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WIKI ANALYSIS
Imperial Sugar (NYSE:IPSU) is the largest publicly traded, independent sugar refiner in the U.S., accounting for 15.7% of domestic production in FY2007.[1] The company uses either sugar beets or raw cane sugar to produce refined sugar. Its brands include Dixie Crystals, Holly, and Imperial.
Imperial Sugar has sugar refining facilities in both Port Wentworth, Georgia, and Gramercy, Louisiana. In February 2008, an explosion at Imperial's Port Wentworth plant forced the company to shut it down, which led to a net loss of $15.5 million in the second quarter of fiscal 2008. Imperial's insurance plan covers both lost revenue and the cost of rebuilding the plant, however, so the company will be able to resume business as usual (and with newer equipment to boot).[2]
A joint venture between Cargill, the U.S.'s second-largest privately held corporation in terms of revenue,[3] and Louisiana Sugar Cane Products Inc., which supplies Imperial's Louisiana refinery, will leave Imperial without its main raw cane sugar supplier by as early as 2009. As a result, Imperial, making use of the repeal of certain U.S.-Mexico sugar tariffs, has partnered with Mexican sugar refiner Ingenios Santos to make up for the lost supply. Additionally, Imperial and Ingenios Santos will sell each other's products in their respective home countries, giving Imperial a foothold in the Mexican refined sugar market.
Business Overview
Imperial Sugar only operates in the refined sugar business, which accounted for approximately 97% of consolidated net sales for the year ended September 30, 2007.[5] The company refines raw sugar into granulated sugar, brown sugar, and other confectionary sugar products, which it then sells to retailers, wholesalers, and food manufacturers. On the retail side, Imperial sells its own branded products (32% of sales) as well as private labels (68% of sales).[6]
Most of Imperial's raw sugar supply is priced from New York Board of Trade (NYBOT) sugar future contracts.[7] As of 2007, Imperial's Louisiana plant received 90% of its raw sugar from the Louisiana Sugar Company Inc. (LSCPI) under a contract set to expire on September 30, 2009.[8]
A combination of flat refined sugar prices trading in the 15-16 cent/lb. range through 2007[9] and rising energy costs contributed to a Q2 2008 net loss for Imperial. The company reported that the accident at its Port Wentworth plant, which accounts for approximately 60% of total production,[10] was the main catalyst for a decrease in quarterly net sales of 31.7% compared to a year earlier.
Trends and Forces
LSCPI-Cargill Partnership Cuts Off Imperial's Main Raw Sugar Supply
Louisiana Sugar Cane Products (LSCPI), a cooperative that supplies 90% of the raw sugar used by Imperial's Louisiana refinery, is teaming up with Cargill to build a new independent refinery.[11] The refinery is not expected to be operational until mid-2010, but LSCPI will supply it with its entire crop, effectively leaving Imperial's Louisiana plant without a supplier.[12] Imperial has already partnered with the Mexican sugar company Ingenios Santos S.A. de C.V to import raw sugar from Mexico, taking advantage of the repeal of sugar tariffs. As of the second quarter of fiscal 2008, however, the amount of raw sugar imported from Mexico was not enough to replace the supply from LSCPI.[13]
Natural Gas Prices Up 22% From 2007-2008
In fiscal 2007, the total cost of natural gas for Imperial was roughly $21.33 million, and accounted for approximately 3% of Imperial's total cost of goods sold.[14] Imperial's Port Wentworth plant uses less expensive coal, while the Gramercy plant uses more expensive natural gas. Energy costs for the second quarter of fiscal 2008 were higher because, while the Port Wentworth plant was shut down, the Gramercy plant operated at 110% of its recommended normal capacity. As a result, natural gas usage increased to 74% of total usage compared to 53% in Q2 2007.[15] In addition, natural gas prices increased 22.3% from 2007 to 2008 in Louisiana, while refined sugar prices were stable in the same period.[16] As of April 30, 2008, Imperial expects natural gas costs for the second half of 2008 to increase from $7.74 to $9.88 per mmbtu. This translates to approximately a 1% increase in cost of goods sold for the second half of 2008.[17]
Imperial Faces More Competition and International Price Pressure: Tariff-Free Mexican Imports
Historically, U.S. domestic sugar prices have been twice as high as international prices.[18] Through tariffs and quotas, higher domestic sugar prices cost the U.S. government close to $1.68 billion a year to artificially maintain through the purchase and storage of excess sugar.[19] As a domestic U.S. producer, Imperial benefits directly from these inflated prices.
NAFTA was fully implemented on January 1st, 2008, repealing tariffs on the sugar trade between Mexico and the U.S.[20] As a result, Imperial has partnered with Mexican refiner Ingenios Santos S.A. de C.V. The partnership will supply Imperial with sugar to both refine and sell in the U.S., as well as give it access to the Mexican sugar market. However, with tariffs completely abolished between the two countries, other Mexican refiners can now also sell tariff-free refined sugar to U.S. consumers.[21]
Competition
- U.S. Sugar Corporation, a privately held company, is the largest sugar refiner in the U.S. by volume.[22]
- Domino Foods, Inc., which is a wholly owned subsidiary of Tate & Lyle PLC (TATYY).[23]
References
- ↑ USDA Economic Research Service- calculated as IPSU's FY2007 production as a percentage of total U.S. FY2007 production
- ↑ SeekingAlpha: Imperial Sugar: Insurance Coverage Adequate to Rebuild. May 16, 2008
- ↑ Wikipedia: Cargill
- ↑ Google Finance: IPSU Income Statement
- ↑ Imperial Sugar 10K 2007 pg. 5
- ↑ Imperial Sugar 10K 2007 pg. 6
- ↑ Imperial Sugar 10K 2007 pg. 8
- ↑ Imperial Sugar 10K 2007 pg. 7
- ↑ U.S. Department of Agriculture: Sugar Data
- ↑ Imperial Sugar Q2 2008 pg. 13
- ↑ The Atlanta Journal-Constitution : Sugar refinery near Savannah determined to rebuild 04/13/08
- ↑ SeekingAlpha: Imperial Sugar: Insurance Coverage Adequate to Rebuild. May 16, 2008.
- ↑ SeekingAlpha: Q2 2008 Imperial Sugar Conference Call Transcript
- ↑ Imperial Sugar 10K 2007 pg. 25
- ↑ Imperial Sugar Q2 2008 10Q pg. 14
- ↑ Energy Information Association: Official Energy Statistics from U.S.
- ↑ Imperial Sugar Q2 2008 10Q pg. 14- calc: 28% (increase in gas costs)*3% (total gas as % of COGS)
- ↑ The New Yorker: Deal Sweeteners Nov. 2006
- ↑ CATO Institute: America's Bittersweet Sugar Policy
- ↑ Imperial Sugar 2007 Annual Company Financial Report pg. 4
- ↑ The Atlanta Journal-Constitution : Sugar refinery near Savannah determined to rebuild 04/13/08
- ↑ U.S. Sugar Corp
- ↑ Answers: Domino Sugar Corporation
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