Rentech Nitrogen Partners' CEO Discusses Q1 2013 Earnings Results - Earnings Call Transcript

May. 9.13 | About: Rentech Nitrogen (RNF)

Rentech Nitrogen Partners LP (NYSE:RNF)

Q1 2013 Earnings Call

May 09, 2013 04:30 pm ET

Executives

Julie Cafarella – VicePresident-Investor Relations & Communications

Hunt Ramsbottom – Chief Executive Officer

Dan Cohrs – Executive Vice President, Chief Financial Officer

Analysts

Adam Samuelson – Goldman Sachs

Lucas Pipes – Brean Capital

Brent Rystrom – Feltl & Company

Jay Srivatsa – Chardan Capital Markets

Operator

Welcome to the Rentech Nitrogen First Quarter 2013 Conference Call. My name is Larrisa and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. Please note that this conference is being recorded.

And I’ll turn the call over to Julie Cafarella, Vice President of Investor Relations and Communications. Julie, you may begin.

Julie Cafarella

Thank you. Welcome to Rentech Nitrogen’s conference call for the three months ended March 31, 2013. During this call, Hunt Ramsbottom, CEO of Rentech Nitrogen will summarize the Partnerships activities during the quarter 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 is Marc Wallis, SVP of Sales and Marketing, who will be available for the question-and-answer session at the end of our prepared remarks.

Please be advised that certain information discussed on this conference call will contain forward-looking statements. 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 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 us of May 9, 2013 and Rentech Nitrogen 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.

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 2013 first quarter earnings press release that is available on our website.

Now, I’d like to turn the call over to Hunt Ramsbottom, CEO of Rentech Nitrogen.

Hunt Ramsbottom

Good afternoon, everyone and thank you for joining us today. The main drivers for the results for this period included the benefit of a full quarter’s contribution from the Pasadena Facility and a slow start for ammonia and ammonium sulfate deliveries due to bad weather. We maintained full production throughout the period of slow deliveries and we still expect a good year. We are reiterating 2013 guidance of $2.60 per unit for cash distributions.

During the quarter, we achieved 100% on-stream rates for the ammonia and UAN plants at East Dubuque facility. And during March, production exceeded main play capacity due to ideal temperatures for production.

Achieving such high production rates so long after the last turnaround is extraordinary and is a direct result of the integrity of our maintenance programs and capital improvements.

Production at the ammonium sulfate plant in the Pasadena Facility has more than doubled within 12 months. They are in the ramp-up period; the ammonium sulfate plant is operated below the target on-stream rate of 90%. The majority of the issues that are preventing targeted production are expected to be in resolved by de-bottlenecking project in November and the costs are within our guidance for maintenance CapEx.

As I mentioned we’re reiterating our guidance for cash distributions of $2.60 per unit in ‘13. Remember that the guidance includes the impact of two schedule outages at our facilities during 2013, and the impact of lost revenue due to the unscheduled outage at the East Dubuque facility in December 2012.

Excluding the effects of these outages, the forecast for 2013 cash available for distribution would be higher by approximately $0.65 per unit.

Please review the updated calculation of forecasted cash available for distribution included in our press release issued today. In April we raised new debt, which eliminated our amortization requirements and funded all of our announced projects. Dan will give you more detail on the stats later during the call.

Turning our attention to the first-quarter results we generated $0.38 in earnings per unit this quarter and declared a first quarter cash distribution of $0.50 per unit, which includes approximately $4 million of cash we collected on prepaid products that had not been delivered at the end of the quarter, but that has now been delivered. The distribution is payable on May15 to unit holders of record as of May 8.

First quarter results were dampened by persistent rain which delayed shipment of approximately 3,000 tons of prepaid ammonia volume in the quarter. UAN deliveries in the quarter were strong; much of the product shipped was for orders originally scheduled for delivery in the late 2012 that were delayed due to our plant outage in December.

On the ammonium sulfate front, we focused on the U.S. where we saw strong demand with prices north of $300 per ton. As we will discuss later weather affected movement of AS and we had vessel shipment schedule for the quarter that was delayed.

I will now turn it over to Dan to discuss the financials in more detail. Dan?

