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

Rentech, Inc. (RTK)

Q2 2008 Earnings Call Transcript

May 9, 2008 1:00 pm ET

Executives

Julie Dawoodjee – Director of IR

Hunt Ramsbottom – President and CEO

Merrick Kerr – CFO

Analysts

Jeremy Sussman – Natexis Bleichroeder

Ankush Agarwal – JP Morgan

Bill Burns – Johnson Rice

Brian Gamble – Simmons & Co.

Robert Toseva [ph] – Arden Investments [ph]

Bob Kosh [ph] – Stifel Nicolaus

Jeff Holcomb – Mid South Capital

Julian Benscher – Sherwood Investments

Joseph Messnick [ph] – private investor

Operator

Good day everyone and welcome to the Rentech, Inc. fiscal 2008 second quarter earnings conference call. Today's conference is being recorded.

Now at this time for opening remarks and introductions, I would like to turn the call over to your host, Ms. Julie Dawoodjee, Director of Investor Relations. Please go ahead.

Julie Dawoodjee

Thank you. I would like to welcome all of you to Rentech's 2008 fiscal second quarter conference call. Before we begin our prepared remarks, I would like to cover some administrative aspects of this conference call. Hunt Ramsbottom, President and CEO of 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 second quarter and will provide comments on Rentech's financial position. We will then open the line for questions and ask that you limit your call to one question so that we may get to as many questions as possible.

Please be advised that certain information discussed on this conference call will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. They can be identified by the use of terminology such as may, will, expects, believes, 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 May 9, 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 law.

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

Hunt Ramsbottom

Thank you, Julie, and good morning everyone and thank you for participating in Rentech's 2008 fiscal second quarter conference call for the period ended March 31.

During this morning's call, I would like to focus our efforts to develop the commercial production of synthetic fuels using the Rentech Process. With our PDU facility in Colorado nearly complete and soon to be producing synthetic fuels, we are reaching a very exciting milestone in our company's course. Our plant will be the only operating synthetic fuels and chemicals facility in the United States. The facility will produce synthetic fuels for testing and certification purposes.

We will also demonstrate the entire production process of synthetic fuels, including our improvements to the Rentech process. Providing sample fuels for testing should progress our commercial discussions with potential licensees, customers, and those parties whose support is critical to the development of commercial scale facilities.

The Colorado facility is a fully integrated small scale synthetics fuels plant designed to produce approximately 420 gallons per day of synthetic fuels. We believe the design of the plant will verify the engineering parameters for scale up to commercial operations. In addition, the PDU provides us with valuable engineering, design, process knowledge that will be transferred to the planning and construction of our commercial scale facilities.

I am pleased to say that all systems required for start-up at the PDU are mechanically complete, except for an issue with the gas detection system, which we anticipate resolving within the next few days. We expect to begin to produce syngas shortly thereafter, which will be fed into the Rentech reactor and expect first fuel production at the facility around the end of June.

As I said earlier, we believe that once our Colorado facility is operating and producing fuels, commercial arrangements will solidify with licensees, off-takers, partners and customers. We are having discussions with the United States Air Force, the British Royal Air Force, commercial airlines and chemical companies to supply them with fuels and chemicals produced at the facility for testing purposes.

We believe that once these and other potential customers test and analyze the synthetic fuels and chemicals we produce, we can accelerate our ability to obtain off-take contracts for our commercial scale facilities. We believe obtaining off-take contracts for substantial portion of the products will be critical in obtaining financing for the Natchez facility from banks and/or equity partners.

To further enhance our ability to enhance the Natchez project and other planned commercial facilities, we are currently evaluating opportunities to improve the project economics through production scale optimization.

We are pleased to announce this week Governor Haley Barbour's approval of our request for an allocation of $175 million in tax exempt go-zone bonds for the Natchez project. The selection process was very competitive and we believe the award underscores the importance of the Natchez project to the state of Mississippi and its contribution to domestic energy security. The award is an important step in our capital-raising efforts for the project.

We have completed the feasibility study for the project and we are doing some additional engineering work to finalize technology selection for the facility. We are also assessing and have begun discussions with government officials regarding environmental permitting necessary for the plant.

