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Imperial Sugar Co. (NASDAQ:IPSU)

F3Q09 Earnings Call

August 05, 2009; 9.00 am ET

Executives

John Sheptor - President & Chief Executive Officer

Hal Mechler - Chief Financial Officer

Lou Bolognini - Senior Vice President & General Counsel

Analyst

Hamed Khorsand - BWS Financial

Brad Cephalo - PAA Research

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2009 Imperial Sugar earnings conference call. My name is Juanita and I’ll be your operator for today. At this time all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. Lou Bolognini, Senior Vice President and General Counsel; please proceed sir.

Lou Bolognini

Thank you, Juanita. Good morning. I’m Lou 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 the results for the third fiscal quarter of 2009 is being transmitted live over the web, and is being recorded and this replay will be available through close of business September 05, 2009, but all information is current as of today, August 05, 2009. 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-Q for the first, second and third quarters 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 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’ll turn the call over to John Sheptor, our President and CEO.

John Sheptor

Thank you, Lou and thank you to everyone for joining us for our third quarter 2009 earnings call. While we did narrow our loss compared to last quarter, the absence of having Port Wentworth at full capacity significantly affected results. Our goal is to fully restore Port Wentworth operations this fall and I’m very pleased to report that we remain on schedule. I will talk more about our progress in a moment. Hal will also provide a brief financial summary of our results after I conclude my remarks.

The outlook for the U.S. Sugar industry remains favorable as the USDA continues to forecast that domestic sugar supplies will remain tight for the balance of 2009 and extending into 2010. Mexico which supplied 12% of the U.S. demand this year is forecasted to dramatically reduce exports to the U.S. as their surplus has been depleted, leaving ample room for the sugar produced from the restart of our Port Wentworth Refinery.

We are watching closely world Raw Sugar pricing as it approaches U.S. levels. The last time that world prices surpassed the U.S. raw prices was in 1980. This current rise has been caused by the substantial shortfall in India production, due to the lack of rain. At this point, domestic refined prices have not been affected by world supply conditions.

We also see positive trends developing for consumer preferences. According to USDA statistics, sugar once again overtook high fructose corn sweetener as the preferred U.S. sweetener in 2007 and we expect this preference towards natural sugar to continue. Consumer preferences have resulted in some companies testing products using pure cane sugar rather than high fructose corn syrup.

Pepsi’s market test of sugar based Pepsi and Mountain Dew this spring was successful, and a broader test market is planned later this fall. Products like Ocean Spray, Snapple, and Jones Soda were early adopters as they followed consumer demand.

As I have stated previously, our primary goal is to return this company to normalized operations as a principal supplier of refined sugar to the marketplace. We have made great progress on this front. During the third quarter, we completed the concrete pour of the sugar silos and worked again on interior structures. The new packaging building is now virtually complete structurally, and we are installing material handling and packaging equipment.

In June, we resumed limited shipments of liquid bulk sugar and in July, resumed loading bulk granulated sugar for delivery to our industrial customers. The rebuild granulization in bulk loading facilities, represent state-of-the-art operations for the sugar refining industry, both in terms of efficiency and worker safety.

Our Port Wentworth rebuild progress has been truly remarkable and all of our employees and contractors are to be commended for their hard work. Approximately 300 workers have been retrained with new manufacturing and warehousing skills during 2008 and 2009.

Imperial also collaborated with the Georgia Department of Technical and Adult Education to prepare employees for the rebuild refineries new technology and improved operations. I encourage you to view our progress by visiting our website at www.imperialsugarcompany.com and especially our newly added www.iscnewsroom.com for the latest news on our company and industry.

Our discussions with Cargill and the Sugar Growers to form a new partnership continue productively as we work towards a fall closing. The LSR joint venture will allow us to participate in a new state-of-the-art refinery, with improvements in cost and productivity, while securing a long term supply over our sugar. Prospects are to close this transaction in the fall.