Dan Cohrs

Thank you, Hunt. Good afternoon, everyone. As Hunt discussed, wet weather delayed the start of the application season this year which is in contrast to last year’s fast and early start. It is another reminder that quarterly analysis of the fertilizer business often does not yield very much insight, since deliveries regularly ship across quarterly boundaries and revenue and can show up when it wasn’t expected.

Deliveries of both ammonia and ammonium sulfate got off to slow starts this year due to the weather, but we expect to make up for it with very active May. We maintained production. So the product is in inventory and trucks are now moving in East Dubuque. The slow start for ammonia sulfate was also because of delays in the arrival of a vessel we were counting on for a shipment of 25,000 tons.

We currently have that shipment and another large vessel shipment in process. And we expect to recover the lost ground in the second quarter. Despite the lower volumes in the quarter for some products, we benefited from solid margins, strong shipments of UAN, and three full months of result from the Pasadena plant. Specifically for the quarter, consolidated revenues were up 55% from 38.5 million in the quarter last year to 59.6 million in this year. 25 million of that was due to the contribution of Pasadena for the first time.

Revenues in East Dubuque were down slightly by about 10% compared to the quarter last year because of the lower volumes of ammonia and because of lower UAN product prices. Gross profit margin held pretty well. In East Dubuque we recorded a 54% margin and in Pasadena a 16% gross product margins. Those are normal margins for us. Of course, Pasadena tends to have lower gross margins than East Dubuque.

When you add the margins together for the first time, we consolidated the results of East Dubuque and Pasadena to get a gross margin of 38%, which is down from 59% last year, but that is really because of the mix between Pasadena and East Dubuque.

SG&A for the entire partnership increased by about $2.1 million from last year. If we break it down, in East Dubuque, SG&A was absolutely flat at $1.3 million. We added about $1.2 million of SG&A at the plant level in Pasadena, of that there is about $300,000 in integration expense. At the Partnership level, we added about $900,000 of SG&A compared to last year. That’s to support additional activity in Pasadena, unit-based compensation, and also higher development costs as we are still actively seeking opportunities to grow the Partnership’s business.

Operating income declined slightly by $2.5 million. Net income was down by 4.4 million and led to net income per basic unit, this quarter of $0.38, compared to $0.51 in the first quarter of last year. EBITDA was down by 1.3 million at the consolidated level and we had a $3.2 million contribution at EBITDA from Pasadena. We ended the quarter with 50.1 million in cash, of course that was before the offering of notes that we completed after the end of the quarter.

Looking at the key operating data, ammonia deliveries were down compared to last year, as I said we had a very strong start last year due to early good weather. So ammonia deliveries this year were 11,000 tons compared to 30,000 tons last year. UAN deliveries were up 61,000 this year versus 34,000 last year. At the Pasadena facility, we delivered 54,000 tons of ammonium sulfate and 41,000 tons of sulfuric acid.

Prices were mixed for the various products. Ammonia prices were up compared to last year, 739 versus 673, UAN prices were down 301 this quarter versus 327 last year. Ammonium sulfate price for the quarter was at 320, which is very much in line with our expectations.

Natural gas costs at the East Dubuque facility continue to come down compared to prior periods. This quarter the average price included in our cost of sales was $3.97 down from $4.46 last year. For Pasadena, we signed a new contract that improves our formula to purchase ammonia of the feedstock. Because the pricing is sensitive, we’re no longer disclosing the average cost of ammonia we purchase.

But to give you an indication of those costs, ammonia and sulfur expenses for the Pasadena facility accounted for about 71% of the total cost of sales for the quarter or $15 million.

Maintenance CapEx in this quarter was 1.5 million in East Dubuque and $800,000 Pasadena. And growth CapEx was 8.9 million in East Dubuque as we continue the expansion project and just a $0.5 million in Pasadena.

In April, we completed the offering of $320 million of 6.5% second lien, senior secured eight year notes, which fully financed the estimated cost of our expansion and major maintenance projects. And will help our cash available for distribution, everything else equal, beginning in 2014.

The retired credit facilities required significant principal amortization beginning this year. Whereas, the newly issued notes required no amortization until the full principal amount is due in 2021. As we detailed in our April 18th press release, we expect cash available for distribution to be higher by about $1.75 per unit cumulatively in 2014 through ‘17, due to the lower debt service.