We are scheduled to close on the Natchez site purchase by June 1. Once the site is purchased – once the site purchase is completed, the next step is to conduct an evaluation of equipment and buildings on the land. The approximate 450-acre site has significant existing infrastructure, including water treatment, warehouse, laboratory and office buildings that can either be sold or salvaged providing and saving investment dollars for the construction of the future of the Natchez synthetic fuels and chemicals facility.

The site is ideally located with access to multiple types of feedstock and is outside the direct impact zone of Gulf Coast hurricanes and flooding. The site is essential to several product distribution channels. The Baton Rouge terminal and the Colonial and Plantation Pipelines are within 100 miles down the river from the site, allowing products from the facility to be shipped as far as the northeast coast. The local port authority and a liquids terminal are also adjacent to the site and can be utilized.

Additionally, there's a CO2 pipeline within a few miles that serviced enhanced oil recovery in the region. The long-term agreement that we have secured for the sale of all captured CO2 from the facility will allow us to have a carbon footprint that's significantly cleaner than petroleum-derived fuels. We believe the fuels produced at this facility will be among the most greenhouse gas friendly fuels available in this country.

We've completed a third-party life cycle analysis of the CO2 footprint for the Natchez which supports our and the Department of Energy's assertions that synthetic fuels plants can have a lower carbon footprint than petroleum-derived fuels. This study has been completed and will soon be peer reviewed by independent scientific experts. Once the peer review has been completed, we intend to publish the results.

To improve our carbon footprint and thus make our commercial scale facilities more environmentally friendly, we have joined a collaborative effort with Southern Research Institute and others for biomass to liquids development project, which has been selected for funding by the Department of Energy. This project will demonstrate and test several phases of the production process of synthetic fuels from biomass, such as the effectiveness of biomass gasifiers, the cleanup of syngas from biomass, and the conversion of syngas to liquid transportation fuels and the performance of those fuels in diesel vehicles.

To further broaden the market for our products, we are involved in market development and testing of synthetic diesel for rail and heavy off-road equipment with (inaudible) and with one of the largest caterpillar equipment dealers in the nation.

Our proposed commercial facility in Mingo County, West Virginia continues to look promising. Progress is being made on securing the site and evaluating biomass feedstock suppliers. In addition, local waste coal samples have been collected and evaluated as potential feedstock for the project.

The economic impact study conducted by Marshall University for the proposed Mingo County synthetic fuels facility has been completed. The study indicates that locating the plant in Mingo County would make it the largest single site employer in the county and would significantly impact not only the County's economy but the economy of the surrounding region as well. We expect these results to have a positive influence on encouraging state support for the synthetic fuels project.

We are also working closely with a Commercial Aviation Alternative Fuel Initiative or CAFI which recently approached Rentech's Director of Product Development to spearhead CAFI's efforts to obtain approval of synthetic fuels for commercial aviation use. Commercial airlines have a genuine need for secure supply of fuels for a stable price, which we believe can be achieved with synthetic fuels.

According to the EIA, the price of jet fuel has increased 78% since last year. Already this year, record fuel prices have forced five carriers to file for bankruptcy. The lack of stability in the purchase price of petroleum based fuels is clearly a significant issue for airlines.

As you can see, we have been focused on several key priorities that we believe are necessary for the deployment of our technology and the launch of our synthetic fuels production in the United States. These include production of synthetic fuels at our Colorado plant, providing those fuels for testing purposes for potential customers we are currently conversing with, and hosting potential partners and banks at the PDU to verify the process.

In addition, we remain committed to our ammonia nitrogen fertilizer facility, REMC. REMC provides products critical for the growing of corn that is increasingly used for the production of ethanol. REMC is uniquely located in the middle of the cornbelt, providing a number of competitive – provides us with a number of competitive advantages.

Our geographic location enhances the value of our facility when benchmarked against other domestic producers and importers. This advantage continues to increase with the escalation in diesel prices. We see this in terms of inbound freight costs in all forms of transportation for competitors trying to bring product into our trade zone and customers who want to purchase as close to home as possible. As a result, REMC's prospects continue to look strong.

In addition, according to the USDA, demand for planted corn acreage is expected it to remain high estimated at 91 million acres in 2009, up from 88 million acres in 2008. We are already selling our products to serve the growers' needs for the next planting season at levels much higher than last year at this time.

