Rentech, Inc. (NYSEMKT:RTK)
Q2 2009 Earnings Call
May 12, 2009 1:00 pm ET
Julie Dawoodjee – VP IR
Hunt Ramsbottom – President & CEO
Dan Cohrs – EVP & CFO
Welcome to the Rentech fiscal 2009 second quarter conference call. (Operator Instructions) I would now like to turn the conference over to Julie Dawoodjee, Vice President of Investor Relations.
I would like to welcome all of you to Rentech's 2009 fiscal second quarter conference call for the period ended March 31, 2009. Before we begin our prepared remarks I would like to cover some administrative aspects of this conference call.
Hunt Ramsbottom, President and CEO of Rentech, will discuss our renewable strategy as well as our Rialto renewable energy center project. Dan Cohrs, our Chief Financial Officer will also discuss the Rialto Project and provide a financial review of the second quarter.
Please be advised that certain information discussed on this conference call will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. They can be identified by the use of terminology such as may, will, expect, believe, and other comparable terms.
You are cautioned that while forward-looking statement reflect our good faith belief and best judgment based upon current information, they are not guaranteed the future performance and are subject to known and unknown risk 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 May 12, 2009 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 law.
Now I would like to turn the call over to Hunt Ramsbottom, President and CEO of Rentech.
Thank you Julie, good morning everyone and thank you for joining us today. The primary focus of today’s call will be on our renewable energy strategy. Yesterday we announced an exciting project that launches Rentech’s first ever integrated solution to convert low value waste biomass feedstock into high value synthetic fuels and power.
The project is the result of the integration of our patented Rentech process with biomass gasification technology provided by SilvaGas Corporation. The key to this integration and this is a very important point, is that we have developed the conditioning and cleanup technologies that are required to integrate biomass gasification with synthetic fuel technology.
This has been a significant barrier to entry into the renewable synthetic fuels market. Let’s review how these important technologies fit with the other technologies required to produce synthetic fuels from biomass.
Synthesis gas or syngas, is produced from gasifying biomass. However as we’ve come to learn biomass gasification technology is not wildly available on a commercial scale. Therefore as a first step to implementing our biomass strategy, we’ve compiled a list of potential gasification technologies to examine which ones could meet our syngas requirements.
Over the last two years our technical and engineering professionals have evaluated these technologies and determined that only a few gasification processes have the potential to produce high quality syngas from a range of biomass feedstock.
Although the syngas levels they produce can be useful for power or heating applications, the syngas still requires enhancement to achieve levels acceptable for production of high quality synthetic fuels. The required technologies to enhance the syngas at these levels are not commercially available.
As a result we spent several months developing our own syngas conditioning and cleanup technologies that remove contaminants from the syngas and bring the H to CO ratio to an optimal level of 1:1. We’ve applied for patents around these technologies.
These conditioning and cleanup technologies enable us to integrate biomass gasification with our patented Rentech process for producing synthetic fuels from syngas. This is possible because the syngas is clean and close to the optimal ratio of hydrogen and carbon monoxide.
The integration of viable biomass gasification technologies that work with our patent pending syngas conditioning and cleanup technologies and synthetic fuels processes result in a complete renewable energy conversion technology chain.
This technology chain is completed by UOP’s upgrading unit to produce renewable synthetic fuels. This integrated technology package for biomass based clean fuels is unmatched for low carbon jet, diesel, or power production.
The gas supplier we selected for the Rialto project will be provided by SilvaGas Corporation. SilvaGas’ process works best with the types of urban waste feedstock that we plan to use. We have secured a long-term licensing agreement with SilvaGas for its biomass gasification technology for the Rialto Project and there are commitments for additional licenses for other potential waste to energy projects.
SilvaGas’ technology is proven, the processes operate on a commercial scale during a series of campaigns between 1998 and 2001 at a plant in Burlington, Vermont. That plant was built in partnership with the United States Department of Energy, Battelle Columbus Laboratory and the National Renewable Energy Laboratory and successfully produced syngas from wood based biomass in a 400-ton per day SilvaGas gas supplier.
We are applying the integrated conversion technology I described earlier at our prototype facility in Rialto, California. We believe that this facility [inaudible] first facilities United States that can produce synthetic fuels from waste products. At this plant we’ll focus on the simpler urban waste feedstock which are [homogenous] in nature and have low or negative costs.
We plan to take the design and knowhow obtained from this pioneer renewable project and standardize, replicate and enhance the design for each subsequent plant increasing efficiencies and generating higher economic returns.
