Reddy Ice Holdings, Inc. (FRZ) Q2 2010 Earnings Call August 5, 2010 10:00 AM ET
Hala Elsherbini – Halliburton, Investor Relations
Gil Cassagne – Chief Executive Officer
Steve Janusek – Chief Financial Officer
Hello. And welcome to the Reddy Ice Holdings Incorporated Fiscal Year 2010 Second 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 in part is not permitted without prior written authorization of Reddy Ice Holdings. And as a reminder, this conference is being recorded today, Thursday, August 5, 2010.
I would like to turn the call over to Hala Elsherbini, Halliburton Investor Relations, who will begin the call. Please go ahead.
Thank you, Tony. Good morning, everybody. And thank you for joining us today for the Reddy Ice Holdings conference call to discuss the company’s second quarter 2010 financial results. Before I turn the call over to management, I would like to review a few items.
The company issued its second 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 offices 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 telephone replay will be available through August 12th at approximately 1 PM Eastern Time and can be accessed by dialing 1-877-344-7529, and entering passcode number 442795, and the webcast will be available for about -- 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, August 5, 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.
I would now like to turn the call over to Mr. Gil Cassagne, Chief Executive Officer of Reddy Ice.
Thanks, Hala. Good morning, and thank you to everyone for joining us today. The purpose of our call is to discuss our 2010 second quarter results, as well as, other items related to our business. Before I report on our results, I’d like to briefly comment on the DoJ investigation and related matters.
The DoJ investigation of the packaged ice industry is ongoing and we continue to cooperate, just as we have since we learned of the investigation. Since our last earnings call, there have not been any material developments in the investigation. There have also been no significant developments in the other ongoing government investigations.
Moving to the civil litigation for a moment, several months ago, we filed motions to dismiss direct purchaser and indirect purchaser claims in the multi-district antitrust litigation. The motion to dismiss relating to the direct purchaser claims was denied by the court on July 1, 2010. That portion of the litigation is now moving into the discovery phase. The motion related to the indirect purchaser claims has been fully briefed by the parties and is awaiting consideration by the judge.
In March of this year, two periodic class action statements of claims were filed against us in two different courts in Canada. A status conference has been held in the matter pending in Ontario and a schedule was set for proceedings related to the plaintiff’s motion for certification of the class. We have not been served with the second statement of claim, which is pending in Alberta.
Moving to the shareholder class action, we filed a motion to dismiss the shareholder class action several months ago. The motions related to this case have been fully briefed by the parties and are awaiting consideration by the judge. Also, the shareholder derivative litigation in Texas State Court is now set for trial on August 2, 2011.
And finally, the McNulty case continues to proceed with discovery in the normal course. As we’ve said in the past, the company continues to vigorously defend all of these cases. As with our past conference calls, due to the ongoing investigation by the DoJ and based on the advice of legal counsel, we will not hold a question-and-answer session on today’s call.
Now turning to the financial results for the second quarter, packaged ice volumes for the quarter were up from last year’s second quarter, primarily as a result of a more stable, although still challenging, economic environment, improved weather conditions and net account gains. This is the first quarter with volume and revenue growth, since the fourth quarter of 2007 and we are cautiously optimistic that we are turning the corner in regards to volume trends.
As mentioned on our first quarter conference call, we are seeing increased competitive activity, particularly in the western region of our operations with one of our large competitors and to a lesser extent with smaller technology-based competition. This competition has resulted in some account gains and losses, mix changes within our distribution area and in some cases, lower pricing, causing overall lower margins in those areas.
In regards to the cost side of the business, while we are pleased that we continue to make good progress on our efficiency and automation agenda, we did experience some higher costs related to customer start-up and transition activities, as well as, stress related to peak volume in markets, where certain operational initiatives were still in start-up mode.
In addition, as we roll out new customers, particularly in the non-retail channels, we do expect some erosion in margin on a percentage basis prior to the effects of our operational initiatives. We do continue to believe we are on track overall to realize at least $8 million in operational savings during the year, estimate that we have achieved approximately 30% of the savings during the first half of 2010.