REMC's strong operating performance provides cash flows to support our commercialization efforts. REMC operates very efficiently with on-stream time of over 96%. We are seeking opportunities to enhance the efficiency of the plant to further capitalize on the demand for fertilizer in the Corn Belt region. We are currently engaged in a companywide cost review and reduction program that would take corporate spending to a level that can be supported by the free cash flow at REMC. It's important that we take a measured approach to the cost cuts to ensure that we will still be able to deliver on our current focused business plan.

I look forward to your questions in a few moments, but first I will turn the call over to Merrick Kerr, our Chief Financial Officer.

Merrick Kerr

Thank you, Hunt. Good morning everyone. During the second quarter of fiscal 2008, we recognized revenues of $28.5 million and a gross profit of $7.9 million compared to revenues of $16.9 million and a gross profit of $0.8 million in the corresponding period of fiscal 2007. We reported a net loss applicable to common shareholders of $22.8 million or a loss of $0.14 per share for the quarter compared to a net loss applicable to common shareholders of $17.2 million or a loss of $0.12 per share in the corresponding period of fiscal 2007.

During the first six months of fiscal 2008, we recognized revenues of $76 million and a gross profit of $18.2 million compared to revenues of $52.3 million and a gross profit of $4.6 million in the corresponding period of fiscal 2007. We reported a net loss applicable to common shareholders of $46.2 million or a loss of $0.28 per share for the period compared to a net loss applicable to common shareholders of $25.9 million or a loss of $0.18 per share in the corresponding period of fiscal 2007.

Sales, general and administrative expenses were $17.8 million during the first six months of fiscal 2008, up $4.2 million from the corresponding period of fiscal 2007, when these expenses were $13.6 million. Salaries and benefits accounted for $2.1 million of current period increases while information technology enhancements and professional fees each accounted for $0.8 million. We experienced increases in our SG&A expenses during the period in various categories, including travel costs, project development and recruitment expenses. An offset to these increases was $0.5 million decline in public company compliance expenses and insurance expenses.

Research and development expenditures during the first six months of fiscal 2008 were $48.1 million as compared to $19.4 million during the same period last year. Expenses related to the design, procurement of equipment for and construction of the PDU accounted for 77% or $29.4 million of current period R&D expenses while post-construction efforts including commissioning and stock up expenses were an additional $5.3 million. The remaining $3.4 million of the period's R&D expenses related to (inaudible) and process development and product upgrading work.

Estimated construction costs for the PDU are approximately $80 million to $85 million. Through the end of the second quarter fiscal 2008, we had spent $70.9 million of the estimated total construction costs. Operating expenses for the first six months of fiscal 2008 included an apparent charge of $9.1 million related to the postponement of the REMC conversion project. This impacted the earnings per share for the period by $0.06 per share.

During the first six months of fiscal 2008, REMC generated operating income of $15.9 million and net income of $16.4 million. As Hunt mentioned, REMC continues to perform well due to the strong demand for nitrogen fertilizer products for the growing of feedstock for ethanol. I am pleased to say that we set new UAN production and sale trackers for both the quarter and six months period. We also have the second highest ammonia production in this quarter.

Overall, product sales set new records for both the quarter and the six months period. At this time, we have sales agreements on ammonia for approximately 95% of our fiscal 2008 production at an average sales price of $503 per ton. This is in comparison to our average selling price of ammonia of $351 per ton in fiscal 2007 and $300 per ton in fiscal 2006.

We also are doing UAN sales agreements for approximately 82% of our fiscal 2008 production at an average sales price of $286 per ton. That is in comparison to our average selling price of UAN of $209 per ton in fiscal 2007 and $161 per ton in fiscal 2006. These sales of 98% of the margin brought in by gas purchases, inventories already produced, and for the product purchase.

We continue to expect REMC to generate over $40 million in EBITDA in fiscal 2008, and these cash flows will continue to support the commercialization efforts of synthetic fuels. As of March 31, 2008, we had cash, cash equivalents and available for sale securities of $31.7 million. Our available for sale securities consist of $8.3 million of option rate securities. The recent conditions in the global credit markets have caused auctions for these securities to fail and we have been unable to liquidate our position.

