allocate those down, if they are legitimate expenses for the partnership. So there are a number of things like insurance and legal and systems that we pay the invoice at Rentech and then allocate those expenses down. And of course, we allocate the compensation expense for shared executives and people who spent their time on partnership matters, if they are on the staff at the parent.

Matthew Farwell - Imperial Capital, LLC, Research Division

Have you disclosed a rough amount for the expenses that are shared in 2012?

Dan J. Cohrs

No. I don't think that's disclosed anywhere. It's all in the expenses recognized by Rentech Nitrogen. But I don't think it's separately broken out.

The expenses -- some of the expenses on the shared executives are in our compensation disclosures. But we don't have like one item where we disclose all of the allocated expenses.


Lucas Pipes from Brean Capital is online with a question.

Lucas Pipes - Brean Capital LLC, Research Division

To go back to the M&A. Just in terms of timing, you've discussed the potential for awhile, could you just elaborate on why this may have taken a little bit longer than originally expected?

D. Hunt Ramsbottom

Yes. As I said in my closing remarks that we expect a big announcement in the coming months. And it has taken a little bit longer and I think these things tend to take longer than one expects. But I would say this, that over the last 6, 8 months or so, we've gotten smarter about our entry point, as we always articulated over the last year, that we want to make sure -- we are looking at multiple platforms and opportunities and that takes time. And the folks that we've acquired in the company have helped us get smarter about the business and along with our folks. I'm pleased with the direction. It's taking longer than we anticipated, but I think the entry points that we're going through, I think, we've gotten smarter about during this period of time. And as I said, I can't get anymore specific on the timing, but it is in the coming months.

Lucas Pipes - Brean Capital LLC, Research Division

Appreciate it. And then to -- maybe a little bit more clarity on the size of this potential acquisition. Should we look at it first step kind of creating sustainable stream of cash flows that would lead Rentech to be overall cash flow breakeven? Or would you look to exceed your current overhead costs?

D. Hunt Ramsbottom

That's a tough one for us to answer on this call. But I would say the goal is all of the above, that you just mentioned. And but I think if we were to put it in a range, I think -- it's just, I think, it get's too much into forecasting here. But I think that's certainly the goal of what you're describing.

Dan J. Cohrs

I mean, look, it's certainly fair to say, Lucas, that we see a path to quickly getting to cash flow positive based on this new business. Whether the very first thing we announce would get us there? We can't say.


Our last question comes from Matt Niblack [ph] from HITE Hedge [ph] .

Unknown Analyst

So just a little more color on the acquisition. It sounds like you've narrowed your focus here a bit. Are you focusing in more on sort of 1 or 2 high priority platforms now? Or maybe you could elucidate us, give us a little bit of focus that you seem to now have?

D. Hunt Ramsbottom

I didn't catch -- it's kind of garbled on the second part of your question. But if the question was have we focused out at 1 or 2 platform companies? The answer is yes.

Unknown Analyst

Okay. And you mentioned earlier in the call that you were trying to take some -- get into a platform that takes advantage of your skills, and yet seems like that's a little bit in conflict with the idea of something that is not going to be exposed to the cyclicality of variable rate MLP, like RNF is. So what skills do you plan to utilize? And will this be something that's more of a fixed-fee type business or not?

D. Hunt Ramsbottom

Yes. I think it's hard for us to give a lot more detail, as much as I would love to. But I would say that the skills, obviously, the technology skills and the folks that were working on catalyst development and some of the fuels conversion technologies, that's not -- they are talking about -- it's process engineers, it's operating folks that toggle between the operating plants and certainly some of the folks that we have at corporate. I think that the combination of those folks, coupled with some folks that we have hired in the marketplace over the last year, have the skill sets required to build out this platform. I think any more color that I would put on it would just not be appropriate right now, unfortunately, as much as I'd like to.

Unknown Analyst

Okay. That's everything. Then, I guess, specifically on whether this would be a more fixed-fee type of arrangement contract-wise, in the sort of platforms you're looking at?

D. Hunt Ramsbottom

Yes. Yes, absolutely. That's what we've said in our prepared remarks, that this would be more of a fixed-fee, certainly less volatility than we experienced, like I said, in the fertilizer side of the business. It would be more long-term in nature and fixed fee, absolutely.

Unknown Analyst

And would you envision this being, whatever the platform is, a separate MLP, so that you would effectively be the parent of 2 MLPs? Or would this be a business that would sit within RTK? How are you thinking about structuring that?

D. Hunt Ramsbottom

I think if we're fortunate enough to do what you just described, and that's certainly the goal, that it would be, for lack of better words, incubated at the parent, much like we did with the fertilizer business. We've put a lot of capital in the fertilizer business before we did take it out. So we would build it out at the parent and then subsequently take it to the marketplace and the parent would be then, the holding company for the 2 MLPs.


Julie, do you have any final remarks?

Julie Dawoodjee Cafarella

Yes. In summary, we have a -- we have made a concentrated and successful effort in reducing our cash operating expenses at Rentech, while working to grow the businesses. Rentech Nitrogen is poised to grow with the expansion projects underway, which are expected to begin contributing to incremental cash distributions in 2014 or sooner. We are optimistic about the future of both businesses and look forward to sharing our successes with you. We'd like to thank, everyone, who participated on the call today, and please contact me if you have any questions. Thank you.


Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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