Lastly, we are seeing year-over-year increases in our commodity expenses but they’re in line with our budgeted expectations.
Other activities during the quarter include the completion of six acquisitions within a variety of existing geographies with an aggregate purchase price of approximately $8.4 million, bringing the first six months totals to eight acquisitions with an aggregate purchase price of $9.2 million. Annual revenue and adjusted EBITDA expected for the eight acquisitions acquired during the first six months of the year are $7.1 million and $2.4 million, respectively.
We’re also very pleased to announce that effective August 4, 2010, we expanded the size of our revolving credit facility from $35 million to $50 million, thereby providing additional liquidity and flexibility to the company in the future.
In summing up the first six months of the year, clearly, this performance is not to the level we had expected at this point due to extremely poor weather during the first quarter, some competitive headwinds and initiative start-up costs. But we do remain cautiously optimistic about the year and the opportunities that we have to grow our existing base, as well as, gaining new business, as well as beginning to take advantage of initiatives that will improve the efficiency of our operations.
At this point, I’d like to turn the call over to Steve Janusek, our Chief Financial Officer, for a more detailed review of our results, balance sheet data and other activities. When Steve is done, I’ll return to give an update on our strategic initiatives and make some additional comments. Steve?
Thanks, Gil. Good morning. In regards to the second quarter and first six months results, revenues for the quarter were $104.2 million versus $99.9 million last year, an increase of approximately 4%. This brings our first six months revenues to $140.1 million, compared to $142.1 million in the first six months last year.
Compared to 2009, volume sales of packaged ice in the second quarter of 2010 were up a percentage in the upper mid single digits. Pricing was down a couple of percentage points from the second quarter last year, primarily due to mix changes within our distribution channels and increased competitive pressures. For the first six months, volume sales of packaged ice were very slightly positive.
Cost of sales excluding depreciation were $62.1 million in the second quarter of 2010, compared to $57.2 million in the same period of 2009. This increase was primarily due to the effects of increased volume sales, although costs increased proportionately more than revenue and volume due to the effects of customer transition and start-up activities in response to peak demand in certain markets where supply was temporarily outstripped. These increases were partially offset by savings from our operational initiatives during the quarter.
In addition, fuel expenses were 4% of revenues during the second quarter of 2010, compared to 3% of revenues in the same quarter last year. While electricity expenses decreased to 4% of revenue in this year’s second quarter, compared with 5% in the second quarter last year.
Our first six months cost of sales was $97.0 million, compared to $92.7 million in the first six months last year. This increase, again is highly -- is higher proportionately than the slight increase in volume due to the highlighted issues in the second quarter and the effect of the fixed costs during the weather-challenged first quarter.
Operating expenses for the second quarter of 2010 were $14.4 million, compared to $13.2 million in last year’s second quarter. This increase was primarily driven by increases in labor and benefit costs, stock compensation expenses and professional services, offset by lower incentive compensation.
For the first six months of 2010, operating expenses were $27.5 million, compared to $25.4 million, due mostly to the same causes as the second quarter. Adjusted EBITDA for the second quarter of 2010 was $28.4 million, down from the $30.1 million recorded in the same period of 2009.
For a reconciliation of adjusted EBITDA to net income or loss, please go to today’s press release on our websites at www.reddyice.com. Our trailing 12-month pro forma adjusted EBITDA as of June 30, 2010 was $59.9 million.
Total depreciation and amortization expense for the second quarter of 2010 increased $0.9 million from last year, primarily due to depreciation expense on new equipment placed into service in the last 12 months and the effective acquisitions.
Net interest expense in the second quarter increased by $7.1 million from $7.2 million last year to $14.3 million, primarily due to the increased interest costs associated with our new 11.25% Senior Secured Notes and 13.25% Senior Secured Notes, as compared to the debt refinanced in March of this year and additional total indebtedness outstanding following the refinancing.
