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Imperial Sugar Company (NASDAQ:IPSU)

F1Q10 (Qtr End 12/31/09) Earnings Call Transcript

February 5, 2009 11:00 am ET

Executives

Louis Bolognini – SVP, Secretary and General Counsel

John Sheptor – President and CEO

Hal Mechler – SVP and CFO

Analysts

Hamed Khorsand – BWS Financial

Brad Safalow – PAA Research

Ejnar Knudsen – Passport Capital

Steve Roberts – NorthPointe Capital

Tim Moynihan – Janney Montgomery Scott

Rupesh Sahu [ph] – Titan Capital

Frank Saldana [ph] – Atlas Capital [ph]

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2010 Imperial Sugar earnings conference call. My name is Fab and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Louis Bolognini, Senior Vice President and General Counsel. Please proceed.

Louis Bolognini

Thank you. Good morning. I'm Louis Bolognini, Senior Vice President, 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 first fiscal quarter ended December 31, 2009 is being transmitted live over the web and is being recorded. This replay will be available through the close of business March 5, 2010, but all information is current as of today February 5, 2010.

Any recording or other use of this live transmission or audio replay is not allowed without the prior written permission of the Imperial Sugar Company. The earnings press release issued this morning, is available on the Investor 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 the Imperial Sugar Company 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.

Additionally, our website contains a reconciliation of non-GAAP financial measures which we will be discussed on this morning’s call. At this point, I will turn the call over to John Sheptor, our President and CEO.

John Sheptor

Thank you, Lou and thank you to everyone for joining us today. During our first fiscal quarter of 2010, we announced final settlement with our insurance carriers for our property and business interruption claims related to Port Wentworth accident. Our team works very hard over many months to finalize these negotiations. Successful closure of this claim has been a priority in our recovery effort. The $278 million property insurance gain reported today in our first quarter results is substantially all of our $14.84 earnings per share. All interested stakeholders should consider carefully the accounting treatment for this insurance recovery as they analyze our first quarter results.

Hal’s comments will address more specifically this subject. Major milestones were completed this quarter in the rebuild project at the Port Wentworth refinery. The high speed lines for 50 pound, 25 pound and retail size packages for white refined sugar were all commissioned and the new silos were placed into service. This has enabled us to reinitiate branded and private label sales with many of our largest consumer channel customers within the Southeast region.

The 356 foot silos are particularly critical as the final step of moisture removal occurs in the storage system. Running without them has been rate limiting. Installation of the final major production area our new brown sugar and powdered sugar lines is complete, and our team is engaged in commissioning activities and anticipation of supplying Easter holiday requirements, limited production has already begun.

Many industry experts from our customers, competitors and the government have visited our facilities during our start-up over the past six months. And in unison have acknowledged and complemented Imperial and establishing new best practices for the industry regarding combustible dust management and production efficiency, the effectiveness of our investment has also been recognized with SQF certification in December confirming to our customers our high standard for food safety management.

On Wednesday, February 3, we celebrated the ground breaking for the new $120 million state-of-the-art, LSR refinery being built adjacent to our Gramercy facility, with an expected start-up in the summer of 2011. Representatives from LSR we’re joined by Governor Jindal and other state and local officials.

The construction project by the partnership between Imperial, Cargill and sugar grows and millers is expected to bring more than 500 construction jobs to the Gramercy area. Imperial will be a benefactor from this partnership through our long term supply agreement with the new refinery for bulk white refined sugar supplying our small bag packaging facility and that will continue to operate on the Gramercy site as well as from being a one third owner of the new refinery.

We continue to find new ways through product development to meet customer needs, Redi-Measure brown sugar one half cup packets successfully grew to 10% of our brown sugar sales during this holiday season. The convenience in hygienic properties of this packaging concept have been well received by customers.

Our newest product Bakers Supreme, all natural ingredients frosting mix performed very well in Texas retail test. We're now considering introduction of this product in larger region. The Wholesome Sweeteners launched of Agave syrup in Costco has been extremely successful contributing materially Wholesome first quarter results. Wholesome Sweeteners in total continues to grow at double-digit rate turning toward another record year in 2010. In Mexico, Comercializadora Santos Imperial our joint venture has optimized its distribution network and achieved U.S. American Institute of Baking Certification for our partner's Mexican in white refined sugar refinery and most importantly, strengthening confidence with our broadening customer base. U.S. customers now view CSI as a substitute supplier for U.S. sourced sugar without discount. While our Mexican sugar customers accept premium pricing.

We look forward to another successful year by our CSI team with favorable industry conditions. 2010 harvest began several weeks earlier this year in mid November and part due to this vast trade inventories but also due to high prices. Early indications are that the crop will be smaller than last year due to unfavorable weather conditions during the growing season.

