Rentech Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 7.13 | About: Rentech, Inc (RTK)

Rentech (NASDAQ:RTK)

Q3 2013 Earnings Call

November 07, 2013 6:00 pm ET

Executives

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

Analysts

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Lucas Pipes - Brean Capital LLC, Research Division

Matthew Farwell - Imperial Capital, LLC, Research Division

James A. Bardowski - Sidoti & Company, LLC

Operator

Welcome to the Rentech Third Quarter 2013 Conference Call. My name is Eric. I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Julie Cafarella. Julie, you may begin.

Julie Dawoodjee Cafarella

Thank you. Welcome to Rentech's conference call for the 3 and 9 months ended September 30, 2013. During this call, Hunt Ramsbottom, President and CEO of Rentech will summarize the company's activities for the periods 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 Sean Ebnet, SVP of Fiber Business Development, 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 terminologies 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 November 7, 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 2013 third quarter earnings press release that is available on our website.

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

D. Hunt Ramsbottom

Good afternoon, everyone, and thank you for joining us today.

We're now 5 months into our public launch of our wood fiber business, which includes the acquisition of Fulghum Fibres' chipping business and the construction of 2 announced pellet projects and port terminal and storage facility -- port terminal storage facility. I'm pleased with the operating performance of Fulghum's 32 chipping facilities and with the progress we're making out of 2 pellet projects in Canada. During the quarter, Fulghum generated gross margins of 19%. The business is on track to generate approximately $95 million of revenues and $20 million of EBITDA for the full year of 2013, of which we would recognize 8 months of results since the acquisition.

In the inception of the projects in 2012, we retained 2 affiliated firms, AgriRecycle and EAD. Who, together, have 27 years of experience designing and building 11 pellet plants to perform engineering and project design. After the JV with Graanul Invest was formed in May of this year, Graanul reviewed the engineering and project plans. Rentech and Graanul then jointly decided that AgriRecycle and EAD would continue their work, as it didn't make sense to insert Graanul as the EPC provider in the middle of project. This also allows the resources of the JV and Graanul to be focused on other projects under development. Since Graanul would not be providing EPC services, the Wawa and Atikokan projects would not be financed and owned by the JV. Rentech will continue to own the projects outright and be responsible for construction. The Rentech team includes the former plant manager, woodyard manager and manager of capital projects at the Wawa facility. All of whom have worked at the plant when it was operated by Weyerhaeuser as an OSB mill, processing nearly 750,000 green metric tons of logs annually.

We began construction of the Atikokan and Wawa pellet facilities in August to remain on schedule to begin producing wood pellets from these facilities in 2014. Demolition work at the sites has been completed within budget. We placed orders or received bids for all major equipment with costs consistent with the budget. We decided to increase capital costs at the Wawa facility by installing 2 electric 170-foot radio log cranes to be purchased from Fulghum Industries, rather than using diesel-powered mobile equipment to manage the woodyard, offloading and feeding. It's expected the project costs will increase by approximately $8 million due to this decision. Cranes are typically more reliable, safer, reduce emissions and are significantly less expensive to operate for large capacity facilities such as the Wawa plant. The use of these cranes should result in annual operating cost savings of at least $1 million, with an expected useful life of 20 years or more.

The design of the facility has been further modified to add capacity, which will increase capital costs. The expected production of the Wawa plant has increased to approximately 450,000 tons. The Wawa plant is now expected to supply the entire 400,000 tons of annual pellet deliveries to Drax, with 50,000 tons available for sale to Drax or other customers. The production at the Atikokan facility now expected to be approximately 100,000 tons, which will fulfill the existing contract with OPG for 45,000 tons, with the remaining 55,000 tons available for sale to OPG or other customers. When the increased output anticipated from the design changes and the operating efficiencies anticipated from the log cranes are balanced against higher capital costs, the expected return profile of these projects remains unchanged, with stabilized annual EBITDA now projected in the range of $17 million to $20 million.

With Rentech's oversight, QSL began construction of pellet storage and handling facilities at the port of Québec, keeping on track with estimated construction costs and time line. The infrastructure and storage at the port can handle up to 1 million tons of pellets annually, providing us additional embedded capacity for growth and aggregation in Eastern Canada, as we seek to leverage the exclusive storage and priority access we have at the port of Québec. Increased volume at the port will reduce our per ton handling cost for all of our projects.

