Rentech, Inc. F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

Feb. 8.08 | About: Rentech, Inc (RTK)

Rentech, Inc. (NYSEMKT:RTK)

F1Q08 Earnings Call

February 8, 2008 01:00 pm ET

Executives

Dennis Yakobson – Co-Founder and Chairman

Hunt Ramsbottom Jr. – CEO and Exec. Director

Merrick Kerr – Chief Financial Officer

Douglas Miller – Chief Operating Officer

Richard Sheppard – Sr. VP of Project Devel.

Julie Dawoodjee - Director of Investor Relations

Analysts

William Burns – Johnson Rice & Company

Mark Flannery – Credit Suisse

Pearce Hamond – Simmons & Company International

Michael Horwitz – Pacific Growth Equities

Pavel Molchanov – Raymond James

Michael Molnar – Goldman Sachs

Jeremy Sussman – Natixis Bleichroeder

Operator

Welcome to the Rentech, Inc. First Quarter 2008 Conference Call. Today’s Conference Call is being recorded at this time, I would like to turn the call over to your host Ms. Julie Dawoodjee, Director of Investor Relations, please go ahead.

Julie Dawoodjee - Director of Investor Relations

Thank you, I would like to welcome all of you to Rentech’s 2008 Fiscal First Quarter Conference Call. Before we begin our prepared remarks, I would like to cover some administrative aspects of this Conference Call.

Hunt Ramsbottom, Jr. President and CEO Rentech., will provide opening remarks highlighting the company’s progress during the Quarter and Merrick Kerr, our Chief Financial Officer will give a Fiscal review of the First Quarter and will provide comments on Rentech’s financial position. He will then open the lines for questions and ask that you limit your call to one question, so that we may get through with many questions as possible.

Please be advised that certain information discussed in this Conference Call will contain forward-looking statements, as defined in a 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.

We were cautioned that while forward-looking statements, request of 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 details. 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 8, 2008 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.

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

Hunt Ramsbottom Jr.

Thank you Julie and good morning every one and thank you for continuing spending in Rentech’s First Quarter Conference Call for the period ended December of 2007. I would like to spend this morning, focused on addressing key issues that many of our shareholders and stakeholders that recently ask management about regarding our company, in its positioning within the alternative fuel sector. We intend to provide out investors in the Capital Markets with addition clarity this morning in the coming months, regarding the value of Rentech’s Synthetic Fuel and Technology.

With improved clarity and reinforcement of our message, we believe investors will come to understand Rentech’s value of the clear and sustainable investment choice within the fuels market. We continue to remain focused on our five-point strategy we laid out two years ago, which includes continuing and developing our commercial relationships with Mingo County Redevelopment, DKRW, Peabody Energy and Solena Group. We also launched our International Licensing Strategy last year and have had discussions with multiple International Companies and various Industries interested in licensing our technology for synthetic fuel production.

This morning’s call will focus on the Rentech process in a Carbon Constrain World and the value of our Natchez project, our Product Demonstration Unit or PDU and our Fertilizer Plant Rentech Energy Midwest Corporation or REMC. We believe a long term value of Rentech lies in leveraging our intellectual property assets and its core, Rentech is a fuel and chemicals technology company. Our patented Rentech process can produce ultra clean synthetic fuels from any carbon bearing material. This flexibility means that we can produce fuels from waste, biomass, feedstocks such forestry waste, agriculture byproducts, pulp and paper waste, sewage lodges, sugar industry waste and municipal solid waste.

When biomass is used as a sole feedstock for the production of synthetic fuels from the Rentech process, along with sequestration, the value and competitive advantage of our technology offers is a production of synthetic fuels with a zero and potentially a negative carbon footprint. Even if our technology is uses coal or petroleum coke as the feedstock for the production of synthetic fuels with carbon capture and sequestration, we can still produce synthetic fuels that have a carbon’s footprint that is below, that are petroleum derived fuels. The addition of biomass per 20% of the feedstock by mass offers the opportunity to have a carbon’s footprint significantly below that of petroleum derived fuels. It is clear that this technology offers significant opportunities for deployment in a carbon constrained world. With a high cost of cap-and-trade system or carbon tax structure, we have the ability to produce carbon neutral or carbon negative fuels. We are very proud of our technology and a benefit that we can provide our country. We have persevered throughout the years advancing the Rentech process by building on basic Fischer-Tropsch chemistry.

