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

Rentech (NASDAQ:RTK)

Q3 2012 Earnings Call

November 08, 2012 2:00 pm ET

Executives

Julie Dawoodjee Cafarella - Vice President of Investor Relations & Communications

D. Hunt Ramsbottom - Chief Executive Officer, President and Executive Director

Dan J. Cohrs - Chief Financial Officer, Executive Vice President, Treasurer and Principal Financial Officer for Rentech Nitrogen Partners LP

Analysts

Christopher Brown

Justin Orlando

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

Operator

Ladies and gentlemen, welcome, and thank you for standing by. Welcome to the Rentech Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, November 8, 2012. I would now like to turn the conference over to Julie Cafarella, Vice President of Investor Relations and Communications. Please go ahead, ma'am.

Julie Dawoodjee Cafarella

Thank you. Welcome to Rentech's conference call for the third quarter ended September 30, 2012. During this call, Hunt Ramsbottom, President and CEO of Rentech, will summarize our company's activities during the quarter. Dan Cohrs, our Chief Financial Officer, will give a financial review of the period and provide comments on Rentech's financial position. We will then open the lines for question. [Operator Instructions] 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. Your cautioned that while forward-looking statements reflect our good faith, belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties and risk factors detailed from time to time in the company's periodic reports and registration statements filed with the Securities and Exchange Commission.

The forward-looking statements in this call are made as of November 8, 2012, and Rentech does not undertake to revise or update these forward-looking statements, except to the extent that it is required to do so under applicable laws.

In addition, today's presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2012 third quarter earnings press release that is available on our website.

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

D. Hunt Ramsbottom

Good morning, everyone, and thank you for joining us today. I'm pleased to announce we reported strong results for the quarter. We generated consolidated net income of $0.02 per share for the third quarter, resulting from the reduced R&D expenses in the alternative energy segment and strong product margins at Rentech Nitrogen.

We've said that we plan to increase shareholder value by reducing R&D spending, commercializing our technologies with partners, investing in energy businesses that have good returns and do not depend on first of a kind technology and by expanding Rentech Nitrogen through growth and acquisitions. We've made good progress in each of these areas this year.

Last week, we announced that Rentech Nitrogen acquired Agrifos' fertilizer production facility in Pasadena, Texas. The Pasadena plant acquired by Rentech Nitrogen is the largest producer of synthetic granulated ammonium sulfate fertilizer in North America, producing a differentiated premium product in a growing market. This site provides many logistical advantages and expansion possibilities. The acquisition diversifies risk for Rentech Nitrogen, providing a hedge for ammonia, as geographic and location diversity reduces Rentech Nitrogen's product and market concentration and reduces its seasonality.

Our team has identified several near-term growth opportunities at the plant, the first of which is prefinanced on the Rentech Nitrogen's new credit facilities. The good of this growth is the Pasadena plant will add to the expansion projects currently underway at Rentech Nitrogen's existing facility, which continue to progress on schedule.

The Pasadena plant acquisition exemplifies the benefits of the relationship between Rentech and Rentech Nitrogen. We utilize the new Rentech M&A team to seek acquisition targets for Rentech Nitrogen. The team drew on the expertise of Rentech's staff including engineering, environmental, legal and finance, to conduct due diligence on Agrifos and execute the transaction. Our strong balance sheet affords us the flexibility to assist Rentech Nitrogen in executing its acquisition expansion opportunities. For example, Rentech was able to provide Rentech Nitrogen with a bridge loan late last year to keep its ammonia production capacity expansion project on schedule. Similarly, as we were negotiating the acquisition of Agrifos, we've kept sufficient cash on our balance sheet to lend Rentech Nitrogen in the event there are delays in securing external financing commitments. This certainty of financing allow us to push forward on the transaction.

Since Rentech Nitrogen was able to fund about 90% of the initial purchase price of Agrifos through debt financing through the cost of capitals borrowed in issuing the units, Rentech's percentage ownership and Rentech Nitrogen declined only slightly, from 60.8% to 59.9%. The acquisition was expected to be accretive to cash distributions beginning in 2013, and it comes with several growth opportunities. The incremental cash flow this acquisition can provide is very important for Rentech Nitrogen unitholders, and especially Rentech, since we own the majority of the common units. Rentech Nitrogen will be a more diversified and larger company as a result of the acquisition, which we believe will increase the value of our holdings at Rentech Nitrogen, and ultimately, the value of Rentech.

