Executives
Louis T. Bolognini - Senior Vice President, Secretary and General Counsel
John C. Sheptor - President and Chief Executive Officer
Hal P. Mechler - Senior Vice President and Chief Financial Officer
Analysts
Jonathan Lichter – Sidoti & Company
Hamed Khorsand - BWS Financial
Imperial Sugar Co. (IPSU) F3Q08 Earnings Call July 30, 2008 9:00 AM ET
Operator
Good day, ladies and gentlemen and welcome to the third quarter 2008 Imperial Sugar earnings conference call. My name is Fab and I’ll be your coordinator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Lou Bolognini, General Counsel.
Louis T. Bolognini
Thank you, Fab. Good morning. I’m Louis Bolognini, 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 is to discuss the results for the third fiscal quarter of 2008 and year to date results is being transmitted live over the web and is being recorded and this replay will be available through the close of business on August 30, 2008, but all information is current as of today, July 30, 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 10-Q for the first, second, and third fiscal quarters of 2008, and our Form 10-K for the year ended September 30, 2007 are available in the shareholder relations section 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 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. At this point I will turn the call over to John Sheptor, our President and CEO.
John C. Sheptor
Thank you, Lou. Good morning and thank you for joining today's call. We’d like to take some time this morning to discuss our results for the quarter and provide you with updates on several important subjects. We continue to work with all of our employees, engineers, local community, and OSHA to provide the necessary support in the aftermath of the Port Wentworth tragedy. In that respect, we share the same mission with OSHA which is to provide a safe workplace for our employees and contractors.
As you know, we received citations from OSHA and made our initial review and evaluation of the allegations contained in the citations. We look forward to continuing our partnership with OSHA in the future as we have in the past; however, we have filed with OSHA a Notice of Contest in which we challenge the allegations of the citations, the characterization of the violations, and the penalties proposed.
We are continuing in our efforts at Port Wentworth to finalize demolition and prepare the site for construction. We mentioned in our release that we have received the engineering reports which have confirmed the majority of the rebuild costs. We anticipate that principal construction contracts should be signed within the next 30 to 60 days. We are encouraged that this timeline keeps us on track to begin bulk sugar production later this year with complete restoration of our packaging facilities by early summer 2009.
We recently announced an increased investment in Wholesome Sweeteners. Our venture with Edward Billington and Sons we believe Wholesome Sweeteners is the leading organic sugar company in the United States and is well-positioned to capture increased sales from one of the fastest-growing product groups in the food industry. This decision fits very well with our overall strategy to enter new businesses, expand channels of distribution, develop innovative products, and pursue new avenues of growth beyond our core business. We also see great promise to achieve growth in the Mexican market. Our joint venture in Mexico has now completed staffing of key executive positions, sales activity is increasing, and pricing in Mexico has recovered. We see much potential for the future; however, at the moment, overall industry conditions remain difficult. The company’s performance during the quarter continued to be affected by the reduced sales volumes at the Port Wentworth refinery due to the accident. In addition, higher energy and freight costs contributed to the lower results.
I will now turn the call over to Hal to discuss our results in more detail.
Hal P. Mechler
Thank you John, and good morning. I’m going to provide a brief summary of the results of the quarter today and discuss the impact of the Port Wentworth incident on our operations and financials. There is of course more detail in the 10-Q that we filed today so please reference that filing as well.
Our third quarter fiscal 2008 results continue to be impacted by the aftermath of the Port Wentworth incident both in the form of restricted production volumes and higher costs. These factors, coupled with cyclically low industry prices and high energy costs, led to the operating loss reported this quarter. Our net loss for the third quarter was $12.5 million or $1.07 per diluted share. This compares to income from continuing operations of $11.3 million or $0.95 per diluted share a year ago. This quarter’s results include a $5.2 million pre-tax charge related to the accident that occurred in February at Port Wentworth. Last year’s results include a $6.8 million pre-tax gain related to the settlement of an arbitration claim.
The Port Wentworth charge is comprised of property impairments, inventory write offs, demolition, and other costs totaling $13.9 million offset with an $8.7 million of property insurance recoveries recognized in the quarter. I should point out here that we do anticipate additional recoveries in coming quarters; however, $8.7 million is what we were allowed to recognize under the accounting standards this quarter. We did not recognize any amounts for business interruption insurance. Again, there’s more information about all of those subjects in the Form 10-Q.
Sales for the second quarter declined to $107 million which is down from the $216 million in the same period last year. Port Wentworth, which represents about 60% of our production capacity, was not operational during the quarter. We increased production at the Gramercy refinery and purchased sugar from other producers and as a result, sugar sales volumes were down about 50% from the prior quarter. Lower pricing from servicing industrial sales contracts negotiated in an over supply domestic industry during 2007 reduced industrial sales prices 5% for the quarter compared to the same quarter last year. Consumer and food service prices have recovered from the depressed levels earlier this fiscal year and were virtually unchanged from last year’s third quarter.
Increasingly pessimistic USDA forecasts of a small beet crop this coming fall together with more optimistic USDA demand estimates have led to forecasted tighter domestic supplies in fiscal 2009. As a result, prices and margins have firmed in the refined sugar forward contract market for 2009 while sugar futures have seen proportionately smaller increase in prices. However, because of our production constraints in 2008 we expect our fiscal 2009 volume of lower priced sales contracts which were negotiated prior to the upward price movement will be higher than usual and again there’s some more detail on that subject in the Form 10-Q.