This will extend the tight supply conditions in Mexico for at least one more year. Higher than normal sugar pricing is enabling some substitution and bottlers with high fructose corn syrup, the display sugar becoming available for export to the U.S. Even with this trend however exports will be substantially lower to the U.S. this year. Sugar substitution for high fructose corn syrup continues to grow in the U.S. increasing sugar demand particularly in the beverage sector.

Large brands such as Gatorade were transition to sugar in this past quarter while large market test for others such as Pepsi and Mountain Dew have been initiated. Numerous new food products are appearing on retail shelves highlighting the advantages of natural sugar. The USDA reported for this past year a reduction of 400,000 tons of high fructose corn syrup as a result. This trend is picking up momentum and consumers are acting positively to the availability of natural sugar alternatives.

So far in 2010 this has been a year characterized by tight sugar supply globally. Raw sugar prices have set 29 year highs as countries compete for scarce import requirements. To small crop in India and a modest crop in Brazil have led to an imbalance between supply and demand that will likely continue for more than one crop season. Short-term temporary relief is expected only this summer during the South Brazil harvest.

We have raised our refined sugar prices in an attempt to sustain our margins, but have needed to do so conscious that domestic beet sugar producers do not share this increasing cost. Domestic refined sugar is also in tight supply due to the average 2009 beet harvest and will continue as such until the next domestic harvest in the fall as Mexico has limited inventories to export. Industry conditions are favorable to Imperial and we remain optimistic regarding 2010 results. Our priority continues to return to profitability this quarter.

Hal will now make a few comments with regard to our reported financial results. Hal?

Hal Mechler

Thank you, John. This morning, I will provide some comments on our quarterly results, which were summarized in our press release this morning. I should say that we expect the file our Form 10-Q for the first quarter on Tuesday as we're wrapping up some presentation disclosure matters in that document. We reported income from continuing operations for the first fiscal quarter ended December 31, 2009 of $178.1 million, or $14.84 per diluted share, compared to a loss from continuing operations of $600,000, or $0.05 per diluted share, for the same period last year. As John mentioned, this quarter’s results were significant impacted by the gains from the insurance settlement related to the Port Wentworth accident and the effects of certain derivative transactions. Excluding the insurance and derivative items, we would have reported a net loss for the quarter of $6.5 million, or $0.55 per share.

In December, we announced the final insurance settlement of $345 million and in fact we received the final $45 million of proceeds in January. As a result, we booked a pre-tax gain in the first quarter of $278.5 million. As you know, we had previously only recognized $66.5 million of recoveries through the income statement, which were those insurance recoveries that were deemed probable and which represented reimbursement of expenses.

The total $345 million settlement and it breaks down this way. Business interruption recovery 85 million, property replacement cost 212 million, payroll and other incurred cost reimbursements $48 million. Note that this settlement only relates to our property and business interruption claim related to the accident. And has no effect on the personal injury litigation where we maintain separate workers comp and general liability insurance coverage.

The other significant item during the quarter related to our use of trade, sorry of traded raw sugar futures contract and our raw sugar hedging program. In the current quarter, the company recognized pre-tax gains of 18.9 million on derivatives intended to hedge future raw sugar purchases.

As we previously disclosed for the year ending September 30, 2009, we recorded gains of 27.9 million on domestic raw sugar futures contracts intended to hedge fiscal 2010 and 2011 raw sugar purchases. Because these derivatives did not meet the relatively stringent requirements to qualify for hedge accounting treatment, we were required to recognize the gains in current earnings.

Cost of sales during the current quarter includes the $18.9 million of current period gains which is partially offset by $8.8 million of higher raw sugar costs which did not benefit from the hedged gains recognized last year on the first quarter futures contracts. Total sales for the quarter increased to 174 million compared to 109 million for the same period last year.

In terms of domestic sugar sales the additional production at Port Wentworth during the quarter helped to increase our sales to 4.5 million hundredweight or 51% compared to the prior year's quarter. While we ran at about 60% capacity in Port Wentworth during the first quarter, we expect to improve on that during the second quarter. We reported a 6% increase in domestic prices for this quarter as John referenced tight domestic sugar supply conditions driven by lower Mexican imports and a modest size of sugar beet crop as well as higher raw cane sugar cost have resulted in higher domestic refined sugar prices.

The company continued to fulfill low price contracts which existed at the time of the Port Wentworth with accident partially offsetting the effect of higher prices in the current quarter. These contracts comprised about 18% of combined sales in the industrial and distributor channels for the quarter. By the end of our first quarter, we had substantially fulfilled those old contracts. We expect industrial and distributor sales prices will continue to rise through the rest of fiscal ’10 as new contract pricing is captured at these higher levels.

