Rentech, Inc. F3Q09 (Qtr End 06/30/09) Earnings Call Transcript

| About: Rentech, Inc (RTK)

Rentech, Inc. (NYSEMKT:RTK)

F3Q09 Earnings Call

August 11, 2009 1:00 pm ET

Executives

Julie Dawoodjee – VP IR

Hunt Ramsbottom – President & CEO

Dan Cohrs – EVP & CFO

Analysts

John Walker – Private Investor

Julie Coutou – Simmons and Company

Robert [Corsiva] – [Partners]

Jeremy Sussman – Brean Murray

David Callahan – Private Investor

Kirk [Alley] – [Handbridge Management]

Ralph [Etman] – Wells Fargo

Tanya [Modin] – Western Investments Capital

Operator

Welcome to the Rentech fiscal 2009 third quarter conference call. (Operator Instructions) I would now like to turn the conference over to Julie Dawoodjee, Vice President of Investor Relations for Rentech. Please go ahead.

Julie Dawoodjee

I would like to welcome all of you to Rentech's 2009 fiscal third quarter conference call for the period ended June 30, 2009. Before we begin our prepared remarks I would like to cover some administrative aspects of this conference call.

This call will be brief as we had a business update call at the end of June. During this call, Hunt Ramsbottom, President and CEO of Rentech, will provide remarks highlighting our company progress during the fiscal quarter and Dan Cohrs, our Chief Financial Officer will give a financial review of the fiscal quarter and will provide comments on Rentech’s financial condition. We will then open the lines for questions and ask that you limit yourself to one question so that we may get to as many questions as possible.

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 guarantees of 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 August 11, 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.

Hunt Ramsbottom

Thank you Julie, good morning everyone and thank you for joining us today. We have had some significant exciting news over the last week. We announced our first profitable quarter ever and project positive consolidated net income for the full year which Dan will discuss later on the call.

We also announced that our jet fuel has been certified for commercial aviation. ASTM International, the standards organization, approved a modification to commercial aviation jet fuel specifications to include a 50/50 blend of synthetic Fischer-Tropsch jet fuel. The FAA relies on ASTM’s specification so no further action is required by the FAA to certify the use of synthetic jet fuel for commercial flights.

This certification process took about two years and Rentech was the only U.S. based producer of Fischer-Tropsch fuel that participated in the process. This is a very important point to note as it reveals the limited number of technology providers that can actually produce the synthetic fuel certified for commercial aircraft use.

We supplied guidance, data and our jet fuel during the development of specification. It is also important to note that we are currently the only U.S. producer of synthetic jet fuel that qualifies under the new specification for commercial aviation. We can make these fuels today at PDU in Colorado.

With this approval the commercial aviation market is open to us in addition to the markets for green power and diesel and fuels for the Department of Defense. We own demonstrated, core technologies required for the production of products in these markets and are applying them at our commercial scale projects.

Our Natchez project is currently our largest planned project designed to produce approximately 30,000 barrels per day of synthetic fuels. In anticipation of last week’s certification of synthetic jet fuel for aviation, we have been working for some time with a group of commercial carriers for long-term off take agreements for the jet fuel anticipated to be produced at our Natchez project.

We are also having discussions with potential feed stock suppliers and strategic equity partners. In addition, we are on track to complete our permit applications for filing this fall.

Our Rialto project is our first major step in implementing our bio-energy strategy. We view this as the fastest and potentially the most profitable route to generate cash flows from our synthetic fuels business through project development and licensing. Recently we made two investments in biomass gasification companies to advance our renewable energy strategy.

We acquired SilvaGas Corporation and we made a strategic investment in ClearFuels, a biomass gasification and project development company whose gasifier is optimized to efficiently convert finely ground biomass feed stock such as sugar cane bagasse and wood waste into syngas. SilvaGas’ commercially proven biomass gasification technology creates syngas from a wider range of biomass feed stocks including wood, wood residue, straw, switch grass, municipal solid waste, energy crops and agricultural residues.

The Rentech SilvaGas gasifier can be deployed today at commercial scale for biomass for power and synthetic fuels production. We are applying gas conditioning technology to integrate this gasifier with our Fischer-Tropsch process to optimize fuel production at our Rialto project.

The Rialto project is continuing to progress on schedule. We expect to complete the feasibility study this fall and then move into permitting and detail design. The results of the feasibility being done by Jacobs Engineering will provide us with much of the data necessary to complete our permit applications and cost estimates.

