The Imperial Sugar Company F4Q08 (Qtr End 10/30/08) Earnings Call Transcript

The Imperial Sugar Company (IPSU)

Q4 2008 Earnings Call

December 15, 2008 11:00 am ET

Executives

Louis Bolognini – SVP

John Sheptor – President & CEO

Hal Mechler – SVP & CFO

Analysts

Jonathan Lichter – Sidoti & Company

[Ronnie Bracewell – Imperial Sugar]

[Lauren Nardella – Unidentified Company]

Presentation

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 Imperial Sugar earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Lou Bolognini, Senior Vice President, and General Counsel.

Louis Bolognini

Good morning. I’m Louis Bolognini, General Counsel for the company, and joining me on the call are John Sheptor, our President and CEO, and Hal Mechler, our Chief Financial Officer.

Our conference call today to discuss results for the fourth fiscal quarter and year ended September 30, 2008 results is being transmitted live over the web and is being recorded and this replay will be available through the close of business January 15, 2009, but all information is current as of today, December 15, 2008. Any recording or other use of this live transmission or audio replay is not allowed without the prior written permission of Imperial Sugar.

The earnings press release issued this morning, our Form 10-K for fiscal 2008, and the Form 10-Q for the first, second, and third fiscal quarters of 2008, are available in the Shareholder Relations section of our website at www.imperialsugar.com.

Today’s discussion and responses to questions may contain forward-looking statements that represent management’s expectations and beliefs concerning future goals and performance by Imperial Sugar and are based on information available to us as of today and involve risks and uncertainties that could lead to actual results different from management’s expectations.

Some of these business risks and uncertainties are listed in our SEC filings and we urge you to consult those documents. At this point I will turn the call over to John Sheptor, our President, and CEO.

John Sheptor

Thank you Louis, welcome to everyone joining today’s call. I would like to begin by wishing each of you a Happy Holiday season and a New Year filled with health and success.

We enter 2009 with optimism and poise to take transitional steps. Thank you for your continued support and trust in Imperial’s future.

I will provide some brief comments regarding our strategic initiatives and the sugar industry and then Hal will summarize our financial results.

The year 2008 has been a challenging year for Imperial beginning with low prices in the early part of the year followed by the Port Wentworth accident in February. We have acted responsibly and humanely with those most impacted and worked collaboratively with our customers to minimize the degree of disruption to their businesses.

The losses reported by Imperial resulting from the shutdown of our Port Wentworth plant are disappointing and not representative of the strength of this company. As the Port Wentworth plant comprises 60% of our production capacity, the loss of these sales during the reconstruction period has made it challenging to cover our overhead and ongoing business expenses.

Business interruption claims cannot be reported until settled and negotiations are continuing. Historically high corn and wheat prices resulted in a significant shift in anchors away from sugar beet production into spring and that has resulted in a dramatic upswing in pricing as sugar buyers anticipate a much smaller harvest.

Current economics favor imports from Mexico to fill unmet US demand enabling our Mexican joint venture to place nearly 20% of their sales with Imperial customers. The USDA has forecast the tight supply to continue through 2009 overlapping with the startup of our Port Wentworth facility.

We have completed demolition at our Port Wentworth plant and reconstruction of our packaging facility and restoration of damages to the refinery has begun. Ground breaking for the new silos were celebrated in October and for the new packaging facility in November.

We continue to project that bulk refined sugar production will begin in early 2009 and that the packaging facility will be fully operational in the fall. The plant is already producing liquid sugar and specialty sugars.

The project is estimated to cost $200 million to $220 million which is within the limits of our insurance coverage. Deliberations continue with our carriers regarding property and business interruption settlements. Cash advances have met our construction requirements and we continue with a very strong balance sheet, high liquidity, no debt, and an undrawn credit facility.

We announced in October that preliminary discussions were ongoing between Imperial, our Louisiana sugar growers, and millers cooperative, known as Sugar, and Cargill Incorporated regarding Imperial’s potential entry into their LSR joint venture.