Our gross margin increased to 7.1% compared to a negative 2.7% in the same period last year mainly due to the raw sugar derivative gains as well as higher refined sugar prices. Absent the impact of the derivative gains, our gross margin would have been 1.4% for the current quarter. Our cash position at December 31 was $66 million this of course is before the receipt of the final $45 million insurance payment in January.

Outstanding borrowings were $60 million with capacity to borrow an additional $33 million after deducting letters of credit of 7.4 million. Our capital spending for the quarter was $38 million was approximately 95% of those funds spent at the Port Wentworth rebuild. We expect to spend another $34 million on the rebuild project in the second and the third quarter.

For the full year, we expect our total CapEx, excluding the Port Wentworth project to be approximately 15 to $20 million primarily for safety improvements and novel equipment replacement. And I should say that this includes the $6 million of improvements related to our LSR joint venture obligations.

That concludes my prepared remarks. So, I'd like to open up the call for questions. Fab?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question will come from the line of Hamed Khorsand from BWS Financial.

Hamed Khorsand – BWS Financial

Hey, good morning, guys.

Hal Mechler

Good morning, Hamed.

Hamed Khorsand – BWS Financial

I just had a question here on your comments in the press release and on the call you've made some references to about cost going up and trying to meet those, offset those costs. But it seems like when I’m looking at the table on your press release, it's seems as though you have $0.11 spread. And – my last understanding where your prices are now it seems like you've been able to sustain a spread that would give you a pretty good gross margins. Could you just comment on that for me please?

Hal Mechler

I’m sorry I’m having little trouble following you. We did if you factored out the affect of the derivative recognitions, which do affect the raw sugar costs for the quarter. We would've had a costs increase, a unit increase on raw sugar costs that amounted to 4% of gross margin.

While, sales prices were up about 6%. So, it’s a fair conclusion that thus far, we have been able to maintain sales price, sales price increases to keep pace with raw sugar price increases. So, I think that’s a reasonable conclusion on your part. We’re still running higher manufacturing cost then the prior year and the prior years are difficult comparison anyway because you will recall that we had an attempt to run liquid sugar last year which created higher cost.

So that the increase this year is on top of what was already a high cost basis again, this primarily relates as we’ve talked in the past about the start-up activity and the low, relatively low volumes that we’re still running in Port Wentworth at 60% of normal capacity and there is a higher fixed cost burden and inefficiencies in the variable cost elements. That really is the primary driver.

Hamed Khorsand – BWS Financial

So, looking on to Q2 with improved manufacturing of Port Wentworth wouldn’t that suggest that your gross margins will improve just from the efficiency standpoint?

Hal Mechler

Yeah they should improve as we ramp up volume, continue to ramp up volume and get the full benefit of all of the packaging capabilities. And John mentioned that we had completed the installation of brown and powdered and had had some limited production, but still are in the start-up phase on those particular production lines and with the silos coming on stream.

As production ramps up, we’ll have more efficiency in terms of spreading fixed cost and are at the higher run rates our unit variable cost should decline also. So yes, you would be logical to connect higher run rates with more efficient manufacturing cost and therefore improvements in gross margin.

Hamed Khorsand – BWS Financial

Okay. And then regarding December quarter as well as far as your old contracts are concerned. How much of a burden was that this quarter, December quarter?

Hal Mechler

Well, again I think I mentioned that 18% of the volume of industrial and distributor sales, we’re from the old contracts, you may recall that we reported that similar number the last couple of three quarters and it was declining from the 35-40% level and hit that was down to the 18% level, where we've largely exhausted those contracts, there is very little left to ships, so it will have much almost in distinguishable affect on future sales.

The pricing environment prior to our accident 2008 was quite different and I know you track that, but if you look at published pricing – published spot pricing we’ve seen increases order of magnitude of – do the math quickly in my head here but 20-25% increases in prices published spot prices from the – that earlier '08 period to call at the summer of '09. Since then the raw sugar increases have pushed list prices and published prices substantially higher. But those have been just to keep ahead of the raw sugar numbers.

Hamed Khorsand – BWS Financial

Okay. And then as far as you're accounting goes when will we see this accounting differential the derivative recognition and I mean it will be with Port Wentworth being a 100%?

Hal Mechler

It's really relatively independent of Port Wentworth, Hamed, it’s a, it has more to do with the timing of raw sugar purchases because what we have is gains on derivatives, future contracts where we were hedging raw sugar future purchases, but because of the accounting – requirements we had to recognize the gains currently which means as the raw sugar market has risen our physical purchase of raw sugar will be at higher prices as you began to see this quarter.

