Hala Elsherbini - Investor Relations of Halliburton
Gilbert M. Cassagne - Chief Executive Officer and President
Steven J. Janusek - Executive Vice President, Chief Financial Officer and Secretary
Reddy Ice Holdings, Inc (FRZ) Q4 2008 Earnings Call March 10, 2009 10:00 AM ET
Hello, and welcome to the Reddy Ice Holdings, Inc. Fiscal Year 2008 Year-End and Fourth Quarter 2008 Earnings Results Conference Call. Your host for today's call is Gil Cassagne, Reddy Ice's Chief Executive Officer. At this time, all participants are in a listen-only mode. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Reddy Ice Holdings, Inc. And as a reminder, this conference is being recorded today, Tuesday, March 10th.
I would like to turn the call over to Hala Elsherbini, Halliburton's Investor Relations who will begin the call. Please go ahead.
Good morning, and thank you for joining us today for the Reddy Ice Holdings, Inc. conference call to discuss the company's fourth quarter and full year 2008 financial results.
Before I turn the call over to management, I'd like to review a few items. The company issued its fourth quarter earnings release this morning. And if you did not receive a copy, the release can be found on the Reddy Ice website at www.reddyice.com. Additionally, if you would like to be placed on the company's e-mail or fax distribution for future announcements please e-mail your request to firstname.lastname@example.org or call the office of Halliburton Investor Relations at 972-458-8000. You may also register to receive announcements through the Investor Relations portion of the company's website www.reddyice.com. A replay of today's call will be available at approximately 1:00 PM Eastern Time, and can be accessed by dialing 888-843-8996, and entering passcode number 24014845. The telephone replay will be available through March 17th and the webcast will be available for approximately 90 days.
Before we begin, I would like to remind you that during the course of this conference call, management may make statements concerning the company's future prospects, business strategies and industry trends that are based on management's beliefs as well as assumptions made by and information currently available to management. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, and are subject to certain risks, uncertainties and assumptions, including known events and developments, which could cause actual results to differ materially from those that management might be describing during today's discussion.
Please refer to the company's filings with the Securities and Exchange Commission for more information on those risk factors. Please note that time sensitive information reported on this call is current as of today, March 10, 2009 that but may no longer be accurate at the time of any subsequent replay. Additionally, the company undertakes no obligation to publicly update or revise any forward-looking statements.
And now, I would like to turn the call over to Mr. Gil Cassagne, Reddy Ice's Chief Executive Officer.
Gilbert M. Cassagne
Good morning and thank you for joining us today. As mentioned, the purpose of this call is to discuss our fourth quarter and full year 2008 results, as well as other items related to the business.
Before I comment on our results, I'd like to address the Department of Justice Antitrust Division of Investigation and related matters that are on the minds of all those interested in our business. While more details will be included in our upcoming 10-K filling, I'd like to share the following: investigations by the DoJ Antitrust Division, the civil division of the DoJ and various states attorney's general are on going and we’re co-operating fully with those investigations. In that regard, we've substantially completed production of documents requested by the Antitrust Division and of the state attorney's general. And we are in the process of providing documents requested by the civil division of the DoJ.
As most of you are aware, the Board of Directors established a special committee to conduct its own internal investigation. That investigation is substantially complete, but remains open at this time as the DoJ investigation remains ongoing.
As you also know, a number of civil cases were filed as a result of the government investigation. Those cases generally remain pending. Although last month, we were able to obtain the dismissal of a punitive antitrust flat action filled in Kansas State Corp. The special committee of the board, its counsel and our company counsel continued to work through these issues in the most judicious manner possible. Due to the active nature of the ongoing investigations and the pending civil litigation, we're not able to discuss any additional details at this time. Also based on advice of counsel, we will not be holding a question-and-answer session in conjunction with this call.
Additionally, we received a notice in November of 2008 from the New York Stock Exchange, indicating that we had fallen below the exchange’s continued listing standards. We subsequently submitted a plan for continued listings and received notice on February 13, 2009 that the NYSE had accepted that plan. We intend to update the NYSE quarterly regarding our plans to regain compliance with those listing standards.
