Ingles Markets, Incorporated (IMKTA) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ingles Market Inc. third quarter 2004 results conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded today Thursday, July 29th, 2004.

I would now like to turn the conference over to Miss Brenda Tudor, Vice President of Finance and Chief Financial Officer. Please go ahead, Ma'am.

Good morning. Welcome to Ingles Market 2004 third quarter conference call. With me today are Robert Ingle, Founder of our Company 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 as defined and subject to the Safe Harbors created by federal securities law. Words such as expects, anticipates, intends, plans, and believes are intended to identify forward looking statements. These statements are not guarantees of future performance and involve risk, uncertainties, and assumptions which are difficult to predict. Therefore actual outcomes and 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 factors that could cause actual results to differ materially from those anticipated by forward looking statements you will refer to the Company's public filings including the Form 10-K for the fiscal year ended September 27th, 2003, and the Form 10-Q for the quarters ended December 27th, 2003, and March 27, 2004.

Now I will give you a brief overview of our third quarter and 9 month ended June 26, 2004. Then we will be happy to take your questions.

Hopefully you have all seen our press release. If not it is available on our web site at www.Ingles-markets.com. We're very pleased to report to you today both solid sales and earnings growth for the third quarter and for the first 9 months of fiscal year 2004. Our quarter was highlighted by strong sales growth, stabilizing gross profit margins, and decreased operating expenses as a percent of sales.

We continued our pattern of strong sales growth into the third quarter with total sales growth of 6.8 percent and comparable store sales growth of 6 1/2 percent. Even stronger than in our second quarter.

For the 9 months sales growth was 7.1 percent with comparable sales growth of 6.2 percent. Programs designed to build customer loyalty and improve the overall shopping experience of our customers continue to result in both sales and earnings growth. Gross profit dollars for the quarter and 9 months increased due primarily to the increase in sales. Gross profit as a percentage of sales stabilized in the third quarter after a decline year-over-year in the first 6 months.

We believe this stabilization is a result of some improved purchasing negotiation and growth in the higher margin perishable department. Operating expenses also increased in dollars due to the sales growth but decreased 126 basis points for the June 2004 quarter and 114 basis points for the June 2004 9 month period.

Many operating costs are fixed costs such rent, utilities, and depreciation resulting in lower costs as a percent of sales with strong sales growth. The Company continues to diligently seek cost-effective solutions to operating its business.

Rental income for the June 2004 9 months declined $1 million over the prior year period but increased slightly for the June 2004 quarter over the June 2003 quarter. The decrease for the 9 months is due primarily to the loss of rental income from the sale of shopping centers in September 2003 and at the beginning of the March 2004 quarter.

The rental of previously vacant space during the June 2004 quarter offset the decreases experienced in the sale of the shopping centers. We're very proud that income from operations increased $8.5 million or 51 percent for the June 2004 quarter and 13.4 million or 28 percent for the June 2004 nine-month period. Net income increased 4.6 million or 130 percent for the June 2004 quarter and 8.6 million or 101 percent for the June 2004 and nine-month period.

We currently have committed lines of credit totaling 135 million, all of which is unused. 120 million of the lines mature in October of 2006, 5 million mature in November 2005 and 10 million matures in October 2004. We had unencumbered property with a book value of $382 million of which $281 million is real estate at June 26th, 2004.

Our capital expenditures for the June 2004 nine-month period totaled $60.8 million. During the period, Ingles opened one new store and one replacement store, completed two major remodeling expansions and two minor remodels and closed three older stores.

In addition, we purchased four store sites, two shopping centers in which Ingles is a tenant and one freestanding retail store leased to another retailer. We also completed our point of sale conversion and self checkout rollout and purchased $9.3 million in existing store equipment that was on an operating lease. For the balance of the fiscal year, we expect to open one new store. Capital expenditures for the entire fiscal year expect to be approximately 70 million, including expenditures for stores to open in fiscal 2005.

Capital expenditures were more heavily weighted in the first six months of our year as we had 180 days from the sale of the shopping center in September 2003 to reinvest the proceeds in a like kind exchange in order to defer the tax impact of the sale.