Rentech's balance sheet also plays a significant role in establishing company's incredible partner for larger, more mature companies and have the resources to help support our energy technologies. We've made significant progress on agreements for the licensing and commercialization of certain of our energy technologies. As those discussions progress, we are evaluating alternatives for our technology portfolio with the assistance of advisors.

With respect to the -- benefits of licensing and commercialization partnership are being assessed in comparison to any incremental costs required by such a partnership and in comparison to the prospective benefits and cost of alternatives for our technology portfolio. We're currently planning for R&D spending in 2013 to be in the range of $10 million. Successful licensing and commercialization agreements may require R&D spending in excess of that amount as such expense is justified on the estimated benefits. We expect to choose and implement the highest value alternative during the first half of 2013.

Our strong liquidity and expertise have also opened opportunities for us in a new line of business we've identified for Rentech. The industry, though growing and characterized by unlevered returns in the midteens and higher with long-term contracting, is certainly composed of small entities. We believe we can capitalize on these opportunities by growing businesses with our access to resources, including those from logistics, operations, engineering and capital. We are in negotiations with a few opportunities which have cash flow generation within 24 months or less. We're aware that not each one of these opportunities will end in a successful transaction, which is why we're pursuing multiple opportunities and focusing on the ones with the best expected returns. These opportunities are well within our resources and would still allow us to keep a comfortable cash position. We would like to create a business platform with strong cash flow generation that potentially qualifies for another MLP structure. If we make a commitment in this new line of business, we expect our cash SG&A to be comparable to this year's spend. As the valuations and returns do not warrant investment, we will reduce our SG&A appropriately.

Our decisions on capital allocation are carefully thought out so we maintain flexibility in our balance sheet to grow both Rentech and Rentech Nitrogen, pursuing opportunities that create the greatest value for our shareholders.

I'll now spend a few moments discussing the market dynamics for our nitrogen business. Rentech Nitrogen has commitments for 100% of its forecasted 2012 deliveries, and has locked in a substantial portion of its gross margins by contracting its fixed prices for 100% of the natural gas required to produce these products. Rentech Nitrogen reiterated its guidance for 2012 cash available for distribution to be in excess of $126 million or $3.30 per unit, and EBITDA to be in excess of $130 million. This guidance includes the expected impacts of business development expenses and SG&A attributed to the Agrifos acquisition, the contribution of the Pasadena's plant operations and the 5-day outage at East Dubuque facility have occurred in early November.

Default harvest in our market area is nearly complete, several weeks earlier than typical. Recent rains, as well as optimal soil temperatures have set the stage for an early start to fall application. As of October 30, ammonia application was in full stride in the Mid Corn Belt. From '12, '13, ending cornstalks are forecast to be at or near record low levels of 450 million to 650 million bushels as a result of the drought. For this reason, multiple forecasting services are projecting corn plantings to exceed 96 million acres next year. We believe this will continue to drive strong nitrogen demand in 2013.

Since we last reported in August, we've sold additional ammonia 8 million tons for spring 2013 delivery. Current spring '13 posted prices for ammonia and UAN are $810 and $360 per ton, respectively. We expect spring 2013 activity to pick up once again when the fall application is completed.

Rentech Nitrogen 2013 distributions should benefit from strong pricing and demand for the nitrogen products produced at our East Dubuque facility. The additional 19,250 tons from the DES expansion will come online at the end of this year and provide incremental increase 2013 distributions.

2013 cash distributions also benefited from the accretive nature of the acquisition of the Pasadena facility, and we expect the plant to generate approximately $25 million in EBITDA in 2013, excluding onetime integration or in transition costs. The biannual turnaround of the East Dubuque facility is scheduled to take place in the fall of 2013. The turnaround is anticipated to take up to 4 weeks, which is longer than the typical 18 to 25 days, due to the fact that the final tie-ins for the ammonia production capacity expansion will occur during the scheduled turnaround to minimize plant downtime.

During this time, the plant's ammonia and UAN units will be offline and therefore, ammonia and UAN production and sales volumes during 2013 are expected to be lower than 2012. Approximately $3 million to $5 million of turnaround expenses are anticipated to be incurred in the costings of sales in the fall 2013.

In 2014, we expect cash distributions to benefit from the additional 70,000 annual tons of ammonia production at East Dubuque, which should come online by the end of 2013, and the additional 115,000 annual tons of ammonium sulfate production in Pasadena, which should come online in the second half of 2014.

I'll now turn the call over to Dan for additional color on the quarter. Dan?

Dan J. Cohrs

Thank you, Hunt, and good morning, everybody. We reported very solid results this quarter. The alternative energy segment benefited from lower R&D expenses and the nitrogen segment showed higher sales volume and lower natural gas costs. Revenues were up about 56% this quarter compared to the quarter last year. This was primarily due to higher volumes in our fertilizer segment. Remember, in the quarter last year, we had a turnaround, which not that we had less products to sell and we also shifted sales into the fourth quarter, so the third quarter was a relatively weaker quarter. We shifted those sales so we could achieve higher prices in the fourth quarter. For this quarter, gross profit margin in our fertilizer segment was 58%, which is up from 33% in the quarter last year. This reflects higher sales volumes, lower natural gas prices and the fact that last year, we had $4.5 million in turnaround expenses that ran through the P&L.

SG&A is up compared to the quarter last year for several reasons. Let's focus on the parent, Rentech, and the alternative energy segment first. SG&A increase is actually -- looks a lot larger than it really is, if you look at the components. SG&A this quarter was $6.6 million, up from $2.7 million last year, but cash SG&A increased by only $900,000. The rest of that increase is due to a relatively large increase in noncash compensation and that increase looks larger than it is because in the quarter last year, we reversed several accruals so that quarter last year was lower than normal because of those accrual reversals.

At Rentech Nitrogen, the primary reason for SG&A being up is due to M&A activity and becoming a public company. So this quarter, SG&A was $5.5 million compared to last year, $1.8 million. If you break that down, $1.7 million of that was due to M&A expenses related to the Agrifos acquisition and then we have a $1.1 million increase in noncash comp that didn't exist there last year, as well as other costs of becoming a public company.

R&D expense, which hits the alternative energy segment, was down by 45% year-over-year. That's primarily due to expenses coming down as we finish up the ClearFuels gasifier net of the reimbursements from the DOE. We also had some benefits from reduced sales and use taxes flowing through compared to last year. We have reached down to earnings per share of $0.02 in the quarter this year. Now if we adjust for last year's unusual items, debt extinguishment and the asset impairments, we had a loss of $0.04 last year, so a $0.02 profit this year compared to a $0.04 loss last year.

Results for the 9-month period year-to-date showed very similar trends. Revenues are up 24%, that's due to the increased sales prices for all products and increased volumes for ammonia. The margin on our fertilizer segment was at 61% year-to-date, up from 44% last year, again, higher sales prices across the board, lower natural gas prices, and last year, we had that $4.5 million in turnaround expense.

For the year-to-date, very similar explanations on SG&A. In the alternative energy segment, we had an increase, well, a lot of that increase was due to noncash items and the reversal of accruals last year. When you net it all out, year-to-date, cash SG&A expenses for the Energy segment increased only $100,000 year-to-date versus last year.

At Rentech Nitrogen, similar explanations as the quarter. We have an increase from $4.4 million, up to $12 million. Most of all that increase is due to becoming a public company, $2 million of M&A expense and noncash comp of $2.3 million. R&D for the year-to-date is down about 40%, showing the same kind of trends and for the same reasons of the quarter.

If we focus on Rentech Nitrogen, the product deliveries were up significantly this quarter. We had a 72% increase in deliveries of ammonia, and a 25% increase year-to-date. UAN deliveries this quarter were up 43% year-to-date, about flat with last year. We're getting a big benefit from natural gas and we've discussed before that there are lags in gas prices actually flowing through in the cost of goods sold. But if we look at actual prices for gas that are in our cost of goods sold today, in this quarter, we have $3.14 per million Btu versus the quarter a year ago at $4.74, so big improvement coming through the P&L. Year-to-date, similar trends, $3.63 per million Btus this year versus $4.78 year-to-date last year.

