Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rentech, Inc. (NASDAQ:RTK)

F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

August 10, 2010 1:00 pm ET

Executives

Julie Dawoodjee – VP, IR

Hunt Ramsbottom – President and CEO

Dan Cohrs – EVP and CFO

Analysts

Matt Farwell – Imperial Capital

Cory Garcia – Raymond James

Jeremy Sussman – Brean Murray

Thomas Dresser

Robert Fauche [ph] – Stifel Nicolaus

Operator

Welcome to the Rentech fiscal 2010 third quarter earnings call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, August 10, 2010. I would now like to turn the conference over to Julie Dawoodjee, Rentech Vice President of Investor Relations. Please go ahead, ma’am.

Julie Dawoodjee

Welcome to Rentech's 2010 fiscal third quarter conference call for the period ended June 30th, 2010. During this call Hunt Ramsbottom, President and CEO of Rentech will summarize the company's progress during the fiscal quarter. Dan Cohrs, our Chief Financial Officer will give a financial review of the third quarter and provide comments on Rentech's financial position. We will then open the lines for questions. We ask that you limit yourself to one question so that we may get to as many of your 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 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 August 10th, 2010 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. I'll start with an update on our Rialto project. Since our last earnings call in May, we’ve filed all major permit applications and signed a contract with Fluor to perform front end engineering and design for the project.

We also completed some important milestones in support of our ongoing work with the Department of Energy in connection with our application for loan guarantee. The engineering work done during the feed phase establishes the facility layout, sizing, specifications of all equipment, sets critical operating parameters and determines the technology performance requirements for the optimal size of the plant.

Upon completion of the feed phase we'll have a definitive cost estimate that will serve as the basis of the construction contract. A large component of feed is the generation of the feed process design packages. The PDP is defined all major design parameters for the technology units. There are currently five PDPs underway both within Rentech and with outside licensors including UOP.

All the PDPs are progressing on schedule and within budget. The gasification and syngas conditioning PDP are nearly complete. Fluor is fully engaged in the feed process. Their role as feed contractor is to integrate the technology packages and provide the design of all of the supporting facilities.

Fluor's work to date has been focused on feed stock handling and processing; syngas clean up and power generation areas of the plant. We've secured options on all the land required to construct the facility and completing site surveys in preliminary geo technical work.

The preliminary layout of the facility has been completed, identifying the locations of all major process equipment, roads and buildings. Our work in the feed phase is on schedule and the cost is trending less than the guidance we gave of significant less than 20 million. We believe the Rialto project is a strong candidate for the DOE loan guarantee under section 1705, we're still in the process and we have completed all of the steps required to date.

We obtained a report from RW Beck as the independent engineer which evaluated the technology and assumptions used in the financial forecast which we submitted to the DOE. RW Beck's report validated the combination of technologies that we'll use in the project, including the Rentech SilvaGas gas fire, our Rentech process for synthetic fuels and the integration of all technologies.

RW Beck is also evaluated the production capabilities of the plant and the capital cost estimates. The report's conclusions support both the technology and the financial assumptions in the application we submitted to the Department of Energy. RW Beck's report is a critical achievement on the path to getting financing for this project and marks the first time we have received this level of validation from an independent engineer. We also have obtained preliminary credit assessment for the project from a nationally recognized rating agency to support our loan guarantee application.

Now, on to our Natchez project. We're making good progress in adding biomass feedstock. We have advanced our feedstock negotiations with a large company with access to timber harvest residuals such as tree limbs and treetops. We believe that enough of this material is available to make biomass a significant part of our feedstock for the project. We're also negotiating a long term – with a long term supplier of large volumes of petroleum coke.

These discussions about feedstock prompted us to engage Fluor to evaluate alternative configurations for the plant that would use more of these environmentally friendly feedstocks. We believe we can further improve the project's environmental footprint by combining biomass and pet coke feedstocks with our solution for carbon capture and sequestration.

We engaged Life Cycle Associates to assess the benefits of this feedstock combination. Preliminary results indicate significant improvement in the life-cycle carbon footprint compared to the marginal barrel of crude oil. Potentially greener project resonates well with our project partners, including the airlines. We're continuing to work with them toward a definitive agreement for the purchase of jet fuel to be produced by the plant.