And we don't have the benefit the offsetting benefit of those derivative gains because we've already recognized them in the period that they arose. So it really has more to do with the timing of raw sugar purchases it is principally at 2010 event there’s a little bit that runs over in 2011. We’ll have some more granularity on that in the '10-Q but it's principally a 2010 event and primarily the next six months.

Hamed Khorsand – BWS Financial

Okay thank you I'll get back in queue.

Hal Mechler

All right. So thank you.

Operator

Your next question will come from the line of Brad Safalow from PAA Research.

Brad Safalow – PAA Research

Hi, good morning guys.

Hal Mechler

Good morning Brad.

Brad Safalow – PAA Research

I just a quick housekeeping item. In your Q, are you going to make a positive affirmation about the your insurance covering any continuing liability related to the civil litigation?

Hal Mechler

Yes.

Brad Safalow – PAA Research

Okay. And then just on the, if you have where you are from capacity utilization perspective at Port Wentworth, what's the good number for us to think about for the current quarter being your second quarter.

Hal Mechler

Well, I am sorry, it was a little – you've got a little garbled there, which number you're talking about.

Brad Safalow – PAA Research

Just where do you stand in terms of capacity utilization at this point or what’s the good number for us to think about for the second quarter.

Hal Mechler

Well, we are continuing to see improvement. You may recall that we said that up now was about 50% and the quarter was about 60%. So you can kind of back into the math on December and January continues to improve past that. It's a little tough to be very precise in that forward looking because we are as we bring the volumes up, as in any start up you find glitches that you deal with. And so it’s we do expect to reach full capacity during the quarter or what that average will be for the quarter is tough to say. I can say January is, in the books and it's better than December. So we’re continuing to show that progress.

Brad Safalow – PAA Research

Okay.

Hal Mechler

I hesitate to give you a number for January because, like I said it's really just – it's a matter of how quickly all of the systems to get Ironed out.

Brad Safalow – PAA Research

Understood, and then in your K last year you guys actually disclosed with your raw sugar cost would be for fiscal ‘10 based on the pricing environment and I think as of December 4. Can you guys provide us with an update or will you on the call, what you expect your raw sugar cost now given the moving price?

Hal Mechler

We will include that in the queue, I don’t have that number handy. I mean the market has continued to escalate, needless to say. I know you're watching the market, you're following the futures market it has continued to escalate, that where today the average futures value that’s not on our average cost, because we have some amount already booked basically. But the average futures cost today is in the high 30s.

Brad Safalow – PAA Research

Right. So if you will give us a number, I mean can you give us generally range what the number would be?

Hal Mechler

We will give you a snapshot because any estimate is obviously a function of where the market goes in the future. But we’ll give you a snapshot like we did in the K.

Brad Safalow – PAA Research

Okay. And then, how many sugar hedges you have in place right now?

Hal Mechler

Let me just make sure yeah not, about 4.5 million hundredweight.

Brad Safalow – PAA Research

Okay. So hasn’t changed much.

Hal Mechler

Hasn’t changed much, no. I’m sorry, go ahead.

Brad Safalow – PAA Research

Are those covering, just a current fiscal quarter or is that over the course of the year?

Hal Mechler

No, that’s covering the balance of the fiscal year so the next nine months and a piece of it a smaller piece rose into the first quarter of fiscal ‘11 the last calendar quarter, yeah.

Brad Safalow – PAA Research

Okay.

Hal Mechler

What just think of what we're trying – what we're doing as best we can is we're trying to hedge raw sugar cost as we're selling refined sugar sales. So if we have calendar year contract that go to December of ‘10 would be our strategy to hedge raw sugar cost through that period in comparable quantities.

Brad Safalow – PAA Research

Okay. You guys haven’t changed your hedging program at all in light of the run up in the market?

Hal Mechler

We have not. We have not. We believe, it’s more important than ever to as best as is practical cover off that margin risk of selling forward at fixed prices and not having the walls covered that just exposes the company which is a fundamental risk that we as a policy hedge off.

Brad Safalow – PAA Research

And then I don't know if you guys could comment on this, you're getting close to operating as close to actually at Port Wentworth. You guys commented all I've seen pictures of the facility, I've seen the video it looks like I mean Q3 forwards from an efficiency perspective for you guys. Could you comment at all on how this will change the structural margin profile of Imperial Sugar going forward?

Hal Mechler

Well we haven't given any guidance quantitatively there, I think what I've said in the past is that there are some efficiencies in the packaging area, because again the part of the refinery that was fundamentally rebuilt, actually completely rebuilt is the packaging operation, those efficiencies primarily come in labor utilization and paper wastage, material wastage should be down. But we haven't really commented on sort of even order magnitude the quantities affected of that.