Now, turning to the details of the fourth quarter. Packaged ice sales volume for the quarter, were down approximately 15%, and were particularly poor in October and November. Additional pricing taken to offset record commodity costs experienced during the year, increased pricing from 2.6% through the third quarter to 3.3% for the full year. Commodity costs remained a concern during the quarter but at a moderating rate, specifically in fuel.
Our operating expenses also were higher than last year and expectations due to additional costs that were incurred to complete our strategic review and those related to the engagement of the new public accounting firm. Financially, 2008 was a disappointing year, as both our top and bottom lines have been significantly impacted as a result of three primary drivers.
Volume was down almost 6% for the year, which was driven by significantly reduced consumer activity, slowing construction and real estate markets and reduced miles driven during the summer season due to record gas prices.
Record commodity costs, primarily in the areas of fuel and bags were not offset by additional pricing. An approximately $3.8 million in additional professional services related primarily to an acquisition not closed earlier in the year, hiring cost of new executives, the hiring of a new public accounting firm and work completed in connection with the company's strategic review.
We are cautiously optimistic about 2009 and our results. However, due to the tremendous uncertainty in the macroeconomic environment, we no longer think it's prudent to issue forward-looking detailed earnings guidance at this time.
Looking back at our results in January and February of this year, we were encouraged as top and bottom line declines have moderated, but were still below last year on a combined basis.
In addition, we do expect lower commodity costs this year and have taken certain steps, which will be discussed in a moment to ensure stability in key cost areas.
At this point, I'd like to turn the call over to Steve Janusek, our CFO, for a more detailed review of our results and balance sheet data. When Steve is done, I'll return to discuss the results of our strategic review and wrap-up. Steve?
Steven J. Janusek
Thanks, Gil. Good morning. In regards to the fourth quarter, revenues were $57.9 million versus $64.3 million last year, a reduction of 9.9%. Compared to 2007, sales of packaged ice in the fourth quarter of 2008 were down approximately 15.1% to approximately 310,000 tons sold, compared with 365,000 tons sold last year.
Cost of sales excluding depreciation were 42.5 million in this year's fourth quarter, compared to 45.5 million in the same period of 2007. This decrease was primarily due to the effect of reduced volume sales and cost containment initiatives. Moderating energy prices also contributed to the decrease as fourth quarter costs weren't as severe as second and third quarters.
Operating expenses for the quarter were $12.4 million, compared to $12.7 million in last year's fourth quarter.
Professional services were up $2.7 million, primarily due to the hiring of PwC as the company's new independent auditor and related year-end audit procedures in work in connection with the company's strategic review. The remainder operating expenses were 0.7 million below last year, driven primarily by reduced labor and incentive compensation expenses.
Non-cash stock compensations was reduced from 0.8 million last year to a negative 1.1 million this year, a difference of 1.9 million. The difference was due to the reverse of prior expense booked for performance of a few shares not expected to be divested in future periods. Adjusting for this variance, operating expenses were up 1.6 million compared to last year's fourth quarter.
Adjusted EBITDA from continuing operations for the quarter decreased 5.0 million to 2.0 million in this year's fourth quarter, compared to 7.0 million in the previous year's quarter. For a reconciliation of adjusted EBITDA from continuing operations to net income or loss, please go to today's press release on our website at www.reddyice.com. Our trailing 12 months pro forma adjusted EBITDA as of December 31, 2008 was 68.6 million.
Total depreciation and amortization expense was up approximately 0.2 million as compared to the prior year, due to the effects of acquisitions and new CapEx.
Net interest expense increased by 0.7 million from last year to 8.0 million, primarily due to a higher interest rates on the revolving credit facility and the unhedged portion of our term loan. Our 90 day LIBOR reset occurred in mid-October as a peak in the LIBOR's rate spike which drove our borrowing cost for the quarter.
In addition, scheduled increases in the non-cash interest expense associated with our 10.5% senior discount notes contribute to the increase. The notational balance of our hedge was reduced to 160 million effective October 12, 2008 while the balance of our term loan remains at 240 million.
In regards to the ongoing antitrust investigations related litigations, we incurred 3.6 million of expenses for legal and other professional services during the fourth quarter. These expenses continued to be funded by cash at the holding company level and have no impact on the operating company's adjusted EBITDA. We are continuing to work with our insurance carriers in regards to coverage, and are working to maximize into recovery. However, at this time no estimates can be made regarding any potential reimbursements.
In addition, during the fourth quarter, we entered into a settlement agreement regarding the GSO merger litigation and reached agreement with our insurance carrier resulting in the company being reimbursed 0.2 million early in 2009.
The income tax benefit in this year's fourth quarter was 7.1 million, compared to a benefit of 4.5 million in last year's fourth quarter. Our original or our year-to-date effective rate is 15.1%, which is lower than originally expected primarily due to the non-cash goodwill impairment charge taken in the third quarter. A substantial portion of that charge was not deductible for tax purposes and therefore decreased the tax benefit we were able to book. For 2009, we are currently estimating our effective rate at approximately 44%.
Our net operating loss carry-forward was approximately 73 million at December 31, 2008. We currently do not see any significant cash taxes through 2010, and assuming that we refinance our 10.5% senior notes by the end of 2011, we do not expect to pay any significant cash taxes through the end of that year. The goodwill impairment charge incurred in the third quarter did not have any impact on our NOL carry-forward or our projection of cash taxes.
Net loss for the current quarter was 9.8 million or $0.44 per share, as compared to a loss of 6.6 million or $0.30 per share in the fourth quarter of 2007. The current share account stands at 22.1 million shares.
For the full year of 2008, revenues were 329.3 million versus 339.0 million in 2007. The decrease is primarily due to reduced volume sales related to the current economic trends and less overall favorable weather conditions. Particularly offsetting these declines were higher average selling prices, acquisitions and hurricane activity.
Volume sales of packaged ice in 2008 were approximately 1,809,000 tons, compared to 1,916,000 tons in 2007, approximately a 5.7% decline. Cost of sales, excluding depreciation were 214.9 million in 2008, compared to 215.2 million in 2007. This decrease in cost of sales is primarily due to the effect of reduced volume sales on labor and third-party delivery costs. Almost fully offsetting these decreases were significant increases in the price of fuel and moderate increases in the price of plastic bags and electricity related to higher market prices for energy. The prices of these energy related items were up approximately 8 million in total over 2007.
Operating expenses for 2008 were 47.6 million, compared to 45.0 million in the prior year. This increase is primarily due to a 0.6 million increase in labor and benefits, and a 3.8 million increase in professional services. The increase in labor expenses is related to annual wage increases, additional head count due to acquisitions and the hiring of a new Chief Executive Officer in June 2008, and a new Chief Operating Officer in September, 2008.
Professional service expenses in 2008 include 0.2 million of cost related to central acquisitions were not completed, 0.4 million in fees related an executive search firm, and 3.0 million for other accounting, legal and consulting services.
Non-cash stock compensation expenses were down 2.3 million for the year. Adjusted EBITDA for continuing operations for 2008 decreased 14.3 million to 68.5 million, compared to 82.7 million in 2007.
Turning to the balance sheet. Cash and equivalents were 39.7 million at December 31st, of which 12.0 million was at the holding company level, and represents the remaining cash generated from the net proceeds from the termination of the GSO merger agreement. As previously noted, the holding company cash has been and is being used to fund the cost of the antitrust investigations and related litigation expenses.
Based on the current status of the investigations and related civil litigation and projected expenses, we believe the holding company's cash balances will be sufficient to fund these expenses for the next 12 months. However, this expectation includes assumptions regarding matters beyond our control or knowledge.
Out total debt net of cash was 350.8 million on December 31, 2008. The ratio of net debt to pro forma adjusted EBITDA was approximately 5.1 times in a ratio of operating company net debt to pro forma adjusted EBITDA was 3.1 times.
In addition, the company was in compliance with this covenants as computed under the credit facility.
From an availability standpoint at December 31st, we had 53.5 million of availability under our 60 million revolver, which is net of stand by letters of credit of 6.5 million. Lehman Commercial Paper, Inc., which has a 10 million commitment under revolving credit facility, all of which is unfunded, filed for bankruptcy in October. We understand that Lehman has failed to fund on other revolving credit facilities subsequent to file for bankruptcy.
As a result, we believe Lehman will likely not perform under the terms of the facility, which will effectively reduce the amount available to us under the revolving credit facility by 10 million.