We recently engaged Environ International to act as our consultant and contractor for the permitting process for the project. Environ is assisting us in preparing applications for permits necessary to construct and operate the Rialto project and is also performing technical studies and preparing environmental documents. Environ has been involved in the issuance of major air permits by the agency that the Rialto project is subject to. We have already begun some of the permitting work required and expect to file for permits around year-end.

In addition, we are commencing the selection process of the engineering and construction firm that will perform the front end engineering and design or feed work for the Rialto project. We continue to progress in our commercial discussions with green waste haulers for the projects feed stock and we will be submitting a response to the Southern California Edison 2009 RFP for renewable power. The package of data prepared for the Edison bid will be used in response to other RFP’s for renewable power. The process from bid submission to selection by the utilities can take many months.

Our commercial negotiations to secure off take agreements for a portion of the diesel output are progressing very well with local operators of fleet diesel equipment who appreciate the benefits of a low emissions profile and zero carbon footprint of these fuels.

There is significant benefit to building a project like this in California. California is the only state that currently has both a renewable portfolio standard for power and a low carbon fuel standard for transportation fuels. This means that the renewable power and fuels we produce are mandated products, allowing us to potentially sell the output from the Rialto facility at a premium with what we could normally receive in other states.

California’s low carbon fuel standard can present a significant opportunity for us to earn premium prices for the renewable diesel produced at the Rialto project.

The low carbon fuel standard (LCFS) requires fuel providers to reduce the carbon intensity of transportation fuels sold in California. This standard firmly establishes sustainable demand for lower carbon fuels. By 2020 the standard requires that the carbon intensity of California’s passenger vehicles be at least 10% lower than today’s fuels.

The question is, how the large integrated producers of transportation fuel meet this upcoming target. We believe our renewable diesel will provide a solution by serving as a valuable, low carbon blending fuel by treating our low carbon RenDiesel which will be the cleanest diesel in California as an additive to conventional petroleum fuels. Petroleum producers can reduce the carbon intensity of the fuels they sell and thus meet the mandate.

We have done a significant amount of research with market consultants that indicate that this is a viable market opportunity for our fuels and perhaps even more valuable than the traditional diesel market. We will share more with you on this as we continue to evaluate this market opportunity going forward.

We are looking at opportunities to develop additional biomass to energy projects. We are conducting preliminary third-party market studies evaluating biomass availability, site access and market demand.

Now, turning our focus to the PDU. The PDU is our fully integrated, demonstration scale plant in Colorado which has been operating since August of last year. Since that time we have produced thousands of gallons of synthetic fuel that have exceeded the applicable fuel standards. We have also sold fuel to the United States Air Force. Our fuels are the only fuel pipe certified by both the U.S. Air Force and for commercial aviation use. The PDU is currently in startup mode for our fourth full production run. During this run we will be producing certified jet fuel for commercial aviation use that meets the new AFCM specifications and is expected to be delivered to commercial airlines.

We have shared data from the PDU with potential licensees and have ongoing discussions with several large parties. We have now signed several engagements to perform paid, preliminary engineering work on the design of synthetic fuels facilities using Rentech’s technologies for potential licensees. We also continue to receive inquiries from potential licensees for our gasification technology since announcing our acquisition of SilvaGas.

Switching gears now to our nitrogen fertilizer facility, Rentech Energy Midwest corporation (OTC:REMC). REMC continues to benefit from low natural gas prices and has been selling products at or near expected levels. We experienced a record month for deliveries and revenue in April which among other things provided us the confidence to increase our guidance.

Dan will now provide the details on our financial performance for the period.

Dan Sink

Thank you. Good morning everyone. The numbers for this quarter are pretty good and could speak for themselves as they did yesterday. Before I summarize those numbers I would like to summarize some of the financial discipline we have put in place. This discipline is going to serve us well as we roll out our commercial projects.

Early last fall we had a preliminary budget that required external capital to get through the year even after some significant reductions in corporate spending. As the financial crisis intensified we recast that budget with further cuts in SG&A, R&D and capital expenses. Those budget reductions together with strong projected performance by REMC were the key to amending our loan agreement so that we could get through the year with no requirement for outside capital.

We have lived within that reduced budget. Perhaps just as importantly we have established a strong culture of living within our budget. If it is not in the budget we don’t spend it. You are seeing the results of that control in our reduced levels of R&D and SG&A spending. We have re-staffed the key accounting positions in the company, completed the implementation of our Oracle accounting system and trained our people in the use of that system. We are implementing project accounting modules within the system so that we have timely tracking and control of our project spending.

We have moved to a four audit firm, PWC, who will be a big help to us to ensure our controls and systems remain state of the art as the company grows and becomes more complex.