Our CSI Mexico joint venture continues to perform well, with our share of their earnings up $1 million year-over-year. Mexico inventories have been depleted by the large export to the U.S. during the first calendar semester, and as a result prices have risen more than 70% versus this time last year.

The Mexican harvest was 500,000 to 700,000 metric tons smaller than projected, magnifying the impact of the week peso driven export. Unless world imports are facilitated by the Mexican government, we expect the supply demand situation to cause Mexico’s domestic prices to continue increase into the fall.

Wholesome, our natural and organic sweetener platform, diversifies us into higher margin businesses. Wholesome branded products continue to have strong consumer demand even in the phase of the recession, contributing to 20% revenue growth through the first 10 months of Wholesome’s fiscal year.

The weakening of the US dollar versus countries of import has diluted earnings somewhat versus top line results. Demand for agave syrup continues to expand and main line retail outlets such as Casco are substantially increasing the number of outlets where the product is available. Wholesome’s honey business has been strengthened in the quarter with the launching of a consumer size squeeze bottle.

I am enthusiastic regarding the prospects of our near term performance. Resumption of full operations in Port Wentworth in our first fiscal quarter 2010, increasing demand from the beverage sector and crop dynamics, all bode well for Imperial.

At this point, Hal will make some remarks about our third quarter results and the financial position.

Hal Mechler

Thank you, John. For those of you who maybe listening for the first time, its probably worth noting that our Port Wentworth facility which represent 60% of our production capability, has not been fully operational since February 2008 and that obviously significantly impacts our operating results for these periods.

Our net loss for the third quarter of fiscal 2009 was $10.5 million or $0.89 per share, compared to a quarterly loss of $12.5 million or $1.07 per share for the same period last year. These results include a $6.2 million pre-tax charge this year and a $5.2 million charge last year, related to the accident that occurred in February of 2008. The current quarters charge is comprised largely of repair, legal and labor cost.

We did accrue $6.9 million of insurance recoveries during the quarter, but did not recognize any amounts for business interruption insurance. Since February of 2008, the company has incurred over $105 million of refinery related charges and recorded a $64 million of recoveries against those charges.

We have now recognized any amounts for business interruption insurance since the accident last year, but do expect to do so when the insurance claims are resolved. At this time the company estimates that the probable recovery under business interruption claims or lost income will total between $60 million and $70 million for the period since February of 2008.

Sales increased approximately 33% during the quarter, compared to the same period last year, due to increased supplies of sugar purchased from other producers to mitigate the loss volume from Port Wentworth. In addition, we increased our deliveries from Gramercy into the consumer and distributor channels and which also contribute to higher sales.

Manufacturing cost increased over the prior quarter due to start-up costs at the Port Wentworth refinery for liquid bulk sugar production which began in late June 2009. In addition, higher safety and cleaning cost also contributed to the increase over the comparable period last year.

Energy costs per 100 watt were lower in the quarter than the prior year’s period, reflecting the decline in natural gas costs. I should note here that we have purchased our hedge, 98% of our natural gas requirements for fiscal 2009, at an average price of $1, 44% per mmbtu, lower than last fiscal year.

We reported a positive gross margin for the quarter of 0.2% compared to a negative 4.7% for the same period last year, mainly owing to higher pricing and domestic derivative gains offset in part by manufacturing and raw sugar cost increases. The company intends to honor the lower price contracts which existed at the time of our Port Wentworth accident, which will of course dampen the effects of higher prices for the remainder of calendar 2009.

SG&A of approximately $11 million for the quarter was relatively flat compared to the same period last year. The result of all of those effects was that operating loss for the quarter was $16.8 million compared to a loss of $21.2 million last year and the improvement primarily driven by the higher gross margin.

During the quarter we received an additional $40 million of advances for property insurance claims. With these latest advances, our total advances total now $200 million. Construction spending on the Port Wentworth project totaled $102 million today and we do estimate the total rebuild cost will be between $210 million and $225 million.

From a balance sheet perspectives, our cash balance was $55 million at July 31, borrowings and the revolving line of credit were $60 million and we had undrawn availability under that same line of approximately $31 million. We remain in full compliance with all required governance and the back credit agreement.

We do believe our liquidity and capital resources including insurance recoveries, are sufficient to meet our operating and capital needs and to complete the Port Wentworth refinery rebuild.

Just a final remainder, please reference our 10-K and other SEC filing for more detailed information, including supplemental financial information we have posted to our investor relations website at www.imperialsugar.com.

This concludes my prepared remarks for the quarter. So operator, if we can just open up the line for questions now please. Juanita.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Hamed Khorsand with BWS Financial; please proceed.

Hamed Khorsand - BWS Financial

Good morning. Just one question for clarity, and I’ll continue. Could you repeat the cash number you just said, because it was different from what you reported in the press release?

John Sheptor

I hope it wasn’t. The number I was talking about was at July 31, not June 30, it was updated to July 31. I don’t want to miss dates, so let me check. $55 million of cash at July 31.

Hamed Khorsand - BWS Financial

Okay, thank you. My question is, you’re seeing some growth on the distributor side over the last couple of quarters, how much of that is related to the Wholesome Sweeteners?

John Sheptor

Wholesome is not consolidated in those numbers. So the short answer Hamed is, none of that’s related to Wholesome. That’s really growth in servicing the distributor channel and then putting the foodservice distributors and really more of a function of available supply than anything, when compared to a quarter or a year ago.

Hamed Khorsand - BWS Financial

Okay, and then how much of inventory will you be using; no, let me rephrase; how much is left of those ’08 contracts for the industrial customers?

Hal Mechler

I think what we said and I realized it’s early, you probably haven’t read the 10-Q yet, and I apologies for the timing of this call for U.S. participants, but I think what we say in the 10-Q is that those old contracts constituted 30% of the current quarter sales and we expect them to continue in a declining percentage through the end of calendar 2009.

Hamed Khorsand - BWS Financial

Okay, and then my final question is, right now it seems like you’re on a trend that’s very similar to what we saw back in ’06, ’07 from a pricing mix scenario. Do you think we might see prices increase to those levels again?

Hal Mechler

Of course, I’m going to disclaim a forward looking statement in that area Hamed, but certainly if you look at USDA data relative to supply demand, the numbers are not dissimilar to what we saw immediately after Katrina in 2005.

The question relative to where domestic pricing going has of course multifaceted and will certainly be influenced by USDA actions including import allowances. Mexico obviously has changed the equation a little bit since 2005, 2006, so the size of their crop and their appetite for exports to the U.S. also will have an impact.

Hamed Khorsand - BWS Financial

Okay, thank you.

Hal Mechler

You are welcome.

Operator

(Operator Instructions) Your next question comes from the line of Brad Cephalo [Ph] with PAA Research. Please proceed.

Brad Cephalo - PAA Research

Hi, good morning. Thanks for taking my question.

John Sheptor

Good morning Brad.

Brad Cephalo - PAA Research

Just a question on the natural gas exposure at this point; I know historically you’ve hedged most of your exposure for the following fiscal year around this time of the year. I think looking at the Q; you had about 1.4 million btu’s hedged out at this point in the contract exposure for fiscal 2010.

John Sheptor

Yes, we were less than 1.5, right.

Brad Cephalo - PAA Research

Okay and pro forma with Port Wentworth opening some point in the first quarter of next fiscal year, what are the natural gas need. I think historically it was somewhere between like 2.2 and 2.5. I don’t know what it is with the new facility?

John Sheptor

Right, it depends a little bit about the relative pricing of gas to coal, because in Port Wentworth we can run coal and we normally wouldn’t do that as a primary energy source and supplement it with gas, but in the normal year, probably if we go back to 2007, we bought $2.7 mmbtu of natural gas and then an additional $1.8 of equivalent in coal.

Brad Cephalo - PAA Research

Okay. So you don’t expect the mix to change materially with the new facility?

John Sheptor

Relative to historical performance at that refinery, no I wouldn’t expect that.

Brad Cephalo - PAA Research

Okay and in terms of adopting or putting in place your hedges, should we assume that you have somewhere of lets say around 70% hedged by the end of your fourth fiscal quarter? It was kind of that has somewhat been historically?

John Sheptor

I think we’re at 98% for fiscal ’09 at the end of July.

Brad Cephalo - PAA Research

Well, I was referring more to, when you put hedges and price for 2010?

John Sheptor

I’m sorry. That sounds little heavy historically. Yes, if you use the 27 and 144, we’re at 54%, 55% right now. 30% is on local hedging.

Brad Cephalo - PAA Research

Then can you talk about how we should think about the progression of the production at Port Wentworth? I know you just put some level of bulk online or you just have the rest coming in July. What percentage of your production has historically been bulk versus package?

John Sheptor

Historically it’s been in the 25% to 30% bulk, because we only have bulk production available to us there, until we begin bringing packaging lines up in the fall. I think in the last call, we said we believe we could reach as much as 40% of the normal output of that refinery in bulk production, bulk liquid and bulk granularly production. Obviously when you start-up a new facility like this, that’s a ramp not a step function and we’re on that ramp now. So I think that’s probably the high side, 40%.

Brad Cephalo - PAA Research

Okay and as you ramp up, what are the conversations like with your customers in terms of both from a sourcing of your raw sugar and then selling it on other side to your customers. I mean you really have enough; I’m thinking more first quarter calendar 2010, presumably you’ll be getting towards full capacity. You really have kind of contract agreements in place, to place all that sugar at this point?

Hal Mechler

Fundamentally, yes. Between the carryover book that we should finish up in calendar ’09 and new contracts and commitments, we are at a relatively normal level of commitments rolling into 2010.

Brad Cephalo - PAA Research

Okay, so that’s to the extent that this is just strictly at this point, how quickly can you get the facility up? You will be at full capacity, as soon as I guess humanly possible from a physical standpoint. There’s no issue with your contract exposure.

Hal Mechler

No, I don’t believe that there is. I think it is a physical constraint of bringing the new equipment up.

Brad Cephalo - PAA Research

When the new facility is fully up in running, does it structurally have a higher gross margin profile than the legacy facility and can you talk about what that might look like?

Hal Mechler

I guess it’s important to understand first that, the new facility we’re talking about in Georgia starts with the tail-end of the refining process. The majority of the refining process was not seriously damaged or significantly damaged and where it was, it was repaired, but not replaced. So from a basic conversion of raw sugar to refined sugar, the refinery is largely unchanged.

Where we had completely lost capabilities was in bulk storage and packaging and that’s where the majority of the rebuild dollars and efforts have been, and were any efficiency gains will be gained and it will primarily be in the packaging area.

I can’t give you any quantification, but it’s in areas like efficiency of the machines, staffing levels required because of automation, and hopefully sort of waste in terms of paper and product. These are state-of-the-art machines and we would expect efficiency gains in all those areas.

Brad Cephalo - PAA Research

Okay, that’s helpful. Then from an inventory perspective, you had I think somewhere around $114 million, $115 million I think according to the Q. Do you need to build up a little more raw inventory in the next two quarters as you ramp up production or do you have enough inventory just going forward, the production that you expect to come online?

Hal Mechler

No, we actually have more inventory then we would normally carry in raw sugar. Finished goods, we’ll need to go up to efficiently service the market place, but raw sugar we have ample supplies.

Brad Cephalo - PAA Research

Those were my questions. I’ll turn it over. Thank you.

John Sheptor

Thanks Brad.

Operator

(Operator Instructions) At this time there are no further questions. I would now like to turn the call back over to John Sheptor for any closing remarks.

John Sheptor

I would like to thank everyone again for listening to our call today. As always, Hal and I are available for additional comments upon your interest and scheduling a time to speak with us. Have a great day and again, thank you for joining us.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: Imperial Sugar Company F3Q09 (Qtr End 30/06/09) Earnings Call Transcript
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