Hala Elsherbini – SVP and COO, Halliburton IR
Gilbert Cassagne – Chairman, President and CEO
Steven Janusek – EVP, CFO and Secretary
Reddy Ice Holdings, Inc. (FRZ) Q1 2010 Earnings Call Transcript April 22, 2010 10:00 AM ET
Hello and welcome to the Reddy Ice Holdings Incorporated fiscal year 2010 first quarter 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, Thursday, April 22nd.
I’d now like to turn the call over to Hala Elsherbini, Halliburton Investor Relations who will begin the call. Please go ahead.
Thank you good morning. Thank you for joining us today for the Reddy Ice Holdings conference call to discuss the company’s first quarter 2010 financial results.
Before I turn the call over to management, I'd like to review a few items. The company issued its first 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 email@example.com or call the office at Halliburton Investor Relations at 972-458-8000. You may also register to receive announcements through the Investor Relations portion of the company's website at 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 1877-344-7529, and entering passcode number 439924. The telephone replay will be available through April 29th 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, April 21st, 2010 that 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, Chief Executive Officer of Reddy Ice's.
Thanks Hala. Good morning and thank you to everyone for joining us today. The purpose of this call is to discuss our 2010 first quarter results, as well as other items related to our business.
Before I report on our results I’d like to briefly comment on both the on going DOJ Investigation, related matters and our recent debt refinancing. The DOJ Investigation on the packaged ice industry is ongoing and we continue to cooperate just as we have since we’ve learned the investigation. Since our last earnings call there been a few developments with regards to the other companies in the industry that I would like to mention. Home city, which as you may recall pled guilty sometime ago to conspiring to allocate customers in Southeastern Michigan and the Detroit metropolitan area, was sentenced on March 2nd, 2010 and received a fine of 9 million with a payments schedule to be determined. This fine is in the same amount as that received by Arctic Glacier on February 11th, 2010.
As a reminder Reddy Ice does not now and has never conducted business anywhere in Michigan including Southeastern Michigan and the Detroit metropolitan area. In regard to the ongoing state and federal civil investigations there are no major developments.
Moving to the civil litigation for a moment, we filed motions to dismiss the direct purchaser and indirect purchaser claim in the multi-district antitrust litigation. We’ve also filed a motion to dismiss the shareholder class action those motions have been fully briefed by the parties, and are awaiting consideration by the judge. Our hiring regarding the motion to dismiss the direct purchaser complaint is set for June 24. There is no schedule for when the judge may rule on the motion to dismiss the direct purchaser action.
The shareholder derivative litigation in Taxes State court is still stayed and administratively closed. The next scheduled event in that case is a status conference in mid May. And finally, the McNulty case is proceeding with discovery in normal course.
As we said in the past, the Company intends to vigorously defend all of these cases. Due to the ongoing investigation by the DOJ and they send me advice of legal council. We will not hold a question-and-answer session on today’s call. Now I would also like to comment on our recent debt refinancing.
During the month of March, the Company completed the issuance of $300 million of 11.25, senior secured notes due 2015 and $139.4 million of 13.25, second lean senior secured notes due 2015 and entered into a new 35 million revolving credit facility with the group of banks.
Proceeds from the debt issuance were primarily used to repay the Company’s then-existing indebtedness. We intend to use the excess funds generated to invest in the growth of the company, and believe there are numerous benefits associated with the refinancing including extended maturities, operating flexibility including covenant relief increase the liquidity and certain tax benefits.
Well, this set of transactions increases the Company’s borrowing cost in the short-term as compared to the Company’s prior agreements. We believe the successful deployment of excess funds in combination with execution of our strategy is the best throughout to maximize shareholder value.
Now turning to the financial results for the first quarter. Packaged ice volumes for the quarter were down from last year’s first quarter, primarily as a result of adverse weather conditions encountered in almost all of our markets to the entire duration of the quarter. In addition to lower temperatures increased precipitation, the Company experienced a much higher than normal number of plant closer days due to extreme weather experienced in many of our markets.
Additionally, we are continuing to see the negative impact of macroeconomic factors on the top line. With that said, coinciding of the positive change in weather patterns at the very end of March and thus for an April. We have seen a significant improvement in our business during the month of April. In fact, we are currently trending a mid to high-teen percentage higher in volume than last year on an April month-to-date basis.
Well, this period of time is only a small part of the overall second quarter we are pleased and encouraged to be up to a good start. We are also significantly challenged during the first quarter on the cost side of the business. Well, we continued make good progress on our efficiency and automation agenda.