Some critics of ST related technologies have suggested that the carbon dioxide emissions from the production of FT fuels are twice that of comparable petroleum based fuels. However, Rentech has no intention of deploying its technology in this way, especially since there are proven carbon reducing methods available. Therefore, those same critics should be our biggest supporters. The Synthetic Fuel Industry is already well underway. The industry exists today; there are currently over 200 thousand barrels per day of synthetic fuel produced internationally. That means today there is nearly 3 billion gallons of synthetic fuel produced yearly.

In addition, there are over at 1.2 million barrels per day of announced projects for synthetic fuel production in the US and internationally. Rentech has participation in at least five of those projects in that production figure and all of them are expected to have a carbon footprint below than a petroleum dry fuels. Obviously, there is a lot of momentum behind synthetic fuel productions, but there is a lot of push-backs domestically for Synthetic Fuel Industry, because of the potential use of coal as a feedstock. However, we remained bullish on the deployment of clean coal, synthetic fuel plants in the ice stage in the long-term and believe clean coal technologies are necessary for long-term energy security.

Additionally, significant opportunities exist internationally for coal derived synthetic fuels using the Rentech process and while the US decides this temperament regarding coal derived synthetic fuels, Rentech is very focused in moving forward without plans to construct inaugurate the first US commercial scales synthetic fuels facility with our Natchez project. The domestic coal debate does not impede the progress of or our Natchez project, as we will be using petroleum coke, as a waste product of the refining process in conjunction with waste biomass as a feedstock. In fact, we have already issued request for proposals for pet coke in the region and that have meaningful discussions with potential suppliers. Moreover, we have a singed agreement with Denbury resources for the sale of all captured carbon dioxide head facility.

We believe we are the only synthetic fuels facility in the nation to have announced a firm carbon dioxide solution. Our Natchez project as a model for sustainable and clean solution for our nation’s growing need for domestically produced fuels. Our other near term focus is our PDU Commerce City Colorado. Our PDU remains on track for fuel production in this spring of this year. The PDU will serve to provide products for customer testing and to test new feedstocks. We believe fuels produced at the PDU will enable us to secure all state contracts with customers at a large scale synthetic fuels facilities and also, support discussions with potential domestic and international licensees.

At this time, we do not believe Greenhouse Gas Legislation prevents the creation of a significant synthetic fuels industry in the US. We see ongoing support in Washington for the synthetic fuels industry as progress continues negotiations on the farm bill, which includes the extension of the alternative fuels excised tax credit. We also see support from the Air Force, to whom we will supply fuels for testing purposes this year. The Department of Defense currently has the ability to sign five-year contracts with five year extensions. Rentech would welcome the supply the Air Force Fuels produced in our Natchez project and support even longer term contracts.

We have also started to see support from the commercial aviation industry. Last week, an Airbus A 380, successfully flew between UK and France on blended synthetic fuels. The FAA plans to certify the use of blended synthetic fuels in commercial aircrafts this year in the use of pure synthetic fuels by 2010.

In addition to our technology, REMC our Ammonia Nitrogen Fertilizer Facility has proved to be a tremendous asset to Rentech. As you may remember, we purchased this plant less than two years ago at the time, when it was expected to be operating around break even. Now, the plant is performing beyond our expectations, as our REMC team has successfully capitalized on the opportunities presented by renewable fuel standards, which recently doubled the corn ethanol mandate to 15 billion gallons per year by 2015.

The USBA projects the planted of corn anchorage will increase by 20% to 94 million acres in 2007 and 2008 planting season. As a result, we have seen strong pricing for the products that are REMC and now expect REMC to generate over 40 million EBITDA this fiscal year. This is an excellent return for a plant we paid $15 million for, less than two years ago.

To give you some perspective on REMC value, comparable fertilizer businesses are currently trading in a range of 6 to 9 times EBITDA. Clearly, REMC provides significant liquidity to the company, in terms of cash flows. In addition, because REMC has been operating for over four years, the experienced operators of the plant have been instrumental from the implementation of safety standards, systems, and operating procedures at the PDU.

I will look forward to you questions in a few moments, but first I turn the call over to Merrick Kerr, our CFO.

Merrick Kerr

Thank you Hunt, good morning everyone. I kind of mentioned the REMC’s performance has been strong and continues to exceed our expectations, before I review this total mark-up, please note that the seal of Petroleum Mud Logging on November 15, 2006 were approximately $5.4 million resulted in a revenue in course of sales for that segment to be classified as desk continued operation, during the First Quarter of Fiscal 2007.

