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Imperial Sugar Company (NASDAQ:IPSU)

F1Q08 Earnings Call

January 29, 2008 3:30 pm ET

Executives

Bill Schwer – Senior Vice President, General Counsel

John Sheptor – President, CEO

Hal Mechler – CFO

Analysts

Steven [Nissan] – Mid Flow Capital Investments

Hamed Khorsand – BWS Financial

Jonathan Lichter – Sidoti & Company

Vic [Kumar] – Sound Post Partners

Mark [Shelfin] – [Nat] Partners

Jeff Bolton – [Perrynail]

Operator

Good day ladies and gentlemen and welcome to the Q1 2008 Imperial Sugar earnings conference call. My name is Lisa and I’ll be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question and answer sessions towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and the coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today’s call, Mr. Bill Schwer, Senior Vice President, General Counsel. Please proceed sir.

Bill Schwer

Thank you. Good afternoon. Joining me on the call today are John Sheptor, our newly designated President and CEO, Bob Peiser who has taken on the new title of Vice Chairman as he reduces his involvement with the company, this event was announced earlier today in a press release, Hal Mechler, our CFO and [Yarome Geaser], Director Strategy and Corporate Development.

Our conference call today to discuss results for the first quarter of fiscal ’08 is being transmitted live over the web and is being recorded. This replay will be available through the close of business February 29, 2008, but all information is current as of today, January 29, 2008. Any recording or other use of this live transmission or audio replay is not allowed without the prior written permission of Imperial Sugar.

The earnings press release issued this morning, our form 10K for fiscal 2007 and our form 10Q for the first fiscal quarter of 2008 are available on the shareholder relations sections of our website at imperialsugar.com. Today’s discussion and responses to questions may contain forward looking statements that represent management’s expectations and beliefs concerning future goals and performance by imperial sugar and are based on information available as of today and involve risk and uncertainties that could lead to actual results different from management’s expectations.

Some of these risks and uncertainties are listed on our SEC filings and we urge you to consult those documents. At this point I’ll turn the call over to John Sheptor.

John Sheptor

Good afternoon. It’s a pleasure to address you this afternoon for all who are on the call. I will make my comments regarding the state of the market and the company initiatives and then ask Hal to address financial results. Following Hal’s highlights we will open the call for questioning.

Market pricing in the first quarter 2008 has remained relatively stable compared to fourth quarter 2007. The USDA’s crop projections have been increased further resulting in end of the crop season forecast of more than 19% crop to use ratio. Marketing pricing anticipated this over supply during the middle of last year and has already assimilated this condition into their current levels. Raw sugar prices were depressed at the beginning of the quarter anticipating that surplus production in Mexico would lead to increased exports.

This possibility, however, was partly mitigated by the growers strike in Mexico in November. This delayed the start of the harvest and ultimately reduced the volume potential. Since that time, raw sugar pricing has moved upward accordingly. Natural gas pricing has been approximately equal to previous year. Changes in operations allowing for a higher percentage of coal use, however, is given us a mix advantage to beneficial pricing.

Market competition remains aggressive, particularly in the food service channel and industrial large bag offerings. These markets the more typically spot purchase in nature and more representative of short term supply conditions. The resulting pricing has created an overall softness in club volume as restaurants find it more advantageous to purchase directly. Market pricing, however, is predominately contractionally [sic] based and therefore much more stable. Branded retail results were solid through the holiday baking season.

We achieved market share improvement in the Imperial brand due to our successful in store merchandizing and our Dixie crystal market share was sustained even in the face of several large grocery chains choosing to promote store brands over supplier brands. Contract negotiations will be quite active in the second quarter with several large grocers completing annual private label bids and as industrial customers begin to turn their attention to 2009.

We have also seen the issue of genetically modified beet sugar being elevated among mainstream media in recent days and with some large industrials. Several producers have chosen to plant these varieties and the result will be a differentiation with natural with natural king sugar. This subject will certainly receive lots of attention in the upcoming months. The first six weeks of operations of our Mexican joint venture have been encouraging as prospective customers see the potential benefits that we bring to the Mexican and US marketplace.