However, we recently executed a line of credit with Lehman Brothers which is the custodian arm available for sale of securities. The line of credit provides a liquidity mechanism on the account and is for an amount up to $5 million. Rentech's portfolio of available for sale securities held by Lehman Brothers as collateral for the line of credit, and as a result, we are not subject to any covenants. We currently have no borrowings on the line of credit.

As of March 31, 2008, we have negative working capital of $14.5 million. We recognize the importance of increasing our liquidity and are currently pursuing sources to provide the liquidity required. We believe that the debt capacity of REMC should provide the liquidity required to complete the PDU, take it through commissioning and stock up and from the land purchased at Natchez. Once commissioning and stocked up have been completed at PDU, we expect to see a significant reduction in our monthly R&D spend.

As Hunt mentioned, it is then our intention to reduce monthly expenses to a level that can be supported by the free cash flow from REMC and only come to the market to raise capital for project financing purposes. Additionally, we believe that the many positive qualities of the Natchez project including its reduced carbon footprint will help us to receive continued government support both at the federal and state level. We believe the approval of our request for $175 million in go-zone bonds from the state of Mississippi is the first of these and is a first step in funding of the project.

With that, I would like to hand the call back to Hunt.

Hunt Ramsbottom

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) We will go first to Jeremy Sussman with Natexis Bleichroeder.

Hunt Ramsbottom

Hi, Jeremy.

Jeremy Sussman – Natexis Bleichroeder

Good morning and congratulations on receiving the approval for your go-zone bonds.

Hunt Ramsbottom

Thanks.

Jeremy Sussman – Natexis Bleichroeder

I guess along those lines, could you – and you laid this out a bit, but could you give us more of a relative time frame of say catalyst or events that we can look forward to, say, between now and I guess the eventual ground breaking at Natchez?

Hunt Ramsbottom

I think we have been reluctant to say, because we want to make sure we buy the land, Jeremy, and June 1 I think would be the first event. And I think after that, we would be happy to lay out what the events would be post that. We have got a number of things that we have alluded in here, permitting, selection of equipment, all that in partnership, so for this call, I would prefer just to focus on the land purchase and then post that, I think we will lay out the time line.

Jeremy Sussman – Natexis Bleichroeder

Sure. Now, that makes sense. And I guess kind of again more macro here, I guess, but given oil looking at $125 a barrel here compared to – I think it was below $90 the last time we had your conference call a few months ago, any – I guess, what's been the change in the level of interest really of anything that you are seeing out there for synthetic fuels either in the U.S. or abroad, I guess?

Hunt Ramsbottom

I think generally speaking, my view is the last 60 days especially, I think we have seen more attention back on what we can do both domestically and internationally in terms of the attention focused on what we are doing. I think all of this discussion around the globe of food versus fuel, I think people now are scrambling and saying, okay, what's out there and what exists? We have been, as you know, been a little bit lost in the discussion, because of all of that discussion on food for fuel. So, we are seeing more enthusiasm domestically and the fact that – I don't know if you saw the article recently in Science magazine on the greening of synfuels. I think people are starting to understand this technology and the flexibility of this technology that it's not just coal related. So, I think we are getting a lot more traction domestically and internationally.

Jeremy Sussman – Natexis Bleichroeder

Great. And then, I guess last question, just any updates or progress on the legislative front?

Hunt Ramsbottom

There is. Analysts who have been following the farm bill and all, but that's been a little bit of a political football the last few weeks, but it looks like we are going to get put in the extender package, which will be lumped in with the other fuels and alternative energy technologies. And once we get approved sometime between now and the end of the year, that's on the farm bill side. And we are also seeing some traction on the long-term contract with Senate Armed Services Committee and Defense Authorization Act of 2009. There is some wording in there now for long-term contracting and we are feeling pretty good about that and the wording right now does not exclude – or doesn't talk about feedstock. It just has to be as clean as the barrel that you are replacing. So, I think the education and the work that we are doing in Washington, as it relates to the need for these fuels for our government and others is being heard, so we are very encouraged right now.

Jeremy Sussman – Natexis Bleichroeder

Great, thank you very much.

Operator

We'll go next to John Bridges with JP Morgan.