Turning our focus to the nitrogen business. The nitrogen market did not recover from the impacts of the delayed wet spring and significant competitively price offshore urea supply. We saw lower prices for all products relative to last year when demand in prices were fairly robust in anticipation of record corn plantings and low yields due to the drought, as well as the effects of favorable spring weather. Still demand for our products was good, and we made up ground from a volume a perspective in third quarter against the backdrop of a disappointing spring. As we moved into the growing, and now harvesting periods, the market has been relatively illiquid. We believe most buyers have layered in only a small portion of their needs for 2014, taking a wait-and-see attitude, deferring additional purchases until the harvest is completed or until the spring application period.

Rentech Nitrogen revised its 2013 guidance on October 28, largely as a result of the commodity driven and the operational performance impacts at the Pasadena Facility, and the need to repair the foundation on 1 of the 3 existing syn-gas compressors at the East Dubuque Facility. The partnership now anticipates that fourth quarter distribution could be as low as 0.

The turnaround and major tie-ins related to the ammonium capacity expansion at the East Dubuque Facility were complete safely -- completed safety. The plant is currently in the commissioning phase, and we expect ammonia production this weekend. The board has approved 2 new projects at the East Dubuque Facility, both of which are expected to generate returns of greater than 20%. One project contemplates increasing urea production, and the other smaller project involves generation of additional N2O creds. The project to increase ammonium sulfate production at the Pasadena Facility by 20% and the production improvements to increase onstream rates remain on track to be completed this quarter.

We continue to take steps to wind down our legacy energy technologies business. During the quarter, we sold a site we owned in Natchez, Mississippi, for $8.6 million. Our remaining assets in that business are the site we own in Commerce City, Colorado, our mothballed R&D facility in our technology portfolio. We're actively marketing all of these assets for sale and/or licensing.

I'll now turn it over to Dan for more color on the quarter. Dan?

Dan J. Cohrs

Thank you, Hunt. Good afternoon, everybody.

We're pleased to see Fulghum Fibres' financial performance tracking with the guidance we gave, $95 million of revenue and $20 million of EBITDA on an annual basis. That's what we expected for this business, which has long-term contracts structured to produce very stable margins. In the legacy technology business, we continue to reduce our costs as we wind down the business, with SG&A expense running in line with our expectations and no R&D activities for the period.

The results for the quarter. Looking at revenues, we were up 92% for consolidated revenues year-over-year, as we added $42.7 million of revenue from the Pasadena plant at Rentech Nitrogen. We also added $22.4 million of revenue from Fulghum Fibres, and we did see revenue down slightly at the East Dubuque plant this year. The gross profit margin changed significantly from last year. A year ago in the third quarter, we had only the East Dubuque plant, which generated a 58% margin. The East Dubuque plant was at 50% this quarter. The new Pasadena plant actually recorded a gross margin loss for the quarter. We recorded 19% margins at Fulghum Fibres, as expected, which consolidated to an 18% consolidated gross profit margin.

Focusing on SG&A. At the consolidated level, SG&A was up by $3.1 million. If we break that down, Rentech Nitrogen saw a decline in SG&A of $1.4 million. As we added Fulghum Fibres, we added $1.3 million of SG&A that wasn't there last year.

In our wood pellet segment at Rentech, we recorded $2.4 million of SG&A. That was up significantly from the $0.5 million last year, and we should not consider that to be a run rate. A lot of those expenses were associated with the development of the projects. We do not expect to see a run rate of $2.4 million per quarter in the wood pellet segment.

Energy technology SG&A was $1.8 million. Although that was higher than last year. Remember that, that segment is eliminating R&D expense, and some of those activities that were formerly R&D are now recorded as SG&A since we've eliminated R&D activities.

At corporate, the unallocated SG&A was up 8% from the year-ago quarter. That led us to a consolidated operating income loss of $20 million. Included in that loss was a $30 million goodwill impairment that we took, related to the Pasadena plant at Rentech Nitrogen.

Fulghum Fibres' operating income was $1.8 million, and we had a $2.4 million loss at the operating income level in our wood pellet segment.