We ended the quarter with consolidated cash of $239 million, $183 million of that at Rentech and $56 million of that at Rentech Nitrogen. On August 14, Rentech received approximately $27 million in second quarter cash distributions paid by Rentech Nitrogen. On November 14, Rentech will receive approximately $20 million in third quarter cash distributions for Rentech Nitrogen. Rentech's cash balance as of September 30 pro forma for the distribution would've been about $203 million.

Given Rentech Nitrogen's forecast of cash available for distribution in excess of $126 million and our ownership of about 60% in the partnership, Rentech would receive more than $77 million in cash distributions related to the result of 2012, the same as covering the fourth quarter of 2012 will occur on or about February 15.

In the alternative energy segment, we expect cash operating and capital expenses to be about $45 million this year, consistent with our previous guidance. We're planning for R&D spending to be about $10 million next year as we evaluate all alternatives for the energy technology portfolio.

We're making great progress on agreements to commercialize the technology and we'll carefully evaluate any incremental spending against the benefits we see in those commercialization agreements. We're optimistic about the growth opportunities at Rentech Nitrogen's East Dubuque and Pasadena facilities. The expanded credit facilities at Rentech Nitrogen give the partnership a lot of flexibility to fund its capital program, both at the East Dubuque and at the new Pasadena facility.

Rentech Nitrogen will continue to have a $35 million undrawn revolver and a comfortable cash balance. The cost of capital at LIBOR plus 3.75 is significantly lower than issuing new units for the acquisition. The debt is guaranteed by Rentech Nitrogen.

I'll now turn the call over to the operator, and then Hunt and I will answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Chris Brown from Aristides Capital.

Christopher Brown

In spite of a blooming subsidiary, Rentech is barely profitable because you guys are spending tens of millions of dollars for 0 revenue. Including the Bloomberg, since 2006, you guys have a net loss of about $283 million, while you personally have received compensation of at least $8 million. Do shareholders need to sue in order to stop you from wasting their money or are you going to do it on your own? And if so, when?

D. Hunt Ramsbottom

I'm not sure how to address that question, but I haven't looked at my compensation since back then. And we think we're in a very good path forward with our business.

Christopher Brown

Everything that could go right with natural gas is going right and you guys made $0.02 in this quarter.

D. Hunt Ramsbottom

We're making good progress and we're very pleased with our progress.

Christopher Brown

You're spending $40 million a year for 0 revenue, how can you possibly justify that?

D. Hunt Ramsbottom

We -- it's exactly how we just described it, you can go back and read the script.

Operator

And our next question comes from the line of Lucas Pipes with Brean Capital, LLC.

Unknown Analyst

This is Derek Hernandez [ph] again for Lucas Pipes. We were wondering, with regards to the cash balance that you have today, do you expect to employ that in 2013 in any way, returning that to shareholders? And if so, in which manner?

D. Hunt Ramsbottom

Could you repeat, please?

Unknown Analyst

With the cash balance that you guys have there at Rentech, we were wondering if into 2013, do you see returning this to shareholders or -- and if so, in which ways?

D. Hunt Ramsbottom

Well, as we said with previous couple of quarters, we look at all alternatives on the balance sheet deployment and I think we've played it very intelligently with our balance sheet this year with stock repurchases. We want to keep cash balances I described as we looked at this acquisition and some of these build out opportunities that we have at these Pasadena and East Dubuque may require some capital from Rentech as I described earlier. And that's why when we look at our business plan going forward, it's a good idea to keep a good cash balance at the parent. As we have excess cash, we'll look at all alternatives. But you could see now why we wanted to be conservative through this year, for the reasons I just described. So we'll continue to look at it by shares when appropriate, and we will also allocate capital as we see fit. We have a new line of business that we're looking at and growing the opportunities in the fertilizer space.

Unknown Analyst

I see, I see. And within the new line of business, is there any more color you could provide us with regards to the direction you're looking at and possibly the scale of the investment at this point?

