Rentech's (RTK) CEO Keith Forman on Q2 2016 Results - Earnings Call Transcript

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Rentech, Inc. (NYSEMKT:RTK) Q2 2016 Earnings Conference Call August 10, 2016 10:00 AM ET

Executives

Julie Cafarella - VP, IR and Communications

Keith Forman - Chief Executive Officer, President and Director

Jeffrey Spain - Senior Vice President and Chief Financial Officer

Analysts

Brent Rystrom - Feltl and Company

Joseph Pratt - Stifel, Nicolaus & Company

Operator

Welcome to the Rentech, Inc.’s Second Quarter 2016 Conference Call. My name is Jason and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

I would like to inform all participants this call is being recorded at the request of Rentech. This broadcast is copyrighted property of Rentech. Any rebroadcast of this information in whole or in part without the prior written permission of Rentech is prohibited.

I will now turn the call over to Julie Cafarella, Vice President of Senior Investor Relations. Julie, please go ahead.

Julie Cafarella

Thanks for joining us everyone. Welcome to Rentech's conference call for the three months ended June 30, 2016. During today's call, Keith Forman, President and CEO of Rentech will summarize our activities. Jeff Spain, our Chief Financial Officer, will give a financial review of the period. They will be available for questions at the end of our remarks.

Please be advised that certain information discussed on this conference call will contain forward-looking statements. They can be identified by the use of terms such as may, will, expect, believe, and other comparable terms. You are cautioned that while forward-looking statements reflect our good faith, belief and best judgment based upon current information, they are not guarantees of future performance.

They are subject to known and unknown risks and uncertainties and risk factors. We detail these factors from time-to-time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. The forward-looking statements in this call are made as of August 10, 2016. Rentech does not revise or update these forward-looking statements except to the extent that it is required to do so under applicable laws.

Today's presentation also includes various non-GAAP financial measures. The disclosures related to these non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2016 second quarter earnings press release. You can find the release on our website.

Now, I'll turn the call over to Keith.

Keith Forman

Welcome everyone and thank you for joining us this morning. We are not on the medal stand yet, but we're through the preliminary rounds and hopefully we'll get there. Start by discussing the status of our Canadian pellet facilities production increased at both Wawa and Atikokan over the past quarter and our production cost per metric ton is improving. I feel that we have a good handle on the remaining issues that need to be resolved in order to further increase production at both plants.

Our total CapEx budget for the plants has remained unchanged at approximately $145 million which has been our forecast for the past 12 months. Our expectations of timing to reach full capacity of the plants also remains unchanged. Addressing each plant individually, our production at Wawa is improving the plant has been producing at approximately 40% of capacity during the past several weeks.

Average weekly pellet production during the second quarter was approximately 2,500 metric tons which is a 50% increase as compared to the average weekly production during the first quarter. Wawa, as the times produced above 800 metric tons per day and 500 metric tons per shift, which is a 12-hour shift, which shows that the plant can produce at an annual average equivalent of over 70% of our Drax contract requirements prior to replacing the remaining problematic conveyors.

Most of the increase is attributable to a focus on improving mechanical reliability to achieve higher levels of sustained production. The team is now tackling a number of mechanical improvements identified by the site personnel and the independent engineering firm engaged to assist us during ramp up. We plan to take the plant down beginning August 15 next Monday for approximately two to four weeks to complete some of these mechanical upgrades to replace the remaining defective conveyors on the dry side of the plant and to conduct general repairs and maintenance.

These improvements should remove the remaining identified conveyance bottlenecks enable the plant to resume ramping up with the expectations of reaching 70% of capacity over the next several quarters. During the second quarter we shipped our third vessel to Drax, for the year we have delivered 95,000 metric tons of pellets in light of Wawa’s performance in the upcoming shutdown for Phase 2 of the conveyor replacements we finalize with Drax our reduction in 2016 volumes of 144,000 tons with no monetary penalties.

Atikokan is now typically producing between 80% and 90% of capacity. Average weekly production increased by 10% during the second quarter as compared to the prior quarter. We continue to fulfill our obligations to OPG from the Atikokan plant and rail excess production to the port for delivery to Drax. We have delivered a total of 46,000 metric tons of pellets this year to OPG and Drax from Atikokan.

We plan to take Atikokan down for approximately one-week this fall to replace conveyors to enhance reliability and operational control with the plant. We are still holding off on replacing the last of the conveyors that would allow us to improve production to 110,000 metric tons annually until so we see an economic justification to make the investment.