Energy technology segment recorded a $4.5 million profit that was due to the gain on the sale of the Natchez site.

If we drop down to net income, consolidated for the year was -- or, sorry, for the quarter was a loss of $14.6 million. That's a loss of $0.06 per share. If we adjust for the $30 million loss on goodwill impairment, we also adjust for the gain on the sale of Natchez and then 2 smaller items, an income tax item and a small gain on a change in value of earn-out consideration for Pasadena. We adjust for those onetime items. We have an adjusted gain of $0.03 per share at the net income level.

Looking at EBITDA. Fulghum Fibres generated $5.2 million of EBITDA this quarter. Rentech Nitrogen consolidated EBITDA was $16.1 million. We ended the quarter with $180 million of consolidated cash. Of that, $85 million is at Rentech Nitrogen, $95 million sits at Rentech. And pro forma, for the cash distribution that we'll receive on November 14, the Rentech cash balance minus Rentech Nitrogen, would be about $101 million.

We have $427 million of debt, that's $320 million of the bonds at Rentech Nitrogen and $107 million of debt at Rentech, consisting of the Fulghum Fibres debt that we assumed at the time of the acquisition, as well as $50 million under our new revolving loan facility. Fulghum's balance at the end of the third quarter was $57 million, with an average interest rate of 6.8%. We expect to pay $2.6 million in interest on that debt in 2013, for the 8 months of the year we will have owned Fulghum. Total principle amortization of the debt this year is $16.3 million, bringing the debt balance to $46.3 million, including $1.4 million of unamortized premium at the end of the year.

In September, we arranged a new $100 million revolving loan facility at Rentech. The loan facility has a 3-year maturity and interest rate on undrawn balances -- on drawn balances equal to LIBOR plus 400 basis points. The facility is secured by $15.4 million of the 23.25 million units of RNF that we own, with the potential for another 4 million shares to be pledged under certain circumstances.

We'll continue to receive all of the cash distributions paid on the collateral units and retaining the right to sell units not held as collateral as long as certain conditions outlined in the loan facility are met. We drew down $50 million of the facility upon the close of the transaction, with those proceeds to be used for future growth in the wood fiber business.

As a sole equity owner of the Atikokan and Wawa pellet facilities, we were responsible for the full project costs. We expect to fund these capital requirements through a combination of cash on hand, our new loan facility, expected distributions from Rentech Nitrogen and cash generated by Fulghum. We're reiterating our guidance of total cash operating expenses for Rentech, including Fulghum Fibres, and excluding the nitrogen products manufacturing business of approximately $34 million for 2013. Recall that the $34 million is made up of $20 million of Rentech corporate cash expenses, including roughly $5 million for wood pellet development, $4 million for 8 months of SG&A at Fulghum, $5 million of SG&A from our legacy business and $5 million of R&D expense that was recorded early in the year.

Looking now to 2014, we expect roughly $8 million of combined cash operating expense savings from 2013 levels, including $2 million to $3 million from the legacy business, nearly $1 million from corporate, due to the sale of the Natchez site, and $5 million from the elimination of cash R&D expenses. The remaining cost structures supports the growth and build-out of our fiber business, growing it to the point where we can potentially take that business public at MLP multiples, further enhancing shareholder value.

I'll turn it back to Hunt, and then we'll go for questions.

D. Hunt Ramsbottom

Thanks, Dan.

In addition to these Canadian projects, we're looking to build a strong position in North America and to expand our operating base, both geographically and increase the EBITDA through potential acquisitions and new projects already in development with our JV partner, Graanul. We entered into the fiber processing business to create value by investing in high-return projects with stable cash flows and long-term contracts. This business also diversifies Rentech's exposure to the commodity fluctuations in our nitrogen business. We're working on specific growth opportunities in both chipping and pellet operations. We believe we can further enhance values through an MLP structure once we have a clear path to a somewhat larger scale than Fulghum Fibres' current EBITDA run rate and the anticipated EBITDA from the Atikokan and Wawa projects. We anticipate that an MLP in the fiber business could be possible in approximately 2 years or less, depending on our ability to successfully and timely execute on opportunities we have in the pipeline.

