Ingles Markets, Incorporated (IMKTA) 2003 Q4 法說會逐字稿

Good morning and welcome to the Ingles Markets corporate conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Finance and Chief Financial Officer, Ms. Brenda Tudor. Please go ahead ma'am.

Good morning. Welcome to Ingles Markets' 2003 fourth-quarter conference call. With me today are Robert Ingle, founder of our Company, Chairman of the Board and Chief Executive Officer, Jim Lanning, President and Tom Outlaw, Vice President Sales and Marketing. Statements made on this call include forward-looking statements which are based on current expectations, estimates, forecasts and projections about the Company's business based on management's beliefs and assumptions. These statements are forward-looking statements within the meaning of section 27A of the Securities Act of 1933, section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbors created by such laws. Words such as expects, anticipates, intends, plans and believes and variations of such words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore actual outcomes or results may differ materially from what is expressed on this call. We do not undertake to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. For a description of forward-looking statements you are referred to the Company's public filings including the form 10-K for the fiscal year ended September 28, 2002 and the forms 10-Q's for the quarter ended December 28, 2002, March 29, 2003 and June 28, 2003.

Now I will give you a brief overview of our fourth-quarter and year ended September 27, 2003. Then we will be happy to take your questions. Hopefully you've all seen our press release. If not, it is available now on our website at www.Ingles-markets.com. We are happy to report both sales and earnings growth for our fourth quarter and our fiscal year. Sales in the fourth quarter were strong with a 3.7 percent total increase and a 2.1 percent comparable store sales increase. For our 40th anniversary year we achieved 1.6 percent total sales growth and 0.8 percent comparable store sales growth.

Sales have increased every year in our forty-year history. We operated 198 stores at both fiscal year end 2003 and 2002. During 2003 we opened four new stores, closed four older stores, replaced one store, completed three major remodel expansions and three minor remodels. Gross profit dollars increased 0.9 percent for the fourth quarter, however, gross margin decreased 72 basis points. Aggressive promotional activity fueled sales growth and tightened margins.

For the year gross profit dollars were flat with a gross margin decline of 41 basis points. The adoption of EITF 0216 accounting by a customer for certain consideration received from a vendor resulted in a $2.6 million non-cash charge to gross profit for the year. The charge was due primarily to an involving interpretation of the EITF particularly in relation to the treatment of slotting (ph) fees. Previously the Company recognized slotting fees as a reduction of cost of goods sold when the amount was contractually established and collection was probable.

As of January 1, 2003 the Company began recognizing these allowances of reduction to inventory and ultimately the cost of goods sold when the related products were sold. The Company does not anticipate any material impact of the adoption of EITF 0216 going forward. Operating expenses as a percentage of sales decreased to 23.8 percent for the September 2003 quarter compared to 23.9 percent for the September 2002 quarter. For the year, operating expense as a percentage of sales increased slightly to 23.5 percent in 2003 compared to 23.4 percent in 2002. In total dollars operating expenses increased 3.3 percent for the quarter and 1.7 percent for the year. The primary factor was higher payroll due to increased allotted labor hours. In an effort to drive sales through customer service and to beef up front end service in preparation for the introduction of the Ingles Advantage Savings and Reward card on the first day of fiscal 2004, additional labor hours were assigned.

Rent expense and depreciation increased due to new stores and store expansion during the year. Partially offsetting these increases were a reduction in advertising expense due to a more focused approach in the allocation of advertising dollars, and reductions in insurance expense through risk management techniques and accident accountability. Rental income declined 0.2 million for the September 2003 quarter and 0.8 million for the 2003 fiscal year due primarily to the loss of income from Kmart as a tenant in one location and the closure of several drugstores that relocated from shopping centers to freestanding stores.

An $11.7 million pre-tax gain on the sale of a shopping center that did not contain an Ingles store in the fourth quarter of 2003 had a very positive impact on our quarter and our year. We believe that the timing was right to sell the center to obtain optimum value and the proceeds will be used to fund a portion of capital expenditures in the coming year. We will have a heavier emphasis on land purchases in 2004 as we use the proceeds in a like kind exchange for income tax purposes in order to defer the tax impact of the sale.

Interest expense increased 0.9 million for the September 2003 quarter and decreased 0.5 million for the year. Prior to the issuance on May 29, 2003 of a $100 million add-on to the existing 8 7/8 percent senior unsecured subordinated notes due December 2011, they actually decreased year-over-year resulting in interest expense decline for the year. A portion of the proceeds from the additional notes was used to reduce existing lines of credit outstanding of 22.4 million and to payoff approximately 10 million in equipment term loans.