The fixed cost component of the cost structure in the smallest quarter of the year is significant and corresponding reductions in cost to offset volume declines are difficult to achieve. We have not seen any recent material inflationary trends in our cost and commodities are inline with our budgeted expectations.
Other activities during the quarter, include the completion of too small tuck-in acquisitions with an existing geographies with an aggregate cost of approximately $0.8 million. I will spend on this and other like initiatives in a few minutes. Now clearly this is not the start of the year we had anticipated, but we are pleased with the completion of the refinancing and remained optimistic about the year and the opportunities that we have to grow our existing based in new business, as well as beginning to take advantage of initiatives that will improve the efficiency of our operations.
At this point, I would like to turn the call over to Steve Janusek, our Chief Financial Officer for more detailed review of our results of our recent refinancing and balance sheet data. When Steve’s done, I’ll return to give an update on our strategic initiatives and make some additional comments. Steve.
Thanks Gil. Good morning. In regards for the first quarter, revenues were $35.9 million was $42.2 million last year a reduction of 15%, compared to 2009 volume sales for packaged ice in the first quarter 2010 were down a percentage in the low double digits. Pricing was down slightly from the first quarter last year, primarily due to mix changes within our distribution.
Cost of sales excluding depreciation was 34.9 million in the first quarter 2010, compared to 35.5 million in the same period of 2009. This decrease was primarily due to the effect of reduced volume sales, although cost did not decrease proportionately to revenues due to a significant portion of our costs that are fixed during the quarter. We currently do not have any commodity hedges in place and are reviewing various alternatives in this regard.
Operating expenses for the first quarter of 2010 were $13.1 million, compared to $12.2 million in last year’s first quarter. This increase of 900,000 was primarily driven by increases in labor and benefits costs, bad debt and other expenses offset by decreases in professional services.
Adjusted EBITDA for the first quarter of 2010 was negative $11.8 million, down from negative $5.1 million recorded in the same period of 2009. For reconciliation of adjusted EBITDA to net income or loss, please go to today’s press release on our website at www.reddy.ice.com.
Our trailing 12 month pro forma adjusted EBITDA as of March 31st, 2010 was $59.8 million. Total depreciation and amortization expense of the first quarter of 2010 increased $0.4 million from last year primarily due to the depreciation expense and new equipment in the service of the last 12 months.
Net interest expense in the first quarter increased by 0.1 million from 7.2 million last year to 7.3 million, primarily due to increased cost associated with our new debt offset by lower interest rates on the bank term loan that was repaid in connection with the refinancing and a decrease in the amount of 10.5% HoldCo discount notes, also is a result of the refinancing.
Also as a result of the refinancing, the company recognized 6.1 million of expenses in the first quarter of 2010 related to fees, expenses in the write-off of certain debt issuance cost related to debt that was repaid.
In regards to ongoing antitrust investigation and related litigation, we recognized $0.9 million of expense in the first quarter of 2010 as compared to $2.9 million in the prior year. These expenses continue to be funded by cash at the holding company level and have no impact on the operating company’s adjusted EBITDA.
In addition, we continue to have discussions with an additional insurance provider regarding future recoveries, although at this point we are not able to predict any additional reimbursement. The income tax benefit in this year’s first quarter was $11.2 million within effective rate of 33.2% compared to a $10.7 million benefit in the first quarter 2009.
Our net operating loss carry-forward was approximately $69 million at December 31st 2009. We currently do not anticipate any significant cash tax were at least 2013 as a result of the refinancing transaction.
Our net loss for the first quarter at 2010 was $22. 6 million or $1.01 per share as compared to a net loss $12.0 million or $0.54 per share in the first quarter 2010. As of today, we are $23.8 million of shares outstanding.
Prior to discussing the balance sheet and other financial metrics, I would like to make a couple of additional comments related to the recent refinancing. As Gil mentioned, during the month of March the company completed the issuance of 300 million of 11.25 senior secured notes due March 2015, and $139.4 million of 13.25% second lean senior secured notes to November 2015, and entered into new $35 million revolving credit facility due January 2014.
Those refinancing, the company has approximately 11.7 million of 10.5% senior discount notes due November 2012 outstanding at the holding company level. Those notes are called a par beginning in November of this year and can be refinanced with additional secondary notes at the operating company level. We expect to periodic review auction regarding the remaining wholesale company notes.
In regards to the new revolving credit facility the company has the ability to increase its revolver commitments to $50 million from the current level of $35 million. We also expect to consider this option in the future which will allow additional flexibility for the company.
