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Executives

Julie Dawoodjee - Vice President, Investor Relations and Communications

D. Hunt Ramsbottom - President and Chief Executive Officer

Dan J. Cohrs - Executive Vice President and Chief Financial Officer

Analysts

Matthew Farwell - Imperial Capital

Lucas Pipes - Brean Murray, Carret & Co.

Pavel Molchanov - Raymond James

David Neuhauser - Livermore Partners

Rentech, Inc. (RTK) F1Q11 Earnings Call February 10, 2011 1:00 PM ET

Operator

Welcome to the Rentech's First Quarter 2011 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, February 10, 2011.

I would now like to turn the conference over to Julie Dawoodjee, Vice President of Investor Relations. Please go ahead, ma'am.

Julie Dawoodjee

Welcome to Rentech's 2011 fiscal first quarter conference call for the period ended December 31, 2010. During this call, Hunt Ramsbottom, President and CEO of Rentech, will summarize our company's progress during the quarter. Dan Cohrs, our Chief Financial Officer, will give a financial review of the fiscal period 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 beliefs 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 February 10, 2011 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 the applicable law.

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

D. Hunt Ramsbottom

Thank you, Julie. Good morning, everyone and thank you for joining us today. We're pleased to announce that we reported a significant improvement in first quarter results from a year ago. The quarter's results reflect exceptionally strong rebound in the nitrogen fertilizer market, which is expected to continue. I'll talk more about this robust outlook for REMC later on the call.

As we announced this morning, we are encouraged to be entering into the due diligence phase of the DOE Loan Guarantee Process on the Rialto Project. This is an important step forward because it opens the dialogue with the Loan Guarantee Program Office for detailed due diligence which could lead to the negotiation of terms and conditions of a potential loan guarantee.

The DOE specified in this letter and inviting us into the diligence that they expect a more conservative capital structure than we had hoped including less leverage and a significant higher requirement for project equity. It seems the more conservative terms reflect the requirements of not just the DOE but of other government entities that are involved in the approval process for loan guarantees.

We believe that any terms we're offered will have some flexibility and that continued progress on reducing the commercial risks in the project through finalizing contracts could lead to the negotiation of loan guarantee terms that are more favorable. We've made great strides in the commercial aspects of this project. We are in term sheet discussions with fuel distributors, including integrated oil companies for the Rialto Project's remaining renewable RenDiesel output that's not already contracted with ASIG and the 8 airlines at LAX.

We're also in exclusive negotiations for fixed-price, long-term power purchase agreement for the project's renewable power output. The next step, after finalizing the PPA, is to pursue approvals with the California Public Utilities Commission. The air permit work and all other pre-construction permit activities are on schedule. We expect the environmental impact report required by the California Environmental Quality Act to be ready for comment in mid-March. The air permit final design updates our nearly complete and will be submitted to the permitting agency within the next couple of weeks. The documents for the federal and environmental review of the project are being written and will soon be ready for submittal now that the DOE is engaged.

Front-End Engineering and Design or FEED for the project is about 95% complete. All piping and instrumentation diagram reviews as well as site model have been completed. Fluor is currently preparing a cost estimate and assembling its final report, which will include drawings, equipment data sheets and specifications, process descriptions, and heat and material balances.

We expect all FEED work to be completed on schedule within the next few weeks. We're also evaluating alternative forms of financing, including municipal bonds for financing of waste processing facilities and potential US DOE Loan Guarantees. Alternative financing would not require us to stay on the same tight schedule required by the American Reinvestment and Recovery Act that authorize the loan guarantee program. Setting our own deadlines would allow us to spend more time optimizing the engineering and reducing the project cost.

With respect to Natchez, we continue to work on configurations of a smaller scale project, which we expect to develop at the site. We're having detailed discussions with large-scale resource owners who would provide feedstock for the potential project. We're pleased with the significant headway we're making in securing feedstocks in other North America projects.