Higher manufacturing and freight costs coupled with lower sales prices were the primary drivers which caused our gross margin to fall from around 9% last year to a negative 4.7% in the current quarter. Higher energy costs were the result both of an unfavorable fuel mix during the quarter due to the elimination of production activity at Port Wentworth along with higher natural gas costs. Port Wentworth uses primarily lower priced coal as its energy source while Gramercy uses higher cost natural gas. Freight costs were driven largely by a 12% increase in average length of haul during the quarter as well as fuel surcharges and freight on inbound sugar that we purchased from other producers.
Our SG&A line showed improvement as a decrease of $800,000 due to lower brokerage advertising and professional services cost. Our annual tax rate for the year is 37.5%, higher than last year because of the elimination of tax-free interest this year. In terms of our liquidity, our cash and temporary investment balance at the end of the quarter is $73 million. As you know our bank agreement provides for loans up to $100 million and we had drawn no advances under that line.
I want to make a couple of comments to reinforce some thoughts on insurance. Insurance recoveries as we discussed before that are deemed probable and reasonably estimatable may be recognized up to the extent of the loss recorded. As I’ve mentioned previously, we had $8.7 million of such recoveries deemed probable and recorded during the third quarter. Recoveries which are deemed possible had been disclosed in the 10-Q but will not be recognized, that is, recorded as credits, until they are probable. Finally, insurance recoveries which result in gains, including recoveries under business interruption coverage, are reported only when realized by settlement with the insurers. We have received $35 million in advances on our insurance policy to this point. Again, I would encourage you to review the information provided in our Form 10-Q, particularly in MD&A. We have also posted supplemental additional information to our website that investors may find meaningful.
That concludes my remarks, so Fab, I think we’re ready to open up the line for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Jonathan Lichter from Sidoti and Company.
Jonathan Lichter – Sidoti & Company
Are customers willing to sign long term agreements based on your reconstruction timetable?
Louis T. Bolognini
Jonathan, we have been signing agreements for 2009 and a little bit beyond that in 2010 with those customers and the answer to your question basically is yes.
Jonathan Lichter – Sidoti & Company
And those are based on current market prices?
Louis T. Bolognini
Those are based on market prices at the time that they were negotiated. The market has been moving upward steadily since mid-spring, April. We’ve been negotiating contracts with customers for calendar 2009 primarily, some rolling into 2010 during that period of time.
Jonathan Lichter – Sidoti & Company
What percentage of ’09 have you contracted already?
Hal P. Mechler
Jonathan, I know you’d like me to answer that question with some very precise numbers. The number, and I don’t know if you’ve had a chance to look at the Q, what we said in the Q was that the contracts that were negotiated prior to the incident in Savannah that are being carried into fiscal ’09 we estimate to be about a third of ‘09’s industrial sales. Those are the old lower price contracts.
Jonathan Lichter – Sidoti & Company
Can you also talk about any liabilities that might not be covered by insurance?
Hal P. Mechler
The principal one that is pointed out in the 10-Q is that any liability, any fines that would be ultimately assessed, would not be covered by insurance.
Jonathan Lichter – Sidoti & Company
Is there anything else beyond that?
Hal P. Mechler
Well there are certain costs incurred in the incident that are not covered like a lot of the legal fees relative to the OSHA investigation for example. Some of the humanitarian things that we’ve undertaken that are again some numbers in that footnote to the 10-Q, but from a, your question was liabilities, the one that’s obvious and comes to mind is the OSHA fines.
Jonathan Lichter – Sidoti & Company
Lastly, when do you expect Gramercy’s powdered sugar production to be up and running?
John C. Sheptor
What we have chosen to do, Jonathan, this is John Sheptor, is to continue to leave that facility idle until we complete the engineering work at our Port Wentworth facility. Once we have that design in hand we will duplicate that at Gramercy and operate both facilities with the same technology.
Jonathan Lichter – Sidoti & Company
So would that be towards the end of this calendar year?
John C. Sheptor
We would expect that the engineering work will be completed in the fall of this year and so construction activities can take place after the calendar year.
Jonathan Lichter – Sidoti & Company
Thank you.
Operator
Your next question comes from Hamed Khorsand from BWS Financial.
Hamed Khorsand - BWS Financial
Question regarding your fuel logistics costs. Will you guys see a lower cost basis with increased volume or if oil prices come down a bit from your logistics standpoint, or are these price increases set?
Louis T. Bolognini
I want to make sure I understand your question with regard to freight charges, if that’s the logistics piece you were referring to. Generally our freight charges, our freight contracts, are for a base price adjusted by a diesel fuel index, so there is a variable rate based on the national diesel fuel index. A good portion of the freight increases this year though, or this quarter, really aren’t related directly to fuel prices. It’s because we are hauling product longer distances and 12% was the number that we calculated in terms of the average increase in mileage because we’re taking sugar from Louisiana and serving customers on the east coast for example, plus to the extent we purchase sugar from other producers, we had to incur the inbound freight on that product. The combination of those two is about two-thirds of the freight increase that we incurred this quarter. I hope that was responsive to your question.
Hamed Khorsand - BWS Financial
That was, and also going into the fiscal fourth quarter, what kind of increase in volume and sales are you expecting from the Mexico operations?
Hal P. Mechler
We had not disclosed that specifically. We did bring sugar in from Mexico during this quarter as well as you will recall we had the option with Southern Minn to buy sugar. That was a residual from our 2005 sale of those operations in California. We brought sugar in under both of those agreements, the option as well as transactions with our joint venture partner in Mexico. We would expect the joint venture purchases to continue through the fourth quarter and probably into the first part of next year also, but we haven’t disclosed the amount between the two.
Hamed Khorsand - BWS Financial
Thank you.
Operator
There are no further questions at this time.
John C. Sheptor
We want to thank you all for joining us this morning. We appreciate your support and your interest. Please feel free to contact Hal with any residual questions you might have in the future.
Hal P. Mechler
Thank you all.
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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