Ankush Agarwal – JP Morgan

Hi Hunt and Merrick. This is Ankush Agarwal on behalf of John Bridges.

Hunt Ramsbottom

Hi Ankush.

Ankush Agarwal – JP Morgan

Congratulations for getting the approval for the go-zone bonds. Could you just give us a little more color on what the timeline would be to raise this money and also how you plan to finance the balance, which would be required for the phase one? I know it wouldn't be required immediately, but over the time that you plan to develop with phase one.

Merrick Kerr

Yes, I think the process for phase one right now as we are continuing to evaluate responses both for the feedstock supply and for the gasifier supply, as Hunt mentioned, we are starting to look at the permitting required for it. We continue to monitor the economics with the changes in capital costs and obviously the value of the products as well. But, I mean, I still feel that the time line that we had talked about before, where I think it was 12 to 15 months, I think we're probably maybe in the 10 to 13 months right now, maybe lost a month in the last three or four months just in the time that it's taken to start putting everything together. But it's still at least 10 months away, yes, I would say.

Ankush Agarwal – JP Morgan

So, when do you expect to raise money from these bonds?

Merrick Kerr

Well, the bonds, we can hold them as long as they are used by, I believe, it's the end of 2010. So we have the allocation now. I think that helps with us as we go out to do the remainder of the financing because we can show that we have that part in place. But in terms of drawing them down, we would not draw the bonds down until we have the rest of the financing in place.

Ankush Agarwal – JP Morgan

Okay, that's helpful. And then just another question, if I may, the R&D expenses this quarter were a little higher than what had been guided previously. Now, since the PDU is mostly done, what should be the going forward run rate we should be looking at?

Merrick Kerr

I think the numbers that we are still looking at for pure R&D still feel that it's somewhere in that $500,000 to $600,000 a month as the kind of target we can go to, but running the PDU, it is certainly over the stock up and commissioning time. It's hard to see exactly how much it will be. And any plan like this, when you have a start-up, we do expect to have infant mortality (inaudible) will have to be replaced. We actually saw that just recently with, as Hunt mentioned on the call, with the gas analyzers. So, it's probably about $1.25 million to $1.5 million to just run the PDU.

Ankush Agarwal – JP Morgan

Okay.

Merrick Kerr

There will be something initially on top of that to cover the infant mortality, et cetera.

Ankush Agarwal – JP Morgan

Okay, thank you. That's helpful. Good luck.

Merrick Kerr

Thank you.

Operator

We'll go next to Bill Burns with Johnson Rice.

Bill Burns – Johnson Rice

Hello, all. On the bonds, does the state guarantee those bonds?

Merrick Kerr

No, the bonds rely on their credit from the project.

Bill Burns – Johnson Rice

Okay, so it's project financing type bonds but they are tax exempt.

Merrick Kerr

Correct.

Bill Burns – Johnson Rice

Okay. And the schedule for the PDU is still this spring?

Hunt Ramsbottom

Yes. As we mentioned in the call, it is still – as I mentioned, start-up and commissioning is going on as we speak and fuels are still scheduled for around the end of June.

Bill Burns – Johnson Rice

I apologize I was a little late in getting on the call. Thanks very much.

Hunt Ramsbottom

Okay, thanks Bill.

Operator

We'll go next to Brian Gamble with Simmons & Co..

Brian Gamble – Simmons & Co.

Good afternoon, guys.

Hunt Ramsbottom

Hello, Brian.

Brian Gamble – Simmons & Co.

Merrick, that number that you just threw out, the $1.25 million to $1.5 million, that was a monthly figure for the P DU running, is that right?

Merrick Kerr

Yes, that's monthly.

Brian Gamble – Simmons & Co.

Okay. And then, have you started layering in any of the 2009 output from REMC, any numbers you could provide there?

Merrick Kerr

I have my first early look at that, but nothing that I would be ready to go to the market with. Maybe on the next quarterly call.

Brian Gamble – Simmons & Co.

Okay. And then finally, any details you can provide, I know you mentioned trying to get essentially cash quarterly expenditures down to where they could be funded by REMC, any more details, Hunt, that you want to provide there that might give us kind of a point of reference for where those dollars are going to be coming out of besides obvious R&D constraints going forward?