We're obviously very pleased with our performance for the quarter and the first nine months of our year. We believe we have the right team in place that is focused on building customer loyalty and improving the customers' overall shopping experience by providing quality, value, and convenience. This in turn should increase earnings and stockholder value.

We anticipate filing our 10-Q on August 3rd and we will now take your questions.

(OPERATOR INSTRUCTIONS) Brian Hunt, Wachovia Securities.

Please forgive me if I ask something you already said, I got hung up elsewhere. Brenda, could you talk about I understand you did say something that perishables were driving your sales growth. Could you give us an idea whether regionally your growth has been pretty balanced or are you seeing it more in your key markets such as Asheville or Greenville?

Additionally, could you talk about categories other than perishables or what are you doing different to drive your perishable sales growth?

Okay. We're really seeing growth pretty much overall in our market area. And then we are seeing growth in all of our departments. Particularly some of the perishables department particularly the meat department of course. There has been significant inflation in food prices in the meat department but it is a higher margin department so that has generated more gross profit for us and more sales. I think some of the things that we're trying to do -- we've got a really good team in place that is really focused on providing a good experience for our customers. And some of the things we've been trying to do is carry more local produce, carry more variety in our meat department and so just really trying to look at everything that we're doing and provide the customers what they want.

Excellent. Also could you explain your OG&A cost during the quarter? You had a nice decline sequentially. Roughly $1 million all around and what the outlook may be for that number? Are there some accruals that are going to hit in the fourth quarter that appears -- looking at the last couple of years your fourth quarter always sees a step up in O&A expense?

No, one of the things of course that has helped to decrease our operating cost this year is, as I mentioned the purchase of the existing store equipment and that's helped to drive down our equipment rent expense so that has been one of the things that has driven the SG&A decline, which I think you'll see that again in the fourth quarter. Because most of the purchase of the store equipment was done in the first quarter of 2004. So we should continue to see that piece. We've also really just been looking at all of our expenses and on a line item basis. In trying to make improvements there, we've renegotiated a lot of our advertising contracts. So we've seen large decreases there which you should continue to see into the fourth quarter. We've renegotiated our waste disposal, which has made good savings for us.

So there's a lot of things that we've been doing that I think we should continue to see in the fourth quarter. And of course, one of the things in this business particularly are the sales. So as a percentage of sales we're always looking at -- if you've got good sales growth and a lot of fixed costs, it certainly helps to drive that line item.

Could you address competitive openings? What you saw during the quarter and what that outlook may be? It appears most of the pressure in your region has been from really Publix and Wal-Mart, maybe some of club stores? And again if you'd just address what's occurring?

We've had about 21 competitive openings in the first nine months of our year. 7 of those have been Wal-Mart, 3 Publix and then kind of 1 on in a lot of other competitors. What we have knowledge of over about the next 12 months is about 13 competitive openings that we are aware of and 8 of those being Wal-Mart and 3 of those being Alby's (ph).

Are you not ... have there been a significant number of I guess store closures? Sounds like that's a decent amount of capacity addition in the markets where you play. I mean are you seeing some of the competitors that are experiencing pressures like Bilo (indiscernible) transaction and Winn-Dixie with a number of stores they've announced they're closing. What were those closures total, I guess, over the last 12 months?

We've had 7 competitive closing over the last nine months, 3 of those Winn Dixie and 3 of those Bilo's.

Okay and then, lastly, based on your sales strength, you're obviously taking market share. Who do you feel like you're taking market share from? Or the most market share from?

Brian, it is probably a wide variety of competitors but surely Winn-Dixie has lost some ground in our area but we feel what we're doing a good job against Bilo and all the other competitors in our area.

Andrew Berg with Financial (indiscernible).

Brenda, if I could follow up on Brian's questions with respect to the topline. Can you give us a little better understanding of how much of that topline growth is coming from increased average ticket vs. traffic? And then I have a follow-up.

We have seen a larger increase in average ticket than we have in traffic but they have both increased.

So can you give me a ballpark number? Is it going to get two thirds of it is ticket vs. traffic one-third or two-thirds difference (inaudible)

Yes that's probably close. (MULTIPLE SPEAKERS)

And then on the topline, how much for the sales of groceries vs. fluid dairy? Can you talk about that a little bit?

Those numbers will be in our 10-Q which we're going to file on Tuesday but what we have seen in the milk business is, of course, big sales increases in dollars. And actually production volume is down slightly in the June quarter. So the big increases in the raw milk cost is what's driven the prices so we have seen a large increase in sales but not in profitability in the dairy business.

And the last question, with respect to your revolver it looks like there's virtually nothing drawn (inaudible) that number?

135 million.

(indiscernible) you don't have anything drawn on the LCs?

We have about 7 million on the LCS.

So about even with last quarter?

Right.

Karen Miller with Bear Stearns.

I wondered if you can explain why, looking at your press release, your rent expense went down to 7 million from approximately 11 million?

It's primarily due, I mentioned that we purchased the store equipment that was previously owned and operating lease and so that's been the decline, is in equipment rent expense. We now own the equipment.

And that 7 million is that also occupancy expenses in there as well?

It is. That piece really hasn't declined, it's really the equipment rent that has declined.

And then if I can revert back to the competitive landscape. It seems like you improved your gross margin and that's because you said you're selling more perishables at such a higher margin. But with all the competitive opening that you've talked about that happened in the first nine months and then the 13 that you expect over the next 12 months do you see some pressure on your gross margin. How are you gaining market share? What's your secret?

We're just really good. No, I think what we're seeing we're always aware of the competitive situation. And all willing to sacrifice gross margin when necessary and we did have lower gross margins in the first six months of the year and they stabilized as a percent of sales in this current quarter and I think some of that, a lot of that has to do not only with the increase in the perishable department but just better negotiation of our -- better procurement. We are really looking at just like I was talking about in the SG&A how we looked at different contracts and the cost of operating our business. We are doing the same thing in buying product and trying to do a better job at buying product to improve our margins without increasing the price to our customers.

How would you describe the competitive landscape from a pricing standpoint? Would you say it's pretty aggressive, rational, stabilized, would you see it getting worse with the new openings?

It's fairly aggressive. But really nothing out of the ordinary.

(OPERATOR INSTRUCTIONS) Brian Hunt.

Brenda, could you give us what the outlook may be? I know you bought 4 store sites this year. Does the Company plan on opening all 4 of those sites in fiscal '05?

Well, right now we've got 1 store that's going to open in our first quarter, a brand-new store that is going to open in the first quarter of '05. And we've got I think two major remodels that will open in the first quarter of '05. We have started construction on a couple of those other sites but we are kind of in the process right now of looking at our CapEx budget for the upcoming year. And I can't really tell you exactly how many more new and replacement remodels, we're trying to allocate those dollars to where we think we will get the biggest bang for the buck.

Do you believe your CapEx in '05 will be higher than the '04 number or relatively the same?

Relatively the same.

And then if you can -- back to the question I asked earlier about the G&A or O&A expense, you said it will be down and when you said it would be down do you mean it'll be down from a year ago or roughly in line with the third quarter number?

Down from a year ago. As a percentage of sales. I mean I think we should see, given the same type of sales growth into the fourth quarter, we should see about the same thing as we see in the third quarter which would be down from a year ago.

And we're a month already into this fourth quarter. Is your sales tempo continuing at that nice mid single digit comp base?

Yes.

Because it appears you had an easier comparison in the fourth quarter than in the third quarter. All right. And then based on my model it appears you're going to be pretty close to cash flow break even in fiscal '04. Is that -- would that the a relatively safe assumption for '05 as well?

We hope so. Yes.

You hope so.

I mean given -- yeah, given the performance that we had in the last three quarters I would say yes because we're looking at roughly the same amount of CapEx and so if we continue with the performance and we certainly expect to continue and improve our performance we would I think be looking at about the same thing next year as far as free cash flow.

And the new store that is going to open in the first quarter you (indiscernible) first of all opening 1 store in the fourth quarter. Is that correct?

Yes.

And where is that store located?

The store that we are opening in the fourth quarter is in Greenville.

Greenville, South Carolina?

Greenville and the one in the first quarter is in Asheville.

(OPERATOR INSTRUCTIONS) I'm showing no further questions at this time.

We thank you for your time and your interest and we will look forward to keeping you updated in a future. Have a great day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines. Have a nice day.