It is just over a year, since we launched our bioenergy strategy with the acquisition of SilvaGas and an interest in ClearFuels. The positive response we're receiving from the global marketplace underscores the importance of biomass in today's low carbon world. When we combined our Rentech process for synthetic fuels with the gasification technology required, we acquired – we created an unmatched technology portfolio.

The appeal of this technology package has resulted in the most robust project development pipeline in our company's history. We'll announce projects from our pipeline when we've achieved appropriate development milestones and we feel confident in the economics of each project. The projects in our pipeline, other than Rialto and Natchez, are in the scoping and pre-feasibility phases.

We have a lot of activity in our development group seeking control over sites and feedstock, off take agreements and support from various government programs for these projects. We are working on development projects that use our proven Rentech SilvaGas biomass gasifier and ClearFuel's biomass gasification technology depending on a particular application.

Our joint biorefinery project with ClearFuels, demonstrate their technology and our PDU is moving forward. We expect to build a ClearFuels gassifer integrated with our existing synthetic fuels facility by the end of next year. The $7.7 million of budget period one funds are being used for engineering activity to assist with this work and pay for the design and material handling and gasification unit. The application for budget period two funds is being prepared for submission to the DOE. Those funds will be used to pay for the fabrication, construction and integration of the biomass gasifier.

Our nitrogen fertilizer plant, REMC continues to provide financial support for the development of our alternative energy business that I've discussed. REMC is managed exceptionally well and sales are being recorded at improved pricing. The outlook for REMC is on track to hit our EBITDA guidance for the year of over $30 million. We're seeing fall presales ammonia prices above $500 per ton. Margins are improving as natural gas prices are currently below $5 per million BTU.

Dan will now provide more details on REMC and our financial performance for the period. Dan?

Dan Cohrs

Thank you, Hunt. Good morning, everyone. As Hunt mentioned, we're seeing a significant rebound in fertilizer prices with ammonia selling recently at more than $500 per ton.

For the third quarter, the comparisons from a year ago suffer because of the prices of product delivered a year ago were extraordinarily high. That product had been presold during the all time record industry environment of late 2008. Although prices this quarter were down from last year, we shipped a few more tons this period.

Consolidated results for the third quarter were as follows. Revenue was down this quarter compared to the quarter – third quarter a year ago it was $49.8 million this quarter compared to $93.3 million in the quarter a year ago. Gross profit was down to $15.2 million from $50.7 million that led to a loss this quarter of $1.7 million compared to a profit last year of $33.6 million and the net income per share this quarter was a loss of $0.01.

Focusing on SG&A and R&D, SG&A was up about $1.5 million in this quarter compared to the prior quarter and that had – that was the result of several items we did bring on some additional employees and consultants to push forward with our project development activities that Hunt talked about. We are still seeing increased compensation expense compared to the prior quarter because of the acquisition of SilvaGas and the retention of their key employees.

And we had some increase in non-cash compensation expense due to stock awards that were granted earlier this year and we have an accrual for the severance to be paid to former officer of the company. R&D expenses were actually down by $2.2 million, although there was an unusual item there, in the quarter last year, we accrued $2.9 million for sales and use taxes at the PDU. We ended the quarter with $47.9 million of cash and equivalents on the balance sheet.

At the end of the quarter, REMC had already delivered or presold 98% of the expected deliveries for this fiscal year. As I mentioned, prices for product delivered in the third quarter were down significantly from historical highs a year earlier, but they are in line with our budget. More importantly, product prices are rising. Third quarter prices are higher than those we saw in the second quarter and prices in the market continue to rise.

For delivered product prices in the third quarter, let's focus on ammonia, we saw $408 per ton in the third quarter of this year that's up from $368 in the second quarter, but it is down from the $826 we saw a year ago. For UAN, the same pattern, $207 per delivered ton this quarter, up from $176 in the second quarter, but down from $330 a year ago.

But current prices that we see in the market for fall deliveries are up significantly. We have now sold ammonia for fall delivery at prices above $500. UAM prices in the market for spring delivery are up in the $265 range. These prices are more than $100 per ton higher than last year at this time. All of this points to an improved outlook for fiscal year 2011, which should benefit from higher corn prices, strong farm income and reasonably priced natural gas.