Brad Safalow – PAA Research

Okay I'll jump back into the queue.

Operator

Your next question will come from the line of Ejnar Knudsen from Passport Capital.

Ejnar Knudsen – Passport Capital

Hi. Couple, let me start with the easiest question on taxes, the $100 million in provisions what's the cash expense, what is non-cash, how should we look at taxes or what will happen in going forward?

Hal Mechler

The simple answer is we have no cash liability, we estimate we have no cash liability with the inclusion of these gains and earnings and that arises as again we and we’ve discussed in the past. 200 plus of the 345 recovery was for replacement cost of existing assets and because of the provisions of the code relative to involuntary conversion those gains are not recognized currently for tax. So, the short answer is when you take into account the recovery are in a well position starting the year, some capital loss issues that come to play also in terms of carry forwards we end up with no cash obligation as we kind of true up taxes through December 31.

Ejnar Knudsen – Passport Capital

Okay, thank you. And then regarding the follow up question on the run rate discussion that you are at 60% average for the quarter. If you had been at a 100% which you don’t expect to be up that run rate until later this fiscal year but if you had been a 100% what would if the gross margins been?

Hal Mechler

Not mean to be smart about it, but I’d say better, I’m sorry I didn’t, I shouldn’t say that. I don’t have it quantitatively in my head with me. Clearly our efficiencies, manufacturing rates would have been better. Our sales volume would have been higher also and contributed positively to margins. But I don’t have that number. I’m sorry.

Ejnar Knudsen – Passport Capital

Is that something that you can put in the 10-Q where you – well I guess probably not, but that that would be helpful for I think all of us if we could try to get?

Hal Mechler

Sure.

Ejnar Knudsen – Passport Capital

Access to the normalized margins are for the business just as you ramp up maybe in future call you can do that. Next question would be on the switch the momentum on the consumer to go to natural sweeteners sugar and other sweeteners how is the Wholesome Sweeteners business tracking and does it participating in that trend change?

Hal Mechler

It continues to track very well. I think John mentioned continuing double-digit growth in the current quarter. We’ll have some sales comparatives, sales and actually net income comparatives. In the Q, we're going to breakout Wholesome from the Mexican operations just because and again we may have discussed this conceptionally in the past. Wholesome is a lower sales dollar entity but high margin and Mexico operates basically on a commission basis that the marketing joint venture. So, it tends to be high volume low margin basis. So, we're going to separate those two for you in the queue but you'll see very substantial growth. They continue to have success in new product launches. They’re served new one this year is an Agave product, that's at the club store level. That’s had very good acceptance thus far and growth in their prior products. It continues be a very successful business.

Ejnar Knudsen – Passport Capital

Okay and on the sugar demand side for the beverage industry switches if back the envelope if I take, there’s already been a 5% switch from high fructose corn syrup with sugar. If there is another 5%, I think fairly 5% switch it could be a 20% increase in demand for Imperial Sugar and my question is that that the envelop math is correct if you have 5 to 10% switch that could be 20 to 40% increase demand and while plant probably can't handle that increased volume now any guess on what CapEx would be to expand capacity for the beverage industry by expanding the plan 20 to 40%, is this a 10 million CapEx item or is a 100 million CapEx type item?

John Sheptor

This is John. I'll answer that in with two points first there is approximately 10% excess refining capacity in the industry today. So, over the next two years as sugar demand grows with the substitution that excess capacity will be absorbed across all producers. If you look at Port Wentworth specifically the low CapEx expansion is potentially in the 10% range and turn to the expansion anything large that that would be substantial capital project because it would be fundamentally rebuilding large portions of the refinery.

Ejnar Knudsen – Passport Capital

Okay, that’s helpful, thank you. Another question related John you might be the right person to answer is that Montana's beets, Roundup beets is under lawsuits and on March 5 the court potentially may find at the beet crop and the seeds that are planning to be planting may not be plantable and – if that happens like it did with alfalfa, it would be I think pretty negative event in the beet industry do you have any view on that and its perspective outcome for the cane sugar refiners and how the industry will deal with the situation where the beet, 90% of the beet crop can be planting?

John Sheptor

Well, we don’t have any particular insight that you wouldn’t. There is a lot of information being exchanged in this lawsuit through the media. It’s our understanding that is sufficient non-GMO seed for planting this year to have a moderate crop. They would not be able to have an extensive large crop because of that limitation. If they were to have a, and if they have to switch out of GMO and go to traditional seed, the more substantial impact could be in 2011 planting if the seed producers are not able to continue with their production of GMO seed and having to switch to traditional seed. But the lawsuit will have to makes rulings between those two periods of time. The cane producers as I indicated represent the excess capacity of the industry. And so, any shortfall on the sugar beet side would be covered with increasing the sugarcane output. And so, I don’t think supply is at risk for 2010 into 2011 crop year, but there could be a rebalancing between cane and beet with regard to the source of the sugar.

Ejnar Knudsen – Passport Capital

And would the amount of imports that are allowed for need to increase if that if beet supply was reduced, is that or is it going to be met through Mexico and the quarters that are already exist?

John Sheptor

Under the Farm Bill, the USDA has an opportunity to adjust the quota after the first of April again under the law of the bill they have to do that first by raising the raw sugar import so that the cane producers reached capacity levels before they would import white refined sugar from other producers ex-U.S. Both options who are available to the USDA to make corrections in turn in the supply and depending on the size of the plated acres of beats with the output of this, outcome of this lawsuit USDA will be making decisions about raw sugar imports and white sugar import.

Ejnar Knudsen – Passport Capital

Okay.

John Sheptor

If I could make just one comment about Mexico as well, the high prices of sugar in Mexico are enabling the high fructose corn syrup suppliers to make some inroads in the beverage industry in Mexico. You probably are quite aware that about 75% of beverages in Mexico are sweated with sugar quite different from the U.S. and so there is an opportunity for high fructose corn syrup penetration if prices allow for that to occur and that’s what's happening at the moment. We’re expecting the amount of high fructose corn syrup in Mexico to increase 400,000 to 600,000 tons, which would make sugar available for export to the U.S. If you look at 2009 exports to the U.S., it's 1.4 million tons of refined sugar. The imports to the U.S. even with that available export from the high fructose corn syrup substitution would be substantially lower in 2010 and having a much less significant impact on prices.

Ejnar Knudsen – Passport Capital

And on the or for the, on the question on the hypotheticals what the court case would be so your thought is that the, if I understood that correctly that low the yields will be down, it will be a moderate crop for beets that, that deduction could be satisfied by the available capacity.

John Sheptor

Okay.

Ejnar Knudsen – Passport Capital

The cane sugar refineries have and that's where the government would first have to build that 10% available capacity up before they allowed refined sugar and from overseas. Is that a proper summary of what was said?

John Sheptor

That's correct.

Ejnar Knudsen – Passport Capital

Okay, that’s helpful. I think that's my main questions I'll get back in the queue. Thank you.

Operator

Your next question will come from the line of Steve Roberts from NorthPointe Capital.

Steve Roberts – NorthPointe Capital

Hi. Just wondering a couple of things, on the stockholders equity, is that about 264 million though?

Hal Mechler

Sorry, we're shuffling papers.

Steve Roberts – NorthPointe Capital

Okay.

Hal Mechler

Let me, it would be simply…

Steve Roberts – NorthPointe Capital

I just took the net income from the quarter and that is the previous circular I put.

Hal Mechler

Your math is very accurate.

Steve Roberts – NorthPointe Capital

Okay. And then on the insurance the 45 million you're talking about the insurance that you collected this quarter. Is that already been accounted for or is that going to be accounted for this quarter?

Hal Mechler

It's been accounted for in the gain recognized in December and in fact we’ll have receivable for that on the December balance sheet it gets liquidated in January.

Steve Roberts – NorthPointe Capital

Okay. So that's, it’s already accounted.

Hal Mechler

It's already in the income number yes.

Steve Roberts – NorthPointe Capital

Okay. And then the, you mentioned that you're, I wasn't quite sure. And you mentioned that you're driving or for a profitable quarter, this quarter. I mean is that, what we should be looking for then excluding your onetime items or is that just more of course you’re driving for that?

Steve Roberts – NorthPointe Capital

Steve we don’t as a rule provide forward guidance on earnings. So, it hasn’t to be more specific and that obviously it’s every management’s objective to return profits each quarter. What we’re saying is that we’re driving at the issues that are restraining us from profitability now and hope to have overcome majority of them during the quarter. I don’t want to tell you that you should expect earnings, positive earnings this quarter because that would violate my principle about forward earnings, full guidance.

Steve Roberts – NorthPointe Capital

Okay. And then as far as the production profile for the year, can you give us some numbers on that?

Hal Mechler

I’m sorry. Can you clarify your question a bit Steve?

Steve Roberts – NorthPointe Capital

Just what, how much sugar you plan to produced this quarter, next quarter, following quarter?

Hal Mechler

Again that’s partially a function of how successful, how quickly and how successful we are at restoring capacities in Port Wentworth. There are some normal areas what I would call a relative normal year in our 10-K full year 2007. We did that deliberately in the statistical data in the 10-K to be able to put out so that you had in mind what a normal year was. The full year as I recall was about 14.5 million, hundredweight but obviously we’re not the first quarter hasn’t been equal to what that year was. I’m sorry I’ll take it 14.5 was Port Wentworth the total sales were – just under 26 million hundredweight.

