Imperial Sugar Company F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

Imperial Sugar Company (IPSU)

F1Q09 Earnings Call

February 5, 2009 11:00 am ET

Executives

Louis Bolognini - General Counsel

John C. Sheptor – President, Chief Executive Officer

Hal P. Mechler – Chief Financial Officer

Analysts

Jonathan Lichter - Sidoti & Company

Hamed Khorsand - BWS Financial

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the first quarter 2009 Imperial Sugar earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Lou Bolognini, General Counsel of Imperial Sugar. You may proceed, sir.

Louis Bolognini

Thank you, Geri and good morning. I am 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 is to discuss results for the first fiscal quarter of 2009. It is being transmitted live over the web and is being recorded and this replay will be available through close of business March 5, 2009 but all information is current as of today, February 5, 2009. Any recording or other use of this live transmission or audio replay is not allowed without the prior permission of Imperial Sugar Company.

The earnings press release issued this morning, our Form 10-Q for the first quarter of 2009 and our Form 10-K for the year ended September 30, 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 involved 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’ll turn the call over to John Sheptor, our President and CEO.

John C. Sheptor

Thank you, Lou. I would also like to welcome everyone to Imperial’s first quarter 2009 earnings call.

2009 will be a year of rebuilding our core sugar business and will involve some complex challenges to manage including the extensive capital program of Port Wentworth, recovery of customer volumes post-startup, and resolution of our insurance claims. I am confident in our ability to manage these challenges and to emerge from this recovery period with the start-up of our new facilities in Port Wentworth as a stronger competitor. Our priority focus is on accelerating the Port Wentworth project, pacing our expenditures, and readying our resources to recover our lost business.

We enter the new year with an undersupplied sugar sector, critical strategic initiatives well underway, and the U.S. economy in recession. Sugar prices are above historical levels due to the reduced plantings in the sugar beets in the Spring 2008 and Mexican imports are being drawn to fill on net demand.

Our Port Wentworth refinery should return to full operation in the fall and our negotiations to participate in the Louisiana sugar refinery joint venture are progressing. Our Mexican joint venture is performing well in marketing sugar in Mexico and across the border into the U.S. Wholesome Sweeteners growth has slowed but continues at a double-digit rate even in the face of recession.

As we approach the one year anniversary of the Port Wentworth tragedy, we do so with solemn memories of those that were lost and hope for full recovery to those who are injured. A memorial will be dedicated at the site this weekend.

Historically high prices for corn and wheat during the 2008 crop year enticed sugar beet farmers to convert 18% of their acres to other crops. Although excellent weather and the transition to genetically-modified varieties offset this loss of production somewhat, the USDA continues to forecast that the 10.5% reduction in beet sugar production year-to-year. This has since been reflected in sugar pricing rising more than 30% since lows experienced in the Fall of 2007. Prices will undoubtedly respond again once the 2009 Spring plantings are done.

The effect of the recession on public demand for sugar and sugar-based products is still unclear, although USDA projection forecasts overall flat demand. Consumers are eating at home more frequently and trending down when they do eat away from home. Line patterns are shifting to mass marketers away from traditional grocery and from branded products to private label as consumers search for lower prices. Industry intelligence suggests that inventories are beginning to recover suggesting overall demand may be slowing. We are monitoring closely these dynamics and will respond appropriately utilizing the flexibility of our Gramercy operations to serve all sales channels and our capacity to source from Mexico when economics favor.

Port Wentworth construction is making excellent progress. We have begun erecting steel and all major equipment is on order. Solid pilings have been completed and foundations are being formed to be poured. Pre-formed concrete walls are being erected in the new packaging building and new drying equipment has been set in place. Refinery and bulk operations should be started this month and packaging lines will be started up as they are installed with all operations expected to be returned to full capacity in the fall. Engineering cost estimates for replacement of Port Wentworth facility are in-line with our cost projections of $200-$220 million and our discussions with our insurance carriers continue constructively. Carriers have advanced $110 million against property and business interruption claims, through December 31, 2008 as reported in our first quarter filings.

Negotiations for Imperial to join LSR as an equity partner proceed and due diligence is underway. This transaction envisions Imperial’s contribution of the Gramercy refinery for a one-third share of the three-way joint venture with SUGAR our current supplier, Raw Sugar and Cargill. LSR would construct a new 1 million ton refinery on the Gramercy property adjacent to the existing refinery and would transition production from the old to the new refinery once completed. Under the terms of the proposed transaction, Imperial would retain Gramercy’s small packaging facility and LSR would supply bulk refined sugar.