The budget discipline and systems we have implemented to manage our corporate spending will be applied as we build our commercial projects. We now have the processes and tools to control and predict spending on our construction projects as they move into commercial development. As we develop the commercial projects, we approve them according to a specific phased gate process beginning with scoping studies, feasibility engineering, permitting, front end engineering and design, procurement, construction and managing operations.

As the project enters each phase we must approve the spending for the next phase and at that point we revisit the complete financial analysis for the project. We significantly improved our project modeling to forecast financial performance and financeability and to assess the value of the project in various scenarios. We look for a project to be economic and financeable without any special government support and also evaluate the significant upside potential from all of the various renewable energy credits, property tax credits and any other subsidies that may be available.

As we finish feasibility engineering, we will be designing a financing plan for the Rialto project. We will look at the project finance market to the extent it opens up. We are talking to private equity firms and strategic equity partners who are interested in that project. We will continue to evaluate the capital markets for Rentech to raise additional funds to invest equity in the project and we are staying very close to the development of the Department of Energy regarding loan guarantees for renewable energy projects.

A new solicitation was just issued by DOE that includes support for leading edge bio-refineries and other renewable and innovative energy projects. Up to $30 billion of authority was included in the solicitation that was issued about two weeks ago. Under that solicitation the U.S. government may guarantee up to 80% of the total project loan. They have laid out seven rounds of applications to be submitted beginning as early as September 14th and extending all the way into 2010.

We are currently preparing an application for the Rialto project which we believe will be an excellent candidate for such a guarantee and we will be submitting the application in the very early round of that process.

Let’s turn to the highlights of the quarter. For consolidated third quarter results we reported revenues up over 50% from the third quarter of last year at $91.4 million. $91.4 million. Net income was up to $36.1 million this quarter from a loss of $7.8 million last year. That put our earnings per share at $0.22 this year, up from a loss of $0.05 last year. We have had a 28% reduction in our SG&A from the prior quarter. We reported $6 million of SG&A this quarter, down 28% from last year.

If we normalize our R&D spending it is down 31% year-over-year. By normalizing I am backing out the construction expense we recorded last year as part of R&D and then backing out a $2.9 million tax accrual we recorded this year. Our real run rate for R&D spending is down over 30% from last year.

For the nine months, still at the consolidated level, nine months year-to-date we recorded revenues up 16% to over $158 million and net income per share went from a loss of $0.33 up to a profit of $0.09 for the nine months year-to-date. SG&A spending over that nine month period had a very similar trend down 28% for the nine month period over the nine month period. R&D, again normalized R&D backing out the construction expense and the one-time accrual, was down 9% for that period which tells you the reduction in our burn rate accelerated during that period.

Consolidated EBITDA was $43 million for the quarter up from a loss of $4.4 million last year. Of course REMC produced most of our revenue, $91.3 million up over 50% from last year. EBITDA of $55.5 million at REMC up from $19 million last year. REMC had record levels of production reliability with the highest levels of on stream time ever. Although tons shipped this year were down mainly due to weather delays during the key application periods, higher prices more than compensated.

For the nine months year-to-date our average delivered price for ammonia was $750 per ton compared to $484 per ton last year. Again, for the nine months year-to-date for the UAM product the average price was $318 up from $269 last year.

Looking ahead, we have already delivered and/or pre-sold through July 31 about 95% of our shippable ammonia production and 70% of our UAM production capacity for fiscal year 2009. We have locked in natural gas prices for those pre-sold tons to stabilize our gross margin on the pre-sold tons. We are starting to pre-sell ammonia for the 2010 season but that market is just starting to develop at this point.

Because of all this we are updating our guidance for fiscal year 2009. For REMC EBITDA, our new guidance is greater than $65 million, up from guidance of $65 million. At the consolidated level our new guidance for EBITDA is greater than $25 million, up from previous guidance of $15 million. We are now projecting fiscal 2009 consolidated earnings per share to be positive for the first time in the company’s history.

We are continuing to benefit from strong performance at REMC and our expense reduction efforts. R&D expense is down significantly after the end of PDU construction and after normalization so our real run rate is down significantly. We continue to reduce our SG&A spending and are on track with our budget, leading to the overhead reductions exceeding 25%.

Thank you. I will now turn the call back to Hunt.

Hunt Ramsbottom

Thanks Dan. Now I will turn it back to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of John Walker – Private Investor.

John Walker – Private Investor

I just want to say that I have been a shareholder of this company for a little over five years, closer to six actually, and I know that I am responsible for bringing in lots of other guys and together we have millions of shares and this is one of the best conference calls I have heard in a very long time. I just want to give you an “atta boy.” Nothing else.

Hunt Ramsbottom

We appreciate it. Thank you very much.

Operator

The next question comes from the line of Julie Coutou – Simmons and Company.

Julie Coutou – Simmons and Company

Just starting off I am just wondering if there is anything specific in the fourth quarter you see that could impact your ability to hit your new full-year guidance?

Hunt Ramsbottom

No, we are very comfortable with that guidance. As you can imagine, we like to give guidance in round numbers and we like to give guidance we think we can beat. The words “greater than” in that guidance are important. We expect REMC EMBITDA to be greater than $65 million and we expect consolidated EBITDA to be greater than $25 million and we expect net income to be positive for the year.

Julie Coutou – Simmons and Company

Next question, with the higher pricing we saw this quarter on your ammonia and UAM shipments you just mentioned, I am just wondering if you can speak a little bit about what you are seeing out there on your pre-sale contracts for Q4 and looking into 2010?

Hunt Ramsbottom

It is really early so it is pretty hard to draw any conclusions at this point on the pre-sales and looking out into 2010. For pre-sales for this fall prices are clearly lower than they were last year. You are going to see ammonia prices and product prices for delivery this fall lower than the numbers we just showed you because remember those tons were sold in an extremely strong market last year. Of course, we are seeing benefit from lower natural gas prices so to a great extent the lower natural gas prices help us maintain margins even though prices are lower.

Operator

The next question comes from the line of Robert [Corsiva] – [Partners].

Robert [Corsiva] – [Partners]

Some time back there was an auction rate security issue where some $10 million approximately were written off. What is the chance of recovery of that, if any? At what rate are the securities performing presently?

Dan Cohrs

We wrote the auction rate preferred securities from $10 million down to $6 million. We are holding those. We are comfortable with that at this point and we think at this point the best course is to just hold those securities on our books.

Robert [Corsiva] – [Partners]

They are performing with a rate commensurate with the 60% level?

Dan Cohrs

Just slightly below that.

Robert [Corsiva] – [Partners]

Some time back there was a question about de-bottlenecking the plant. Has any success come of that? Are we to look forward to increased capacity next year or is that issue dead?

Hunt Ramsbottom

At REMC?

Robert [Corsiva] – [Partners]

Yes, there was a de-bottlenecking you specifically mentioned you were working on to increase the capacity of the plant. You mentioned it on an analyst conference call and I was wondering, I haven’t heard of the progress of that effort.

Hunt Ramsbottom

We pulled some of that capital out as part of our reduction when the economic crisis this past year. Although the work continues at REMC. As Dan mentioned, they continue to do further engineering work and we have had the best on stream track time ever in the history of the plant. We continue to do the de-bottlenecking and the engineering work to get good on stream time but not the major capital project you are referring to we did put aside for now when we saw the economic crisis hitting.

Operator

The next question comes from the line of Jeremy Sussman – Brean Murray.

Jeremy Sussman – Brean Murray

A question on one of the announcements in terms of your synthetic jet fuel which is now certified for commercial aviation. You have now got that. You have got your fuel approved by the U.S. Air Force obviously as well. Can you talk about how this could springboard you to potential long-term off take agreements with either potential customers or how this could potentially even play out with some legislation?

Hunt Ramsbottom

I think the airlines have been extremely supportive and internally our Dr. [Firks] who has worked very closely with the certification process with the airlines and Jim McVaney in Washington used to work at the ATA. So we have very good relationships with the airlines. They have been waiting for the certification so they can move forward with an alternative fuel strategy in the United States. I think from our perspective it is encouraging because everybody has seen these one-off flights, whether coconut oil or whatever else, but they look to the synthetic fuels markets as ready-now technology that is scalable that they truly do want to get behind and have a domestic source of fuel so they don’t have the volatility going forward.

So, it is a long way of saying we have been in close communication throughout the process and even closer communication since approval in the last couple of weeks. I think this works not only their aviation fuels but also their ground equipment. The airlines also want to have a secure supply but they also want to have a cleaner supply. We fit both of those goals. I think you will see potentially some work going forward with us with the airlines.

How that plays out in Washington I don’t know. I would tell you from my perspective I am encouraging the airlines to work very closely with us to help pass legislation so these fuels really get noticed in Washington more than they have. It is always good to have a very significant off-taker or end-user creating market demand for your fuels who desperately need them for the reasons that I have articulated. So, I think you will see us working very closely with them both in the projects and in Washington.