While we're not offering any speculation on the size and structure of a potential MLP of the Fiber business, the long-term contracts of the business structure to deliver stable margins fit the characteristics of a traditional MLP with IDRs. An analysis of MLP IPO transactions points to an EBITDA of approximately $50 million as a reasonable target for an offering, assuming that the IPO market is available at that time. Under the scenario where the fiber business is a public MLP, we anticipate Rentech to play a traditional sponsor role, developing and/or acquiring new and brownfield chipping and pellet projects, and dropping them down into the fiber MLP.

With that, I'll turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have Brent Rystrom online from Feltl.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Just a couple of quick questions. On the Fulghum Fibres business, I'm just kind of trying to get a sense from a modeling perspective. As you dug into the business a little bit further, is there seasonality there that we should be aware of, as far as winter logging or such or other things that might slow their business at certain times of the year?

Dan J. Cohrs

Brent, it's Dan. There's a little bit of seasonality, but very little. I mean, especially of course, we're used to the fertilizer business which has big seasonality. You got a little bit of variance through the year. This year, the southeast was very wet and it can interfere with logging operations and things. You have a little bit of seasonality in Chile with the operations down there, but compared to what we're used to looking at the fertilizer business, you hardly even notice seasonality here.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Okay. And then from a simplistic perspective, we previously talked about the EBITDA of the new plants. You thought $15 million a year, is that correct? Now you're seeing the 2 wood pellet plants, $17 million to $20 million?

D. Hunt Ramsbottom

That's correct.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

All right. Can you give us a thought of what you've identified there that has changed that a little?

D. Hunt Ramsbottom

Well, as I said in my prepared remarks, it's primarily Wawa. We've done some investment in the capital projects up there to increase throughput. One is the cranes that we invested in, and we also higher -- then that gives us higher fee rates and we added more pellet mills. Those are the 2 primary capital projects that we put in into those, and primarily into Wawa.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Okay. And then as kind of a final question. When you're looking at adding additional potential projects with Graanul on your own, then would it be fair to say that a typical project would be a facility that may have the 300,000, 400,000, 500,000 tons of capacity, would it be smaller than that? And then, from a timing perspective, do you think you will have additional stuff wrapped up say by the time these 2 plants go active?

Dan J. Cohrs

So first and foremost, the ones that we're anticipating and we're looking at with Graanul are somewhere between Atikokan and Wawa. So let's it call in the 200,000 to 400,000. There's certainly pellet facilities out there that are smaller, that we can aggregate as part of our portfolio. But the plants that we're looking at and working on are larger than Atikokan and smaller than Wawa, safe to say. What was part 2 of your question?

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Just curious, do you think you will see additional facilities added between now and the time the 2 plants that you currently have go active?

D. Hunt Ramsbottom

They won't be added, but we're certainly working the pipeline and hopeful that you'll certainly hear some news about those projects. As I said a while ago, and certainly when we bought Fulghum, they've been working with Graanul on some projects in North America. So you'll certainly should hear some activity around that over the next few months.

Operator

We have Lucas Pipes online from Brean Capital.

Lucas Pipes - Brean Capital LLC, Research Division

To go back to the pellets business and wood fiber business, you kind of gave a target for what is necessary to consider that for an IPO. Could you maybe elaborate on what type of organic growth you see, both on the fiber and on the pellet side? And then maybe also where you might consider M&A within the existing wood fiber and pellet space or would you also go into other aspects of the wood industry to grow that business?

D. Hunt Ramsbottom

So I would say, on the chipping side, as we said when we acquire that business, that's basically grows at inflation. And we certainly -- we expect to track with that but we will also -- we're also looking at other chipping opportunities and some other opportunities within that complex, both domestically and internationally. So that business will grow but I would -- the way I think I look at it today, you'll see, I would say, higher growth on the pellet business, both through acquisition and greenfield opportunities over the next 24, 36 months. So I would say, both will grow, both organically. Because obviously, we've got -- we've picked the markets that Fulghum has, in terms of the markets they're pursuing on the fiber board business, on the box board business. But you'll also see higher growth, I think, as we pursue the pellet business, without putting a number on it. But that's the pipeline as we see it.

