Rentech Q1 2016: domestic pellet sales down big, rebound expected

On May 11, Rentech Inc. reported first quarter results significantly below historic levels, attributing a main reason as being the struggles faced by the domestic wood pellet industry in the face of a warm winter and low oil prices.

For Q1 2016, consolidated revenues for the first quarter of 2016 were $39.9 million, compared to $36.4 million in Q1 2015. Gross profit for Q1 2016 was $0.1 million, compared to $5.5 million in the prior year period, and net loss attributable to Rentech common shareholders for the first quarter of 2016 was $10.2 million, or a loss of 44 cents per basic share.

On domestic wood pellets specifically, Rentech reported revenues at $2.6 million for Q1 2016, for deliveries of approximately 13,000 short tons of wood pellets. This compared to revenues of $12.1 million for the first quarter of 2015, for deliveries totaling approximately 63,000 short tons of wood pellets.

Keith Forman, president and CEO of Rentech, said that due weather and market conditions, retailers weren’t able to sell all inventory purchased from NEWP, causing a drop in orders during the quarter and close to an 80 percent dip in revenue compared to Q1 2015. As a result, NEWP began scaling back at its plants in February.

The outlook for Q2 is better, Forman said, but still below-average order numbers. “We expect the majority of NEWP’s EBITDA for the year to be generated in the second half of 2016, which corresponds to typical winter buying patterns. While 2016 is shaping up to be weaker than the record results we had last year, the business is fundamentally sound,” Forman said, adding that NEWP leads the residential pellet market in the Northeast, and it’s consistency and reliability has enabled the company to maintain its long-standing relationship with small and big box retailers. Addressing a caller question later in the call, Forman  said the tough winter resulted in some companies not surviving the winter, which has reduced the number of competitors on the playing field, and discussions with both big box and small retailers have indicated buying habits will return to normal in preparation for next winter.

On industrial wood pellets specifically, revenues for Q1 2016 were $9.9 million, earned by delivery of approximately 64,000 metric tons of wood pellets produced at the Atikokan and Wawa plants. Out of the approximately 64,000 metric tons, about 49,000 metric tons were shipped to Drax and 15,000 metric tons were sold to OPG, most of which were produced at Atikokan.

On business with Drax, Rentech’s next delivery of 48,000 metrics tons is scheduled to occur in Q2. “Given our performance at Wawa, we are evaluating the remaining delivery schedule for this year,” Forman said, adding that the company believes that it will hit its goal of bringing the plant to full capacity in 2017.

Forman said though production at its Wawa facility is not currently meeting expectations, the company’s Atikokan facility is. It is operating at 80 to 90 percent capacity, he said, a “level of production capacity that is just about in line with our expectations, and enables us to more than meet 100 percent of our contractual obligations to OPG.”

Forman said some conveyors will need to be replaced at Wawa, but it appears that production shortcomings this quarter were not related to the plant design flaw. Rather, he said, it is likely a result of a lack of operating experience at higher levels of throughput, experience that would have been gained if it weren’t for past conveyor problems. “While we will replace systems this year that are necessary to operate our plant at current levels, we have yet to decide when to replace the systems that are needed to take the plant to full capacity,” he said, adding that at times the plant has operated at daily production rates between 40 and 60 percent capacity, but on average, the facility is operating at 20 to 30 percent of its capacity, on a weekly basis.

Forman said operators are still learning how to prevent and respond to typical causes of production disruptions, and have been consulting with industry peers who have been helpful in assessing those challenges.

Forman added that Rentech had engaged an engineering firm that has advised other large plant operators to help the company with operating issues and other shortcomings.