A portion of the proceeds from the note’s offerings were used to repay $206.3 million. All of the principal outstanding on the partnership’s 2012 credit facilities and related interest rate swaps. Our first quarter cash distribution, $0.50 per unit, will include about $4 million from our cash reserves. We had collected 100% of the cash on a number of spring prepaid contracts, but delivery and revenue recognition were delayed.

Knowing that we had the cash plus a high cash balance following the notes offering and knowing the product deliveries were likely to take place shortly after the quarter end, we decided to pay out a bit more cash for the quarter than would be implied by our simple formula of EBITDA less maintenance CapEx less debt service.

And now I’ll turn the call back to Hunt.

Hunt Ramsbottom

Thanks, Dan. As I mentioned earlier, the start of the spring season was delayed due to excessive wet weather in our market. The last time such a delay occurred in the Midwest was in – excuse me – was in 2008. During that year we recognized record ammonia shipments in May and a similar pattern may take place again this year, as we expect significant deliveries this month. We do not expect total ammonia shipments in the second quarter to vary dramatically from our previous expectations.

However, with the shortened planting period favors UAN applications, we will maximize production of UAN to satisfy product demand and optimize margins. We continue to monitor the pace of corn planting. At the end of April corn plantings were only 12% complete, which is well below the historical average of 47% for this time – for that time of the year.

And near record slow pace of 10% that occurred 29 years ago. Due to a slow start in planting, industry analysts are forecasting reduction in planted corn acres this year that would reduce the USDA assessment of 97.3 million acres to 96 million acres.

We continue to expect yields to be in the range of 150 to 155 bushels per acre, which is lower than the current USDA expectation of 163 bushels per acre. The combined effects of fewer acres and lower yields could cause corn stalks to end the year below 2 billion bushels.

Because of these circumstances we continue to believe the fundamentals of the corn and nitrogen markets remain favorable. Prepaid product either delivered or locked in has not changed much in the one additional month covered by our updated reporting compared to last quarter.

Ammonia deliveries were slow, and this was a fairly quiet period for prepaid activity. We now have locked in or delivered approximately 42% of estimated ammonia deliveries for ‘13, at an average price of $741 per ton. And approximately 41% of forecasted UAN deliveries for 2013 at an average price of $329 per ton.

As Dan mentioned, weather affected movement of AS and we experienced a delay of our vessel shipment of 25,000 tons that had been scheduled for the first quarter. As a result, at the end of March we had delivered only about 10% of our ammonium sulfate deliveries, we have forecasted for 2013 at average price of $320 per ton.

These vessels is now at berth and once it’s loaded, we have another vessel shipment right behind it, which would bring us back on track with our forecasted delivery for volume, by the time we reach the end of the second quarter. All of our announced projects for the East Dubuque and Pasadena facilities are fully financed with the proceeds of our recent notes offerings. The ammonia production and storage capacity project of the East Dubuque facility is on track to be completed by the end of this year.

The project was about 65% complete at the end of March. The additional 23% of ammonia volume is expected to begin contributing to cash available for distribution in the first quarter of ‘14.

The debottlenecking project to increase ammonium sulfate capacity at Pasadena facility by 20%, and increase downstream time, is scheduled for completion by the end of this year. Currently, we are proceeding with the detailed engineering and procurement for this project.

We also announced previously – we’ve also commenced the previously announced 15-megawatt power generation project at the Pasadena facility. We currently expect this project to have a return of approximately 20% and to begin contributing to cash available for distribution in the first quarter ‘15. This project will be completed under a lump sum turnkey EPC contract with Abengoa.

With the new financing in place we have also begun the engineering replacement of a sulfuric acid converter at the Pasadena facility, which is designed to improve plant reliability. We are very happy to have the new debt financing in place to move these projects forward, which will increase cash distributions.

And I’ll now turn the call over to the Operator for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions). Adam Samuelson from Goldman Sachs is online with the question.

Adam Samuelson – Goldman Sachs

Hi, thanks, good afternoon, everyone. Maybe the first question is on the marketplace itself. I guess wondering where given the late start to spring your confidence about ammonia shipments through the end of June and maybe any customers that you’ve seen switching to UAN at this point?

Hunt Ramsbottom

I think right now, and I will let Marc jump in a minute here. But tight now I think I’ve said in the prepared remarks, we are confident that this quarter will be as we expected in our forecast. It was delayed, but we are seeing an aggressive planting now and our tanks are getting emptied and we have not yet seen a shifting to UAN. I don’t know Marc if you want to add any further...

Marc Wallis

Adam, good afternoon. The last four days of April were really big for us. We gained a lot of ground. We are working through the prepaid rapidly and down to the short rows in that area. Ammonia usage in general across the upper Midwest is going to be less low.

We haven’t seen, as Hunt mentioned, any switching going on in our trade zone. I think we are likely to see some of that take place in the Western market which might put a little more UAN available that can push east.

I’m actually pretty optimistic on our market moving the ammonia that we want to move and then picking up some additional UAN. We are well-positioned on the UAN front to capitalize and I think still fairly strong pricing and I think the demand will hold into the June window very well.

Adam Samuelson – Goldman Sachs

That’s helpful. And maybe just thinking couple of months out. Clearly, you have had that late start to spring. Some risk, and you’ve highlighted that there is some delayed, some risks to aggregate corn acreage, urea imports are up significantly year-on-year. Where do you – how you think about inventories across the industry exiting the spring and the impacts that that could have on summer fuel pricing?

Hunt Ramsbottom

Marc?

Marc Wallis

It’s a little bit early to tell. Obviously we’ll need to progress a little bit further until we can gauge what the ending stocks are going to be in the stage, relative to fertilizer inventories. Urea is a drag on the market. I think constructively we’ve just seen some announcements of some, let’s say higher producers shutting down over in the FSU.

I think we’re going to see a little bit of more production curtailments offshore while the market sort of stabilizes. Our projections as we look forward into the summer and into next fall, from internally and our side, we had already factored in some more pricing, I think we’re staying with our guidance. Markets likely to be lower than it was a year ago. But, we’re not – we’ve I think properly accounted for that from our outlook.

Adam Samuelson – Goldman Sachs

Okay. That’s helpful. Then maybe just finally from me, and I’ll pass it one. And it goes back to that second half outlook and maybe philosophically with the 260 distribution guidance for the year, given kind of how volatile pricing can ultimately prove in this industry. Maybe if – should we think about 260 really is that for price and what are – what should we think about as kind of really pricing levels that would put pressure in your minds on that distribution outlook?

Hunt Ramsbottom

I’ll start off and then I’ll let Dan. This is Hunt. I think as Mark said earlier, what’s occurring in the marketplace, of course we didn’t predict it, the deriving strength, but in terms of the pricing structure in the marketplace, we have factored into our plan for the year, which is why we are reiterating that guidance today.

And I think, if you go back historically on how well this plant has forecasted, since we have owned it and certainly well before, again, Bill has been buying gas for 30 years and Mark selling product in this area for 25 years. I mean, we have a very good handle on how we look at the market and how we forecasted. So, I think we obviously anything can happen, but as Mark indicated we have – we validated all of this and are planning for this year.

Adam Samuelson – Goldman Sachs

Okay, great. Thank you very much.

Operator

The next question comes from Lucas Pipes from Brean Capital.

Lucas Pipes – Brean Capital

Hey, good afternoon everyone.

Hunt Ramsbottom

Hello, Lucas.

Lucas Pipes – Brean Capital

My first question is on kind of your plans going forward. You’ve been very busy, acquisition, growth project, should we think about – you kind of executing on these projects first, or do you also see some further targets out there?

Dan Cohrs

Well, I think the best way to answer is, we absolutely have a team focus on the projects and as I said, they are going very, very well. We’re very pleased with the progress of the CapEx and the projects that we have underway.

I will tell you that the folks that are involved in business development and M&A activity are also out in the marketplace doing what they need to be doing and that’s looking for further growth. So it’s two separate groups that don’t conflict with each other, but we will make sure that we get these projects on-stream and whatever we do will not conflict with that.

Hunt Ramsbottom

It’s one of the benefits of our structure, Lucas, we have people inside the nitrogen business, who are 100% everyday focused on operating and building of expansion projects and we have other people at the parent who work with some of those people to work on future ideas for growing the business.

Dan Cohrs

Yeah, I think that is a great point. But value, that is the value of the structure. Mark, Billy do well in operating these businesses and works well having us and others focused on growth and combining us.

Lucas Pipes – Brean Capital

That’s very helpful. Thank you. And then maybe to circle back on the Pasadena facility. Could you remind us kind of on timeline for those projects to come through on the distribution level?

Dan Cohrs

So, the 20% expansion on the developed project will take effect at the end of this year. We are taking the plant out for that and we will see those distributions and 14 and the other major project is the Cogen and that will be on-stream for 15 distributions.

Lucas Pipes – Brean Capital

That’s helpful. Thank you very much.

Hunt Ramsbottom

Yep.

Operator

Brent Rystrom from Feltl & Company is online with the question.

Brent Rystrom – Feltl & Company

Thank you. Hello everybody. Quick couple of thoughts. Can you tell me from a simplistic perspective, do you think urea costs in the Ukraine would be $280 per ton. We have gotten pretty close to that pricing there as far as a pressure point where he will start seeing more of that thrashing of production. You see that thrashing.

Hunt Ramsbottom

Brent, I think you’re right on the money. Even the 280 might be a tad bit low. Just yesterday I got a wire where we’re seen a shut down at OPZ Company. There may be maintenance but I have a suspicion its going to be extended. The urea market in general as we mentioned earlier, I feel like offshore has traded down into the low 300 and that’s getting to a pressure point as you mentioned for multiple players.

Brent Rystrom – Feltl & Company

From a tightening perspective, we’re planting in wetter soils this year and wetter soils tend to create compaction. Does that has any change in your mix in the second quarter for side dressing?

Hunt Ramsbottom

You know I’m going to dance around that question. Compaction definitely affects yield and in our forecast, in our script out we indicated that we don’t think we’re going to be at 163. We made our yield production at 150 to 155, which is in line with kind of the trade estimates. I think we’re going to see heavier UAN side dress in lieu loop of ammonia to be quite frank with you. But that’s about as much insight as I can give you Brent.

Brent Rystrom – Feltl & Company

Okay. And then is there a possibility or a likelihood when you think of how late we’re planting a lot of areas are within your 200 mile radius that’s so important. A lot of those areas won’t be planted until very late May. So will some of the side dressing season potentially also flow into the 3Q, with 1Q flowing in the 2Q benefit with the medial little side dressing flowing in the 3Q.

Hunt Ramsbottom

I guess it’s possible, I think we will wrap up most of the side dress though in our portrait zone still and before we begin calendar Q2.

Brent Rystrom – Feltl & Company

Okay. And then final question. Would you guys clarify a little bit what you think the run rate in Pasadena will be this year, revenue wise at this point one quarter end?

Hunt Ramsbottom

I would say, we don’t – we haven’t changed our expectations. As we said, obviously we start in Pasadena; we have sold about 10% of our annual production down there. But we expect once we get those two vessel shipments out and other deliveries in the second quarter we will be right on track by the end of the second quarter. So we haven’t really changed our expectations for what we expect in Pasadena for the full year.

Brent Rystrom – Feltl & Company

Okay, thank you.

Operator

Last question comes from Jay Srivatsa from Chardan Capital Markets.

Jay Srivatsa – Chardan Capital Markets

Yeah, thanks for taking my question. Hunt, with this low planting season in Q1, what percentage of completion would you like to see in Q2 to feel comfortable with the guidance you’ve given to the employer?

Hunt Ramsbottom

What percentage of planting...

Jay Srivatsa – Chardan Capital Markets

In terms of the planting itself, yes.

Hunt Ramsbottom

Our Q2 planting to be 100% of what we would normally plant in Q2.

Jay Srivatsa – Chardan Capital Markets

Okay. So you feel pretty confident that that will happen in Q2?

Hunt Ramsbottom

Yeah.

Jay Srivatsa – Chardan Capital Markets

Thank you.

Operator

Julie, do you have any final remarks.

Julie Cafarella

Yes, thank you. We are pleased to see moisture levels improve in our trade zones and we have begun product shipment for the spring application period. We continue to see a good year for unit holders and we’re moving forward with all our announced expansion projects with the new debt financing. This will position us to deliver incremental cash available for distribution to unit holders as early as the first quarter of next year. This concludes our call. Thanks for joining us today and please contact me if you have any questions. Thank you.

Operator

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

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