Key leadership for the joint venture has been hired, including the general manager and sales director and recruiting for the remaining staff has been initiated. Qualification visits with large customers have been scheduled beginning in the second quarter. Clearly, Imperial’s reputation in established US market relationships have been influential in achieving these early results. As we move through our second quarter, I can confidently say Imperial is well positioned to meet competitive market conditions with its quality products and excellent service standards, but we will not be complaisant.

We will continue to defend our status as a leading processor and marketer of refined sugar while we research and develop new and innovative product solutions. As our marketing joint venture grows, we will provide the necessary support to maximize its benefits. Finally, nothing can be accomplished without a dedicated team of employees and we intend to invest in training, developing and recruiting talent as we emphasize operational excellence in every area of our business. I will turn the call over to Hal so he can summarize our first quarter results.

Hal Mechler

Thanks John. Good afternoon. I’ll cover the financial results that were identified in our press release and our form 10Q that we filed this morning. There is more detail in both of those documents and I’ll refer you to that and be happy to answer any questions during the Q&A. Our financial results for the first quarter ending December 31, 2007, as John indicated, continues to reflect the results of the industry trend of ample supplies and softer prices. Net income for the first quarter was $12.3 million, or a $1.04 per diluted share, compared to income of $15.7 million or $1.37 per diluted share last year in the first quarter.

Of course this year’s income includes an $11.2 million pretax distribution from our [chart] for a limited partnership investment which we had previously announced. Net sales for the fourth quarter were $215 million, down from the $227 million last year due to lower prices. Domestic prices in the current quarter were 11.4% below the same quarter last year. Total volume for the quarter was virtually unchanged from the year earlier period, although there was a switch between industrial and total volumes. Excuse me. Gross margin for the quarter was 7.9% of sales compared to 17.1% of sales last year.

This 9.2% reduction in gross margin percentage was driven by lower domestic sales prices offset in part by lower raw sugar cost. SG&A was $9.9 million for the first quarter, a decrease of $2.2 million from last year’s first quarter, primarily resulting from lower advertising, compensation and benefit costs. Operating income for the quarter was $3.6 million compared to last year, $23.9 million. A couple of other items of financial interest. Interest expenses went up $436,000 while interest income was $918,000. Our estimated annual effective tax rate, you’ll note, was quite low at 25%, largely the result of tax free investment income and our equity in the earnings of the Santos Mexican joint venture.

Long term debt at the end of the quarter was $1.5 million and we had no borrowings under our revolving credit agreement. Cash and marketable securities at the end of the period was $105 million, obviously this cash position was before funding the $2.50 special dividend which was paid January 3. Capital expenditures were $1.8 million for the quarter and capital expenditures for the full year are expected to be between $16-$18 million. For a more complete discussion of our operating results, I encourage you to review the information provided in our form 10Q, particularly in MD&A. And again I’d be happy to discuss that more fully during the Q&A. John.

John Sheptor

I think we’ll open now to questions.

Hal Mechler

Operator, if you’d open up the lines for questions please.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen, if you wish to ask a question please press star followed by one on your touchtone telephone. If your question has been answered or if you wish to withdraw your question, please press star two. All questions must be submitted at the time in order for it to be registered. Questions will be taken in the order received. Please press star one to begin please. Our first question comes from Steven [Nissan] from Mid Flow Capital Investments, please proceed.

Steven [Nissan] – Mid Flow Capital Investments

Thank you very much, John congratulations on your promotion, I’m sure you’ll be able to take the challenges head on. A couple of things, moving into ’08, we’re heading into a very challenging economy in terms of manufacturing capacities and through put, what are going to be your operational improvement initiatives revolving around lean manufacturing PPM six sigma help improve through puts throughout your plants and overall improved productivity throughout your organization?