We continue additional development and licensing activities including biomass to power projects in several other countries. These activities have not yet matured to the point of announcements but we have several promising opportunities under development, some with potential partners. We are seeing positive momentum with government officials and potential off-take customers and feedstock suppliers outside our borders.

Detailed engineering and procurement is underway for our joint bio-refinery project with ClearFuels to demonstrate their technology integrated in our PDU. On-site construction activities are expected to begin within the next 60 days with all equipment to be delivered to the PDU during the second half of this year. We anticipate to begin producing renewable synthetic jet and diesel fuels from biomass at the end of the calendar year of 2011.

The nitrogen fertilizer segment of our business is doing extremely well. We continue to expect fiscal year 2011 EBITDA to be at least $60 million. Robust global grain demand and low grain inventory levels and strong crop economics have fostered a significantly improved environment for nitrogen fertilizer demand and prices since the recent lows of the cycle. Many in the industry believe that this positive environment for global agricultural support strong prices for nitrogen fertilizer products in the years ahead. With natural gas prices predicted to remain low, margins are expected to be very attractive as they are now.

In fact, we're seeing uncharacteristically strong demand for our products, having already signed some pre-sale contracts for delivery in the fall of 2011. We typically see this activity for fall deliveries in the summer, not this early in the year. Considering the positive trends and high margins for nitrogen fertilizer, we've engaged an engineering firm to evaluate possibilities to expand RNC's production and increased efficiency of the plan. The feasibility study will take several months to complete, after which we'll evaluate the attractiveness in investing in the capacity of the expansion of the plant.

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

Dan J. Cohrs

Thank you Hunt and good morning, everyone. As Hunt said, RNC's outlook for fiscal 2011 was very strong. We expect at least $60 million of EBITDA compared to $32 million in 2010.

We reported exceptionally strong fiscal first quarter results, which reflect a high volume of, delivered product and a significant rebound in nitrogen fertilizer prices. Consolidated results for the first quarter were as follows; revenue was a very strong $42.1 million, which is up from $27.1 million in the quarter a year ago. That's due to significant increases in both delivered tons and prices of the delivered product. The gross profit was up correspondingly.

We recorded a profit of $16.1 million in this quarter compared a loss of $1.2 million in the quarter a year ago, although a year ago we did have $4 million of expenses due to the turnaround which happens every two years. That brought us to a net loss for this quarter of $5.5 million which is a significant improvement from the loss of $15.5 million in the quarter a year ago, net loss per share of $0.03 this quarter versus $0.07 in the prior quarter.

SG&A this quarter was up just slightly due to increases in salaries as we hired a few extra people and increases in some other expenses for an increase in SG&A of about 4%. R&D had a more significant increase of about $2 million compared to the quarter a year ago, but remember, last winter the PDU was not operating. So this year we had significantly more days operating as a the PDU.

We had expenses from modifications and repairs at the PDU, and also had expense of consolidating ClearFuels, excuse me. The run rate in the last few quarters, quarters 2, 3, and 4 were much closer to the $5.8 million that we reported for R&D this quarter.

Other expenses increased mainly due to the loss on extinguishment of debt that we recorded when we increased the size of our term loan in November. We ended the quarter with cash of almost $85 million. In the fertilizer market, the average price per delivered ton was up significantly.

This quarter, we recorded $497 per ton for ammonia deliveries up from $320 per ton in the quarter a year ago. UAN prices averaged $189 per ton versus $143 per ton a year ago. And currently in the market, we're seeing prices for ammonia approach $700 per ton and the range of $340 per ton for UAN. We've now delivered and locked in of more than 70% of our expected product sales and the natural gas required to produce those products for fiscal 2011.

In the first quarter, we had consolidated EBITDA of $5.5 million, while REMC generated $17.6 million of EBITDA. We continue to project REMC's EBITDA for fiscal year 2011 of at least $60 million. Our budgeted activities for fiscal year 2011 are fully financed. These activities include REMC's ongoing operations, capital improvements, completion of feed for the Rialto Project, continued development of the Natchez project and others, operation of the PDU, continued research and development of Rentech Technologies and funding of general working capital needs.