With this in mind as of yesterday, availability under our credit facility was effectively 43.9 million, with 6.1 million in letters of credit and no revolver balances outstanding. Our current cash balances approximately 21.5 million, which includes 8.2 million at the holding company level.
Capital expenditures and dispositions during 2008 were 18.0 million and 2.0 million respectively. Capital expenditures, net of reinvested proceeds from dispositions, the relevant measure in our credit facility and for the purposes of calculating available cash, were 1.2 million for the full year of 2008. Looking forward into 2009, we currently expect that our capital expenditures will be in a range of 17 to 19 million.
In addition, we continued to expect to utilize operating leases as the source of capital to make investments in fleet assets, in plant and other equipment, including additional ice factories.
Lastly, before I turn the call over to Gil, I would like to mention that on February 2, 2009 the company entered into two cash flow hedges, specifically for 2009 to lock the interest rate on a portion of its term loan and fix the price per gallon for the majority of the company's diesel fuel requirements. Both of these hedges were entered into to take advantage of the current depressed market prices while ensuring savings as compared to 2008.
Specifically, the cash interest payments on our term loans are expected to be approximately 5 million lower than the level in 2008 and diesel costs are expected to be in a range of 4 to 6 million lower than what we was experienced in 2008.
At this point, let me turn the call back over to Gil for some further comments.
Gilbert M. Cassagne
Thanks Steve. The senior team and I began a strategic review of all aspects of the business last fall. I'm pleased to report that we've recently completed that work, and are cautiously optimistic about many of the opportunities we've identified. Throughout the process, we were successful in developing significant additional facts and data for use in progressing and executing our strategy.
Specifically, we see continued opportunities to capitalize on our long standing customer relationships by growing with our large national and regional customers as they seek to increase their market penetration and consolidate the retail segments in which they operate.
Also, in addition to seeking new customers, we see an opportunity to capture incremental volume as these customers continued to reduce their supplier base in order to achieve efficiencies across the supply chain.
Acquisitions were another area we took a hard look at. And I'm pleased that we continued to see opportunities for growth through the disciplined pursuit of this growth vehicle. We'll continue to evaluate and pursue strategic acquisitions that enhance the density of our distribution routes provide capacity rationalization opportunities and increase our market penetration in existing or contiguous markets.
We also see numerous opportunities in the manufacturing, distribution and administrative areas. We intend to reduce the costs of our manufacturing operations through a review of our manufacturing processes, deployment of best practices and targeted investments in plant efficiency.
In addition, we've identified several opportunities for continued facility consolidation. In regard to distribution and logistics, we also see opportunities for improvement, including investments in labor, time-saving equipments and distribution route optimization technologies. Administratively, we are pursuing opportunities to reduce cost through further centralization of certain administrative functions.
Technology is also an area we spent considerable time on strategically, and believed new technologies will play a significant role in the package ice industry in the future. We have been leader in this area historically with our ice factory systems, and we intend to continue to invest in the deployment of that technology and other related technology.
While it is premature to put any specific timelines or savings from these opportunities, we are committed to moving on these areas. As far our balance sheet, we remain fortunate to have the liquidity and flexibility we currently enjoy. We've also build contingency plans that are ready to execute the phase with significant volume erosion due to the economy and/or other factors.
Although, we are operating in a very difficult economic and financial time, and while not require to refinance in the near-term, we plan to regularly investigate opportunities to improve our capital structure in conjunction with executing on our strategy.
Switching gears, many of you may have noticed that we've recently had Kevin Cameron join the Board at the end of 2008. I look forward to his input and contributions as a member of our Board. And at the same time, I'd like to thanks Chris Kiper for his contributions, while on the Board.
Also today, we announced the retirement of our Executive Chairman and Chairman of the Board, Bill Brick, effective at our annual meeting scheduled for May 20th. Bill has been a major contributor to the success of this company for many years. And I personally want to thank him for his assistance and council in the transition since my appointment as CEO. I look forward to continuing to work with Bill in his new role as a consultant to senior management and as a continued member of the Board of Directors.
Thank you all for your time today and continued support of the company. I'll now turn it over to the operator to close the call.
Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.
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