During the first year of operation of our Mexican joint venture, we have made excellent progress in building a sustainable base of Mexican business, improving ourselves as a successful cross-border competitor. The joint venture’s management team has successfully broadened its customer base from beverage to include confectionary, industrial baking and retail. As sales dynamics due to a significant weakening of the peso and tightening of crop-turned credit from millers began more strongly to favor export of Mexican origin sugar to the U.S, we were well-positioned to successfully participate, garnering more than 15% of the export share. Our partner has begun harvesting for our second year of operations.

Our Wholesome Sweeteners joint venture continues to execute successfully against its strategies. Despite the recession, consumers continue to see Wholesome’s organic, natural and fair trade product preferentially. Wholesome’s principal retail customers have experienced an impact from the recession but in spite of this, year-over-year sales have still grown by more than 10% through the first four fiscal months. The breadth of the Wholesome portfolio has given strength to this business during these challenging times with demand for agave syrup continuing to expand and honey steadily broadening distribution. The link between organic and fair trade has built a very strong consumer preference for Wholesome products.

I am confident that our Port Wentworth refinery reconstruction, our participation in our Mexican joint venture and our potential participation in the LSR joint venture will strengthen our core sugar business. I’m equally optimistic about Wholesome Sweeteners. Management is working diligently to maximize these opportunities.

Thank you for joining us today. Hal will now cover some financial highlights from the quarter.

Hal P. Mechler

Thanks, John. This morning I will be providing a summary of our results from the first quarter compared to last year. This includes some of the items that have affected our performance, most notably the outage of our Port Wentworth refinery. We filed our 10-Q this morning so please reference that filing for additional information.

As you know, the Port Wentworth incident shut down about 60% of our capacity and so until that plant is again operational, our results will be greatly impacted, both in the form of restricted production volumes and higher costs. Combined also with higher energy and freight costs, all of these factors led to the operating losses reported this quarter.

Our loss in continuing operations for the fourth quarter was $600,000 or $0.05 which compared to income last year of $12.3 million or $1.04 per diluted share. This quarter’s results had grown to $3.3 million pre-tax charge, right until the accident that occurred in February of last year at Port Wentworth. An unrelated $16 million pre-tax gain on a litigation settlement from a pending lawsuit with McNeil Nutritionals during the first quarter. Last year’s first quarter results included an $11.4 million pre-tax gain from distributions received from a long-term cost basis asset. The $3.3 million Port Wentworth charge in the first quarter was comprised largely of demolition and repair costs as well as legal and labor charges. We accrued $11.7 million of insurance recoveries this quarter but did not recognize any amounts from business interruption insurance. There is a substantial amount of additional information on these matters on the 10-Q and I would suggest that you refer particularly to Note 2 of that discussion.

Sales from the second quarter declined to $109 million which is down from $216 million in the same period last year. With Port Wentworth not operational this quarter, we increased production at the Gramercy refinery and purchased sugar from other producers to help compensate for the shortfall, however, sugar volumes were still down about 53%.

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 distributor channel prices, average domestic prices increased 5.7% from the most recent quarter and 6.3% compared to last year’s first quarter.

Higher energy, manufacturing and freight costs were the primary reasons why our gross margin fell from 6.6% last year to a -2.7% in the current quarter. Higher energy costs were once again the result of unfavorable fuel mix during the quarter as well as higher natural gas costs. Freight costs continued at high levels driven by a longer length of haul, a shift away from customer pick-up, and by higher fuel surcharges. The primary driver of increased manufacturing costs during the first quarter was the start-up of limited liquid sugar production at the Port Wentworth refinery. Because of the cost of producing product on this limited scale without having the normal crystallization facilities proved uneconomic, the production was halted in January and will not resume until crystallization production commences this spring.

SG&A costs increased $1 million on a quarter-to-quarter basis due to higher legal and medical costs. In terms of the balance sheet, our cash and marketable securities balance as of December 31 was $35 million and the undrawn availability under our bank agreement was approximately $47 million. We have received an additional $10 million of insurance advances during the quarter bringing the total to date of $110 million. As a footnote, we drew-down $30 million of the revolver in late January as a source of quick, stand-down liquidity and ended the month of January with cash balances in excess of $50 million.

As John mentioned, the rebuild project is proceeding at the Port Wentworth refinery and spending on that project totaled $14 million during the quarter bringing the project total to over $22 million.

That concludes my prepared remarks for the quarter. In addition to our 10-Q, I encourage you to review the additional supplemental financial information that we have posted to our website at imperialsugar.com. Geri, I think at this time we are ready to buildup a line for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jonathan Lichter with Sidoti & Company. You may proceed.

Jonathan Lichter - Sidoti & Company

In terms of your customers, are they going to stick with you when production returns?