Our cash balance at year end was approximately 65 million more than the normal cash balance; however, it was not economically feasible to reduce other debt at this time due to prepayment penalties. However, we plan to use the balance of the proceeds to fund current (indiscernible) of existing debt and capital expenditures in 2004.

Net income for the September 2003 quarter was 8.4 million or 37 cents per share compared to 3.8 million or 16 cents per share for the September 2002 quarter. Net income for the year increased 15 percent to 17 million or 74 cents per share for fiscal 2003, compared to 14.7 million or 64 cents per share for fiscal 2002. We currently have committed lines of credit totaling 135 million, all of which is unused. $120 million of the lines matures in October 2006 while the other $15 million matures in October and November of 2004. We had unencumbered property with a book value of $330 million of which 261 million is real estate at September 27, 2003.

Our capital expenditures totaled 75.9 million for fiscal 2003. Capital expenditure plans for fiscal 2004 include investments of approximately 70 million including one new store, three major remodeling expansions and two minor remodels to be completed in fiscal 2004. Capital expenditure plans also include investments in stores to open in fiscal 2005 and sites for future stores. Originally the company planned to invest approximately 60 million in net capital expenditures in fiscal 2004 however; proceeds of 19.6 million from the sale of the shopping center in the fourth quarter generated cash and provided an opportunity to defer taxes of approximately $4.5 million. Therefore, 10 million of the 19.6 million proceeds was added to the capital expense budget for 2004.

We anticipate filing our 10-K on December 22, 2003. We will now take your questions.

(OPERATOR INSTRUCTIONS) Rick Gore (ph) with Tempo Capital.

I was hoping you can share the balances on cash, the availability on the revolver and also if you could talk about the competitive environment and what other companies are doing in terms of pricing.

Cash balance at year end was $80.9 million. The revolver is completely unused, and we have 135 million of availability all of which is unused. Tom, would you like to address the competitive factor?

It's about the normal future competitors coming up. It is not abnormally high, it is not abnormally low.

Yes, if you could also talk about competitors pricing. Thank you.

We monitor prices continually, and we have not seen any major shift in pricing strategies of our competitors.

Thank you.

Jeff Togro (ph) with (indiscernible) Capital.

Actually the first questioner asked the same three questions I was going to. But since I have you on, do you see any change in the Wal-Mart openings or their strategy in your neighborhoods?

No, I think we are seeing about the same number of Wal-Marts scheduled to open in this coming up fiscal year as we saw in the past fiscal year.

How many was that?

This year we've got coming up I think its 6.

Okay, all supercenters?

Pardon?

Were they all supercenters or neighborhood markets?

Supercenters, compete with any neighborhood market.

Thank you very much. Good luck.

Andrew Burke (ph).

Could I get a breakout of the sales? How much was dairy versus supermarket? Also could you also provide the inventory and receivable balances? And then just lastly that $2.6 million charge you took that was in the fourth quarter, correct?

No, that was in the -- we amended our March 10-Q. In the second quarter. Your question about inventory, inventories are 194 million at year end. Let's see -- receivables were -- I'm going to take a minute to find that for you. What was your other question?

The breakout of dairy sales versus supermarket.

The dairy sales growth -- that will be in our 10-K when we file on December 22nd, but our dairy sales were about the same as the grocery sales growth. There wasn't a significant difference between the two. Your receivables are 30.8 million.

Thank you very much.

Arthur Rulack (ph) with Bank of America.

Brenda, I didn't -- the cash balance you said was 80.9 million at the end of the year,

Yes.

And you said the revolver was completely undrawn?

That's correct.

And just to confirm on the press release is a little bit confusing -- the entire $2.6 million charge did occur during the second quarter and nothing in the fourth quarter?

That's correct.

Okay, and could you offer any more guidance at all besides the CAPEX for '04?

Other than just kind of the normal amount of store openings and all that, we really prefer not to give guidance.

Okay. And then in 2004 can you tell us how much, how many debt maturities you are going to have, the total amount?

Current maturities are 38 million in 2004.

And finally just sort of looking back you certainly had a good quarter but if you were to reverse some of the asset sales that you had, it seemed like you are still modestly free cash flow negative. Is there a thought as to when you guys are going to be going free cash flow positive going forward, excluding any sort of onetime positive events like an asset sale?

I guess when we look at the asset sales we don't, we see ourselves as a partially a real estate company as well as a grocery company, so we don't really see those as onetime sales. Of course the one in the fourth quarter was a large real estate sale; we won't see a lot of those. But we do when we do our budgeting, if we look at cash flow, we do look at real estate sales, as well as the grocery business. But we are certainly focused on trying to reduce our debt and to increase our cash flow. And we hope to be able to be free cash flow positive if not in 2004, perhaps in 2005.

And do you think that you are going to achieve that through spending less in CAPEX, or do you think EBITDA can move up materially to bridge the gap?

