Hala Elsherbini – COO, Halliburton Investor Relations
Gil Cassagne – Chairman, President and CEO
Steve Janusek – EVP, Chief Accounting Officer, CFO and Secretary
Reddy Ice Holdings, Inc. (FRZ) Q3 2010 Earnings Conference Call November 4, 2010 10:00 AM ET
Hello, everyone and welcome to the Reddy Ice Holdings Incorporated Fiscal Year 2010 Third Quarter Earnings Results Conference Call. Your host for today’s call is Gil Cassagne, Reddy Ice’s Chief Executive Officer. (Operator Instructions)
I would like to turn the call over to Hala Elsherbini, Halliburton Investor Relations, who will begin the call. Please go ahead.
Thank you. Good morning. Thanks for joining us today for the Reddy Ice Holdings conference call to discuss the company’s third quarter 2010 financial results. Before I turn the call over to management, I would like to review a few items.
The company issued its third quarter earnings release this morning. And if you did not receive a copy, the release can be found on the Reddy Ice website at www.reddyice.com. Additionally, if you would like to be placed on the company’s e-mail or fax distribution for future announcements, please e-mail your request to firstname.lastname@example.org or call the 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 November 11th at approximately 1 PM Eastern Time and can be accessed by dialing 1-877-344-7529, and entering passcode number 445562, 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, November 4th, 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 third 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.
On October 29th, 2010, we were notified by the Anti-Trust position of the Department of Justice that it will take no action against the company or any of its present or past employees in connection with its investigation of the package ice industry. On that same date, we were informed by the SEC that it has closed its informal inquiry regarding the company and again no action will be taken against the company. We’re obviously very pleased with these developments.
In regards to the other ongoing government investigations specifically the multi-state civil investigations and the DoJ Civil Fraud investigation, there haven’t been any significant developments at this time.
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 punitive 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 third statement of claim, which is pending in Alberta.
Moving to the shareowner class action, we filed a motion to dismiss those claims several months ago. A hearing was held on that motion on October 22nd, 2010 and we’re awaiting a ruling. 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. The decision of the Anti-trust position is obviously recent and it’s our understanding that neither the state, attorney’s general nor the Department of Justice’s Civil Fraud Division has at this time made any determination regarding those investigations as a result of the decision by the Anti-trust Division.
Based on advice of our counsel, we will not conduct a question and answer session on this conference call. However, we look forward to and anticipate the opportunity to resume Q&A sessions on conference calls commencing with our fourth quarter earnings.
Now, turning to the financial results in the third quarter, packaged ice volumes for the quarter were up from last year’s third quarter, as a result of net account gains from both acquisitions and new distribution, a more stable, although still challenging, economic environment, and improved weather conditions offset by competitive driven volume losses. This is the second quarter with volume and revenue growth, a trend we have not seen since 2006 and we are continue to remain optimistic that we’ve turned the corner in regards to volume trends.
As discussed on our second quarter conference call, we are seeing increased competitive activity, particularly in the western region of our operations with 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 mode and in some cases, lower pricing, causing overall lower margins in those areas.
While there wasn’t significant new competitive activity during the third quarter resulting in volume losses or other changes, we continue to feel the effect of second quarter activities and will continue to until they’re out of our base. We’re pleased that our same store sales growth and new distribution fully offset the lost revenue from account losses and price achievements excluding the impacts of acquisitions.
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, similar to the second quarter, we continue to experience higher costs related to customer start-up and transition activities. In addition, higher costs were incurred with peak volume in markets, where certain operational initiatives were still in start-up mode, particularly in the month of July.
As mentioned on our last conference call, as we have continued to rollout new customers and channels, particularly in non-retail channels, we’ve experience the margin erosion on a percentage basis prior to the effects of our operational initiatives. In regards for our cost-savings and revenue efforts, we just recently implemented a new round of both revenue and cost initiatives targeting significant reductions in elements of our cost structure and new select revenue opportunities in order to combat the effects of competitive pressures. These initiatives involve personnel processes and quick win programs.
The combination of expected impacts from these initiatives and our savings to date give us confidence that we will realize at least $8 million in cost reductions this year. In fact, we believe the combination of these initiatives will result in at least that amount and additional cost savings in 2011.
Lastly, we continue to see year-over-year increases in our commodity expenses, primarily fuel, which is having a negative impact on margins.
Other activities during the quarter include the completion of three aggregate purchase price of approximately $3.5 million, bringing the first nine months totals to 11 acquisitions with an aggregate purchase price of $12.6 million.
Annual revenue and adjusted EBITDA associated with the 11 acquisitions completed during the first nine months of the year are $10.4 million and $3.4 million, respectively.