Our CapEx budget includes the cost of fabricating and replacing these conveyors which we have not yet sanctioned. I will close out the Canadian discussion by noting that the loading operations at the Port of Quebec are working efficiently and that the quality of pellets we are producing is meeting the requirements under our customer contracts.

Let me now turn to Fulghum, for the first six months of this year Fulghum’s revenues were flat as compared to the prior year period largely due to strong South American sales in the first quarter which offset lower domestic sales revenue to date. We also continue to see the benefits of actions we took last year to improve labor productivity and maintenance efficiency, but EBITDA for the first half of the year was down about 6% from the prior year period.

The reduction was primarily due to the loss of contribution from a mill, we no longer own or operate and the impacts of flooding on two paper mills of our customers partially offset by slightly lower SG&A costs. We previously disclosed that one of our customers exercised their contractual right to purchase one of our U.S. mills and the effects of this loss are reflected for the first time in our financial statements.

Fulghum’s second quarter EBITDA declined by 36% from the second quarter 2015 due to the exercise of the purchase option in April and the flooding that impacted the two customer mills that I just referenced. In addition, South American sales were lower in the quarter as compared to 2Q 2015.

We are receiving indications from customers in Asia that lead us to believe that we could see a healthy level of South American export activity in the second half of the year. However, we still expect Fulghum’s results for the year to be lower than the record performance in 2015 given the previously announced loss of a mill contract.

At NEWP, the effects of this past winter continue to negatively affect results during the second quarter and unseasonably warm winter caused sales volumes to drop significantly during the first five months of the year until sales began picking up in June in preparation for the next heating season. In fact half of NEWP’s revenues and volumes for the second quarter were earned in June.

Most of the $400,000 of EBITDA generated by NEWP in the first half of this year was earned in the second quarter that is in sharp contrast to the $4.8 million in EBITDA for the same period last year. We continue to believe that the majority of NEWP’s EBITDA for the year will be generated in the second half of 2016.

After the unseasonably warm winter, we anticipate that pellet purchases will revert to historical patterns where most of the buying will take place in the fall and winter timeframe. And we are encouraged that the big-box stores began buying pellets from NEWP in June.

I am going to close with an update on our cost savings initiatives, the transition of our corporate offices is nearly complete. We recently exited our Los Angeles office space and we are subleasing the space to a local firm for the remainder of our lease term. We established a small corporate office in the Washington D.C. area to begin the transition from Los Angeles. We have already moved most of the accounting and back office functions to New England Wood Pellets’ Jaffrey location.

We estimate that our total corporate headcount heading into 2017 will be 35% lower than 2015 levels. The remaining headcount reductions and other actions planned for the third and fourth quarter should enable us to achieve a $12 million to $15 million of annualized SG&A savings by the end of this year which is in excess of our original $10 million to $12 million target.

One-time costs associated with restructuring actions already taken total approximately $2 million. We expect total one-time cash cost to be approximately $5 million which is $1 million less than our previous guidance. We also anticipate incurring $500,000 in one-time non-cash costs. We are currently working on identifying additional areas in which we can streamline systems and related support to further reduce overhead.

I’d like Jeff just take us through our financial results in more detail.

Jeffrey Spain

Thank you, Keith. I’ll start by mentioning that you may have seen our 12b-25 filings this morning regarding the delayed find of our 10-Q. We do expect to file the Q within the next handful of days after completing a review of a GAAP tax provision allocations between discontinued and continued operations for the quarter and the six months ended June 30 of last year. We do anticipate that the review will not result in any changes to the financial statements included in our press release issued today.

Turning to our results and starting with the topline, Rentech’s revenues for the second quarter totaled $31.8 million which were down 20% year-over-year. The decrease was due to lower sales at New England Wood Pellet and Fulghum Fibres, partially offset by an increase in pellet sales from our industrial pellet plants in Canada.

Our total gross profits were down $5.5 million compared to Q2 of last year. Much of this was due to lower product sales volumes at Fulghum and NEWP with the balance due to higher cost of sales in Canada because of plant operating costs at Wawa moving up the P&L from SG&A in Q2 of 2015 to cost of sales this second quarter. Wawa was still being commissioned during the second quarter of last year, so bulk of its costs were accounted for an SG&A versus cost of sales.

As a result, in spite of higher sales volumes gross loss for our Industrial Wood Pellet segment during Q2 of this year was $2.1 million worse than the second quarter of 2015. Our gross loss in Industrial Wood Pellets reflects high production and depreciation cost per ton that primarily Wawa where the plant is still ramping up to capacity. We recorded our non-cash inventory write-down of $5.2 million in our Industrial Wood Pellet segment during the second quarter due to this high level of fixed operating cost relative to produce volumes.