In regards to our ongoing antitrust investigations and related litigation, we recognized $1.1 million of expense in the second quarter of 2010, as compared to $1.1 million in gross expenses in the second quarter of last year, which was offset by $0.6 million in insurance recoveries bringing last year’s expenses to a net $0.5 million.
Our gross quarterly expenses related to these matters have been fairly steady since the beginning of the first quarter 2009, after the higher costs incurred during the first 12 days of the DoJ investigation. 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’re not able to predict any future reimbursements.
The income tax expense in this year’s second quarter was $0.6 million for an effective rate of 22.3%, compared to $7.3 million in expense, an effective rate of 46.8% in the second quarter 2009.
In regards to cash taxes, we continue to anticipate that we will not have any significant cash tax at least 2013 as a result of the refinancing transactions.
Our net income for the second quarter of 2010 was $2.1 million or $0.09 per diluted share as compared to net income of $8.2 million or $0.37 per diluted share in the second quarter of 2010. As of today, we have 22.9 million shares outstanding.
Turning to the balance sheet, cash and cash equivalents were $36.7 million as of June 30, 2010, of which $9 million was at the holding company level. Additionally, restricted cash used to collateralize outstanding letters of credit was $10.6 million at June 30th. As previously noted, the holding company cash has been and is being used to fund the cost of the antitrust investigations and related litigation.
Based upon the current status of the investigations and related 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 assumption regarding matters beyond our control or knowledge. As of yesterday, our cash balance was approximately $50 million and our restricted cash balance was $11 million.
Our total debt, net of unrestricted and restricted cash, was $403.4 million as of June 30, 2010. Our ratio of net debt to pro forma adjusted EBITDA was approximately 6.7 times on both a consolidated and operating company level.
Based upon our swings in working capital and CapEx cycle, this ratio remains near its seasonal high for the year. In addition, at June 30th, the company was in compliance with all of its covenants, as computed under the credit facility and we expect to be in compliance with such covenants during the next 12 months.
As Gil mentioned, we are pleased to announce that effective August 4, 2010, we expanded the size of our revolving credit facility from $35 million to $50 million, providing additional liquidity and flexibility to the company. Currently, from an availability standpoint, we have full availability on our $50 million revolver.
Letters of credit are now provided under a separate facility that is cash collateralized. As of today, the revolver is undrawn and we continue to think about the revolver as a seasonal backup facility with only limited use during low points in our cash flow cycle.
The combination of the increased revolver capacity and cash on hand provides us with approximately $100 million in liquidity as of today. And over the next several months, based upon our normal working capital cycle, we expect cash to continue to build, subject to additional capital expenditures and acquisitions.
Capital expenditures during the first six months of 2010, net of dispositions and the reimbursement of costs of equipment placed under operating leases in early 2010 were $20.9 million. In addition, as Gil mentioned, we have now completed eight acquisitions to date in 2010 with a total acquisition price of $9.2 million.
In regards to CapEx, we have begun to invest in certain assets based upon our strategic plan during the last six months. Our base CapEx expectation continues to include approximately $12 million in maintenance CapEx for the full year with the remainder being more growth orientated.
In addition, we are leasing certain assets under operating lease arrangements to allow additional investments in other areas. At this time, we can’t quantify our expectations for the full year in regards to CapEx or acquisitions.
Lastly, I would like to comment on one other more administrative matter. For our note holders listening on the call, two days ago, we commenced a private to public exchange offer for all of the 11.25 and 13.25 Senior Secured Notes issued in the refinancing, as required by the registration rights agreement. We expect the exchange to close in early September. Please see the prospectus and registration statement on our website under SEC filings for further information.
At this point, let me turn the call back over to Gil for some further comments.
Thanks, Steve. As discussed on prior calls, we have and are continuing with the execution of our strategic plan, generally speaking believe we are on course. We are making revisions in certain areas as conditions dictate. I’d like to spend a few minutes to provide an update on our progress and direction.