This implementation strategy will enable us to pursue over time more complex urban and rural feedstock. The Rialto Project will use urban woody green waste such as yard clippings as the primary feedstock because its composition is generally easy to work with and the material has negative feedstock costs.
We’ll combine the green waste with processed sewage sludge obtained at a nominal cost. The Rialto facility will use this urban waste to produce approximately 600 daily barrels or about 25,000 daily gallons of pure renewable synthetic fuels and export approximately 35 megawatts of renewable electric power, which is enough to power approximately 30,000 in the region.
We have an exclusive option on a site for the Rialto Project that’s located adjacent to existing processing plants to take advantage of established infrastructure including access to water, waste water, disposal, and zoning.
The location of this site also gives local green waste haulers a cost effective alternative to increasingly scarce landfills for the disposal of woody green waste. We’re currently negotiating with several local haulers for the long-term supply of green waste. The green waste haulers are incentivized to enter in the long-term supply agreements with us due to reduced haul distances to our facility and our ability to accept competitive tipping fees.
Some landfills close to Rialto are closing and others are proposing to increase tipping fees. As a result we believe we can realize competitive yet economic tipping fees for the green waste. EnerTech Environmental will provide the treated sewage sludge or bio-solids under a long-term supply agreement.
The renewable synthetic diesel produced at the facility will have many environmental benefits. Our renewable synthetic diesel meets all applicable fuel standards, is compatible with existing engines and pipelines and burns cleanly, with significantly lower emissions of particulates and other regulated pollutants and emissions from the combustion of CARB ultra low sulfur diesel.
In late April of this year, the California Air Resources Board, or CARB, approved the country’s first low carbon fuel standard for transportation fuels. The regulation takes effect beginning in 2011 and requires fuel providers to reduce the carbon content of their fuels over time.
In 2020 when the regulation is fully phased in the regulations require a 10% reduction in the carbon content of fuels. Our diesel fuel produced at the Rialto facility is expected to have a lifecycle carbon content of near zero.
As a result we expect that the RenDiesel produced at the facility will be in high demand as California attempts to meet these carbon reduction requirements. We also expect the 35 megawatts of renewable electric power produced at the Rialto facility to qualify under California’s renewables portfolio standard or RPS.
The RPS requires that utilities must increase their proportion of electricity produced by renewable energy sources by at least 1% per year to 20% by 2010. Renewable electricity supply is limited. Time to market is long and infrastructure barriers exist. Utilities can face RPS noncompliance penalties.
As a result utilities are willing to pay significant premiums for renewable energy. We expect to sell our renewable power under the RPS program. The Rialto site has access to multiple high voltage transmission lines resulting in no foreseeable transmission access barriers to the utilities market.
We are encouraged by the Federal, state and local support for the project. Renewable energy and green jobs are two high priority objectives of the Obama administration. The Rialto Project would create renewable energy, and result in about 250 green jobs during construction and at least 55 regular full time green collar jobs during operation.
The stimulus plan calls for doubling our nation’s renewable energy capacity in three years and with it the creation of green jobs. These objectives combined with California’s commitment to reduce the state’s emissions to 1990 levels by 2020, have led the California Commission for economic development to consider introducing targeted tax incentives for green businesses in California.
We are taking a disciplined, step by step approach for the Rialto Project, committing funds only as we complete each step. Here is a summary of our progress to date on the Rialto Project.
We have completed a fatal flaw analysis for the permitting and development of the facility. We have completed preliminary scoping studies which included development of preliminary capital and operating cost estimates. We have identified and contracted for all major technology selections for the facility.
We have executed technology license and engineering service agreements with SilvaGas Corporation for its proven biomass gasification process. We have developed our own patent pending syngas conditioning and clean up technology adding to our technology portfolio.
We will apply our Rentech process proven at our PDU for producing hydrocarbons from syngas. WE have partnered with UOP for the technology to upgrade the hydrocarbons into finished diesel and other products.
We have entered into an agreement with EnerTech that will service as the basis for the bio-solids feedstock supply. We have site control and a location with established infrastructure. We have engaged Jacobs Engineering for the current feasibility engineering phase of the project which will advance the project development activities including preliminary design, plot plans, and provide the refined construction cost estimates.
And we have been engaged in discussions with potential customers for [off-take] of the renewable diesel and green power produced at the facility.
Based on the work completed thus far, our expectations of the current timeline for the project are as follows. In 2009 complete feasibility and advance our development activities related to feedstock supplies [off take and permanent]. In 2010 complete front end engineering and design or FEED while pursuing major permits for the project.
In 2011, complete detailed engineering, procure equipment and begin construction and in 2012, complete construction, commence commissioning and startup.
