Rentech Management Discusses Q2 2012 Results - Earnings Call Transcript

Rentech (RTK)

Q2 2012 Earnings Call

August 10, 2012 3:00 pm ET


Julie Dawoodjee - 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


Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

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

Matthew Farwell - Imperial Capital, LLC, Research Division



Ladies and gentlemen, thank you for standing by, and welcome to the Rentech Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, August 10, 2012.

I would now like to turn the conference over to Ms. Julie Dawoodjee, Vice President of Investor Relations and Communications. Please go ahead.

Julie Dawoodjee

Thank you. Welcome to Rentech's conference call for the second quarter ended June 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 questions. [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. 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 August 10, 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 law.

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 second 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.

We report a solid second quarter results and increased guidance for the year for our nitrogen segment. We generated consolidated net income of $0.04 per share, driven by strong fertilizer product prices, lower prices for natural gas and reduced R&D expenses in the alternative energy segment.

Rentech Nitrogen generated strong cash flow resulting in second quarter cash distributions of $1.17 per unit. Average prices for delivered products were up significantly from last year. Ammonia at $695 per ton was 9% higher and UAN at $378 per ton was 21% higher than last year. Higher product prices and relatively low natural gas prices by historical standards contribute to gross margins of 65%, up significantly from 50% in the same quarter last year.

The weather this spring, which was warmer than usual, enabled farmers to apply ammonium, about 15 days earlier than they usually do. This shifted significant ammonia deliveries and revenues from the second quarter into the first quarter. The high ammonia usage reduced the demand for UAN this spring. In addition, the hot, dry weather resulted in poor soil and crop conditions, which led to reduced UAN application.

As the drought continued and damaged the corn crop, it became evident that yields and therefore ending inventories would be significantly lower than the earlier projections for the year. This prompted buyers to end of the market in late June for UAN purchases for the third and fourth quarter deliveries in preparation for the spring 2013 season. The drought has now affected most of the nation's corn crop with only 23% of the corn crop in good to excellent condition. This number could continue downward as the dry weather persists. Any rains from this point forward will offer little benefit to this year's corn crop.

This morning, the USDA significantly reduced its yield estimates for corn to 123.4 bushels per acre in its August WASDE report, reflecting lower yields, lower harvested acreage and lower ending stocks. As the last 3 drought years of 1983, '88 and 1991, it took 2 full years of corn crops to return to normalized inventory levels. Based on these historical precedents, many believe it will take multiple years to bring ending cornstalks back above the 1 billion bushel mark. So corn prices should be strong, while stocks are below-normal levels. Corn prices have soared over recent weeks, with 2012 corn above $8 per bushel, up 45% from mid-May when the USDA first published its corn crop estimates for the year. As we look forward, 2013 corn prices are strong, hovering in the mid-$6 range.

Nitrogen usage and prices have historically increased following a drought due to the expectation of higher plantings to replenish stocks in a response to higher corn prices. These pricing patterns held true as ammonia and UAN prices marked steadily higher as the drought progressively impacted the corn crop over the last few months. We've seen prepaid sales for fall deliveries of ammonia rise from $600 per ton in early May to posted prices of $770 per ton today, while UAN prices increased from $290 per ton in late June to posted prices of $370 per ton today.

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