Lucas Pipes - Brean Capital LLC, Research Division

That's helpful. And then as you try to model out the potential benefit from drop-downs off the wood fiber business, any special considerations that we should make for foreign assets? Could you maybe give us a little bit -- your quick view on that?

Dan J. Cohrs

Well, Lucas, I guess you're talking about how foreign assets would fit into an MLP. First of all, if it's qualifying income, it's qualifying income no matter where it's located. So, the nature of the fiber business is that it's qualifying income. If you put those assets in Canada or Chile or anywhere else, it's still qualifying income. So the slightly complicated part is that you have to account for foreign taxes, and as that -- assume you have a foreign asset already in an MLP, that income is going to flow up out of that foreign jurisdiction, is going to come to U.S. partners and the foreign taxes that are generated in those flows are creditable, generally, against U.S. taxes. So if those partners are able to use the credits, it looks just like a U.S. MLP in the sense that it's a pass-through vehicle and partners credit the taxes and it all nets out.

Lucas Pipes - Brean Capital LLC, Research Division

So there is a corporate tax in Canada but then, essentially, the U.S. investors get that money back?

Dan J. Cohrs

That's right.

Operator

We have Matt Farwell online from Imperial Capital.

Matthew Farwell - Imperial Capital, LLC, Research Division

A quick question on the cash. You have, pro forma, around $100 million in cash. Does that include the drawdown on the revolving loan that you made, $50 million? Or was that somehow...

D. Hunt Ramsbottom

Yes. That's included, Matt. So there's $50 million of cash that we drew and then $50 million of unused capacity.

Matthew Farwell - Imperial Capital, LLC, Research Division

Got it. So could you just walk us through, in terms of the sort of the total capital expenditure for the pellet business? What has been spent, thus far, and then what remains to be spent?

Dan J. Cohrs

So this year, so far, we've spent $34 million. We're a little bit lagging on what we spent this year in 2013. We've spent around $34 million anticipated to spend, of I think the total $65 million we expected to spend this year roughly. So there's a lag. The remainder will come in the first quarter probably of '14.

Matthew Farwell - Imperial Capital, LLC, Research Division

Got it. And in that, where you're also spending some SG&A, so you're including that in the $34 million?

Dan J. Cohrs

That's CapEx.

Matthew Farwell - Imperial Capital, LLC, Research Division

Okay. Just $34 million in CapEx has been spent. In addition, there has been some SG&A expense?

Dan J. Cohrs

Right. Very small.

Operator

James Bardowski is online from Sidoti & Company.

James A. Bardowski - Sidoti & Company, LLC

Just a quick question. I want to make sure I understand this correct. The JV for the Atikokan and Wawa plants, because it's going to be owned outright by Rentech, with the ATA risk, you will be realizing 100% of the profits then?

D. Hunt Ramsbottom

Correct. That's right.

James A. Bardowski - Sidoti & Company, LLC

All right. Excellent, excellent news. And regarding the others individual plans, is anything in the works with Graanul to expand in the pellet business or are you going to look for expansion in the processing side?

D. Hunt Ramsbottom

No. Absolutely more plans with Graanul. As I said earlier, they already had some projects under development with Fulghum Fibres. And part of the decision, not only when timing of them being introduced to our projects in Canada, which was why we elected, jointly, for us to proceed on our own, and we also liked the profile of those projects. But secondarily, this helps us move, frankly, with more speed because the projects that they had identified in other market areas with Fulghum, this allows our Canada project team to continue on those projects and Graanul with some folks in Fulghum to pick up and continue with those projects that they had already identified in their marketplace. And so it allows us, really, to pursue a couple of markets simultaneously.

Operator

We have no further questions. I will now turn it over back to Julie for closing remarks.

Julie Dawoodjee Cafarella

Thank you. We're focused on execution as the key announced pellet projects and port terminal, along with building a pipeline of additional pellet and chipping operations to grow the fiber business, with a goal of an MLP of that business in approximately 2 years or less. We're also focused on growing the fertilizer business and operating at maximum on-street rates. Pricing indicators for the products and inputs are encouraging as we look to position the additional capacity anticipated to come on stream at both plants from the expansion project.

This concludes our call. Please feel free to reach out to me if you have any questions about our results. 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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