LSR’s principal mission is to construct a one million ton refinery that will convert 100% of the raw sugar produced by the sugar cooperative. If a definitive agreement were reached, Imperial would contribute its Gramercy refinery for a one-third equity position in LSR.

Current conceptual agreement envisions the new refinery would be constructed adjacent to Imperial’s exiting Gramercy refinery with Imperial retaining its packaging facilities supplied by the new refinery. Locating the new refinery in Gramercy would result in lower capital requirements and conversion cost advantages due to operational synergies.

When finished LSR’s and Imperial’s customers would be served by a state of the art refinery vertically integrated with cane sugar growers and millers.

Wholesome Sweeteners completed its fiscal year in August with record results sustaining its 30% compound annual growth. September and October have continued that trend with October being the best month in the history of the franchise.

Imperial and Wholesome management are working jointly to expand the distribution of Wholesome’s product into mainline grocery channels and new product development focused on the post option period.

In July Imperial purchased an option to acquire the remaining 50% of Wholesome shares, exercisable between September, 2010 and May, 2011. Key sourcing contracts have been finalized extending foreign supply another three years.

Wholesome’s products include organic, natural and fair trade sugars, agave syrups, a non-nutritive sweetener and launched most recently, honey sourced from the rainforest of southern Mexico.

Our core sugar franchise continued to develop with the success of our Mexican joint venture, Comercializadora Santos Imperial, CSI, and the launch of ready measure brown sugar. [LSI] completed its first year of operations with sales of more then 400,000 tons, about two-thirds the size of Gramercy, to more then 110 customers including industrial baking, beverage, confectionary uses, and retail.

Plans are under consideration to construct a bulk bag transfer station to improve cross border logistics. Ready measure has been well received by the trade. Convenience and hygienic packaging are sought after by consumers and Imperial has taken another step to make such packaging available in the sugar sector.

Ready measure provides one-quarter cup individually packaged portions in a user-friendly carton. The year 2008 has been clouded by the Port Wentworth event but during this time significant strategic steps have been accomplished.

The startup and development of CSI, the option to acquire Wholesome Sweeteners, negotiations with the intent to join LSR, and the initiation of the construction of one of the most modern sugar packaging facilities in the sugar industry in Port Wentworth.

We are optimistic toward what these transformational actions will enable in future Imperial results. In 2009 we will continue with our strategic direction, minimize the Port Wentworth outage and update our refinery technology, co-develop new products with our customers and improve our service levels, enhance our cores business profitability through improved productivity and the reduction of waste, expand our reach in the organic, natural foods and fair trade channel and grow our profitability and presence in Mexico.

We are focused on restoring our capacity to produce earnings with the earliest possible restart of our Port Wentworth plant positioning the company for the future with state of the art construction in Port Wentworth and Gramercy, growth of our natural, organic and fair trade portfolio, and strengthening our customer relationships through new product development, improved service and enhanced product quality.

We believe that our success in these areas will create sustainable, long-term shareholder value. Hal will now review our financial results.

Hal Mechler

Thank you John, I’m going to provide a brief summary of the results for the fourth quarter today and discuss some of the issues surrounding Port Wentworth and the impact to operations and our financials.

There is of course more detail in the 10-K that we filed today, so please reference that filing as well. Our fourth quarter fiscal 2008 results continue to be impacted by the aftermath of the Port Wentworth accident, both in the form of restricted production volumes and higher costs.

These factors along with high energy and freight cost led to the operating losses we reported this quarter. Our loss from continuing operations for the fourth quarter was $5.4 million or $0.46 per share.

This compares to income last year in the fourth quarter of $7.8 million or $0.65 per diluted share. This quarter’s results include a $10 million pre-tax charge related to the accident that occurred in February at Port Wentworth. Last year’s results include a $1.4 million pre-tax gain from asset sales.