At each step we will review the project with the new information available before we commit further funds. I’d like now to take a few minutes to discuss other projects in our operating assets.
At our Natchez project we continue to engage in low cost but high impact activities. We engaged the engineering firm of [inaudible], to assist us in preparing the permit applications for the construction of the approximately 30,000 barrel per day synthetic fuels facility.
We anticipate filing the permit applications for the facility by fall of this year. We’re confident of the clean environmental profile of the planned Natchez facility which will have a lower lifecycle carbon footprint then traditional petroleum fuels due to our contract for CO2 sequestration.
We are in discussions with a number of feedstock companies for the supply of feedstock for the project. We are also in discussions with a number of potential customers concerning the purchase of synthetic jet fuel from the Natchez facility.
We are currently producing synthetic fuels and chemicals at our product demonstration unit or PDU, with an enhanced catalyst manufactured by major [inaudible] vendor that lowers the overall operating costs of the Rentech process.
This new catalyst has high activity and improved strength that results in better operation, high yield and lower costs. The fuels we produce during this production run at the PDU are anticipated to be delivered to various parties including potential customers for performance and emission testing.
Switching gears to our nitrogen fertilizer facility, Rentech Energy Midwest Corporation, or REMC. REMC continues to benefit from low natural gas prices, have been selling products at or near expected levels. We experienced a record month in April which provides us with the confidence to increase fiscal year 2009 guidance of EBITDA performance at the plant to $65 million.
We are also increasing consolidated EBITDA guidance for the fiscal year to the highest level ever for Rentech of a positive $15 million.
Dan will now provide details on our financial performance for the period as well as some comments on the financial aspects of the Rialto Project.
Thank you Hunt, good morning everyone. Before we review the quarter’s numbers, let’s talk a bit about the financing of the Rialto Project that we announced yesterday.
Since we haven’t finished the feasibility work it’s a little too early to talk about specific numbers but we want you to be aware of our general thinking on this. For the balance of calendar year 2009 feasibility costs are built into our budget for the year. So the project has no immediate need for capital to progress on the current timeline.
We expect to complete the front end engineering and design in calendar year 2010. Some of that cost could be funded by internal sources but probably not all. Beyond that point in the project we expect to raise funds from external sources in order to complete the remaining phases of the project that Hunt discussed and bringing it into service in 2012.
We believe based on the scoping studies that the project can provide commercially viable returns without any financing support from the government. And we expect that the capital markets, the banking sector, private equity funds, and green investors, will all be in better shape then they are now to support a project like this as we get into the heavier funding needs of the project in late 2010 and 2011.
Having said that, we also believe this project is a prime candidate for significant government support both from the job creation programs under the stimulus package and from programs targeted to promoting the development of fuels and power from biomass.
The DOE recently published a funding opportunity announcement for $786 million in grants for bio fuels projects. Included in that is a $480 million fund for integrated bio refineries. We are evaluating that and we may file a grant application under that program. There are two programs for loan guarantees from DOE that we’re also tracking.
The new program under the stimulus package which looks like the best one for this project has no solicitation out yet, but we expect one this summer. In total the stimulus plan contains up to $60 billion for loan guarantees for innovative energy technologies, including those that produce renewable power and bio fuels.
We are also evaluating programs at the US Department of Agriculture, the bio refinery assistance program, for loan support there. We believe the Rialto Project will qualify for the $0.01 per kilowatt hour Federal tax credit for power produced from biomass. As an alternative to that credit, we should be able to claim a 30% investment tax credit available as a cash grant, which could provide a significant source of capital for the project.
Regulations for this credit have not yet been published. Other forms of government support should enhance the economics of the project making it more attractive to investors. For example, the project should be eligible for a $1.00 per gallon credit for renewable diesel and jet fuel.
Now that we’ve announced the project we can more freely discuss it with state and local governments and we expect the project to qualify for various forms of support that can further enhance the projected returns making it that much more attractive to private investors.
Now let’s turn quickly to the highlights of the fiscal 2009 second quarter and the six months that ended March 31, in the second quarter we saw declines in both revenue and gross profit. Revenue was at $16.8 million for the quarter compared to $28.5 million in the quarter last year. Gross profit declined to a loss of $3 million this year compared to $7.9 million last year.
But because of significant reductions in our operating expenses, our net loss improved year over year from $22.8 million last year to a loss of $16.5 million this year. On a per share basis, the improvement was from $0.14 per share a loss last year, to a loss of $0.10 per share in this year’s quarter.