I don't see us really spending less in CAPEX, but if we can fund part of our CAPEX through real estate sales that keeps us from having to incur more debt to do the things that we need to do.

Do you have any future sales on tap or target for the amount of sales in '04 after this big sale you just did?

We are working on some other real estate sales, but as I said before I do not like to count them or project them until their close because anything can happen in a real estate sale.

That is very true. Thank you very much.

Brian Hunt with Wachovia Securities.

Brenda, could you talk about what impact your new customer card has had in Q1 on either the tempo of sales or and additionally onto gross margin?

We are pleased with the introduction of the card. We have -- certainly can't give numbers at this point, but we have met our expectations with what we hope to get out of the card at this early stage. So we do believe that is going to have a positive impact on us going forward. Of course it will take us sometime. What you hope to do with the card is to be able to use the data to target your best customers and improve your best customers and hold onto your best customers. We really don't have enough data at this point to make that extremely useful but we think it should be extremely useful within six months of introducing the cards.

Then next was there any significant cost in launching the card?

There was some significant cost in labor at store level because we had to retag all of our stores, for signing up people for the card. We did have some.

Most of that was in Q4, then?

No, it is really part of a very small part in Q4 but more of it will be in Q1. Of course the cost of your cards and your applications and we did buy software; of course that gets amortized over a five-year period. So there are some upfront costs.

Would you say it was more than a couple million dollars?

No, no.

Next, what location did you sell -- that was a single location, $12 million is a great price tag.

19 million.

Sorry, I was looking at the net.

You are looking at the gain.

Yes. The $19 million, what location did you sell?

This was a shopping center in the Atlanta area.

Do you have an approximate square footage on that location?

I do not. I would say it was probably 100,000 plus square feet.

And can you say who the tenant is, or was?

Actually Kroger is the anchor tenant in the shopping center.

Great. And could you tell us what the payables were at the end of the quarter, as well?

Yes. Payables were about 146 million.

Payables were -- and that includes other accrued --?

The trade (ph) Payables are about 84 million.

Last question, you mentioned what CAPEX would be and I think you said one new store, three major remodels and one had a remodel? $70 million is a pretty big number for the amount of activity that it appears to be taking place. I was wondering --.

One thing I mentioned on the like kind exchange; in order to qualify for the like kind exchange the money has to be designated and spent within a six-month period of time, and it can't be on property that you already own. So we're going to have a heavy emphasis on this year on the purchase of land in order to defer those taxes, so we will actually see less store construction and more land purchases this year, and then that will probably turn around in the next year as we do the construction on the sites that we are purchasing.

So you are purchasing land for future use?

Yes. And some of the land are for new store sites and some of the land is for replacement stores or land adjacent to existing stores in order to do expansion.

Thank you very much.

Sean Newman with GE Asset Management.

I was wondering if you can give us an idea of the percent of upgraded or remodel, the store basis currently.

When we look at what our goal is to generally keep about 60 percent of our store base would have been touched in some way in the last five years, whether it is a major remodel, expansion, or a minor remodel. So in that range.

Two other points, could you talk about what you see in terms of inflation? And finally could you give us an idea what your private-label penetration trends are like.

On inflation, I guess inflation in the food sector is a little bit higher than inflation as a whole, not significantly higher but it is higher. We have seen particularly inflation in beef prices, and of course its helping our meat sales.

You are able to pass on those increases?

I don't think we were able to pass them on as quickly as they were passed on to us, but eventually yes.

Okay. And finally, what is a private-label penetration level looking like?

We have increased private label sales a good bit. I don't have an exact number in front of me. We've totally revamped the packaging. We are striving for a better quality label in our private-label, so we've made great strides in increasing our private-label sales.

Okay. Thank you.

Ralph Moresh (ph) with First Manhattan Company.

Thank you. You answered my question.

(OPERATOR INSTRUCTIONS) Greg Kelher (ph) with (indiscernible) Capitol.

My question was answered. Thank you.

Jennifer Graff (ph) with Trustco (ph) Capitol.

I have a question, with all the new property purchases that you're going to be making, will all that property be used for new Ingles stores or will you potentially be renting it out? Thanks.

It will be used for new Ingles stores.

(OPERATOR INSTRUCTIONS) Ken Wang (ph) with Jefferies & Co.

Could you talk about how the stores that face new competition from Wal-Mart fared during the year, whether they had a big impact on sales? Whether that improved as the year went on?

It is always a mixed bag. It depends on the location. Initially when a Wal-Mart supercenter opens up against us we take somewhat a hit and then we come back around and constantly improve. We feel like we have some different things going on for us, especially our strengths and our perishable departments which helps us compete with Wal-Mart quite well. And we have numerous examples of Wal-Marts being very close proximity to an Ingles store and after a year's period of time they bounce back very nicely.