John Sheptor

Thank you for your question. It’s a great lead in with regard to the priorities that we’ve set at the manufacturing level. We have aggressively gone to the market and recruited experience in these particular areas of manufacturing productivity and we’ve begun the foundational work to prepare for full implementation over the next several years.

In the short term, our focus is clearly on maintenance and effectiveness to improve reliability of our equipment and from a lean perspective, working on work flow analysis to ensure that we have efficient use of our labor resource. That will be quickly followed up in terms of our execution plan with good baseline estimation and calculation of our defect rates so that we can effectively do the analysis for root cause elimination for any variance that we have on a quality front which is leading to excessive or unnecessary costs.

Steven [Nissan] – Mid Flow Capital Investments

And regarding like metrics within your manufacturing plants, how are you guys going to be judging yourself? Are you looking at OEE, is RONA important to you? What specifically is going to be important to you in ’08 to determine how successful your plants are operating?

John Sheptor

Fundamentally, if you look at six sigma and lean technology, you’re first efforts are to set what varability [sic] that you have in your production process and then establish interventions to bring yourself into control and then work to a much more capable result from your performance. An so our initial metrics that we will utilize in the organization and at the production floor level will be focused on defects produced per million units through the various packaging and refining areas so that our workforce becomes sensitized to the elimination of variations.

Steven [Nissan] – Mid Flow Capital Investments

Are there certain plants that concern you more than others right now or are all pretty much equal as you go into ’08?

John Sheptor

Our two refineries are quite similar in nature in terms of their capabilities and so that’s a great opportunity for us that we can leverage our learning in our implementations in parallel with each other.

Steven [Nissan] – Mid Flow Capital Investments

Okay and final question going forward, for the remainder of ’08, you know obviously it’s going to be a very challenging time for a lot of manufacturers, what systems are you going to be putting in place, what types of solutions are you going to be using to accelerate your CI initiatives. Are you imputing and ERP system? What are you guys doing to accelerate those initiatives?

John Sheptor

If you could please repeat part of your question towards the end?

Steven [Nissan] – Mid Flow Capital Investments

[Repeating question]

John Sheptor

First step with regard to our intervention and our path towards improved productivity has been to recruit leadership into our manufacturing function that has solid and successful experience with using these tools in other companies that they were previously employed. Second, will be to selectively employ third party consultants that can bring in the support training and tools applications that certainly are critical in any type of transformation of this nature. And then third, is frankly to keep it simple, is to work at the floor level in a language and in a format in a visual way that every employee can understand. It’s absolutely critical at the early stage of the transformation that the entire organization embrace and move together in a committed way towards the improvement.

Steven [Nissan] – Mid Flow Capital Investments

Great, thank you very much I wish you continued success and good job in your first couple of months.

Operator

Our next question comes from Adam Poland from [Barington] Capital Research. Please proceed.

John Sheptor

Good afternoon Adam.

Operator

Adam’s line disconnected. Our next question comes from Hamed Khorsand from BWS Financial, please proceed.

Hamed Khorsand – BWS Financial

Hi, thank you for taking my call. Just two questions, one, could you provide more a description on the SG&A line decreasing by such a large amount. Would the current rate be the level that you’ll be operating at going forward?

Hal Mechler

I think well first of all Hamed you know we don’t give forward guidance. I think we have made some adjustments in some of the spend rates that are reflected in the first quarter results. We have made some adjustments in compensation, incentive compensation given the earnings level of the company has been adjusted for and we’ve seen some benefit reductions but some of that’s in areas like medical et cetera where it’s not a systemic change as much as it’s just the way things have played out in the first quarter. So again we don’t give forward guidance so I hate to tell you to just take that number times four but I will tell you that we’ve made some adjustments in the spend rates.

Hamed Khorsand – BWS Financial

Okay and given that you don’t provide guidance, can you provide anything on the current quarter? I mean is it going to be as seasonal as it has been in the past?