The declines in revenue and gross profit were mainly due to the delays in shipments of presold products at REMC due to the bad spring weather which delayed fertilizer applications. I’ll talk a little bit more later about the fact that we more then made up that ground in April.
Revenue for the fiscal year through April is up 35% compared to last year. Gross profit is up 78% due to very strong product shipments in April as well as higher product prices. This quarter’s profit numbers were effected by a write-down in inventory of $5.9 million. There was no write-down last year in the corresponding quarter.
As we purchase gas in advance to lock in margins on presold product when the gas prices declined we marked those contracts to market and the write-down flows through the gas inventories. The write-downs in the current period will then be offset through higher gross profit in future periods when the products are shipped and the amount recorded as cost of sales have the lower imbedded cost of natural gas that we had just marked down to.
In this quarter we continue to see the reduction in corporate expenses that we’ve been talking about on the last several calls. SG&A was down 25.8% to $6.7 million this quarter, that’s consistent with the guidance we’ve been putting out, and R&D expense this quarter was only $3.9 million compared to $22.1 million last year.
In that quarter last year $16.9 million of that R&D expense was due to construction of the PDU which of course has now been completed. We saw similar trends in the first six months of fiscal year 2009. Revenues and gross profits were both down, the net loss improved, and its really due to all the same factors that I just discussed for the second quarter so we’ll go on and not go through all of those comparisons on this call.
That brings us to consolidated EBITDA for the year which improved from a loss of $20.7 million last year to a loss of $12.6 million this year. For the six month period we improved from a loss of $41.8 million last year to a loss of $12.7 this year. And the end of the year, the quarter, on March 31, was $63.1 million of cash.
The revenue and gross profit results for the periods I just reviewed reflected primarily REMC’s performance. So I won’t repeat all of that for REMC but I do want to talk about prices and volumes. We had higher product prices for the six months partially offset, the higher product prices for the six months partially offset the effect of reduced tonnage shipped.
Average sales per ton for ammonia in the first six months of this year were $653.00 per ton. Last year it was $457.00 for an increase of almost 43%. UAM prices were up almost 36% year over year to $319.00 per ton in the first six months of this year. The tonnage, as we’ve talked about was down year over year for the first six months. Last year we had shipped 274,000 tons at this point compared to about 180,000 tons this year for the first six months.
As I mentioned at the start all the revenue and gross profit comparisons through the second quarter were effected by the delays in product shipments which were caused by the poor fall and spring weather conditions which delayed fertilizer applications.
In April we caught up with our strong pace of deliveries from a year ago. So if we look at the year to date through April, we now have shipped more tons then we had last year through April in a very strong year. We have shipped over 96,000 tons this year which is an increase of almost 700 tons compared to the year to date April numbers from a year ago.
What that leads to is a significant increase in revenues year to date through April. These of course are unaudited numbers but we’re expecting that for the year to date through April our revenues will be approximately $120 million compared to $89 million last year and gross profit we expect to be $39 million through April compared to slightly less then $22 million last year, significant improvements year over year due to the very strong shipments in April.
So as a result of that strong performance through April, we’re increasing our guidance for fiscal year 2009. At REMC we expect EBITDA to be $65 million, our previous guidance was well in excess of $50 million. We expect consolidated EBITDA to be positive $15 million, our previous guidance was for EBITDA to be positive for the first time in the company’s history.
In summary we continue to benefit from our expense reduction efforts, R&D expenses are down significantly after the completion of the PDU construction, and more fundamentally we have reduced all of our overhead and we’re on track with reductions of our other corporate spending of about 25% year over year.
Thanks very much, I’ll turn the call back over to Hunt.
We are now ready for your questions.
(Operator Instructions) There are no questions at this time; I would like to turn it back over to management for any additional or closing comments.
Thank you, today we stand strong as an alternative energy company. We have assembled a best in class technology package for commercial renewable synthetic fuel from biomass. We have increased our intellectual property portfolio with a critical component in the technology chain for renewable fuels production.
We have announced our first renewable energy project, which will serve as a prototype for future waste to fuels and power projects. We are moving forward in a measured way with our Natchez facility, having kicked off permitting.
We are producing synthetic fuels at the PDU with our enhanced catalyst. We have increased REMC EBITDA guidance for this year to $65 million and increased consolidated EBITDA guidance to $15 million.
With these accomplishments we believe we have strengthened our company’s growth prospects as well as our competitive positioning within the alternative energy space and we’re projecting strong financial performance in a very difficult macroeconomic environment.
Thank you for your continued support and we look forward to seeing you at our Annual Shareholders Meeting next week. Thank you very much.
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