John C. Sheptor

Jonathan, good morning to you. This is John. Our customers have given us full support throughout this entire rebuild period. Many of them have communicated with us. As we prepare for restart, they are ready to receive product. We are confident that we continue with the strong relationships through the start-up period.

Jonathan Lichter - Sidoti & Company

So you don’t anticipate losing any customers as you ramp up?

John C. Sheptor

At this time, we’ve had no customer contact us, Jonathan that they plan to change their long-term relationship with the company.

Operator

Your next question comes from the line of Hamed Khorsand with BWS Financial. You may proceed.

Hamed Khorsand - BWS Financial

Just a couple of questions here. When can we see the gross margin turn positive given your current operational abilities? I would have thought that with the natural gas coming down as much as it has, it would have been a benefit to you. Is there a cyclical lag?

John C. Sheptor

Hamed, we discussed our gas hedging program and a fair amount of visibility lag in our 10-K and our 10-Q and we do as a routine process, hedge forward on natural gas. So in any hedging program, you’re smoothing out the peaks and smoothing out the valleys, generally speaking. So our gas costs have certainly not dropped as rapidly as the market dropped during the first quarter. I think that’s reflected in our natural gas costs as we reported in the 10-Q. Again, there’s some discussion in there about our current position and expectations for the balance of the year on gas costs. Obviously, some of the costs elements that we have been talking about now for several quarters are related directly to the lack of production coming out of Savannah and the actions that we’ve taken to mitigate that impact, freight costs, for example, purchase sugar costs, the energy mix issue which is obviously a very significant one given coal versus gas costs in recent times. So all of those are certainly impacting the cost structure and impacting the margins that you’re looking at. We would see many of those costs as we do begin operations in Savannah beginning to recover to more normal levels, subject obviously to our market conditions.

Hamed Khorsand - BWS Financial

I know I heard you answer the question before but is Gramercy, can you provide Gramercy’s operating margin and is it profitable and how much so?

John C. Sheptor

Well, we don’t provide it separately. Again, if you factored out some of the items which are specifically driven by our reaction to the cessation of production in Savannah, obviously, the sales and most of the production costs in the last 9 months have been solely Gramercy activities. The freight issues are impacted certainly by the delivery times or delivery lead schedules as we’ve attempted to retain core business in the Southeast for transporting product longer distances. So I think you can get a pretty good sense of Gramercy if you factor out some of those factors against our most recent results. We don’t disclose that separately.

Hamed Khorsand - BWS Financial

The last question, this complete restoration by Fall ’09, will that mean in Fall 2009 you will be able to switch on all the lines or will there still be a lag in getting all the lines up and going?

John C. Sheptor

That means that we will have all the lines up and running by Fall of 2009. We will phase the lines in as the production schedule allows. Some of the packaging lines are scheduled for delivery earlier than others and as the building and other infrastructure support is available and the machines are available and are able to be installed. Then we will be phasing in production on packaged product. The Fall of ’09 is when our current schedule calls for complete restoration of activities.

Operator

You do have a follow-up question from Jonathan Lichter with Sidoti & Company. You may proceed.

Jonathan Lichter - Sidoti & Company

A question about the, I guess it looks like production at Port Wentworth will; the bulk production will start a little later. Does that mean that some of those lower price contracts will take a little longer to clear out of there or is that the right way to think about that?

John C. Sheptor

Jonathan, I think that’s the right logical progression that, the existing contract base will be served and those contracts honored with those customers when the production is available to do so. So if the startup is moved back than they will be served a little later than they would have been in the other scenario.

Jonathan Lichter - Sidoti & Company

Are you thinking early spring, late spring?

John C. Sheptor

We’re thinking spring. It’s a nice try, though.

Jonathan Lichter - Sidoti & Company

Lastly, have you spoken to your banks already about them giving you any additional capacity just in case the timing of the insurance takes a little longer than you think?

John C. Sheptor

We speak with our banks quite frequently. We have not had conversations about increasing loan capacity, no.

Jonathan Lichter - Sidoti & Company

So you don’t foresee any --?

John C. Sheptor

No, we don’t. The line is $100 million subject to a borrowing base. The borrowing base is driven off inventories and receivables. We’ve been disclosing, obviously the undrawn component. We haven’t, prior to this draw in January; we had not drawn the revolver. So we do not foresee the need to deal with an increase. We have not had that direct conversation with the banks. I will say that they have been quite supportive.

Operator

There are no additional questions. We would now like to turn the call over to Mr. John Sheptor for final closing remarks. You may proceed, sir.

John C. Sheptor

We thank you all for joining us today for this call. If you have any further questions, please do not hesitate to contact us through our normal channels. With that, we conclude this morning’s call. Thank you very much.

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