Hal Mechler

Well as you know and as we’ve talked a number of times, the second fiscal quarter, the first calendar quarter that we just began is historically the seasonally weakest quarter both in volumes and product mix. It’s coming off of the holiday season where we have strong grocery volumes and frankly strong volumes in the industrial sector as food manufacturers are consuming more sugar and so both the total volume typically in the second quarter drops off and the product mix in terms of grocery pull will drop off and we would expect this quarter to follow that pattern.

Hamed Khorsand – BWS Financial

Okay, thank you.

Operator

Our next question comes from Jonathan Lichter from Sidoti & Company, please proceed.

Jonathan Lichter – Sidoti & Company

Hi guys. Can you talk a little bit more about the Mexican joint venture and what kind of volumes you did there in the first six weeks?

John Sheptor

I’m getting a little stare around here to remember the volume number. As we reported our share of the earnings were $200,000 and it was six weeks. We sold about a little over 40,000 tons in that six week period of time which is reasonably ratable for their annual production cycle.

Jonathan Lichter – Sidoti & Company

Okay, alright and in the other income line, I guess besides the Mexican earnings and the partnership gain, there was still about probably another $800,000 or so, what is that composed of?

Hal Mechler

Well the biggest component of that Jonathan is our organic sugar venture where we own 45% of an organic sugar marketer. That’s the biggest single item in there.

Jonathan Lichter – Sidoti & Company

Okay, on the non-maintenance part of the cap ex, what kind of rate of return do you generally target?

Hal Mechler

I think we’ve had this discussion with a few other investors, we have sort of a threshold an absolute threshold right at 15% after tax IRR, but frankly we would find it very difficult, it’d have to be a fairly strategic project to go that low, so something reasonably north of that to really get our attention, to get our interest.

Jonathan Lichter – Sidoti & Company

Okay, thank you.

Operator

Our next question comes from Vic [Kumar] from Sound Post Partners, please proceed.

Vic [Kumar] – Sound Post Partners

Hi guys. I had a question on consumer pricing over the last quarter. It looked like as I would have expected with ship pricing weakness the industrial pricing decline, food service decline, looks like consumer went up a reasonable amount, just wanted to get any color on that.

Hal Mechler

On a consecutive quarter basis are you looking at?

Vic [Kumar] – Sound Post Partners

Yes I was looking at it consecutively.

Hal Mechler

On a consecutive quarter basis we did a boost if you will, a favorable mix within consumer in the first fiscal quarter, fourth calendar quarter because of the higher percentage of grocery specialty items, primarily browns and powdereds which commands a higher price. So that consecutive quarter view will give you a little bit of a false reading. There is some decline on it if you look at a comp quarter from prior first quarter I think you’ll see a little over 5%, 5.5% decline in average grocery pricing.

Vic [Kumar] – Sound Post Partners

You mean from Q1 ’07 to Q1 ’08?

Hal Mechler

Correct.

Vic [Kumar] – Sound Post Partners

Okay but if I look sequentially from Q4 ’07 to Q1 ’08 there’s a mix issue?

Hal Mechler

Yes.

Vic [Kumar] – Sound Post Partners

So I guess I should not expect that level.

Hal Mechler

Yeah I think you’ll see that mix issue virtually every quarter, if you look at the first fiscal quarter each year you should see that kind of an impact.

Vic [Kumar] – Sound Post Partners

Okay.

John Sheptor

As you enter the baking season of the two holidays, the percentage of powdered sugar and brown sugar that we sell versus white refined sugar is higher than at other times of the year and those products typically command a higher price.

Vic [Kumar] – Sound Post Partners

Great, that was my other question. Thanks guys.

Operator

Our next question comes from Mark [Shelfin] from [Nat] Partners, please proceed.

Mark [Shelfin] – [Nat] Partners

Good afternoon gentlemen. A couple of quick questions. First off, the tax rate at 25%, is that sustainable for the rest of the year?

Hal Mechler

That is our estimate for the full year.

Mark [Shelfin] – [Nat] Partners

Okay, secondly, did you have any residual carryover of high margin contracts in the quarter?