D. Hunt Ramsbottom

The only thing that I will say is exactly what I said in the script, these are smaller opportunities and certainly well within our means and will afford us a good balance sheet even after doing these investments, and so we're very comfortable with our approach and we'll keep us with a very conservative balance sheet.

Operator

And our next question comes from the line of Justin Orlando with Dolphin Management.

Justin Orlando

Hunt, maybe I missed it in the Q, could you give me the NOL at quarter end and maybe give us a little bit of a status update on the state NOLs?

Dan J. Cohrs

Justin, it's Dan. Our NOL balance is around $110 million. And what was the second part of your question?

D. Hunt Ramsbottom

State NOL.

Justin Orlando

Yes, the state NOLs. Are some of them in advance, have they come off, how is that?

Dan J. Cohrs

There are some states where we can't actually apply those NOLs, Illinois being one of them.

Justin Orlando

But is California back on or?

Dan J. Cohrs

California is on, yes.

Justin Orlando

Could you give us just a little bit more color on the statements on the exploration here, of the strategic alternatives for the alternative energy portfolio? It sounds to me like you're maybe considering at least 2 possibilities, one of them is doing this partnership, a partnership or a couple of them, and the other is potentially selling the whole product portfolio, the technology portfolio to someone in a transaction? Am I reading that wrong or if I am, could you just give us a little bit more color?

D. Hunt Ramsbottom

Well, I mean, as we said, again, in the last couple of quarters, we engaged an advisor and I think the primary goal certainly is to license and partner with somebody with the balance sheet or persons with balance sheets, significant balance sheets, and global reach that can take the technologies forward, that is absolutely what we're working on. And as I've said in my prepared remarks, we're making terrific progress there. And I think, first, as those come to fruition, we'll look at the alternatives from there.

Justin Orlando

Okay. So I did misread it a little bit. It's one or another partnerships that you're exploring options to look at, seeing which one is best for the company rather than either a partnership or a sale of the technology portfolio?

Dan J. Cohrs

No. Justin, I don't think you misread it. What we said, I think we tried to say clearly in there is that we are making really good progress on agreements to commercialize the technology. Those agreements themselves might imply some incremental costs, so we would have to compare the benefits to the cost for those agreements. Then in addition to that, we're saying we will look at other alternatives and compare the whole picture, the cost and benefits or other alternatives as well. So we're not just limiting it to partnerships. We think those commercialization partnerships are going to be very attractive, but we're evaluating the whole picture.

Justin Orlando

Okay. And then I just have one quick last one on the R&D. I was surprised to see the $10 million number and you didn't tell us anything different than that, so if it's not -- but I was expecting it to drop more than it did. Is there going to be more activity at the PDU or is there some other place where the R&D is being spent?

D. Hunt Ramsbottom

The $10 million has been in the last few calls, Justin, throughout the last 6 or 10 months, it's very consistent with what we've said the last few months.

Justin Orlando

No, I know. You said it was going to be under $10 million and then -- and so now you're guiding to $10 million, so I'm not -- I didn't say you were misguiding [indiscernible]

D. Hunt Ramsbottom

We said it's approximately $10 million.

Justin Orlando

Okay. So that's just all at the PDU?

D. Hunt Ramsbottom

Well, everything at the PDU and the folks that are involved in the technology.

Operator

And our last question comes from the line of Brent Rystrom with Feltl.

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

Just a quick question on the diesel emissions fluid, how are you going to sell that? Is that going to go out through a distributor or are you going to sell that somewhat directly with your other products from [indiscernible]

D. Hunt Ramsbottom

Well, the DEF, we have disclosed who we're selling that to and that's through Yarra. That's contractually obligated to sell through Yarra.

Operator

And Ms. Cafarella, there are no further questions at this time. I'll turn the conference back to you.

Julie Dawoodjee Cafarella

Thank you. We would like to thank everyone who participated on the call today. As we have outlined, our strong cash balance provides us with significant opportunities to grow the parent and Rentech Nitrogen. Growth at both levels will maximize value for Rentech shareholders. Please contact me if you have any questions about the quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your lines.

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

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

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

Source: Rentech Management Discusses Q3 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts