LOS ANGELES Aug 11, 2015 (Thomson StreetEvents) -- Edited Transcript of Rentech Inc earnings conference call or presentation Tuesday, August 11, 2015 at 3:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Julie Cafarella Rentech Inc - VP of IR * Keith Forman Rentech Inc - President & CEO * Dan Cohrs Rentech Inc - CFO * Dennis Corn Rentech Inc - VP of Business Development ================================================================================ Conference Call Participants ================================================================================ * Matthew Farwell Imperial Capital - Analyst * Brent Rystrom Feltl and Company - Analyst * Matt Niblack HITE Hedge - Analyst * Richard Haydon Tipp Hill Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Rentech Inc second-quarter conference call. My name is Christine, and I will be the operator for today's call. (Operator Instructions) I would like to inform you, all participants, this call is being recorded at the request of Rentech Inc. This broadcast is copyrighted property of Rentech Inc. Any rebroadcast of this information in its full or in part without the prior written permission of Rentech Inc is prohibited. I would now like to turn the call over to Julie Cafarella, Vice President of Investor Relations. You may begin. -------------------------------------------------------------------------------- Julie Cafarella, Rentech Inc - VP of IR [2] -------------------------------------------------------------------------------- Thanks for joining us, everyone. Welcome to Rentech's conference call for the three and six months ended June 30, 2015. During today's call, Keith Forman, President and CEO of Rentech will summarize our activities. Dan Cohrs, our Chief Financial Officer, will give a financial review of the period. Also in the room with us today, are members of the fibre and fertilizer management teams. 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 risk 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 11, 2015. Rentech does not revise or update these forward-looking statements except to the extent that it is required to do so under applicable law. 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 2015 second-quarter earnings press release. You can find the release on our website. Now, I'll turn the call over to Keith. -------------------------------------------------------------------------------- Keith Forman, Rentech Inc - President & CEO [3] -------------------------------------------------------------------------------- Welcome, everyone. I'm here today to discuss our Q2 2015 results, which are improved year over year when we look at EBITDA from our operating businesses. Before I review the quarter, however, I'll speak briefly about yesterday's announcements made by RTK and RNF. Rentech Nitrogen executed a definitive merger agreement under which CVR Partners will acquire all outstanding units of Rentech Nitrogen in exchange for 1.04 units of UAN for each unit of RNF plus $2.57 per RNF unit in cash. We have agreed to a vote our 59.7% ownership interest in Rentech Nitrogen in favor of the proposed merger with CVR Partners. Upon closing of the merger, Rentech Inc would receive approximately $318 million in cash and units of CVR based on the closing unit price of CVR Partners of August 7, so that's a snapshot number. Holders of RNF units, including Rentech, would receive additional value for the Pasadena facility upon its disposition. In order to enter into the above transaction we needed the consent of our largest single investor, GSO Capital. As you are aware, the terms of our financing dictate that both the loans and preferred equity investments by GSO in RTK can be put to us for cash if we were to sell RNF. With this provision in mind, we might have been placed in a position to favor a suitor proposing a cash heavy transaction. However, we're pleased to announce, or were pleased to announce, that a meaningfully better outcome was negotiated with GSO. Under the terms of our agreement simultaneous with the closing of the merger, we will reduce our leverage by $150 million. The reduction is in the form of GSO exchanging $100 million of its preferred stock for units of CVR and common shares of Rentech, and GSO retiring $50 million of term debt in exchange for units of CVR. The prices of those exchanges will be determined by the discounted pre-closing VWAP. If the discounted pre-closing VWAP were equal to the preannouncement VWAP, Rentech would own about 10% of CVR Partners and GSO would own about 11%. With these repayments we will recognize annual savings of $9.4 million in cash payments that were going in the form of interest and dividends to GSO. What is important to note about this transaction, is that GSO's willingness to take CVR equity in exchange for debt obligations enabled us to close on a predominantly equity transaction. Otherwise, we would've been in the uncomfortable position of having to liquidate almost $200 million of post-closing equity to satisfy the GSO put, an endeavor which would be difficult to accomplish given the combined float of the partnerships and the discounts we would need to pay to monetize that amount of equity. For its part, GSO is retaining an investment in us of over $55 million in the form of secured Series B notes and straight equity. In addition, they are establishing an investment in the combined CVR just as our unitholders will do. Our press release yesterday, used the word transformative in its title. RTK, post closing of the RNF transaction, will be a new company and as such, moves to reorganize and pursue cost savings are afoot. We plan to restructure our retained non-fertilizer businesses to focus on operations and execution while significantly reducing corporate overhead. Our fertilizer exposure is now less committal and will be reflected as equity in earnings going forward in UAN. We expect to complete the restructuring and realize at least $10 million of reductions in annual SG&A run rate expenses exiting 2016, if not sooner. We expect to announce in more detail the restructuring plans within the next 90 days. The scope and the timing of the expected cost reductions are the result of an ongoing comprehensive organizational assessment and are expected to result in one-time charges. If you are listening this morning to our Rentech Nitrogen call, in summary, it was a great quarter. The highlights of the call were that strong demand for ammonia and ammonia sulfate this spring led to higher realized prices and EBITDA, Pasadena had another quarter of positive EBITDA, a distribution for the second quarter of $1 per unit or about $23 million to the account of RTK was declared. We revised our guidance for 2015, our new consolidated guidance on EBITDA is $118 million versus the $64.7 million we posted in 2014, including Partnership level expenses. In 2015's projected EBITDA is projected to be the second highest experienced by RNF since it went public. The record, of course, was $128 million in 2012. The breakout is $117 million at East Dubuque versus $86 million a year ago. At Pasadena, the expected EBITDA is $10 million versus a negative EBITDA of $12.4 million last year, which is over a $22 million swing year over year. We expect our fiscal year distributions from RNF to be approximately $2 per unit this year, which means that RTK will realize $46 million from its investment in RNF. Now let's speak and review the operations of the businesses that will soon comprise the majority of RTK. First, the Canada update. At Atikokan, our smaller facility, we have completed commissioning and now are in the ramp-up stage. The Atikokan plant has been generating positive EBITDA since May. Production rates and the quality and energy content of the pellets have been better than our internal forecasts. Through early August, we have produced and delivered to OPG approximately 26,000 metric tons of pellets. We expect to end the year at the contracted volume amount of 45,000 metric tons. We are exceeding internal production target rates despite the fact that we've been operating the plant with a temporary transformer. The temporary transformer does not permit full operation of all equipment simultaneously at the plant. We expect to install the replacement transformer this quarter. As we operate during this ramp-up period, we have identified the possibility that we may need to replace or repair the truck dump conveyor and hopper and see the potential need to modify or replace some other conveyors. Most of these integral components to our plant were sourced from the same contractor related to similar issues we're seeing at Wawa. Atikokan may still reach the ability to produce at full capacity in February 2016, but the timing could shift by several months depending on the degree of modifications needed to correct the identified material handling equipment issues and any other issues that may arise during ramp-up. We do expect to meet our contractual obligations to OPG in 2016. Wawa is more problematic. Most of the equipment at Wawa has been commissioned. The plant is producing limited qualities of pellets, approximately 7,400 metric tons have been produced through early August most of which have been delivered to our port facility in Quebec City. We have discovered significant design and equipment flaws related to material handling at the plant that are limiting our production abilities. The issues center around the conveyors and the log feed system. On the conveyor front, the green end supply, that's basically before it reaches the hammer mills and pellet sizes. The green end supply conveyors have been experiencing failures, and we're also seeing some of the dry end conveyors experiencing similar issues. The log feed index, right out adjacent next to the wood yard at the front end of the facility that feeds logs into the chippers, require modifications. They are working now only with significant manual intervention. In addition to pursuing options to resolve our issues with the original conveyor manufacturer, we have tasked our new project team, an independent engineering consultant, to address these issues. We are targeting to have the live decks modified and to modify or install new green side conveyors by this fall and replace or repair the remaining conveyors in the first half of next year. These modifications will push our total capital spend for the projects, combined, to approximately $145 million, which is $5 million above the high end of our previous guidance range of $131 million to $140 million. Our cost estimate to correct the issues are preliminary and has significant uncertainty, and our revised projection for CapEx does not include contingencies to address other possible unforeseen issues that may arise as the facility then resumes it's ramping up. We intend to pursue all remedies available to us under our vendor contracts related to issues with the conveyor systems but cannot wait to play them out to final resolution. In essence, we will be running parallel paths. Taking into account the time required to correct the log feed in equipment and conveyance systems, we now expect Wawa to operate at full capacity in the second half of 2016 instead of mid 2016. We have discussed these issues with our valued and patient customer Drax and have been able to again agree to an amended contract for Wawa. We have canceled all deliveries for 2015, which were the revised 240,000 metric tons. We've agreed to pay total penalties of $2.6 million. Half of the penalty will be paid in cash by the end of the year and the remaining $1.3 million will be paid in the form of credits on the first two vessels delivered to Drax in 2016. An earlier February amendment added 72,000 metric tons of the original 2015 deliveries to the 2018 and 2019 time frames, and they will remain at 2015 pricing, which doesn't have the benefit then of the escalations built into the contracts. The pellets produced from the plant this year will continue to be shipped to the port and held in inventory to help satisfy the 2016 deliveries of 400,000 metric tons to Drax and will be additionally supplemented by the overflow production from Atikokan. In addition, we will not meet our 2015 commitments under our CN Rail contract. The estimated amount of penalties could be as high as $2.4 million under the terms of the contract. We are talking to them on that. We are negotiating with CN to amend the contract to allow us to make up the shortfalls in future contract years with additional volumes in lieu of paying such penalties in cash. But the outcome is not certain at this point in time. Now onto our other operating businesses, ones that aren't in construction or ramping up but actually doing very well. Fulghum Fibres, we expect to finish the year at the high end of our EBITDA guidance range of $16 million to $17 million. Our cost containment efforts at our shipping mills in the US attracting better than forecast, margins on shipped exports at the Chile have been better than forecast. Fulghum had a strong second quarter compared to last year with EBITDA $5.5 million versus last year's $2.2 million, which was partially negatively impacted by the fire at our chipping mill in Maine last year. US revenues were essentially flat to Q2 2014, but operating costs were considerably lower than last year as a result of efforts by our operations leadership and mill managers to contain costs. South American revenues were up to $6.4 million as compared to Q2 2014, due to higher biomass product sales domestically and shipped sales to Asia. Fulghum's EBITDA year to date through June was $9.5 million or up $2.6 million higher than in 2014. At NEWP, had another good quarter and it's tracking to our full-year EBITDA guidance of $9 million to $10 million. We've been operating the Allegheny plant under a seven-day work week since the beginning of June, which has increased the plant's annual production pre-acquisition by 40%, and the ramp-up of that expanded capacity has tracked about 10% higher than we expected thus far. At the corporate level, we are encouraged by our expectations for higher RNF distributions this year and improved performance at Fulghum, which is tempered by the partially offsetting higher than expected cost for our Canadian projects, penalties and operating losses. Lastly, just a reminder so you don't wake up on August 21 intentionally sales, our reverse stock split whereby RTK will begin trading at a 1 for 10 split adjusted basis occurs on August 20. Our total shares outstanding will be reduced to approximately 23 million from approximately 230 million shares today. Before Q&A, I will let Dan walk through the financial details. -------------------------------------------------------------------------------- Dan Cohrs, Rentech Inc - CFO [4] -------------------------------------------------------------------------------- Okay, thank you, Keith. The results for the second quarter were in line across the operating business segments, as Keith summarized. The Fulghum results for the quarter improved from last year mostly driven by the cost reduction programs in the US as well as higher sales of biomass in South America, higher profits on those sales. NEWP had another great quarter including new contributions from the Allegheny plants that we purchased. The Atikokan plant up in Ontario has been generating positive EBITDA since May, but the entire Canadian segment is generating negative cash flow during the delayed ramp-up of those plants, as Keith just discussed. Losses in the segment were worse than we expected because of those delays in production. Turning to the balance sheet just briefly, the GSO tranche beat term loan is now fully drawn and the outstanding balance is $45 million. Turning to the results for the quarter, if we look at this quarter compared to the second quarter last year, consolidated revenues were up about 8%. As we discussed this morning on the Rentech Nitrogen call, although revenues at Rentech Nitrogen were down slightly, they were down 3%, gross margins in that business improved significantly so it was a great quarter in terms of margins and EBITDA at Rentech Nitrogen. We discussed all the reasons for that earlier today. Fulghum Fibres also improved revenue this year, a 35% improvement from the quarter of last year as we saw higher biomass product sales down in South America as well as we saw the improvements from the last year because of the fire that we had last year in May, which held down revenues in that year-ago quarter. In the industrial pellet segment, we did report $2.5 million of revenue. Despite the problems we're having, we are selling pellets to OPG and so we are recording revenue up there although not as much as we had hoped. NEWP, combined with Allegheny, saw a very large improvement in revenues, a doubling of revenues from last year. That's because we had a full period this year, only a partial period last year, and of course we also acquired the Allegheny facility which is now contributing. Looking at margins, Fulghum Fibres margin improved significantly by 6 points, up from 11% last year to 17% this year because of the lower costs and the higher margins on those sales in South America. With the NEWP margins also improved from 19% up to 22%, so the consolidated gross profits for the Company improved by 10 percentage points year over year. Looking at SG&A trends across the businesses, when you look at the entire consolidated SG&A, it was flat for the quarter, and that's in spite of the fact that we booked a $2.6 million penalty for Drax that ran through SG&A. Rentech Nitrogen's SG&A was down slightly by 7%. Fulghum Fibres SG&A was down by almost 50%. NEWP's SG&A was up, but that's mainly because of the full period this year versus partial period last year and the addition of Allegheny. And then in the industrial wood pellet segment, we had a significant increase largely due to that Drax settlement of $2.6 million and also an increase of $1 million in expenses for rev car leases and delivery expenses. Shifting us down to net income, I'm just going to do it on a per share basis. If we take the reported numbers, we have a $0.23 loss this quarter compared to a $0.09 loss last quarter. But in each of those periods, we had the one-time items related to Pasadena. We have the asset impairment this quarter, last year's second-quarter saw the goodwill intent. So if we adjust for those items, we had $0.21 per share positive net income versus $0.03 last quarter. Consolidated EBITDA was up nicely for the full Company from $21 million last year to $41 million this year. There's a table in the press release that drills down a little bit on corporate SG&A because the reported numbers are not really that comparable. If you just look on unallocated corporate SG&A, this year it dropped from $7.8 million down to $4.5 million. We walk you through a few adjustments having to do with allocations, non-cash comp as well as transactions costs to get that down to an apples-to-apples basis. So you can look at corporate SG&A on a consistent basis during the last year, and you'll see a 23% improvement in that adjusted number year over year. Shifting briefly to the balance sheet, when we look at cash, we closed the quarter with $63 million of total cash, $38.5 million of that at Rentech Nitrogen, $24.5 million at Rentech. As we look forward, we will be getting about a $23 million distribution late in August from Rentech Nitrogen, and we expect the total year distributions from Rentech Nitrogen to be $46.5 million assuming that Rentech Nitrogen hits the guidance that we put out this morning. On the debt side of the balance sheet, we closed the quarter with consolidated debt of $534 million. $190 million of that sits at RTK and $344 million at Rentech Nitrogen. Breaking that down a little bit and looking at a little broader look at the balance sheet, we want to highlight what's going to happen assuming that we close on the merger of CVR with Rentech Nitrogen as well as on the restructuring of our balance sheet that we've agreed to with GSO assuming that that merger closes. So if we look at the June 30 balance sheet, we have the $100 million of preferred stock, convertible preferred held by GSO, as well as $95 million of term loan, now that that term loan B is fully funded. So the total GSO securities right now are $195 million. Continuing on down the June 30 balance sheet, the balance on the Fulghum debt is $54 million, on debt at NEWP, which includes the acquisition facility for Allegheny. So NEWP's total debt is $18 million. And the capitalized lease up in Quebec for the pellet domes is $23 million, which leads to total $267 million including all of those items of debt capitalized lease and preferred stock. Upon closing of the merger and closing of the restructuring with GSO, we will reduce that exposure by $150 million. So the preferred stock will disappear completely and the term loan will decrease by $50 million as we pay off essentially the tranche A term loan and leave the tranche B in place. The other items of course, wouldn't be affected by that restructuring. And with that, I think we're ready to open the lines and take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Matt Farwell, Imperial Capital. -------------------------------------------------------------------------------- Matthew Farwell, Imperial Capital - Analyst [2] -------------------------------------------------------------------------------- Good morning. I'm just looking back at some of the transactions that took place back in February when this put option was introduced. It seems like you had some other liquidity options at that point. You had the capability to sell the unencumbered units to raise cash. So I'm just wondering what your thought process was at that point given that this change of control, this put option provision, that was introduced into the subscription agreement is basically giving GSO a lot of leverage in this transaction? -------------------------------------------------------------------------------- Keith Forman, Rentech Inc - President & CEO [3] -------------------------------------------------------------------------------- Dan correct me if I'm wrong, but a change of control always triggered the original secured $150 million investment. Am I mistaken? -------------------------------------------------------------------------------- Dan Cohrs, Rentech Inc - CFO [4] -------------------------------------------------------------------------------- No. I think that did come in (multiple speakers). -------------------------------------------------------------------------------- Keith Forman, Rentech Inc - President & CEO [5] |