We’re also very pleased to announce that effective October 22nd, 2010; we amended and stated our revolving credit facility with Macquarie Bank Limited as the sole lender, besides of the amended facility remains at $50 million. This amended facility with Macquarie provides us with enhanced business flexibility, significantly less restrictive financial covenants and liquidity to continue to execute on our strategic plan and growth initiatives.
While the first nine months of the year have been challenging on several fronts, we remain optimistic about our ability to grow the company while improving profitability. As our press release indicated, our monthly results improved sequentially during the quarter with September itself showing year-over-year growth in pro forma adjusted EBITDA. In fact, over 90% of the decline in adjusted EBITDA for the quarter as compared to last year occurred in the month of July.
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 activity. 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 third quarter and first nine months results, revenue for the quarter were $120.1 million versus $115.4 million last year, an increase of slightly over approximately 4%. This brings our first nine months revenues to $260.2 million, compared to $257.6 million in the first nine months last year.
Compared to 2009, volume sales of packaged ice in the third quarter of 2010 were up a percentage in the upper mid-single digits. Pricing was down a couple of percentage points from the third quarter last year, primarily due to mix changes within our distribution channels and increased competitive pressures. For the first nine months, volume sales of packaged ice were positive in the low single digits.
Cost of sales excluding appreciation were $71.8 million in the third quarter of 2010, compared to $64.9 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 third quarter of 2010, compared to 3% of revenues in the same quarter last year.
While electricity expenses increased to 6% of revenue in this year’s third quarter, compared with 5% in the third quarter last year.
Our first nine months cost of sales were $168.8 million, compared to $157.6 million in the first nine months last year. This increase is again higher proportionately than the increase in the volume due to the highlighted issues above, which occurred in both the second and third quarter and the effect of the fixed costs during the weather-challenged first quarter.
Operating expenses for the third quarter of 2010 were $14.4 million, compared to $12.7 million in last year’s third quarter. This increase was primarily driven by increases in labor and benefit costs, bad debt cost and repairs and maintenance, partially offset by lower professional services and non-cash stock compensation expenses. In addition, the company record $0.2 million in severance expenses during the third quarter this year.
For the first nine months of 2010, operating expenses were $41.9 million, compared to $38.1 million, due mostly to the same causes in the third quarter.
Adjusted EBITDA for the third quarter of 2010 was $34.4 million, down from the $38.9 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 September 30, 2010 was $54.2 million.
Total depreciation and amortization expense for the third quarter of 2010 increased $0.9 million from last year, primarily due to depreciation expense on new equipment placed into service over the last 12 months and the effective acquisitions.
Net interest expense in the third quarter increased by $7.9 million from $6.2 million last year to $14.1 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 the anti-trust investigations and related litigation, we recognized $1.1 million of gross expense in this year’s third quarter of 2010, as compared to $0.7 million in gross expenses in the third quarter of last year. In the third quarter of this year, we also settled our outstanding claims with one of our insurance carriers and received $5 million. These expenses continue to be funded by cash at the holding company level and have no impact on the operating company’s adjusted EBITDA.
The income tax expense in this year’s third quarter was $0.5 million for a defective rate of $34.1 million compared to $13.4 million in expense, and an effective rate of 57.3 million in the third quarter 2009.
In regards to cash taxes, we continue to anticipate that we will not have any significant cash tax through at least 2013 as a result of the refinancing transactions completed earlier this year.
Our net income for the third quarter of 2010 was $9.0 million or $0.39 per diluted share as compared to net income of $10.0 million or $0.44 per diluted share in the third quarter of 2010. As of today, we have 23.0 million shares outstanding.
Turning to the balance sheet, cash and equivalents were $52.8 million as of September 30th, 2010, of which $12.9 million was at the holding company level. Additionally, restricted cash used to collateralize outstanding letters of credit was $10.3 million at September 30th. As previously noted, the holding company cash has been and is being used to fund the cost of the anti-trust investigations and related litigation.
Based upon the current status for 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. As of yesterday, our cash balance was approximately $44 million and our restricted cash balance was $10.3 million.
Our total debt, net of unrestricted and restricted cash, was $387.5 million as of September 30, 2010. Our ratio of net debt to pro forma adjusted EBITDA was approximately 7.1 and 7.2 times on a consolidated and operating company level, respectively.
As Gil mentioned, we are pleased to announce that effective October 22nd, 2010, we amended and restated our revolving credit facility with the Macquarie Bank Limited as the sole lender. The size of the amended facility remains at $50 million. The rational for this amended agreement includes broad covenant relief for the entire COD agreement and extension of terms to October 2014 and significantly more business flexibility around available baskets and associated provisions.