The $10 million Port Wentworth charge in the fourth quarter is comprised largely of demolition and repair costs as well as legal and labor charges. Additionally we took a $3.5 million charge related to the ongoing [Osha] matters.

We accrued $11.5 million of insurance recoveries this quarter but did not recognize any amounts for business interruption. There is a substantial additional amount of information on these matters in the 10-K and I would suggest that you refer particularly to footnotes 2 and 13 for that discussion.

Sales for the second quarter declined to $125 million which is down from the $220 million in the same period last year. With Port Wentworth which represents about 60% of our production capacity not operational during the quarter, we increased production at the Gramercy refinery and purchased sugar from other producers and as a result our sugar sales volumes were down about 44% for the quarter.

On the positive side, overall domestic prices were up both on a consecutive quarter and a comparable quarter basis as the industry reacts to projected tighter domestic sugar supplies owing to a smaller sugar beet crop. Led by rising consumer and food service prices, average domestic prices increased 3.3% from the third quarter and 1.8% compared to last year’s fourth quarter.

As we’ve discussed in the past realized industrial prices lag market price trends because of forward contracting with industrial customers. That phenomenon is being exacerbated by the deferral of contract volumes while the Port Wentworth refinery is being rebuilt.

We estimate that approximately one-third of fiscal 2009 industrial volumes will be devoted to satisfying lower priced contracts negotiated prior to the accident.

Higher energy, manufacturing, and freight cost were the primary drivers which caused our gross margin to fall from 7.4% last year to a negative 3.9% in the current quarter. Higher energy cost were the result of an unfavorable fuel mix during the quarter due to the elimination of production activity at Port Wentworth along with higher natural gas costs.

Freight cost increase were driven by a shift away from customer pick-ups, longer length of haul, as well as fuel surcharges and inbound freight charges on purchased sugar. Our SG&A line showed improvement as it decreased $1.3 million due to lower compensation and benefit costs in this quarter.

Our income tax provision for the quarter included the reversal of a $12.4 million valuation allowance established in prior years for the benefits of capital loss carry forwards. These carry forwards which are scheduled to expire in 2010 are expected to shelter a portion of the tax gain from the Port Wentworth property insurance recovery.

The balance of the insurance gain is expected to be deferred under the involuntary conversion rules of the IRS code. While on the subject of income taxes, we recorded a $12.7 million receivable for the cash refund expected from the carry back of the current operating losses and we estimate our net operating loss carry forward into future periods is about $6 million.

In terms of liquidity our cash and marketable securities balance at September 30 was $82 million and the undrawn availability of our bank credit agreement was about $52 million.

Again I encourage you to review the information provided in our Form 10-K particularly in MD&A, also we have posted additional supplemental financial information that may be meaningful to investors on our website www.imperialsugar.com.

That concludes by remarks and we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jonathan Lichter – Sidoti & Company

Jonathan Lichter – Sidoti & Company

It looks like you won’t be restarting the Gramercy powdered sugar line, what’s the reason for that?

Hal Mechler

We’ve evaluated alternatives on the powdered sugar line at Gramercy and at this time we think it makes more economic sense to use the new facility in Savannah which will have the capacity to produce what, by adding a shift, will have the capacity to produce what was produced in Gramercy.

And that was a better economic choice then retrofitting and improving the facility in Gramercy.

Jonathan Lichter – Sidoti & Company

Can you give us just an overall timeline in terms of percentage of the plant that will be up and running at Port Wentworth throughout fiscal 2009.

Hal Mechler

Let me see if I can broadly tell you where we are, liquid sugar production which began in November, will get up to about I’d call it 10% of the capacity of the Port Wentworth facility. When we start granulated bulk shipments in the early part of 2009 that will take us up to nearly 50% of capacity in Georgia. And then the remaining capacity will come online as the silos are completed and packaging lines are brought up and that process will not start until the summer and be completed by the fall.