During the First Quarter of Fiscal 2008, we recognized revenues of $47.5 million and a gross growth $15.3 million, compared to revenues of $3.54 million and a gross profit of 3.7 million in the corresponding period of Fiscal 2007. We reported a net loss applicable from the shareholders of $23.4 million or a loss of $0.14 per share for the quarter compared to a net loss applicable to common shareholders of $8.7 million or loss of $0.6 per share in the corresponding period of Fiscal of 2007.

General administrative expenses were $8.8 million during the Quarter, off 2.1 from the corresponding period of fiscal 2007, where needed expenses were $6.7 million. All the increase in fiscal 2008 resulted in benefits accounted for $1 million and Information Technology enhancement for 24.6. Treaties and other general administrative expenditures in the quarter, including travel costs, long casual fees compensation expense, professional fees and project development expenses. Offset to these was $0.4 million decline in recruitment fees public company and insurance expenses. We structure development expenditures during the Quarter with $60 million compared to $8.4 million during the same period last year.

Expenses related to the design procurement of equipment for and construction on the PDU attends for 89% or $14.3 million of current quarter RND expenses. The remaining $1.7 million of the quarter RND expenses related to capitalist and process development and product upgrading work. Operating expenses for the First Quarter of Fiscal 2008, in closing the impairment charge of $8.7 million arising from the REMC conversion project that imparted for the share for the quarter by $0.5 per share. During the Quarter REMC generated operating income of $8.8 million and net income $9.1 million. Estimated construction cost for the PDU is approximately $66 million, including approximately 7 million. Through the end of the First Quarter of fiscal 2008, we spent $58.6 million.

As of December of 2007, we had cash and cash equivalents and maximum securities of $57.8 million. As I have mentioned, REMC is performing well at increase a more felt a like contributed to continued strong operating margins of the plant. In later phase an anticipated pricing in demand for REMC stepped by the product this year. We are revising upward of fiscal 2008 REMC EBITDA projection to over $40 million from $45 million previously announced.

With the cash flows, REMC and all other potential resources of cash, we believe we have sufficient liquidity to opening our business through the fiscal year. We still do not expect any significant equity readings for the next 12 to 18 months, which is when we expect to raise the equity portion of our capital requirements for the Nachez project and with that I would like to hand the callback to Hunt Ramsbottom.

Hunt Ramsbottom Jr.

Thank you Merrick, now I would like to turn the call back to the operator for questions.

Question and Answer Session

Operator

Thank you, today’s question and answer session will be conducted electronically.

(Operator Instructions)

We will take our first question from William Burns, with Johnson Rice & Company.

William Burns, - Johnson Rice & Company

Good morning, your cash equivalent and mark the security balance of 57.8. I was kind of dig through my notes, it seems like at the end of last quarter it was around 56 though see it actually gone up.

Merrick Kerr

Yes, it gone up in Quarter.

William Burns, - Johnson Rice & Company

Then help me remember about the seasonality of the fertilize business. Your fiscal quarter, which quarter.

Merrick Kerr

For fiscal quarter today ending in December is quarter we are on whatever strongest quarters, would you remember the end of fiscal year, end of September we had quite about accounts receivable from prepaids that the REMC had done that we have not actually received the cash from, so that cash came in. We have also seen continues prepaids flowing from UPPs coming in the First Quarter, as we realize we delivered against the others. And, that is really what driven the cash balance from this evening seen of votes to see more able.

Operator

We will take our next question from Michael Molnar with Goldman Sachs, please go ahead.

Michael Molnar – Goldman Sachs

The 40 million in EBITDA, do you have any port to have you on giving overall EBITDA range or overall net income just so we can gauge the rest of the business?

Merrick Kerr

You know at this thing we are not getting those projections Michael and really because, other than finishing the PDU. I have noticed that, that seem to be the thing that you guys are messing up while I give the extra information, to let you know how much of the 66 we spent. So, that you are looking at the next quarter you can recognize, but there is another 7.5 to 8 million to get spent near the finish the PDU for RND. I think I shared roughly as about 2.5 a month and what RND cost. I think the reason that I do not share them all beyond that and we have flexibility in which projects we choose to advance and we move from a PNL to a capitalization, based on where we are. And, some things actually have spent on money on projects is a good thing. So, that is why I feel that really the importance is how are we performing on the operating part of the business against what we thought we could do and that is why the information that I share.

Michael Molnar – Goldman Sachs

Okay and talk a little bit about carbon and some people’s fear or are commentary about, you know, generally CCL is sort of a high carbon alternative. What are you guys doing things that would be allowed to handle that. You also made a comment on how your technology is a little bit different. I place the question this way, could you walk through some of the back of the envelop now on how you are more carbon friendly that people think. Do you have sort of simple example on how you could walk through that.

Merrick Kerr

Yes, I think I can do that, I can do that firm and quickly and I will simplify this and recognizing that is a lot more complicated that this, but you recognize the error technology, when we do carbon top terms sequestration. Captures about 80% of diesel fuel tube that we produce during the construction process and I was able to have 20% of Carbon that was going and to the process coming from biomass, which is carbon, which is recently been and that was to be blamed in - the paint coat going in. When you then capture the 80% of a carbon in the process, effectively I will be releasing 20% of the 80% that comes from coal and at the same time I will be sequestering 80% of the 20% that came from biomass and theoretically those two months with out a carbon neutral filled I recognized to actually get carbon neutral, you have to do more than 20% because there will be carbon release and calculation in terms of the biomass to the plant, but it is a simplified example that this technology even using color paint cork as the mean feedstock.

What the ability to sequent out to 80%, you could see carbon neutral fuels with that kind of level of biomass.

Hunt Ramsbottom Jr.

I just wanted to add to that, Michael. We capture as you know the Carbon in the manufacturing process. We know the cost to capture and compress the Carbon and it turns out the numbers we are hearing from the other coal plants is that we have the cheapest way to capture and compress the Carbon in the industry. So we can actually make money on our Carbon with evidence with Natchez contract.

Operator

We will take our next question from Shagerwall(ph) of JP Morgan

Shagerwall(ph) - JP Morgan

Coming back to the R&D bond, you said it is $2 ½ million per quarter. So you said how much left for the PDU?

Merrick Kerr

About 7.5 each for the PDU and then the burn that is the corporate firm and in addition to the PDU is about $100,000 a month.

Shagerwall(ph) - JP Morgan

And this PDU is expected to complete by the next quarter, right?

Merrick Kerr

We are looking at it.

Operator

We will take our next question from Pearce Hamond with Simmons & Company International

Pearce Hamond – Simmons & Company International

If you were to look at the matches project and assuming you are using and you have the off take with it on the field too. What would you take the cost per barrel to produce the synthetic fuel with that project?

Merrick Kerr

Well I think stage one obviously is going to be higher but the entire production of coal through phase two will be roughly about 62

Pearce Hamond – Simmons & Company International

Okay and that is if you comprise in the CO2 and then selling it to bring revenues for you?

Merrick Kerr

If the revenue stream is good.

Pearce Hamond – Simmons & Company International

If you have a facility that did not have an all take agreement and you have to sequester it, what would that do to those economics? Obviously it probably makes them go higher but it is trying to get us in.

Merrick Kerr

Yes! It depends on how far you have to move the CO2, it is probably somewhere between $5 on and $15 on the high end you need to go if there is no offset

Hunt Ramsbottom Jr.

We have not shared that but in terms of taking that back next week probably somewhere in that road…

Merrick Kerr

We do know probably release at some point that we know we are significantly below what is going to cause others for compression in getting into the defense line, just because we have to strip them out the manufacturing.

Hunt Ramsbottom Jr.

I know you know that the first quant that we are looking at, we are looking out opportunity. We are in the enhance recovery option as of the next please we would go with cobalt and ethane recovery would be available.

So I think the early opportunity we first look out before we would look at locations where you would just simply put the fuel.

Operator

As a reminder pleases press star one if you would like to ask a question. The next question comes from Michael Horwitz from Pacific Growth Equities

Michael Horwitz – Pacific Growth Equities

Did you walk though the economics around biomass to liquid facilities like a similar breakeven or your cost per barrel?

Merrick Kerr

It is a little harder to do right now and I will try not to and the reason for that is around justification cost where no one also depends on what biomass feed store has, whether you are using waste where potentially you get paid protecting feed to bring your feeds token which makes them for examples. What it can fail you on the economics that we have ran on combining the technology, Rentech technology and values for and it makes a lot of economic since to do this project, We probably have a lot more what to do before we can format on exactly what those numbers.

Operator

We would take our next question from Robert Duvarr.