Last month, we entered into a $20 million incremental loan agreement at REMC. The $18.5 million of net proceeds from this loan are available to Rentech for general and corporate purposes. The proceeds of the loan are greater than the total projected expenses for the feed phase of the Rialto project, which includes the Fluor contract, as well as all of the other engineering and development activities that occurred during this phase of the project.

At the same time, we amended our existing $62.5 million term loan. We made an early payment of $15 million of principal from cash at REMC that had been held for that purpose. The $15 million will reduce the payment of principal from excess cash flow required by the loan agreement at the end of fiscal year 2010. The amendment also modified certain financial covenants.

So in summary, this quarter we raised $18.5 million to fund our alternative energy activities, paid down $15 million of debt, stayed on track for REMC to deliver more than $30 million of EBITDA for the year and recently saw some impressive price improvements for fertilizer products, which give us a good start on improved results for fiscal 2011.

Now I'll turn the call back to Hunt for questions.

Hunt Ramsbottom

Thanks, Dan. And I'll turn it back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Matt Farwell, with Imperial Capital. Please proceed with your question.

Matt Farwell – Imperial Capital

Hi, good afternoon. First question is regarding your capital raising intentions. I think you will need to raise some additional capital to cover some of the new CapEx on feed. And I'm wondering if you're reaching any borrowing capacity limit on the plant? Would you or could you project what that limit might be at some point relative to its market value? And also I see that the share count has been increasing and can you comment on the performance of the share issuance that's going on with Night.

Dan Cohrs

Hey, Matt, this is Dan. First of all, your first question on that capacity REMC, of course we just expanded that loan. We are, as we talked about, we are seeing improved prices in the market, so even though we're not putting out specific guidance, it is pretty easy to draw the conclusion that EBITDA at REMC should be going up next year. And the debt capacity on REMC is fundamentally driven by the level of EBITDA. So as we look forward, I could see the borrowing capacity of REMC improving as those product prices and EBITDA improve, so that's sort of the first point.

We did disclose the level of activity under the, the Night program in the Q when we have issued several million dollars worth of stock under that program. We don't specify our plans going forward, but that program is available to us, but we don't make any definitive statements about whether we'll issue going forward, or not. So, we also have a fairly extensive discussion of our liquidity in the 10-Q and we did mention in there the possibility of asset sales as another source of capital that would be non-dilutive.

Matt Farwell – Imperial Capital

Okay. Good. That's helpful. And on gross profit you have indicated that average selling prices may actually improve for Q. Is it safe to assume that gross profit will also improve as well?

Dan Cohrs

For REMC, I would expect that, yes. The product prices are up significantly and we mentioned over $500 per ton for ammonia for fall delivery. But that is not being driven by higher gas prices. Higher gas prices are staying below $5. So those margins are looking like they will expand.

Matt Farwell – Imperial Capital

That's helpful. Thank you and congratulations on a good quarter.

Dan Cohrs

Thank you.

Operator

Our next question comes from the line of Cory Garcia with Raymond James. Please proceed with your questions.

Cory Garcia – Raymond James

Good afternoon, fellows.

Dan Cohrs

How are you, Cory?

Cory Garcia – Raymond James

I'm doing well, a quick I guess a follow-up. How far in advance I guess do you guys have these contracted volumes? Are you guys looking to really lock it up and can you give any clarity into what fiscal 2011 may look like for the REMC business?

Dan Cohrs

Well, we're not giving guidance, yet. I expect we will, we typically do. But we're just not ready to give guidance yet. We are now signing contracts for fall delivery and there's even some activity on UAN for the spring. We're just getting into that selling season. So, right now, the volumes of those contracts wouldn't be huge, but as we get closer to fall, we move through the next couple of months, we should be signing much larger volumes of that product.

Hunt Ramsbottom

And we're just in our budgeting cycle right now. So, I think we typically give guidance later on in the fall.

Cory Garcia – Raymond James

Okay. That's helpful. And any update, I guess, or perhaps a little more color on the loan guarantees and how you guys are feeling the DOE is moving along, if you're still stated goal is getting kind of a start-up at Rialto at 2012, is still looking like it's going to happen?