In 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 lines.
We are approximately 50% complete with this initiative and have plans to fully complete the project by mid-2011. These initiatives overall are progressing extremely well and we are seeing considerable savings in plants where funds have been invested.
We’re also making good progress in the logistics and distribution area with the primary initiative being the automation and rerouting of our entire [DSB] operation. As mentioned previously, we did experience extra costs in several areas while in start-up mode due to peak volumes.
While we are nearing completion in our major markets with this initiative at this point, we are hard at work smoothing out the implementations and working out all associated issues. Other projects in this area include the use of technology and best practice to reduce labor costs and improve time savings.
Implementation of programs and best practice in the administrative area also are continuing as expected. We continue to expect to realize at least $8 million in cost savings in 2010 and incremental cost savings in 2011 and ‘12 as a result of these operation result efficiency initiatives and although we have had some hiccups, we are confident these changes will make the company more efficient, provide savings and allow for better customer service.
Turning to our commercial efforts, in general we’re seeing more aggressive competition, particularly in the western portion of our operations, including California, Arizona and Colorado. This competition is related to both our Ice Factory expansion and [DSB] operations and is resulting in lower [DSB] pricing.
In regards to our ISB expansion, we remain committed to our delivered approach of placing new equipment in appropriate locations to secure the necessary return and we are making progress in this area in certain markets and having some challenges in others.
We also continue to make inroads in selling new distribution in non-traditional segments, including the dollar store channel and many non-retail markets. New distribution has recently come online and we expect to see the results in coming periods offsetting some of the competitive pressures we’ve already discussed.
Overall, while we are seeing more headwinds in this area, we think we’re well positioned and believe we offer our customers superior value, a full suite of product and distribution capabilities, and a multitude of options to best service their needs.
As highlighted previously, we’re excited about the attractive opportunities for further growth through acquisitions. Acting on strategy, we closed on six transactions during the second quarter, bringing the year-to-date total to eight and have many more candidates in our pipeline.
We continue to believe that successful acquisition execution is a core competency of our business and that the current economic environment is conducive to accretive acquisitions. Our expectation is to continue with these efforts and possibly accelerate to a degree. Having multiple levers to pull in terms of similar return investments was and still is a key philosophy of our strategy.
The final areas of our strategy include entering ice vending and ice machine leasing. We have made good progress in these areas, particularly ice machine leasing through a strategic partnership. While this continues to be a very small part of our business today, we believe that the leasing market provides attractive growth opportunities for the company in the years ahead. We continue to review opportunity to continue this expansion for the benefit of our shareowners.
So while we continue to have our share of challenges as we execute on the strategy, we remain optimistic about our prospects to successfully grow the company, increase cash flows, reduce our leverage ratio and increase shareholder value. We’re particularly excited about our volume trends as four out of the last eight months and all three months in the second quarter showed year-over-year growth.
With what appears to be at least a stable economic environment and better weather trends, we are hopeful for these trends to continue, although our July volume did start slowly compared to last year with weakness in Texas and other western markets, primarily around the 4th of July holiday, which was particularly wet due to tropical storm activity. However, since then, volumes have been strong year-over-year.
We do have a short focus on both our expenses and capital expenditures to ensure that only necessary and strategic expenses are being incurred and capital is allocated to the highest return opportunities, ensuring sufficient liquidity for the business will remain the highest priority.
Although, we continue to be advised not to hold a question-and-answer session on these calls due to the outstanding DoJ investigation, we expect more engagement with our investors and new bondholders in the coming months and quarters as we continue to execute and report on our strategy.
I’d like to thank our employees, partners and investors for their continued support to our company as we continue to navigate through some very difficult times. And I look forward to reporting further on the business after the third quarter.
I’d now like to turn it back to the operator to close the call.
At this time, we thank you for attending today’s conference call. You may now disconnect your telephone lines.
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