Merrick Kerr

I mean, I think what we are doing there, we are in the process right now, we wanted to let you know that we are doing it and we recognize the importance of effectively letting within the free cash flow from the plant. Really, the way that we are working through it is we are looking at our priorities and the challenges that we have coming over the next 15 to 18 months. And then, once we are through that process, we will know where the cuts are going to come. As you mentioned, obviously completion of the PDU will be a significant saving, but then that's the work that we are doing right now.

Brian Gamble – Simmons & Co.

Okay. Thank you very much.

Hunt Ramsbottom

We will be looking at all categories from corporate right on through.

Brian Gamble – Simmons & Co.

That's fair. Appreciate it, Hunt.

Hunt Ramsbottom

Yes.

Operator

We'll go next to Robert Toseva [ph] with Arden Investments [ph].

Robert Toseva – Arden Investments

Yes, my question – congratulations on the funding, by the way. The gasifier at the pilot plant, you will be operating without it, are there any plans for Q1? If so, is it a significant expense and is it a detriment to the operation not to have it in place today?

Hunt Ramsbottom

The first question is, are there plans? There definitely are plans for potential gasification there and the way we are laying it out for the team and internally, I guess the parameters are working and it will not be a significant expense to Rentech. That is the parameter we have laid out to do gasification there.

Merrick Kerr

And on the second question, do we think it's a major impact? We do not believe so. The important part for the demonstration of the Rentech process is basically validating improvements that we made to the process, since the last time we ran the large-scale pilot plant which is really the conversion from the syngas through wax/cat separation. And then, the other important part of the PDU is the products. Neither one of those things is affected by the fact that the syngas is being created from natural gas rather than coal or biomass.

Hunt Ramsbottom

We have not heard any issues from central customers.

Robert Toseva – Arden Investments

Thank you very much.

Operator

(Operator instructions) We go next to Bob Kosh [ph] with Stifel Nicolaus.

Bob Kosh – Stifel Nicolaus

Good morning. Congratulations on those GO bonds. Are they part of the previous inducement that you talked about, the $2.75 billion, or is this totally separate?

Merrick Kerr

No, it would be part of that $2.75 billion. It's first draw down, if you like.

Bob Kosh – Stifel Nicolaus

One other question for Merrick. Previously you indicated that we would not have a need for further equity to be issued this year. Is that pretty much still the case?

Merrick Kerr

Yes, I think what I said was nothing significant and that is still the case.

Bob Kosh – Stifel Nicolaus

Okay. Good. Thanks very much.

Hunt Ramsbottom

Thank you.

Operator

(Operator instructions) We'll go next to Jeff Holcomb with Mid South Capital.

Jeff Holcomb – Mid South Capital

Hey, guys. Just a question on the GO Zone bonds. Could you tell me, it sounds like you beat out a lot of guys for these bonds. What were the requirements to receive the $175 million allocation? Could you just explain maybe to us how these will work? Are you raising the money? Do you get help from the government to raise this money? Exactly how does this work?

Merrick Kerr

Well, I think the process in terms of application, as each state was given an allocation of the GO Zone bonds, and we put an application explaining the project, the benefits that it brings to the region, particularly though in Adams County. I believe we were the only applicant in that region, which I'm sure helped with the process. I think the fact that we have a CO2 solution down there as well was also a big help for that. But, yes, it was a competitive process and we're very pleased with how we received a share of the allocation (inaudible). In terms of how we then move forward with them now, these bonds would then be sold in the marketplace. It will be dependent on the credit from the project. So we will, as I mentioned earlier, have to get the remainder the financing in place and pro forma model [ph] on exactly what the project will look like. Then at that point, these will be sold much like any other municipal bonds.

Jeff Holcomb – Mid South Capital

Okay. Thanks a lot.

Merrick Kerr

Thanks.

Operator

Our next question comes from Julian Benscher with Sherwood Investments.

Julian Benscher – Sherwood Investments

Hi, gentlemen. You were talking about the possibility of some equity raise next year. How confident are you that the PDU, once operational, will attract sufficient interest for you to garner significant license fees? Do you expect that to impact on what you may or may not need to do from the perspective of raising further equity?