Robert Duvarr

What I would like to do, I am going to run some figures by and maybe you can give me score to lay out… there is a lot of speculation going on in the price of Rentech’s stock is being manipulated by Rentech. So just looks I will run some figures on amount of sales of a $132 million and an income of minus $95 million, sales growth of a 197%, Income growth as a minus 5, almost 566%. The net profit margin is down to almost 72% and now stock currently worth $1.24 cents for two years ago, or maybe just a little bit over two years ago, it was up to 5.25 I would like to understand what is going on from Rentech? Why are we in this dilemma now?

Merrick Kerr

I think there is much more to it than the numbers, I think that is why we talked about the carbon issue, the macro issue with coal, I assume that you have been reading the papers. The Macro’s - and pretty substantial out there and I think we have done a very good job of positioning of - liquid company. There are not a lot of coal plants being built in the United States. Building out the PDU and investing in the futures where money is going. We are investing it wisely and in what we are doing and stock is doing what he is doing. We have no control over it, what we can do and we are doing is stay on our business plan.

Hunt Ramsbottom Jr.

I think that we are delivering against the original strategy. We leave that two years ago when the price from we have know strategy would. I recognized moving to Natchez Project was a definite way of achieving the same goal. But we are formerly focused delivering that goal and are significantly closer to it to be than we were but I will tell you when we were just starting out. Something’s have taken longer, the PDU is an example taken longer than we thought, so we are very close now and we have a very good at Natchez to comeback, the CO2 which was - during that period. So we are continuing to deliver on what we say and believe that we have a plan that takes the value - forward.

Operator

We will take our next question from Bill Tobey.

Bill Tobey

First I would like to say that I support philosophy behind the new and incentive award plan. A great deal, I think that the share holder’s value is important, however, I think given the share - officially offered you 228 per share for Rentech for about 85% or 82% of or where the shares are right now. Would it not be appropriate to have the awards only taken once the share price is somewhere over the 228 of share was to offer?

Merrick Kerr

We cannot comment on the incentive program right now. I think that would be really

Bill Tobey

I have a follow up question that I would like to ask if there is time.

Operator

We will take our next question from Pearce Hamond with Simmons & Company International

Pearce Hamond – Simmons & Company International

In the past we have talked about some possibly some opportunities with strategic investors and just curious if you can refresh your -

Merrick Kerr

I can say that I firmly believe in other management team, believe in the board, as we now start to work through the PDU - what we are building there, we are seeing more and more opportunities for the companies both in that internationally and specially in light other alternative fuels in the market place that is why I started of with the conversation today stating that you be seeing Rentech beating the drum a little bit louder about our technology because we now see the tremendous opportunity. I will say the inquiries internationally are stepping up in the last few months because they see the value of this technology round the world.

So can I say specifically today who they are? I cannot but we remain pretty enthuse about the increase we are getting.

Operator

Ladies and Gentlemen just in time we have time for one more question and we will take our final questions from Zen Keilo with Pacific Growth Equities.

Zen Keilo - Pacific Growth Equities

Just one follow up, as energy goes I think there were some benefits of some research institute that carbon capture is this maybe able to get benefit from that?

Merrick Kerr

We are working that also, I think one of the projects that was awarded with some money is right near Nachez and we will be participating in that project.

Operator

That concludes today’s question and answer session and thank you for your participation. I will now turn the conference over to Mr. Ramsbottom for closing remarks. Please go ahead sir.

Hunt Ramsbottom

Thank you I like to make a few closing comments. To just staff that and look at the big picture you will see that you value Rentech, crosses, enough fertilizer production facility, Rentech has the technology that can produce synthetic fuels from a wide range of feed products, that had better performance in our environment than any other commercially available fuels today. We believe fuels from the Rentech process will be the cleanest burring fuels on the market and have carbon that is lower than corn ethanol.

Our technology provides a solution for energy security, allusion and one local and notational economies. We are moving forward with our first commercial scale facility, environmask, speed products along with the secure of long term carbon dioxide solution. We believe the environmental and legislative - carbon will not a fact from developing and constructing our first synthetic fuels facilities in the US.

Internationally, there are multiple opportunities with the potential feeds for coal, natural gas, environ mask, are significant resources. We appreciate your support that our shareholders are giving us and thank you for joining us in the call today. We look forward to speaking with at 2008 annual general meeting. Thank you very much.

Operator

And once again ladies and gentlemen that is jus include today’s conference, thank you for your participation. You may now disconnect.

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!