Hunt Ramsbottom

Yes. I think as – this is Hunt. As I stated in my prepared remarks, that we're still in the process we've worked with the rating agencies, RW Beck. So all of that at least as an indicator should be to shareholders that we're still in the process and we're encouraged.

Again, the signals, if you look at the marketplace, what's been funded from the DOE, there's been some solar and some wind and there's a real lack of next-generation biofuels that have proven technologies in their pipeline. So we feel we're very well situated and the relationship is very good with the DOE right now.

Cory Garcia – Raymond James

Yeah. It definitely seems like things are moving along nicely. Appreciate it, guys.

Hunt Ramsbottom

Thank you.

Operator

Our next question comes from the line of Jeremy Sussman with Brean Murray. Please proceed with your question.

Jeremy Sussman – Brean Murray

Hi, good afternoon, or good morning.

Hunt Ramsbottom

How are you, Jeremy?

Jeremy Sussman – Brean Murray

Good. Thank you. You talked, obviously quite a bit about Rialto and a little bit about Natchez, but you also mentioned that you've got perhaps the most robust potential project pipeline. Can you sort of expand upon, I guess what you're seeing out there, maybe opportunities both in the U.S. and perhaps globally?

Hunt Ramsbottom

Yes. I think we've – generally speaking, we are seeing activity levels and I think this has to do with crude prices going the right direction for us. I think liquidity in the marketplace is there and we're also seeing governments getting a lot more active in some of those countries. Whether it's projects that we are involved in, in the EU, across the border here in North America and we've got some projects that have been announced by others globally that involve our technologies.

So, I think wherever you see abundance of biomass feedstock that would be appropriate for our technologies, we're engaged in those countries, both at the government level and frankly, leveraging off our relationship with the airlines domestically. So, we can go into these markets that have the appropriate feedstock for our technologies and take the relationships that we've built here globally with airlines and as you well know, if the price is right, they're happy to buy green jet fuel. So, we're leveraging the relationships in pursuing the feedstock. And I think the governments in some of these markets can move a lot faster than they do domestically here. I hope that helps, but that's about all I can give you right now.

Jeremy Sussman – Brean Murray

No. That definitely gives us a good sense. I appreciate that. And just quick follow-up domestically. I mean are you, with crude, moving in the right direction, have you seen any increased sense of urgency on the airlines part to try and lock something up at some point? Or how would you characterize where their thinking is now versus maybe 12 months ago?

Hunt Ramsbottom

Definitely. Crude prices, I think 12 months ago were probably in the $50, $60 range and when it gets in the 80s, they now have their sights on $100. So, there's clearly – they haven't lost – let me put it this way, they have not lost their sense of urgency. I think it always comes down to, what's the number? What's the number they're going to pay for clean jet fuel and how does that integrate into the capital cost of these projects? So that's the dance we're in and they know they've got a secure domestic sources of fuel over the medium to long-term, because they know where crude is going.

Jeremy Sussman – Brean Murray

Great. Sounds good, Hunt, thank you.

Hunt Ramsbottom

Thank you.

Operator

Our next question comes from the line of Allen Glick with ARG Enterprises. Please proceed with your question. Mr. Glick, your line is open.

Hunt Ramsbottom

Hello?

Operator

Mr. Glick, I hear you. Please verify the mute function on your handset.

Hunt Ramsbottom

Maybe you ought to cut it, because I'm just hearing wind.

Operator

We'll proceed to the next question.

Hunt Ramsbottom

Thank you.

Operator

Our next question comes from the line of Thomas Dresser [ph], a Private Investor. Please proceed with your question.

Thomas Dresser

Good afternoon, gentlemen. Just a very quick question. You mentioned all of the different projects we're working on and that you will talk about them when you feel the timing is right. To us less than industry experts, I sit here and feel like there's so much information we should at least have some hint of what we're working on. Could you kind of outline for us what you consider the proper time that you can announce when we're partnering up or getting engaged in something and take us through and what that criteria is?

Hunt Ramsbottom

Yeah. We have an internal phase gate process that we go through, that we developed a year or two ago and it's a very disciplined approach in how we look at projects and define projects. And we don't publicly disclose what that is, but it is a process that we go through that gets management approval and then board approval, et cetera, et cetera. And, it has to go through those phase gates in order for us to feel that it's a defined project.