Hunt Ramsbottom

It's very hard to predict what will happen when the fuels come off. We assume it is going to be positive, but we can't predict the marketplace. But we assume that all the work that's gone into the PDU will have a positive effect on customers and offtakers and that should translate into good returns for the shareholders, but we can't predict that.

Julian Benscher – Sherwood Investments

Okay. Thank you.

Operator

We'll go next to Joseph Messnick [ph], private investor.

Joseph Messnick

Thank you. In your opinion, what has been the major cause of the timeline delays in bringing the PDU online? Engineering, fabrication, assembly testing or reliability of the fabrications?

Hunt Ramsbottom

What was the question, again?

Joseph Messnick

In your opinion, what has been the major cause of timeline delays in bringing the PDU online? Engineering, fabrication, assembly testing?

Hunt Ramsbottom

I would say all the above. I mean, I think there's – going back to the initial phase construction of it, there was a big change – I would say the big issue was changing over from gasification to the steam methane reformer. The plant was designed early on for gasification and you try like heck to make that work and when you realize it's not going to work to our satisfaction, you've got to pause, redesign, reengineer for the steam methane reformers and start construct again. So that's probably the most significant delay in cost increase.

Joseph Messnick

What about fabrication. I mean has that been a problem?

Hunt Ramsbottom

No. You mean fabrication in terms of getting the people to do the job?

Joseph Messnick

No. Basically manufacturing the parts. In terms of –

Merrick Kerr

No, that has not been a challenge. The other area that has been a challenge is being the size of the footprint on which we've had to construct this. It's made it difficult, the number of people required on-site all times to keep it moving. That has been a challenge. Obviously, (inaudible) delays as you would expect and once we kind of (inaudible) we were having to construct through the winter, which had an impact as well.

Hunt Ramsbottom

I think, to reiterate, which I mentioned at our AGM and earlier in the call, I mean this was significant for us to build our first end-to-end synfuels plant and I think had it not been for the switch out of the gas-fired to the SMR, I think it would have gone a hell of lot smoother. But, we have learned a lot, more than we can ever go through on this call, but that's you build pilot plants.

Joseph Messnick

Is most of the steel there, is it high-quality steel that you are using? Is it rolled? Is it welded? I mean, how are they doing that?

Hunt Ramsbottom

It's all high-quality steel.

Joseph Messnick

It's steel. It's not an iron, it's not a 1040 or a 4140 or some of the others. It's actually steel?

Hunt Ramsbottom

Yes.

Joseph Messnick

Okay. Thank you very much. That's been very helpful.

Hunt Ramsbottom

Okay. Thank you.

Operator

Ladies and gentlemen, due to time constraints, we will now conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Ramsbottom for any additional or closing comments.

Hunt Ramsbottom

Thank you. I would like to make a few closing comments. Like other alternative fuels companies, we have faced challenges in the last year or so. However, we feel that the commissioning and start-up of the PDU will move things in a positive direction for the company. We also see encouraging progress on legislation to help support the synthetic fuels industry. Producing fuels at our Colorado facility around the end of June will be a major milestone for not only us, but the entire industry as well, as it will be the only fully-integrated synthetic fuels plant operating in the United States.

With the PDU operational, we believe we will be better positioned to enter into commercial arrangements with customers, licensees and partners. On the external front, as you all know, crude continues to trade at record highs; policy makers, economists and the market have been to recognize the need for a wide array of alternative fuels, particularly the need for non-food based fuels like ours, which do not impact crop and food prices.

I also want to reinforce what I stated at our Annual General Meeting regarding our focus on increasing shareholder value by employing the following principles: Maximize cash flow opportunities at REMC, operate our Colorado facility safely and efficiently, focus on commercialization at Natchez, work on technology improvements through focused research and development, pursue global licensing opportunities, and execute on market opportunities that are accretive to cash flows and that potentially expand our technology portfolio.

We will ensure that the execution of our business plan will be carried out in a cost-efficient manner, consistent with the parameters that will result from the recent companywide cost review and reduction program. We appreciate the support that our shareholders have given us, as well as the State of Mississippi. I thank you for joining us on the call today. We look forward to speaking with you when we report our third fiscal quarter results. Thank you all very much.

Operator

And again, that does conclude today's conference call. Thank you for your participation and you may disconnect at this time.

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. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts