Ingles Markets, Incorporated (IMKTA) 2004 Q1 法說會逐字稿

Good day every one and welcome to the Ingles Markets incorporated conference call. At this time for opening remarks and introductions, I would like to turn the call over to vice president of finance, chief financial officer, Ms. Tudor. Please go ahead.

Good morning. Welcome to Ingles Markets 2004 first 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 of 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 and Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor created by such laws.

Words such as "expect", "anticipate", "intend", "plans" and "believe" 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 outcome results may differ materially from what is expressed in 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 factors that could cause actual results to differ materially from that anticipated by forward-looking statements, you are referred to the company's public filings including the Form 10-K for the fiscal year ended September 27th, 2003.

Now I will give you a brief overview of our first quarter ended December 27th, 2003. Then we would be happy to take your questions. Hopefully you've all seen our press release. If not, it is available on our Web site at www.ingles-markets.com. We're pleased to report a 7.9% total sales growth and a 6.3% comparable store sales growth for the December 2003 quarter. This is the largest comparable store sales growth we've had in 18 quarters. Much of the increase is attributable to the introduction of our Ingles and Vantage Savings and Rewards card at the beginning of the December 2003 quarter. Obviously, the card was well received by our customers. Both customer traffic and average ticket price increased during the quarter.

Gross profit dollars increased 1.2% for the first quarter, have a gross margin decreased to 24.7% compared to 26.3% last year. Aggressive promotional activities surrounding the card introduction fueled sales growth but it tightened margins. Operating expenses as a percentage of sales decreased to 22.1% for the December 2003 quarter compared to 23.3% for the December 2002 quarter due primarily to the increased sales volume. Operating expenses in dollars increased 2.4% due primarily to cost of $1.4 million incurred in connection with the card introduction. The $1.4 million in card for one-time card for design, purchasing cards and for one to retagging the stores, enrolling customers and extra advertising.

Rental income for the December 2003 quarter declined $0.6 million over the prior-year quarter due primarily to the mark of the income from the sale of a shopping center in September 2003. You may recall the shopping center was sold at the end of the fourth quarter in 2003 at an $11.7 million gain. Operating income decreased $1.9 million in the December 2003 quarter, the result of the $1.4 million in introductory card costs and the $0.6 million decline in rental income. During the quarter, we sold an out parcel of land adjacent to an Ingles store site to a drug store chain at a pre-tax gain of $1 million.

Interest expense increased $1.1 million for the December 2003 quarter, due primarily to the issuance on May 29th, 2003 of a $100 million add-on to the existing 8-7/8th unsecured subordinated notes due September 2011. A portion of price age from the additional note which used to reduce $30.5 million and there in the fund capital expenditures in fiscal year 2003. Our cash balance at December 2003 is approximately $32 million more than the normal cash balance and will be used to fund current maturities of existing debts and capital expenditures in 2004.

Net income for the December 2003 quarter decreased $1.4 million to $1.8 million, or 8 cents per share compared to $3.2 million or 14 cents per share for the September, on December 2002 quarter. The decline in net income is primarily attributable to the after-tax effects of the $1.4 million in introductory costs of the card and the $0.6 million decline in rental income.

We currently have committed lines of credit totaling $135 million, all of which is unused. $120 million of the lines mature in October 2006, while the other $15 million matures in October and November of 2004. We had unencumbered property with a book value of $348 million, of which $272 million is real estate at December 27, 2003.

Capital expenditures for the December 2003 quarter, total $27.3 million. During the December 2003 quarter, we completed two major remodel expansions and two minor remodels, purchased one new store site and purchased a freestanding retail store leased to another retailer. In addition, we completed our point of sale conversion and self-checkout roll out and purchased $7.6 million in existing store equipment that was previously on an operating lease.

Capital expenditure plans for all of fiscal 2004 include investments of approximately $70 million. During the balance fiscal 2004, we planned to open two new stores, complete one major remodel and add approximately eight fuel stations on existing sites. We also plan to purchase six store sites for future store expansion. Capital expenditure plans also include investments in stores to open in fiscal 2005.

We will have a heavier emphasis on land purchase this year as we use the proceeds of the September 2003 shopping center sale in a like kind exchange for income tax purposes in order to defer the tax impact of the sale. This has been an exciting quarter for us with the introduction of the card. We hope to build on the sales minimum we have established and bring increased profitability to the bottom line. We anticipate filing our 10-Q on February 2nd, 2004. We will now take your questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Michael Rosenthal, Chapman Capital

Good morning.

Good morning, Mike.

Couple things. Could you talk about the impact on comps of the fuel sales and fuel center introductions?

Yes. The fuel sales, the comps excluding the fuel sales would still have been around 6%, so there's not a major impact on the comps from the fuel.

I'd imagine the same, then, would hold for --in terms of gross margin decline, that's not -- the percentage decline is not -

Right, we operate 18 fuel stations at the end of the December, so it's not a major force at this point in the overall scheme of things.

OK. And then looking out to Q2 and beyond, to what extent is that gross margin investment continuing?

Well, when we went into the card, we expected to have a decline in gross margin, you know, as we introduced the card, and we expected it would take us about six months to really have the data from the card information to use to help us in our marketing efforts, so what our plan is really for the increased customer traffic that we were getting from the card is to increase our perishable departments and help our overall margins going forward.

So you would expect another several months, at least, of significant investment before the gains begin to offset that?

As I anticipate in the following quarter, the margins will be better than they were in the first quarter. But I think you'll see the more significant improvement after that.

I see. It looks to me like in order to maintain sort of flattish EBITDA before other income; it sort of requires this 5 to 6% comps.

Right.

Given this level of investment.

What we would anticipate is probably the comps leveling out somewhat after the introduction of the card, but the margins to improve.

OK. Great. Thank you.

You're welcome.

Moving on, we'll hear from Arthur Rulack, Bank of America.

Good morning.

Morning, Art.

Couple of balance sheet items that weren't in the press release. Can you just give balances for cash, receivables, payables and inventory?

Yes. Cash was $47.3 million. Receivables are about $35.9 million. Inventory, is $195.4 million. Is that all them or was there something else?

And payables?

Payables were about $138 million. That's payables and accrued expenses. Just trade payables are $94 million.

OK. Great. And a little bit on the - your sort of SG&A is going up, you're saying because of the higher volume in the supermarkets, I guess obviously the comps are up a lot. Why is that? Are you having to staff more people to handle the volume?

Well, you know, generally what happens is you have more labor dollars as you have more sales, but you hope for your percentage to decline. Our payroll percentage was really about flat this quarter over the same quarter last year, and the reason we didn't get the pickup is because of the intense labor we had to put into the introduction of the card.

Number one, we had to completely re-tag our stores, so our old program was a supersaver program. All those tags had to go down. We had to completely retag our store over a weekend. We had sign age, plus we had to sign up our customers, so for the first two weeks of the card, we had people that were specifically assigned to manning these tables to get our customers signed up, because our goal was to have 80% of our customers signed up within the first month, and we did achieve that.

Would the assumption then be that the SG&A line then, you should go back to sort of being what it was last year on a quarter-over-quarter basis once this initial labor usage is done?

Yes. And I think, you know, and hopefully to see some improvement in the SG&A line because of the increase in the sales, plus we've done some things, I think, that are kind of masking here this quarter because of the introductory costs on the card, but we have seen like our overall advertising expenditures have gone down because we've really looked at our whole advertising program, we've gotten rid of some promotions that we're not doing anymore that we felt like weren't affected.

We re-negotiated some of our major contracts and got some savings there. So there's some things that we're doing at store level as well in the maintenance and supply area in the store that we've seen some benefits from, so hopefully going forward with our increased sales volume and these things that we're putting into place, we'll actually see that SG&A go down.

You mean go down not only on a percentage basis but also on an absolute basis versus 2003?

Well, it's hard to say on the absolute basis when you don't know what the sales are gonna be, because certainly the larger percentage sales increase you've got, you've got to staff the store and you've got supply costs and that type of thing that continue to be there and go up in real dollars but down as a percentage of sales as your sales improve.

OK. And the rental income, I know obviously you've sold some properties recently. What can we expect in 2004 in terms of rental income contribution?

You know, we've had some -- we did sell a shopping center which was a very positive thing, although it did make our rental income decline, and we've had some other factors that I think have impacted us in our rental income. One was the bankruptcy filing of Kmart and Price Cutters, which we lost some income there.

We only had two Kmart's, one was rejected in bankruptcy and one was not, and we had several price cutters, and then everybody's seen the drugstores moving out of the strip centers into the out parcels, which we benefit from that too in selling an out parcel sometimes, but we've seen the rental income go down.

We had a discussion with our real estate vice president to see kind of how he saw the market, and he said we've had more inquiries in the last 30 days than we have in the last six months, people wanting to rent property. So we feel like we may see that improve, or at least stabilize and probably improve going forward.

So, is rental income was roughly $1.5 million in the first quarter? We think that would maintain, you know, at that level or possibly improve throughout the year?

Yes

OK. And I forget if you had given vacancy rates at all with your properties in the past?

No, I really -

I don't think so.

I don't really have that information available right now.

OK. And what was the dairy revenue?

The dairy revenue was up about 10%, but in production or cases, it's about flat. The raw milk prices went up an extreme amount in the first quarter causing the sales to increase - their sales went up but their profitability actually went down. And all that information will be in the 10-Q that we'll file next Monday.

OK. And the asset sale you mentioned, I assume that's been categorized in "other" income?

Yes.

And can you just go over the maturities again?  You were speaking quite quickly and we couldn't write it down. Debt maturities this year and then in the next -- whatever information you've given?

Along the lines of credit?

Right.

OK. $135 million, total. 120 mature in October 2006, and $15 million in October and November 2004.

OK. And this is a larger question. I think things seem to be going generally in the right direction, but in terms of free cash flow, I had been under the understanding originally that you would sell some real estate and use that to permanently pay down some debt, but, you know, with your interest expense coupled with the dividend you're paying and the high level of Capex, although the business generally seems healthy, it seems like you're still burning cash each year. My question is, when are you going to be free cash flow positive, as you can't continue this course in perpetuity.

Right. Well, and I think maybe I didn't make this clear enough last time on our conference call because I had a lot of questions about this. We sold the shopping center last quarter for $19.6 million. And, you know, we had anticipated our Capex budget to be $60 million this year. And so because we could save over $4 million in taxes in structuring this sale as a like-kind exchange, we upped our Capex to $70 million, so out of the 19.6, we put $10 million back into Capex.

But you still got $9.6 million that you can use as cash to reduce debt and at the same time save $4 million in income taxes, so it just made a lot of sense to do that. You only have 180 days to reinvest this money in like-kind property. That's kind of why we have the higher emphasis on land purchases and real estate purchases this year than normal. You know, we do intend to continue to sell real estate.

We do have some other real estate planned for the rest of the year, and we will be using those proceeds to help us fund our Capex, not increasing our Capex budget but help us fund our existing CAPEX and to reduce debt. As I've mentioned before, in real estate sale, you can never really count them until they're closed, and so I don't want to give you a certain date that we're doing any of that, but I would anticipate, you know, by the last half of this year or possibly into the first half of next year of having positive free cash flow if we can continue with our sales momentum and get our gross profit back to normal levels. Because I think we're making some good headway on our SG&A, and we certainly got the momentum on our sales.

So would you then expect that net debt to be lower than it is now at the end of the fourth quarter this year? I mean, I hear what you're saying, I know you're selling the real estate, but it seems like then you have as many reinvestment projects as you have what you're selling. That' all.

Right. Yes, I would expect the net debt - I mean, we have spent a lot, you know, we've spent $27 million off our $70 million CAPEX budget in the first quarter, so your CAPEX for the balance of the year -- it should be high in the second quarter as well because like I could say, we had 180 days to have the real estate reinvested in the like-kind exchange, so you're going to see more of the Capex in the front end of the year.

You know, another thing we did that used $7.6 million of our Capex was purchasing store equipment that was under an operating lease, but what that did was save us a million dollars a month in rent expense. Purchasing that equipment. So that helps the SG&A even though it does take that cash.

So you're saying a million dollars a month?

Yes..

OK. I'll let someone else ask some questions and get back in the queue. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] We'll now hear from Karen Miller, Bear Stearns.

Yes, hi. Good morning.

Hi, Karen.

I'm wondering if you could discuss the competitive landscape, and particularly in relation to Wal-Mart.

OK. Mr. Outlaw can discuss that.

OK. Right now we anticipate nine new Wal-Marts in the upcoming year, and it looks like there are going to be four of them in this particular quarter. I think one thing that you have to realize, that when we say Wal-Mart is affecting stores, you know, they can vary from one is a quarter mile from our store to 10 miles away, so it's varying degrees on how much they affect our store sales. And in this particular quarter, we also have one product coming up and that will affect us in public and one save-a-lot.

Did you say nine Wal-Marts for the upcoming year.

Yes, this year, right.

There are about 96 that we're competing with.

Hello?

I said we currently have about 96 that we're in competition with right now.

And that's super centers?