Would you say the stores that based on Wal-Mart say a couple years ago, are they back to where they were in sales before the store opened, or are they still somewhat below that level?

Some are pretty close to where they were at. One of the (indiscernible) may enter into it is the format of the store, where we have our new format of large stores, superstores compete quite well against Wal-Mart supercenters.

Have any other independents dropped out because of Wal-Mart?

I don't know about independents, we have had several closings of major chains that we are competing against.

Thank you.

A follow up from Brian Hunt.

Brenda, I was wondering if you could comment on in the comp store sales number, what was the driver? Was it average ticket size or traffic?

Essentially both, but I think probably moreso traffic than ticket size. And I think that is because of our increased promotional activity. We've run some really hot ads to get people in the store to drive the sales and that has been successful.

Also looks like you have some really easy comp store sales gains comparisons from the first and the second quarter of fiscal '03. Do you expect your comps to be up in the first half of the year?

We always expect them to be up.

All right. And would you foresee the gross margin investment you've had over the last couple of quarters to continue into next year on a relative basis? And it looks like your gross margin was down somewhere between 50 and 70 basis points over the last two quarters. Would that be a fair comparison going into the first and second quarter next year?

I think so, yes.

Okay, and is there anything on the O&A line operating administrative that we should be concerned about with regards to inflation or are there cost savings opportunities going into next year?

I think we've really been focused on ways to cut expenses and we've seen that in our advertisements even though we cut our advertising expenses, we have been able to drive sales. And I think a lot of that does have to do with how we spend those dollars. And we've been looking at other operating costs. When you look at your operating administrative expenses certainly the biggest thing that stands out is the payroll, because that is really the largest controllable operating cost. And we have added on some hours and have increased that. And I think after this initial push on the card we will be able to see that come back more in control. So hopefully we will be able to lower that some going forward.

And Tom maybe you can give us an idea -- you've had one other competitor enter the market that is kind of relatively new, Publix. Could you talk about maybe not directly a new Publix store, what it does to one of your stores, but what happens when one of your competitors opens a new store relative to a Wal-Mart, whether it is Publix, BI-LO or whomever it might be? Maybe across the street or within a competitive area of one of your stores?

What happens to a competitor?

If Publix were to open a store right next to yours like you have seen in South Carolina, what is the net impact to your store? Is it similar to what you see with a Wal-Mart?

Yes, it is really hard to put a, again it depends on our format and so forth, there's a lot of different factors that could --.

I think one of the big differences is that Wal-Mart probably has a larger draw, people will drive farther than to a traditional supermarket. So there may be a little difference there in the impact.

Lastly, if you look at working capital, it has gone up consistently over the last couple of years. And I was wondering one, what you could attribute that to and two, if you see any opportunities going into '04 to bring working capital down.

I think the primary reason why working capital is up is because of how we've raised money through the high yield bonds, and we often have a larger cash balance sitting there because we did the bond in December 2001 and then the add-on in May of 2003. So I think we've been really generating, having more of a cash balance as we use those funds than normal. So I think as we use that cash and don't go back out into the market, then you will see that come back in more traditional levels.

Even if you -- I guess if you look at working capital X the cash balance and exit the short-term debt portion, just looking at short-term accounts on assets and payables, or assets and liabilities, there is still been an increase just in those individual accounts. Are working capital (indiscernible) to accounts over the last couple of years?

I think we have opportunities to better manage our inventory. The receivables, that just can vary a lot depending on what kind of promotional allowances that you've got from vendors because that is usually what our receivables are. Not really, they are not really money due from customers. They are money due from vendors. And it just depends on what money are due at any point in time. The accounts payable side, we consistently look at trying to manage cash the best way that we can and paying bills on time but not ahead of time.

Lastly, there have been a couple of statements by players in the industry going to debt net costing or at least evaluating it moving down the path towards how Wal-Mart buys goods. Have you evaluated that issue at this point?

Yes, that is certainly something we continue to look at and to talk with our major vendors about. Is how do we get the lowest cost possible on the products.

Thank you very much.

(OPERATOR INSTRUCTIONS) Paul Carpenter (ph) with (indiscernible) Management.

Just to follow-up on that last series of questions, I didn't hear what you said about gross margin, the impact going to be for the next couple of quarters first half of next year.

I think the question was would we anticipate in the next couple quarters the same type of margin decline we've seen in the last couple of quarters, and I said yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Ms. Tudor, there appears to be no further questions at this time.

Okay. Thank you for your time and your interest. We look forward to keeping you updated in the future. Have a good day.

This does conclude today's conference call. At this time you may disconnect.