Hal Mechler

We always have a variety of calendar year contracts in our portfolio of contracts and to the extent that they were negotiated earlier in a declining market, then they would by necessity be higher than the current more recent contracts would be. So our first fiscal quarter is always a mix of new crop year contracts starting October 1 plus the last quarter of the annual calendar contracts.

Mark [Shelfin] – [Nat] Partners

Can you give me some sort of estimate to the percentage of the contracts that are priced at a higher margin than the current spot environment?

Hal Mechler

We wouldn’t disclose that normally and I don’t have that information at hand anyway.

Mark [Shelfin] – [Nat] Partners

Fair enough. Thirdly, and this was alluded to earlier, SG&A came in at a little shy of $10 million, I look back the last 12 quarters or so, that’s kind of a low there, in the first question you alluded to some additional hires in the queue I believe you alluded to the new JV in Mexico that you made some hires there. How much of that could potentially add to SG&A over the coming quarters?

Hal Mechler

The Mexican joint venture does not reflect in, it’s not consolidated, so those hires are not in our SG&A line. The net results are our share, our half of the net results of the JV are in other income. So SG&A is not impacted by Mexico.

Mark [Shelfin] – [Nat] Partners

And what about the new hires that was mentioned in the first question?

John Sheptor

The new hires within the organization should support our productivity improvement at our refining sites, would be in the costs of goods not in the SG&A. I can respond to some of your question with regard to the type of SG&A that we spend in the first quarter versus what we do at other times of the year. A lot of our research and development occurs in the last three quarters of the year as we prepare for the next holiday season and so there will be some evening of spenditures [sic] over the year period that wouldn’t necessarily be reflected in the first quarter.

Mark [Shelfin] – [Nat] Partners

Okay, fair enough and then anything new on the Cargill announcement at all?

Hal Mechler

On the Cargill announcement?

Mark [Shelfin] – [Nat] Partners

Yep.

Hal Mechler

Nothing that we’ve seen, no.

Mark [Shelfin] – [Nat] Partners

Okay, alright thanks so much for your time, I appreciate it.

Operator

Our next question comes from Jeff Bolton from [Perrynail], please proceed.

Jeff Bolton – [Perrynail]

Good afternoon. In the Q you said that industrial prices are expected to decline in 2008, are you saying that they’re going to decline on a year over year basis or are they going to decline sequentially from Q1 levels?

Hal Mechler

The reference was a decline from Q1 levels.

Jeff Bolton – [Perrynail]

From Q1 levels, okay.

Hal Mechler

And largely the contract phenomena that we spoke about with an earlier caller.

Jeff Bolton – [Perrynail]

Okay, that’s all I had, thanks.

Operator

Our next question comes from [Kit] Kumar from Sound Post Partners, please proceed.

Vic [Kumar] – Sound Post Partners

Hi guys this is, I have another follow up question which I forgot to ask earlier. Well I guess I missed what you guys mentioned during while you were talking. You discussed a 25% tax rate. Could you mention again what was behind that?

Hal Mechler

The two largest drivers in that low rate are tax free municipal income and the earnings in our Mexican joint venture which are not subject to US tax. They’ve already been tax affected for Mexican tax.

Vic [Kumar] – Sound Post Partners

And from the Mexican joint venture I think you guys said your share of earnings during Q1 was 200

Hal Mechler

The net was 200,000 correct.

Vic [Kumar] – Sound Post Partners

Right and what was the tax free, okay the tax free municipal income is interest income I guess.

Hal Mechler

Yes.

Vic [Kumar] – Sound Post Partners

Okay, got it, thank you, that was it.

Operator

Once again to ask a question please press star one to begin please, that’s star one. We have no further questions at this time.

John Sheptor

Well we thank you very much for joining us this afternoon and with that we’ll close this call. Thank you very much.

Operator

Thank you for participating in today’s conference, this concludes the presentation, you may now disconnect, have a great day, thank you.

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Source: Imperial Sugar Company F1Q08 (Qtr End 12/31/07) Earnings Call Transcript
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