You may have noticed that we extended our equity distribution agreement and filed a related prospectus supplement. This is for the aftermarket issuance program that we have maintained for the last year, which was expiring so we wanted to renew it. This is a useful and flexible financing tool that we may or may not use. Since our budget is fully financed for the year, we have no immediate plans to use this facility. It could be part of our overall financing plan as we expand our project activities.

I'll now turn it back to the operator and then Hunt and I will answer questions.

Questions-and-Answers Session

Operator

(Operator Instructions) And our first question comes from the line of Matt Farwell with Imperial Capital. Please proceed with you question.

Matthew Farwell - Imperial Capital

Hi. Good morning. Question about the fertilizer business. As of the December call, you had 50% of the shipments pre-sold and now you have 70%. Can you give us an idea of how those pre-sales are going to impact the financials on a quarterly basis? Will they all come in one quarter or will we see a blend of the high ammonia prices over the rest of the fiscal year?

D. Hunt Ramsbottom

Yes, Matt, hi. The main fertilizer deliveries will be in the spring quarter. So this is a very seasonal market. Of course, the timing of those deliveries always depends on the weather and the conditions in the field. So it's a business that's just inherently difficult to forecast on a quarter-by-quarter basis because weather can affect whether those deliveries occur in March or April or May and that could have a big impact on the recorded results. So the revenue recognition and the EBITDA flow along with the product deliveries into the field. What we do know today is we pre-sold a lot of product. So that doesn't appear in revenue but it appears in our cash balance and our deferred revenue.

Matthew Farwell - Imperial Capital

Will the volume shipments this year be similar to those of the last fiscal year?

D. Hunt Ramsbottom

They should be in line, yes. We essentially produced at virtually full capacity at the plant and we filled up our tanks and then delivered. So we expect volumes will be in the same range as last year.

Matthew Farwell - Imperial Capital

Okay. And so when you mention $700 and I've seen prices as high as $770 or $780, are you able to book those prices or are those prices that you can actually presell at this point?

D. Hunt Ramsbottom

Yes. Those are prices that we're actually signing contracts for today.

Matthew Farwell - Imperial Capital

Okay. Do you expect to have the bulk of the year pre-sold by the next conference call?

D. Hunt Ramsbottom

Very hard to say. But the -- as we said, the market is developing early this year. But it's just impossible to say exactly what we'll have done by the next conference call. But if the market is developing very well at very attractive prices and earlier than what is typical.

Dan J. Cohrs

Matt, if you're already looking at some sales in the fall, then the odds are high that, that will occur.

Matthew Farwell - Imperial Capital

Okay. Congratulations on the succeeding to the next phase of the Loan Guarantee. Can you guys give us some color on what this phase is going to look like, the amount of time it might take and perhaps when we might have some additional clarity on the success rate?

D. Hunt Ramsbottom

It's hard to say timing, Matt, but what I think we can say is we've had some face-to-face meetings with them and they are fully engaged and very responsive right now. So the first part of this process was very long and a tenuous process with not a lot of dialogue and it's very different now that we are in this phase. It's open. There is daily, or every other day, communication with them and face-to-face meetings and very candid conversations.

So it's hard to say but what I can say is they have significantly added to the Loan Guarantee Office to accommodate the companies like Rentech for processing loans and we frankly think that they can keep pace with us along the way here. So timing-wise, I think that will depend on us in securing our contract and getting things done and depending on how hard each side negotiates when lawyers and everybody else get involved in the process. So what I can say is the engagement level is very high and we're encouraged by that.

Matthew Farwell - Imperial Capital

Can you remind me, are you essentially qualified for the Section 1603 grant at this point in the Rialto Project?

D. Hunt Ramsbottom

We believe we will qualify. But of course we have to satisfy the beginning of construction by the end of this year to actually qualify.

Matthew Farwell - Imperial Capital

Can you give me an idea of what needs to take place for that qualification to happen?

Dan J. Cohrs

Essentially you need to start construction and commit at least 5% of the project costs.