In short, it provides as ample liquidity to continue to execute on a strategic plan, growth initiatives without a significant amount of increased cost. Specific to covenants, we now only have two financial covenants. First, that we maintain $5 million in liquidity in the operating company at all times. Liquidity -is defined as unrestricted cash on hand, plus revolver availability. The second covenant is a leverage trust that requires that the ratio of any drawn revolver amounts at the end of a quarterly period to be less than 2.5 times pro forma adjusted EBITDA. Assuming that a fully redrawn revolver, the level of pro forma adjusted EBITDA required would be $20 million.
Currently, from an availability standpoint, we have full availability under a $50 million revolver. Letters of credit remain 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 the use during low points in our cash flow cycle.
The combination of a revolver capacity and cash on hand provides us with over $90 million of liquidity as of today. And over the next several months, based upon our normal working capital cycle, we expect to maintain liquidity near this level, subject to additional capital expenditures and acquisitions until we entered the lower cash flow period in the spring of next year.
Capital expenditures during the first nine months of 2010, net of dispositions and the reimbursement of costs of equipment placed under operating leases during 2010 were $25.7 million. In addition, as Gil mentioned, we have now completed 11 acquisitions to date in 2010 with a total acquisition price of $12.6 million.
In regards to CapEx, we have continued to invest in certain assets based upon our strategic plan during the last nine months. Our base CapEx expectation continues to include approximately $12 million in annual maintenance CapEx with the remainder being more growth orientated.
In addition, we are leasing certain assets under operating lease arrangements, primarily in the area of plan automation equipment to allow additional investments in other areas. Although we can’t quantify our expectations for the full year or next year in regards to CapEx or acquisitions at this time, we do expect continued activity in the acquisition area in the coming periods.
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 will continue with the execution of our strategic plan, specifically 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’ve made progress during the quarter with the installation of lines in several plants and should fully complete project by mid-2011. These initiatives remain on track and we’re 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 DSD operation. As mentioned previously, we did experience incremental costs in several areas while in start-up mode due to peak volumes and implementation issues affecting both the second quarter and beginning of the third quarter. We remain hard at work and the resolution of any outstanding issues.
We’re encouraged about the progress we expect to make over the winter season as conditions should permit further benefit maximization. This is a key area of focus for our operations team.
As mentioned previously, we recently embarked upon a new wave of cost initiatives designed to combat the financial effects of recent competitive pressure. While some of these initiatives are tough on the business in the short run, we believe they’re necessary to continue to put the company in a position for future and sustained growth. Many of these initiatives are front loaded during the next six months, so we’re looking forward to potential short-term progress end results.
Turning to our commercial efforts, although we’ve experienced more aggressive competition, particularly in the west, including California, Arizona and Colorado, relating both to our ice factory expansion and DSD operations, which has resulted in some account losses in lower pricing, we remain committed to our ISB expansion and our deliberate approach of placing new equipment in appropriate locations to secure the necessary return.
In terms of selling new distribution in non-traditional segments, including the dollar store and non-retail channels, we are pleased with our results overall thus far.
While we continue to see more headwinds in the commercial 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 remain excited about the attractive opportunities for further growth through acquisitions. We believe the transactions are completed in the third quarter, will benefit us strategically and financially. Many more candidates remain in our pipeline and 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.
We think the upcoming winter season in particular will provide opportunities for us to grow through acquisition.
Final areas of our strategy include entering ice vending and ice machine leasing. We continue to review opportunities to expand this effort to the benefit our shareowners.
So while we continue to have our share of challenges, we remain optimistic about our prospects to successfully grow the company, increase cash flows, reduce our leverage ratio and increase shareholder value. In addition, while we are very pleased with our current capital structure and the flexibility it provides, we do look for growth in cash flow and a lower leverage ratio to help us lower our cost of capital overtime and allow us to take advantage of other strategic opportunities as they become available.
We remain excited about the trends in our volume continue to have a sharp focus on both our expenses and capital expenditures to ensure that only necessary and strategic expenses are being occurred and that capital is allocated to the highest return opportunities. With our amended credit facility in place, we now have maximum flexibility regarding all of our initiative and continue to have significant liquidity.
Through a combination of better overall weather comps for the next six months, our existing and new cost initiatives, select revenue initiatives, and our ongoing acquisition program, we believe we will not only offset our competitive issues, but actually our adjusted EBITDA the next two quarters which should position us positively for further growth during next year’s summer selling season.
We’re also truly excited about the positive developments regarding the DoJ and related investigations and are hopeful for additional positive news in the coming periods. In this vain, and as mentioned in our last call, we do expect more engagement with our investors and new bond holders 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 of our company as we continue to navigate through some difficult times. Steve and I look forward to reporting further on the business early next year.
I’d now like to turn it back to the operator to close the call.
We thank you for attending today’s conference call. The call is now concluded. You may now disconnect your telephone lines.
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