In Q2 of last year, we took a smaller non-cash inventory write-down of $2.5 million, because we have fewer tons in inventory. In spite of the LTM write-down, our EBITDA loss for the Industrial Wood Pellet segment actually improved by approximately $5.2 million compared to the Q2 of last year. This is because of the significantly higher deliveries in revenues that we booked during the quarter.

With respect to New England Wood Pellet, NEWP’s gross profits were down $2 million in the second quarter as compared to last year given low sales volumes due to the continuing effects of the extraordinarily warm and dry winter in the U.S. North East. Fulghum’s gross profits also declined in the second quarter compared to Q2 of last year. The $1.3 million decline reflects the impacts of the recently lost contract that Keith discussed and we previously disclosed and due to lower processing volume at some of our U.S. chipping mills.

Moving down the P&L further, consolidated SG&A expenses at our business units declined by 66% in the second quarter compared to Q2 of 2015. Industrial Wood Pellet’s SG&A expense was down 81%, primarily due to the capitalization of plant operating expenses at Wawa to product inventory and included in cost of sales as I mentioned in the gross profit discussion earlier.

In addition, SG&A in the second quarter of last year included delivery penalties to Drax. NEWP’s SG&A expense was down 31% due to lower bonus accruals and reduced work weeks in response of the terrible winter at selling season. Fulghum’s SG&A expense was essentially flat with last year adjusting for the reversal of a non-cash expense in the second quarter of 2015.

We recorded a pretax gain on the sale of Rentech Nitrogen of $358.6 million which was booked in discontinued operations. This gain was comprised of cash proceeds of approximately $60 million in common units of CVR Partners valued at $202 million based on CVR’s closing price on March 31. These values were compared to Rentech Nitrogen’s net book value excluding the capacity in holdings which was a negative $97.6 million.

Turning to the balance sheet, Rentech's cash balance as of June 30 was $47 million. Our total obligations as of June 30 were $143.8 million. This includes $17.3 million of current portion of long-term debt; $52.3 million of debt owed to GSO; $42.3 Fulghum; $17.6 million at NEWP and $14.3 million of debt related to the port facility in Quebec City.

The pretax value of approximately 7.2 million units of CVR Partners that we still hold was approximately $49 million as of yesterday. We estimate the remaining capital expenditures for the Canadian plants as of June 30 will be approximately $16.5 million, $5.6 million of which is already recorded in accounts payable and accrued liabilities on our books.

We will now open the lines for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Brent Rystrom from Feltl and Company.

Brent Rystrom

Good morning.

Jeffrey Spain

Hi, Brent.

Brent Rystrom

Can you give us a little more color on Wawa and thinking in the context of how you spoke in the call and how the press release rewarded? Are you still concerned that the plant won't hit its nameplate capacity? Or you getting more comfortable that it will?

Jeffrey Spain

No we're getting more comfortable well and that's why you know I hate to say when we do a thousand, if we do thousand in a shift that’s the ability to do theoretically 365,000 tons. So that's pretty good knowing well that we're constrained on the dry side conveyance. So we have a physical bottleneck and you know we've been trying to figure out you know I don't have an answer how much that quantifies to.

What I will - what I do want to impress upon people is that why I feel more confident is in that the list of things get shorter every day. Let’s say we start the week with 25 things to do. We may end the week with 25 things to do, but only five of those are carryovers we've done 20 and then 20 more short comings or inefficiencies show up.

And this sort of dynamic is common in the industry and it wasn't common for us because we never could identify the first 25 much less you know work the list down as readily as we have been now because the team has been around an operating facility longer.

So that may sound discomforting but to me it's comforting because we seem to have a methodology to get our hands around problems as to when something is amiss when an alarm goes off or a signal comes to the control room it says hey this is not functioning properly. We immediately have the ability to go hey it's probably one of these three things, let’s check over here, let's look here and we're back on line a lot quicker.

So our low days or our low shifts are higher than they have been and that trend continues. We need to have the inflection point to change though and I think that that's why we felt confident going forward with the second phase of conveyance is that the gradual slope that we've been on, needs to gain a little bit more steepness. So I'm hopeful that when we come out in early September from this, that the angle is better.

Brent Rystrom

And just to understand the second phase of conveyance is where?

Jeffrey Spain

It’s is on the dry side.

Brent Rystrom

It is on the dry side. So this should resolve all the conveyance issues once this is done.

Jeffrey Spain

Right. It will resolve right we still up to commission them and operate them properly. But yes it will at least say least the conveyance that’s able to handle the mass volume and product distribution properly. Whereas the first set of conveyors were miss designed and misapplied or misconstructed or whatever.