Steve Roberts – NorthPointe Capital

26 million.

Hal Mechler

In 2007.

Steve Roberts – NorthPointe Capital

Okay.

John Sheptor

Our objective is to run both of the refineries at capacity levels throughout the remainder of the fiscal.

Steve Roberts – NorthPointe Capital

Okay.

John Sheptor

The fiscal year.

Steve Roberts – NorthPointe Capital

And running full capacity then, should you be at a normalized earnings or normalized margins at that point or is it – or still I mean you got the hedging and stuff like that?

John Sheptor

The hedging would definitely affect our reported earnings and the other issue that we've been try to be as at front as we can about, we have raw sugar prices at what I would call unprecedentedly, at least unprecedented my 20 plus years here unprecedented levels. And we are obviously attempting to maintain margins by increasing prices, but half of our industry does not buy raw sugar. So we are – we know that’s definitely a factor in that pricing environment.

Steve Roberts – NorthPointe Capital

Okay. Okay thank you.

John Sheptor

Yes sir.

Operator

Your next question will come from the line of Tim Moynihan from Janney Montgomery Scott:

Tim Moynihan – Janney Montgomery Scott

How are you doing, gentlemen?

Hal Mechler

Good.

Tim Moynihan – Janney Montgomery Scott

Could you just tell me what do you expect the gross margins to be for 2010, 2011?

Hal Mechler

Tim we don't provide that kind of guidance to be honest with you. We are in a business that has a substantial commodity element to it and forecasting margins in a commodity business can be very risky.

Tim Moynihan – Janney Montgomery Scott

Okay. Can you tell me with your cash levels improving do you expect to start putting a dividend back in place or maybe what type of things should we be looking for that might guide us to that event maybe happening.

Hal Mechler

Well, we've not suspended our dividend. We continue to pay a dividend although at a reduced level for the last four quarters and the Board's consideration relative to dividends obviously has to do with, liquidity and resources of the firm expected future cash demands we’ve certainly brought down our cash balances over the last two years because of the events in the last two years but all I just want to emphasize we haven’t eliminated our dividend but, so it’s really hard to predict for you I can't predict for you what Board actions they would take in the future.

Tim Moynihan – Janney Montgomery Scott

Okay. With the insurance payment, was there a talk of a special dividend being put back in place like you’ve done in the past.

Hal Mechler

In terms of looking at the position, we had 66 million of cash and $60 million of revolver borrowing, so net cash was basically even at the end of December. We received 45 million of final proceeds in January but we have another, our estimate is another 34 million to spend to complete the Port Wentworth refinery. So, there is not in that math a lot of surplus cash.

Tim Moynihan – Janney Montgomery Scott

Okay. I do see that. Thank you very much.

Operator

And your next question will come from the line of Rupesh Sahu [ph] from Titan Capital.

Rupesh Sahu – Titan Capital

Good morning thanks for taking my question. Once again on the gross margin side, you mentioned 2007 is being kind of a normal year in terms of volume.

Hal Mechler

Yes sir.

Rupesh Sahu – Titan Capital

We did see the 10% gross margin there, now assuming the spread is going to get back to the level of 2007, would the gross margins structurally be higher, lower or about the same?

Hal Mechler

Again the difficulty in providing any guidance on that is the state of the current raw sugar market and…

Rupesh Sahu – Titan Capital

Just assuming the spread were to get back to where it was, is just making that assumption that the spread is exactly what it was in 2007 would we e get back to the same gross margin number again?

Hal Mechler

Well, the raw sugar spread, the refined prices is the largest driver in that gross margin number. So all the things being equal, I think it won’t work that way.

Rupesh Sahu – Titan Capital

Okay great. I had one more follow up on the CapEx side you mentioned the 15 to 20 million from fixed, ex the new construction and then of course the 6 million is forwarded to LSR. So the 15 to 20 million less the 6 million is said about a good kind of run rate maintenance CapEx number do you think forward?

Hal Mechler

No, it is high by historical standards for run rate capital. It does include capital spending in areas that primarily the safety area that would not be expect to be a recurring number. I think run rate capital if you look back in history is more in the 6 to $8 million a year range.

Rupesh Sahu – Titan Capital

6 to $8 million CapEx okay. Then on the depreciation, I am sorry…

Hal Mechler

I was just going to do add to that, you should also in your modeling taking into account that at the end of 2010 the calendar year we will no longer be operating the refinery in Gramercy, Louisiana. So, our maintenance spending will be isolated to just Port Wentworth facility and the packaging operations that are left at Gramercy.