Jeremy Sussman – Brean Murray

It sounds like we could have some nice things to potentially hear about over the next number of months.

Operator

The next question comes from the line of David Callahan – Private Investor.

David Callahan – Private Investor

I just wanted to say congratulations on the incredible quarter to you and all of the staff what an incredible job you have done. I was going to ask you about the airlines if there was some excitement around the approval of the fuels. That was really the question I had.

Hunt Ramsbottom

Hopefully we answered it through Jeremy there for you.

Operator

The next question comes from the line of Kirk [Alley] – [Handbridge Management].

Kirk [Alley] – [Handbridge Management]

I was wondering if you could just speak quickly, it might be a little early, but if you could just speak quickly about the cost structure of the traditional aviation fuel compared to your synthetic fuel.

Hunt Ramsbottom

Well, you mean what it would sell for in the market place?

Kirk [Alley] – [Handbridge Management]

Yes, going forward in a year or two whenever you are up and running.

Hunt Ramsbottom

We price the projects off of the forward curve of jet fuel which is priced off crude. We have to be competitive in the market place with jet fuel. The airlines are not going to pay a premium but they look at the forward curve as most people do and know what we can produce these fuels for with sort of a floor and a ceiling. They are fine with the approach we are taking and we are comfortable with the approach we are taking just pricing off of forward curve.

Kirk [Alley] – [Handbridge Management]

So this is more not really a discounted product, it is more of a more efficient, cleaner product?

Hunt Ramsbottom

Correct. And it is a premium product.

Operator

The next question comes from the line of Ralph [Etman] – Wells Fargo.

Ralph [Etman] – Wells Fargo

A lot of people know about your stock but do you ever think about doing a little advertising with like CNBC where everybody in the country would hear about it and be more apt to look into your business and purchase your stock?

Hunt Ramsbottom

We have been on CNBC a couple of times and at the appropriate times we do go on. We probably will again at the appropriate time. We have a good relationship with the news organizations. We think it is appropriate then we will go back on again. We have done that historically.

Ralph [Etman] – Wells Fargo

I gather that you get your feed stock basically from like coal?

Hunt Ramsbottom

We can. The project in California is green waste; woody green waste.

Ralph [Etman] – Wells Fargo

If you are going to used coal would you be doing your main plant close to that source or would you have to transport that with extra costs across the country to your plants?

Hunt Ramsbottom

We only have one project announced that needed to be coal or pet coke and either one of those there will be transport costs but it will be competitive. It is not at mine in Mississippi. It is all on our website.

Ralph [Etman] – Wells Fargo

I read some of your articles and it said you were selling some of your technology to other countries maybe like China. Is that one of the ways you are going there?

Hunt Ramsbottom

No, we will not sell our technology to the Chinese.

Operator

The next question comes from the line of Tanya [Modin] – Western Investments Capital.

Tanya [Modin] – Western Investments Capital

Taking a look out the next two quarters as far as your mix of synthetic fuel versus nitrogen urea fertilizer as a mix of revenues. Do you have a thumbnail on that?

Dan Cohrs

At this point synthetic fuel is not yet a commercial revenue stream for us. Virtually all of our revenue right now comes from the fertilizer products. We sell very small amounts of synthetic fuel that is produced at our demonstration plant, mainly really for testing purposes at this point. We have a small amount of revenue from engineering services. By far, the vast majority of our revenue comes from fertilizer projects. We expect as the Rialto project comes online in late 2012 we will start selling synthetic fuel in commercial quantities.

Tanya [Modin] – Western Investments Capital

On share count by the end of the year, do you have a feel for that?

Dan Cohrs

Our outstanding shares I believe are about 190 million at this point.

Operator

There are no further questions at this time. I will turn the call back over to you.

Hunt Ramsbottom

Thank you. We believe our value proposition is unique and that we are well positioned to capture the opportunities that are resulting from the approval of our jet fuel for commercial aviation and for renewable power and low carbon fuel mandates. Our Rialto and Natchez projects continue to meet the milestones we set for them and our efforts on the licensing front have resulted in paid, preliminary engineering work for several parties that are the foundation and potential for licensing agreements.

We have done an exceptional job in keeping our expense run rate down and in securing nitrogen fertilizer sales at the best available prices. We reported our first profitable quarter ever and for the first time we expect positive earnings for the full fiscal year. We look forward to sharing our progress on our projects and execution of our strategy in the future. Thank you for your continued support. We will speak to you when we announce our results for the full fiscal year 2009. Thank you all very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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