Brent Rystrom

Sounds great. So are you willing or able to share thoughts about how you're thinking about long-term EBITDA of the three businesses. Now thinking in the next quarter or two but two years out. Do you think the $13 million, $17 million EBITDA range for wood pellets is viable, is it a lower range now? Where do you view NEWP previously you know that had been viewed as kind of that $11 million, $12 million a year business and then Fulghum obviously kind of considered to $20 million, $22 million of your business? How are you thinking about three businesses right now as far as EBITDA opportunity?

Jeffrey Spain

Well, I mean you know we've been a little reticent to give guidance but you know I think NEWP showed its chops last year, right. So I think it's up to - right now how much of that was due to the - to a pretty good winner. So let's say that's probably not a repeatable event every year, so maybe was it 10% colder or something like that.

Fulghum showed its chops, but it also showed a little bit of a sign of weakness this year by that one unique circumstance, so to date it has been unique circumstance of customer deciding to exercise their purchase auction, allowing us to pay down debt, but then losing that recurring cash flow going forward. And then in Canada, it a lot depends on when you get to capacity and a lot depends on the cost recovery mechanisms in the contracts, but the original potential that was there and the C-dollar exchange rate and all of that. I don't think really those things have changed.

I just think that - I think probably we need to take a little bit more harder look at some of the components of - the macroeconomic components which we don't have control over like Brent oil prices which is a tracker through our contract through the Canadian dollar exposure which we never hedged for obvious reasons and the like. So I'm being a little squishy there Brent.

Brent Rystrom

It directionally helps. So in the latest quarter SG&A was about 77 and segment level SG&A was about $3 million, how are those two kind of look say over the next year and a half. Do you have a plan to put all the SG&A eventually down with the units since you're no longer primarily a wood fiber business now or will SG&A always have a corporate component?

Jeffrey Spain

Brent. It’s Jeff. That first question I’ll address. We guided to off of a $44 million total SG&A number several quarters ago that are cost savings of 10 to 12 would be off of that $44 million. We're now seeing 12 to 15 off of that $44 million. That's total SG&A ex- RNF, so all the business units plus corporate and including non-cash comp. So that's a fully gross number.

With respect to the second part of your question. It is too early to be definitive, but I anticipate that there will be some layer of corporate SG&A as we consolidate the business unit financials have reporting - public reporting obligations, so some centralized support and activity for accounting and reporting. So some component of corporate SG&A rather than all being pushed down. And I think next quarter we’ll be able to - be a little more transparent on where the SG&A fits at the units as well as corporate of that refined savings off of $44 million right.

So when we talk about having pushed the back office accounting to Jaffrey, if that still a corporate venture function that just been shifted there, those people that are bifurcated to some extent working on new things. But really there we have a good team in place there. There is cost advantages and the like.

Brent Rystrom

Great. Thank you, guys.

Keith Forman

Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Joe Pratt from Stifel.

Joseph Pratt

Hi Keith, good morning.

Keith Forman

Hi, Joe.

Joseph Pratt

Just could you give me on Wawa and Atikokan the plate capacities? Please.

Keith Forman

110 Atikokan, 450 Wawa.

Joseph Pratt

Okay. And I heard a lot of numbers here. Could you just say currently you're at what percentage of that 110?

Keith Forman

Well, we're right into 80% to 90% and we know what the delta is, we have a very good handle on what the delta is between where we operate and where the name plate is. It's a more modest sized plant, less moving parts and one component of that we have yet decided to spend, so the spend - that’s one-week we're going to go down in September, we’ll probably have that plant consistently operating above 90% of capacity, but it won't allow it to go to a 100.

Joseph Pratt

Okay. Well, I'm not a manufacturing guy, but a lot of times some plants never get to 100 I mean how is that working?

Keith Forman

Well, that’s a really good point. I mean you hit it right on the head. I mean how do we operate 365 days a year. What is our operating efficiency number we have it in the low 90’s, so you may not see the full number. The key number though - the key numbers for us - what are the economics attached to it. So we have 400,000 tons that we need to sell to Drax to get that payment stream in 45,000 tons to OPG and both of those facilities fit in those capacity numbers, no matter how you parse them. You’ll get your debt on.

Joseph Pratt

Okay. So your theoretical capacity is free to sell to somebody else which you haven't done yet is what number?

Keith Forman

Well, at Wawa it’s 415, but I’ll tell you, it’s not only the number of days, there is an assumption of how much each pellet mill can operate at, is the manufacturer's representation 2.6 tons per hour, 2.58 tons per hour. We've seen some of our mills do 2.85 tons per hour. So if you get numbers like that the 450 gets below through it, but then you might be constrained by dryer if you start putting a rate of 470 a day. These are rich man's problems and I would love to discuss it, but I'm just focused on getting that plant to deliver the 400, we owe our customers…

Joseph Pratt

Okay. You’ve given me two nominal plants adding up to 560.

Keith Forman

That’s right.

Joseph Pratt

The two contracts fill up. Let’s just say that’s a theoretical number. The two contracts fill up - what is the two contracts…

Jeffrey Spain

445.

Joseph Pratt

Okay. That gives me an answer. And then on the 450 you're currently - let’s do the same drill here, you're currently running at approximately what percentage of capacity?

Keith Forman

Well we've talked about running at a percentage of the - we're running about 40 now, but we've shown moments where we get into the 70.

Joseph Pratt

Okay. And for you as the leader of this Company, what percentage would you like to be add by let's say December 31 of this year and then a year from now?

Jeffrey Spain

Well, I mean my words, the words in the press release everything on our guidance have been in next couple quarters, so that's the fourth quarter and the first quarter to be at 70%. I mean I'd like to be at that point sooner rather than later. A lot's going to be in the first month after this Phase II goes in.

So between September something in October something we're going to really know whether we got back immediately where we left off and are stepping up our game from that point. So it won't be something where we're sitting here and the next call we have will be pretty telling is to what - where we will be.

Yes. I mean I want to be at a point where I'm not canceling vessels. I want to be delivering eight vessels a year to Drax or nine. I bet we are delivering nine if I want to do 400. So I’m going to be doing that and I want to be testing the capacities of my facility up in Quebec or at least the loading capacities.

Joseph Pratt

Okay. Let's just turn you’re add 90% for Wawa and you are at 70% to 90% for Atikokan and how do you feel about the sale prices on your contract versus the direct cost such that you have the kind of margin you think you ought to have in this business?

Keith Forman

Well, I'm telling right now our math is challenged a little bit on some of the recovery, cost recovery mechanisms that we have given where Breton and where Canadian diesel or the C dollar weakness. So we translate that into U.S. dollar SG&A and overhead. So there are things that aren't perfect. I mean the thing has the potential to do whatever it was $12 million to $15 million of EBITDA, but right now 12%, 15%, 13%, 16%, 14%, 17% whatever, but right now it doesn't really matter because we're not selling that pellets to see those numbers.

Joseph Pratt

Okay. And then just addressing the balance sheet with the debt to GSO and then on the other side you have a dedicated UAN stock. Are you going to make any moves to pay off GSO or you just going to kind of hold the current situation?

Keith Forman

Well, I don't think I'm going to do a [tail] on the call right here. Number one, but I mean I think Jeff updated that price I mean the UAN units have been underperforming since the close for various reasons beyond anybody's control. So I think our lock up ends October 1, but I don't think I can't remember what their daily volume is, but I think they're float is around $2 million. So it's not actually probably a little bit higher than maybe $2.5 million, but - so it's just not, you know it's not something that can just be cavalierly entered into.

Joseph Pratt

I follow that company and - well first of all fertilizer prices are like a seven, eight year low.

Keith Forman

Right.

Joseph Pratt

So you're fighting that headwind to end anytime in those cyclical business, basically these are icon companies are very well run. And a betting man might want to enter the fertilizer business somewhere in here.

Keith Forman

That's something ought to bring up [Mr. Pytosh].

Joseph Pratt

Well you are. That’s right.

Keith Forman

Yes.

Joseph Pratt

Yes. Well I understand the quality of the management at first two icon companies, the refinery and the fertilizer is strong.

Keith Forman

It is and that's why I'm saying it's beyond their control to turn the tide laterally here.

Joseph Pratt

Yes. Thank you for your time.

Keith Forman

You bet.

Operator

Thank you. And we have Brent Rystrom on the line with an additional question.

Brent Rystrom

Thanks. Keith one quick follow-up. At what level of capacity do you expect Wawa to go EBITDA positive?

Keith Forman

That's a good question. I'm thinking it's north of 70%, right. But it got so many moving parts once again, if Brent oil is $40 and Canadian crudes diesels where it is right now, it's a higher number. But this would track the positive movements in our EBITDA margin albeit they're still negative five-point whatever. I think will be eradicated when that thing gets above 70%.

Brent Rystrom

All right. Thank you.

Operator

Thank you. And we have no further questions. Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You now disconnect.

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