Rupesh Sahu – Titan Capital

Okay. And how did that 6 to 8 million number breakout between the two?

Hal Mechler

It probably reduces by 2 to $3 million.

Rupesh Sahu – Titan Capital

Okay, great. And then the depreciation and I don’t know I guess we will have to wait for the Q to figure out what the depreciation, amortization and the cost of goods within? Have you already started the depreciating the Port Wentworth? Is that causing a drag in the gross margin line to some extent?

Hal Mechler

We partially started affecting I’m sorry depreciating the new project in Port Wentworth. So, it is I think it is affecting that gross margin line and I apologize we didn’t put the depreciation in the press release. So, we will have to wait for the Q to see it.

Rupesh Sahu – Titan Capital

Okay. And then as we looked at, to the next few quarters what the good run rate somebody use for depreciation that…?

Hal Mechler

The total project is in the, is about $230 million. I think you can think in terms of an increase and put. I think you can use about a 18 year life, you’ll get to about $12 million new depreciation number and – depreciation previously was in that $12 million range. So, it’s something in the low 20s.

Rupesh Sahu – Titan Capital

Low 20s perfect. And then I know on the last call you have touched about the progression of capacity and then the expectations for that time was to be at close run rates and it's already part of January and I'm kind of wondering if we should push that out a little bit now or does January, February that timeframe still is that just – some kind of reasonable for kind of full operational run rate?

John Sheptor

The key development in the last month has been the cooperation of the silos into the production environment. It is the last processing step of removing moisture from the sugar and we've been rate limited because of that. In January, February we will be ramping up now with the silos in place and operating and our target would be to reach capacity in the quarter.

Rupesh Sahu – Titan Capital

Great.

Hal Mechler

Just to clarify.

Rupesh Sahu – Titan Capital

Okay.

Hal Mechler

John mentioned capacity by the end of the quarter, not for the quarter.

Rupesh Sahu – Titan Capital

End of the quarter, okay. That’s all I have, thank you very much.

Operator

(Operator Instructions). And your next question will come from the line of Frank Saldana [ph] from Atlas Capital [ph].

Frank Saldana – Atlas Capital

Yes hi, guys quick question now what is the percentage breakdown on your raw sugar between world and domestic?

Hal Mechler

Just as a general rule, well first of all everything we buy Frank just not to be confused here is priced against the – virtually everything we buy is priced against the domestic futures market. So even though it may be sourced from the world when it comes in as coated sugar it’s priced against the currently the 16 contract.

Frank Saldana – Atlas Capital

Right.

Hal Mechler

Number 16, because the 16 satisfied by either domestically produced raw sugar or quota eligible imports. So the quarter gets bid up to parity with the domestic production. From a physical standpoint all of our. For all practical purposes all of the production, all the raw sugar in Louisiana is domestic, that’s 40% of our production on a regular basis. And conversely virtually our entire source in Savannah comes from offshore sources but again it’s priced at the domestic price. And there is a very small amount less than 10% certainly probably less than 5% but we're actually brining in world sugar because we're re-exporting refined product.

Frank Saldana – Atlas Capital

Okay and that would be the case where you would pay the actual world price?

Hal Mechler

That would be the case that five percentage number would be where we pay the actual world price for raw but we're getting a reduced sales price because it’s going offshore.

Frank Saldana – Atlas Capital

All right. Okay, that’s all I have, thanks.

Hal Mechler

Okay.

Operator

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

Hamed Khorsand – BWS Financial

I just had the question here is have you seen any change in the habits of the beet farmers because of the increase in pricing activity?

Hal Mechler

John you may have a different view I – we don’t have that much regular contact with the beet farmers that I could say I've seen change in their habits. We will get some and we get an indication when the USDA publishes their survey data I think it’s usually on March 31st of intended acres to plant in beets but beyond that John.

John Sheptor

John, I would say that there have been two behaviors that would be somewhat different than a normal year. They are selling into wider geographies than they normally would too. They would be selling, they are able to absorb more freight in their equation with the margins that they currently have. And then secondly, they are more aggressive at making two year sales commitment than they historically have been, counting on higher margins in 2011 that they would normally count on in crop year.

Hamed Khorsand – BWS Financial

Okay, all right. Thank you.

Operator

There are no further questions in the queue. I would now like to turn the call back over to management for closing comments.

John Sheptor

We want to thank all of you for joining us today for your excellent questions. Our Q will be filed beginning of next week. And we certainly stand available for any questions that you have in scheduling calls with Hal. Have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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Source: Imperial Sugar Company F1Q10 (Qtr End 12/31/09) Earnings Call Transcript
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