Matthew Farwell - Imperial Capital

Okay. Good, well, thanks for the color and good luck in the coming quarter.

D. Hunt Ramsbottom

Thank you.

Operator

Our next question comes from the line of (inaudible). Please proceed with your question.

Unidentified Analyst

A couple of conference calls ago you said that if you were able to obtain a tenure or longer contract with DOD, you would be able to come up with your own financing. Are you working with DOD to get a waiver to the five-year contracting policy?

Dan J. Cohrs

Yes, that has been an ongoing dialogue with the DOD and in some sense they believe they have the authority to do so, so there is still mixed signals coming out of DOD quite honestly. And so they have to an act of Congress literally to get this done. But there is active dialogue with the DOD and I think more broadly based, I think they are looking at all alternative fuels so they can supply both the Navy, Army and all facilities. So I don't know the answer to this, but I can tell you that we are engaged with them and trying to move it from the five years to ten years or longer.

Operator

(Operator Instructions) Our next question comes from the line of John Walker. Please proceed with your question.

Unidentified Analyst

Hi, Hunt, good morning, gentlemen and ladies.

D. Hunt Ramsbottom

Hi, John, how are you?

Unidentified Analyst

I'm good. Thank you very much. I'm better now that Green Bay won, so I'm of little [help] here. I have an extended question about the DOD. There were -- I heard numbers of $1.4 billion and $1.6 billion. And now it seems like because of money and the tightness of it, they're lowering that amount of money, I guess and increasing criteria for it. I'm wondering, Hunt, what the ramifications of a lesser amount of money are going to mean to other business and partners?

D. Hunt Ramsbottom

Are you referring to the 1705 Program?

Unidentified Analyst

Yeah.

D. Hunt Ramsbottom

So you mean DOE?

Unidentified Analyst

I'm sorry, DOE. I'm sorry, yes.

D. Hunt Ramsbottom

DOE. There is still plenty of money available from the Department of Energy for qualified projects. So that's not a concern on our end. Is it enough money to build the entire industry in the US? No. But I think with the term sheets they have out and the monies that are available, they have the funding available to do those projects.

Unidentified Analyst

And can you share a possible window on that?

D. Hunt Ramsbottom

No, I don't think that's appropriate. Okay.

Unidentified Analyst

Okay, thank you guys very much.

D. Hunt Ramsbottom

Okay, thank you.

Operator

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

Lucas Pipes - Brean Murray, Carret & Co.

Good morning, this is Lucas Pipes calling on behalf of Jeremy Sussman.

D. Hunt Ramsbottom

Oh, good morning.

Lucas Pipes - Brean Murray, Carret & Co.

Good morning. Congratulations on a solid quarter and also the progress on the renewable energy side.

D. Hunt Ramsbottom

Thank you.

Lucas Pipes - Brean Murray, Carret & Co.

Just to follow-up on the alternative financing, could you maybe tell us a little bit more on how -- on what timeline looks like in case you don't take the DOE loan?

Dan J. Cohrs

Well, Lucas. This is Dan Cohrs. The main point is, of course, with the DOE process to qualify for the 1705 Guarantee, we have some pretty strict deadlines. We have to close and begin construction by September 30. If we're doing other forms of financing, it's just on normal financing timeline. So it would take whatever time it takes to arrange that financing.

The main point is we're not restricted to closing by September 30 or we lose the guarantee, because we would be going for other types of financing. So we would expect that if we were in the alternative -- or call it the market for financing other than DOE, we would still be moving the project forward on roughly the same timeline. But we may take a little more time to maybe do more optimized engineering or something like that. It just gives us a little bit more flexibility as we develop the project.

Lucas Pipes - Brean Murray, Carret & Co.

That's helpful. Thank you very much.

Operator

Our next question comes from the line of Pavel Molchanov from Raymond James. Please proceed with your question.

Pavel Molchanov - Raymond James

Thanks. I had two questions, if I may. One on Rialto. I remember your original time line was for a 2012 start-up. Are you rethinking that at all, maybe pushing that out into 2013?