And that’s probably frustrating to its shareholders, but I think you probably would rather have us announce projects than have a higher likelihood of outcome than keep announcing projects that, as you know, in the project world, these things have a lot of ups and downs. And just to announce projects that others may be working on with our technology that we feel are not ready for prime time, we would rather announce those when they're ready for prime time, rather than have to pull them back all the time. So we do go through a disciplined process internally and as soon as we feel they are ready to share with our stakeholders, we absolutely will do so.

Thomas Dresser

I guess – do I interpret from that then that you're basically looking for signed contracts before you want to go public with anything? Is that what you're really for here?

Hunt Ramsbottom

There's a number of activities in each phase gate and it is not just one thing. Sure, feedstock is one. Sight control off-take is another, project cost estimates have to be confirmed. I think going out with numbers that have not been, in our view, validated. So, there is a number of criteria that we've set forth.

You don't want to have to hit all of them, but we have to feel, I think, confident internally that that's something we want to talk about. And sometimes folks are working on projects with our technology and they don't want to release it for the same reasons, for competitive reasons. So, it flows both ways.

Thomas Dresser

Okay. It is just – you're right, it is very frustrating when you see pictures of our product in other people's announcements and yet there is nothing coming from our company. You're wondering, what's going on here? It is confusing to the inexperienced guy.

Hunt Ramsbottom

Yes. Well, that's why we have a disciplined approach and we have to look at who is doing what out in the marketplace. And again, that is the approach we take and others tend to be a little bit more bold than we do and that's just the way it is.

Thomas Dresser

Okay. Thank you.

Operator

Our final question comes from the line of Robert Fauche [ph] with Stifel Nicolaus. Please proceed with your question.

Robert Fauche – Stifel Nicolaus

Good morning, just a quick question. I've heard a lot of conversation about your work with the airline industry, the 13 down in Natchez and so forth. I haven't heard anything in a long time about the Air Force. Do you have any update you can give us on where that stands, that the government is still proceeding down that road?

Hunt Ramsbottom

Yes, absolutely. There is some recent activity – there's a couple of things that are going on. The Air Transport Association has signed an agreement with DESI, which is the purchasing arm of the Department of Defense and they are working collectively on getting these fuels to the marketplace on contracts where it is starting to see activity in Washington again on long-term contracting, 10, 20 year type arrangements for alternative fuels.

So I think, once again, the folks in Washington have recognized that there is a way to get these fuels – another way to get these fuels to the marketplace and that is through long-term contracting. So we are seeing activity with the arrangement and agreement with the ATA. We're seeing some movement out of the DOD and particularly the Navy. The Secretary of the Navy is very engaged in moving these fuels – alternative fuels forward. So, I think recently we're seeing more activity. I would say in the last 60 days or so, the activity level has picked up on long-term contracting again.

Robert Fauche – Stifel Nicolaus

It's picked up with relation to Rentech or just in general overall?

Hunt Ramsbottom

Well, we would love to get it all, but –

Robert Fauche – Stifel Nicolaus

That would be fine.

Hunt Ramsbottom

It used to be – just to be very specific, these contracts were very specific toward synthetic fuels and CTL a couple of years ago, the language that was being written. It is broader now to alternative fuels that qualify and currently, we're the only alternative fuels that qualify.

Robert Fauche – Stifel Nicolaus

Well, it's good to be number one.

Hunt Ramsbottom

Sometimes.

Robert Fauche – Stifel Nicolaus

Thanks, Hunt.

Operator

Ladies and gentlemen, this concludes our question-and-answer session for today. I would now like to turn the conference over to Mr. Hunt Ramsbottom.

Hunt Ramsbottom

Thank you. As I said earlier, our market positioning is very good. Our project pipeline continues to grow with promising renewable energy opportunities. We're pleased the Rialto project is moving forward with speed and permitting while underway. We're excited about the prospects of improving the environmental profile of the Natchez project and the positive impacts of a greener project.

We expect an improved outlook next fiscal year for REMC, which should continue to provide support for alternative energy activities. We look forward to reviewing our progress in these areas and speaking with you during our next earnings call. Thank you very much. Have a good day.

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rentech, Inc. F3Q10 (Qtr End 06/30/10) Earnings Call Transcript
This Transcript
All Transcripts