Yes, ma'am,

OK. Then if I could switch gears a little bit, you discuss that you expect further real estate sales. Can you give us an indication of the magnitude, what we could expect in terms of dollars, similar to the $19 million that you generated last year?

Well, you know, the $19 million for one shopping center is not going to be duplicated very often. That was kind of an exceptional piece of property. And again, I don't want to give a dollar amount 'cause real estate sales - you can't count them until they're closed and the deal is made, but we have probably how many millions of dollars that we're looking at?

I'd say about 20.

About $20 million that we have that we're in negotiations on.

OK. Great. Thanks.

Thank you.

We'll now hear from Eileen McGill, ING.

This is Paul Ross (ph) for Eileen McGill. Can you hear me?

Yes.

Relative to your same - your comp store sales increase of 6.3%, could you please tell us what part of your store, the center aisle or your fresh produce or your dairy section, what part has been the most responsive to your Affinity card introduction in the fourth quarter, and do you expect that to continue in the current quarter as well?

Really, center store grocery has done very well but also our meat department has shown excellent increases in sales. But all perishable departments have shared in sales increases.

I'm pleased to know that they all shared, but I wondered which one was the most significant.

The meat department would have been the most -- significant increase in sales over the same quarter last year.

And did that reflect volume or a combination of volume and price? Were both volume and price up in the quarter? I thought prices were down in the quarter.

Volume and prices were up.

Were up?

Yes.

And in the current quarter? What is your expectation in the current quarter as it relates to the sections of the store that will most benefit from the Affinity card?

We feel like we have the most opportunities for increased gross profit through our perishable departments and the extra traffic flow that we have going through the store because of the card, we feel like our perishable departments, because they're impulse sales, will show the largest increase in our gross profit.

Brenda, you've given us some numbers before about average ticket versus number of patrons. Could you tell us what that is in the quarter?

Well, I haven't actually given numbers on average ticket number, I just made comments.

I apologize. You commented about that.

Right.

Can you make a comment here as well given this 6.3% same store number?

We have seen both increased customer traffic and increased ticket.

Market basket.

Market basket, right. And could you tell us which was most significant in the quarter, was the customer count up more than the market basket was up?

Yes.

Customer count was up more.

Yes.

Is that continuing in the quarter now, in January?

It's kind of hard to say because we don't have enough data. I mean, we're continuing with good comps in this quarter, but as everybody's aware this time of year with weather, it's very hard and since I only have three weeks of data, I hate to put something out there that would be misleading. Because it just depends on whether it snowed this week and it didn't snow that week, so I think we need a little more time before I can really tell what the trend's going to be.

It was a very tough winter last year in the northeast and sometimes that clouds the types of situation you had in the southeast.

Right.

When you start talking about comps versus 2003, what type of bad weather did you have in the first quarter of 2003 that we'll be dealing with this year? Can you summarize that for us and remind us of it? Because we obviously don't want to make some incorrect conclusions here.

I don't think it was out of the ordinary last year, and who can predict the weather this year?

Right. I mean, you don't remember a particular storm that affected North Carolina or Tennessee or whatever in particular that had you down for any long period of time?

No, I mean, what we really typically see more is the -- you know, we call them snow scares, and it's how many of them, it's not as much the degree of how bad they are as how many of them there are, because what people do is they rush out to the grocery store and buy their groceries and go home and wait for the storm, and sometimes, you know, the storm doesn't actually materialize.

So I think it has more to do with how many of them there are, and here in this area, very rarely is it to the effect where -- you know, where the stores are closed down for any period of time or anything like that. It's usually just a snow scare and people think it's -- you know, they're going to be snowed in for a week and they go out and buy lots of groceries instead of eat out.

Right. Thank you very much.

[OPERATOR INSTRUCTIONS] We'll hear next from Robert Goch, Miller Tabak Securities.

Good morning. Just a question you mentioned that I believe you wanted to sign up many customers to the card, you got about 80%. Could you perhaps comment on any type of geographic differences in sign-up rates or success rates of how you define success rates of the card through its initial introduction?

We've tracked the sign-up rates, the I.D. rate is what we call them, throughout the company, and we've had excellent results in all states that we do business in. It doesn't seem to matter geographically whether customers are signing up. It's been positive in all areas.

Thank you very much.

And it appears there are no further questions at this time. I'd like to turn things back over to Ms. Tudor for closing remarks.

We appreciate your time and interest today, and we look forward to keeping you updated in the future. Have a great day.