D. Hunt Ramsbottom

Good morning. We've always stated the end of '12, early '13. So we're not changing any timelines as of this date.

Pavel Molchanov - Raymond James

Okay. And then I was hoping to get an update on any of your projects outside Rialto. Natchez, West Virginia, anything along those lines that's progressing?

D. Hunt Ramsbottom

Natchez continues, as I said in the script, to progress. And I think the last call we talked about the opportunity to use multiple feedstocks down there, including natural gas since those prices have now gotten to a point where we could possibly do -- include that as a feedstock down there. So we continue to work with, as I said, feedstock holders and partners and scale the project down to something more manageable. So we haven't put a timeline out but until we secure those arrangements and then -- but we are absolutely committed to the project and we'll move forward with it as soon as we lock down what the feedstock and the configuration will look like.

Pavel Molchanov - Raymond James

Okay. And can you also…

D. Hunt Ramsbottom

Just to clarify, in West Virginia, we have not pursued those coal projects there in the last few years. I think everybody is pretty clear on trying to do coal in the US without CO2 solution. But we do have a robust pipeline of both power and fuel projects outside of the US right now.

Pavel Molchanov - Raymond James

Salina of course signed partnership with you back in November. Any updates on that?

D. Hunt Ramsbottom

They continue to move forward with the project. And I know they're working with their partners in securing other partners for the project and securing a firm off-take with British Air who is involved in the project. So that continues to move along on the schedule they've indicated.

Pavel Molchanov - Raymond James

Okay. Thank you very much, guys.

Operator

Our final question for the day comes from the line of David Neuhauser with Livermore Partners. Please proceed with your question.

David Neuhauser - Livermore Partners

Hey, good morning, gentlemen.

D. Hunt Ramsbottom

Good morning.

David Neuhauser - Livermore Partners

Hey, I guess most of my questions were actually answered. But I guess I wanted to throw out there, as you move forward and we start to see cash generating at this point, are there any other potential acquisition opportunities that you foresee that would continue to make this Company more vertically integrated?

D. Hunt Ramsbottom

The short-term answer is yes. We, along with deploying our technology through building projects, we do look out and look for projects or a Company that may have cash flowing opportunities in the near term or cash flowing today with technologies that may want to put in our portfolio. So we are looking and we'll continue to look. And I think everybody understands very well how REMC was worked for us and if we can find opportunities in the energy space that aren't far afield from what we do, then we'll continue to look for those.

David Neuhauser - Livermore Partners

That's good. That's great. And then as far as the -- I know everyone was harping especially on the alternative financing, with the structure you renewed in place, are you focused still on, at some point equity, if there could be an opportunity that you would have to tap the markets or would that still be something you'd consider and look before that would happen?

Dan J. Cohrs

We'll look at all of the above. In order to finance the Rialto Project we would be looking at every alternative we can get, including tax equity for the project, project equity from either financial investors or strategic investors and then for the corporate equity contribution to the project, we would be looking at some combination of debt and equity. We do believe that the REMC is probably not fully levered at this point with the strength of that market. That we could probably borrow more money at REMC than we currently have. So we'll be looking into all alternatives.

David Neuhauser - Livermore Partners

And that's what I was going at. Because when I hear the equity portion in my view with the performance of REMC there is probably some further leverage there that is much cheaper capital than any solution obviously for equity holders at this stage. But that's good to see. Good to hear. Thank you, guys.

Operator

Mr. Ramsbottom, I'll now turn the call back to you. Please continue with your presentation or closing remarks.

D. Hunt Ramsbottom

Thank you. In closing, I would like to say we're making good progress on the Rialto Project and with the invitation to the due diligence phase of the Loan Guarantee Process, it's great to see that Rentech's technologies are being considered by the government to play an important role in our nation's alternative energy supply.

The activity level for other project development opportunities remains high and we look forward to sharing more of our commercial progress and REMC's results. We'll speak to you when we announce our results for the second quarter very soon. Thank you very much.

Operator

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

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