Jonathan Lichter – Sidoti & Company

It seems like, I think compared to last time, it’s a little bit later, then you had originally thought. What’s the reason for that?

Hal Mechler

It is a little bit later, there was the primary reason is there was damage to our granulation capacity in Port Wentworth that we hadn’t been aware of until we got in to inspect some of the equipment and it required us to replace some additional equipment not in the original timeline or the original plan.

Jonathan Lichter – Sidoti & Company

Can you also give us a sense of the size of the lawsuits that have been filed in Georgia?

Louis Bolognini

We have 19 lawsuits pending.

Jonathan Lichter – Sidoti & Company

What are they seeking?

Louis Bolognini

They are seeking monetary damages for injuries and loss of life, but there are no specific prayers for relief.

Jonathan Lichter – Sidoti & Company

So there are no specific figures there.

Louis Bolognini

No.

Jonathan Lichter – Sidoti & Company

Okay.

Operator

Your next question comes from the line of [Ronnie Bracewell – Imperial Sugar]

[Ronnie Bracewell – Imperial Sugar]

I was retired from Imperial in 2003, in Sugar Land, and I was wondering, if people have been wondering about our severance money that they have been holding I think since then I believe, could you help me out on that.

Hal Mechler

I assume you were a union member in Sugar Land.

[Ronnie Bracewell – Imperial Sugar]

Yes sir, I was.

Hal Mechler

The union was offered severance in 2003 in return for some modifications of the union contract which the union never agreed to and therefore the remaining operations which were intended to be carried forward in Sugar Land, primarily packaging and warehousing, were terminated because the severance offer was contingent on the union leadership and the membership agreeing to some modifications of the contract back in 2003.

So there is no severance benefit under that contract. If you’d like to call me separately I’d be happy to repeat or reiterate that, but I don’t really think this open investor call is the right forum for that.

Operator

Your next question comes from the line of [Lauren Nardella – Unidentified Company]

[Lauren Nardella – Unidentified Company]

I was to ask about the [Osha] citations in the filing, you mentioned that you think its probable that you’ll incur a loss in the range of $3.5 to $8.8 million, tell me why its probable that you’ll incur that kind of a loss.

Louis Bolognini

That’s just based on a company analysis of the citations by our legal counsel in conjunction with management for the company.

[Lauren Nardella – Unidentified Company]

And when do you believe that its, that’ll come out?

Louis Bolognini

That’s really difficult to say. Timing is uncertain as in most litigation but to the extent that we go to trial it likely will not occur earlier then the end of 2009.

[Lauren Nardella – Unidentified Company]

Would you be able to elaborate, you mentioned earlier with everything that’s going on in Gramercy that you might end up adding employees to Port Wentworth, with the new facility and all the ventures.

John Sheptor

The employees at Port Wentworth have been retained on payroll since the event. They continue to be engaged in productive activities at the site including the startup of the operations. We don’t envision that we will be adding staff to the Port Wentworth facility but we do envision that all employees that were previously engaged at the site will continue in productive jobs there.

[Lauren Nardella – Unidentified Company]

Just early when you were answering a question about the joint venture and altering some of the changes at your Gramercy facility you mentioned something about possibly adding employees at Port Wentworth in the future.

Hal Mechler

I think you’re referencing my comment about powered sugar production and the prospect of adding a shift of production in the power packaging activity.

[Lauren Nardella – Unidentified Company]

Adding a shift would not add employees?

Hal Mechler

It would, but it will absorb other employees. Yes it would add a very small number of employees to run that extra shift.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

John Sheptor

We certainly appreciate everyone’s interest in our company and we thank you for your continued support. Imperial has many positive things to look forward to as we move successfully into new frontiers.

As we have updates on key events and products we will inform you. Happy Holidays to all.

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: [e-mail]. Thank you!

Comments

[Packaging:]

I wonder whats going to happen to the sugar industry now the bottom has fell out oil. Can't see people wanting to carry on with biofuels at these prices.

Feb 09 11:06 AM