Turning to the balance sheet. Cash and equivalents were $54.4 million as of March 31st, 2010 of which $9.7 million was at the holding company level. Additionally, restricted cash used to collateralize outstanding letters of credit was $12.3 million in March 31st. The refinancing transaction in the first quarter provided approximately $43 million of additional cash, net of fees and expenses.
As previously noted the holding company cash has been and it has being used to fund the cost of the antitrust investigations and related litigation. Based upon 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 unrestricted and restricted cash was $383.9 million as of March 31st, 2010. Our ratio of net debt to pro forma adjusted EBITDA was approximately 6.4 times on both the consolidated and operating company level.
Based on our swings in working capital and the CapEx cycle, this ratio is at a seasonal high at this time of year. In addition, at March 31st, the company was in compliance with all this covenants as computed under the credit facility, we expect to be in compliance with such covenants during the next 12 months. Specific to liquidity from the availability standpoint at March 31st we have full availability under our $35 million revolver.
Letters of credit are now provided under our separate facility that is cash collateralized. As of today the revolver is undrawn we continue to think about the revolver as a seasonal backup facility with only limited use during low points in our cash flow cycle.
Capital expenditures during the first quarter of 2010 net of dispositions and the reimbursement of the cost of the equipment placed under operating leases in early 2010 was 7.8 million.
In addition, as Gil mentioned we completed two acquisitions during the first quarter with a total acquisition cost of 0.8 [ph] million. We continue to expect that our base capital expenditure for 2010 be in a range of 19 to 21 million net of dispositions and operating leases.
Our base CapEx expectations include approximately 12 million in maintenance CapEx. However, as a result of the additional capital available from the proceeds to refinancing we expect to increase our investment in CapEx and acquisition over the coming quarters.
However, at this time we can not quantify our expectations with respect to those additional expenditures.
At this point let me turn the call back over to Gil for some further comments.
Thanks, Steve. As discussed on prior call we have been in our continuing with the execution of our strategic plan. I would like to spend a few minutes to provide an update on our progress. The area of operational efficiencies, we continue to move forward with projects involving our manufacturing operations, and while there are multiple initiatives in this category, the largest driver of savings is the installation of robotic equipment in our bagging line. We are approximately 30% complete with this initiative and have planned to fully complete the project by mid 2011.
We are also making very good progress in the logistics and distribution area with the primary initiative, being the automation and rerouting of our entire DFC operation. We're nearly 50% complete on the project and expect to be substantially complete within the next few months. Other projects in this area include the use of technology and best practice to reduce labor costs and improved time savings.
The administrative area, we are pleased to have materially reduced our DSO from a year ago and have continued with initiatives around centralization and standardization of processes. We continue to expect to realize at least 8 million in cost savings in 2010 as a result of this operational efficiency initiative. In a commercial area, we made inroad in selling new distribution in non-traditional segment, including the dollar store channel.
We also remained focus on the expansion of our proprietary in-store bagging technology, the ice factory and with additional capital in place from the refinancing. We expect to take advantage in placement opportunities and other own premise placements as they arrived, while the impact of this initiative are not yet evident in our results today due to the greater affect of whether an economic headwinds in the first quarter. We believe we are well positioned for future growth.
In general, we’re seeing more competition on the commercial front as many of our competitors have been impacted by the economy and adverse whether like us and are also looking for additional volume. With that said we think we’re well-positioned overall and believe we offer our customers superior value and option. As highlighted previously, we’re excited about the attractive opportunities for further growth through acquisition. We closed on two small transactions during the first quarter. We believe that successful acquisition execution is a core competency of our business. And that the current economic environment is conducive to accrete of acquisitions.
We’ve moved forward in discussions with the number of smaller tuck-in opportunity and expect additional closings in the coming quarters. Actually we continue to make progress in the ice machine leasing category through strategic partnership while this is a very small part of our business today. We believe that the leasing market provide attractive growth opportunities for the company in the years ahead. So, while we continue to have our shared challenges as we execute on our strategy, we remained optimistic about our prospects to successfully grow the company, increased cash flows, reduced our leverage ratio and increased shareholder value.
The next couple of quarters are important one for the company as we’re entering our busy selling season and we look-forward to seeing results from our efforts.
I would like to thank our employees, partners and investors for their continued support of our company, as we continue to navigate through some very difficult times. And I look forward to reporting further on the business after the second quarter.
I’ll now turn it back to the operator to close the call.
That concludes today's teleconference. We thank you for attending. You may now disconnect your telephone lines.
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