Ingles Markets, Incorporated (IMKTA) 2005 Q1 法說會逐字稿

Good day and welcome to the Ingles Market Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Vice President Finance, Chief Financial Officer, Ms. Brenda Tudor.

Good morning. Welcome to Ingles Markets' 2005 first-quarter conference call for the quarter ended December 25, 2004. With me today are Robert Ingle, founder of our Company and Chief Executive Officer; Robert Ingle II, Chairman of the Board; Jim Lanning, President; and Tom Outlaw, Vice President Sales and Marketing.

Statements made on this call include forward-looking statements as defined by and subject to the safe harbors created by federal securities laws. 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 risks, 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 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 25, 2004.

Now I will give you a brief overview of our fiscal 2005 first-quarter results then we'll be happy to take your questions. Our 10-Q is being filed today and our press release issued this morning is available on our website at www.Ingles-Markets.com.

We're very pleased to report to you today continued growth in both sales and earnings for our first quarter. Net income grew 110.7% to $5.1 million or $0.21 per share for the December 2004 quarter compared to 2.4 million or $0.10 per share for the December 2003 quarter. Solid comparable store sales growth and improved gross margin in the December 2004 quarter provided strong earnings growth. Both net sales and comparable store sales increased 4.7%. We're particularly proud of the comparable store sales growth since we were up against comparable sales growth of 6.3% from the December 2003 quarter when we introduced our Ingles advantage savings and reward card.

Sales grew in all major departments, but the largest percentage growth was in our higher margin perishable department. Ingles operated one less store at the end of the December 2004 quarter than at the end of the December 2003 quarter and retail square footage remained about the same at 9.3 million square feet.

Gross profit dollars increased 6.5% for the quarter while gross profit margin increased 43 basis points due primarily to increased sales in the higher margin perishable department and increased promotional activity in the December 2003 quarter when the card was introduced.

Our operating expenses increased 3.5% for the quarter but decreased as a percentage of sales by 24 basis points for the fourth quarter -- for the first quarter. The increased sales volume resulted in lower operating expenses as a percentage of sales as certain fixed costs were spread over higher volume. The December 2004 quarter did include approximately $1.1 million in professional fees in connection with the previously disclosed internal investigation, resulting SEC inquiry, and restated financial statements.

Net rental income remained constant at 1.5 million for both the December 2004 and December 2003 quarters. Income from operations increased 27% for the December 2004 quarter compared to the December 2003 quarter. Other income for the December 2004 quarter was $447,000 compared to 1.3 million in the December 2003 quarter. The December 2003 quarter included a gain of $1 million from the sale of an outparcel adjacent to an existing Ingles shopping center.

For the December, 2004 quarter, interest expense increased 823,000 over the same quarter last year – decreased; I'm sorry, 823,000 over the same quarter last year. No new debt was incurred during fiscal 2004 or in the first quarter of fiscal 2005. Total debt decreased $35.3 million to 595.2 million at December 2004 compared to 630.5 million at December 2003.

We currently have committed lines of credit totaling 135 million. No amounts are borrowed on these lines; however, letters of credit totaling 13.8 million reduced the amount available to be drawn under the lines to 121.2 million at December 25, 2004. 120 million of the lines mature in October 2006 and 15 million matures in October and November 2005. We had unencumbered property with a book value of $375 million of which 266 million is real estate at December 25, 2004.

Capital expenditures for the quarter totaled 13.7 million. During the quarter we opened one new store and completed one major remodel expansion and purchased two new store sites. Capital expenditure plans for all of fiscal year 2005 are expected to be approximately $70 million. For the balance of fiscal 2005 we expect to open three new stores, one of which will be leased and two of which will be owned, complete one major remodel expansion, add approximately seven fuel stations and purchase sites for future expansion. Capital expenditures also include upgrading and replacing store warehouse and distribution equipment, technology upgrades, expenditures related to the milk processing plant, as well as expenditures for stores to open in fiscal 2006.

As previously announced, the Company received a notice from the staff of the NASDAQ stock market indicating that the Company was subject to potential delisting proceedings due to the failure to timely file its Form 10-Q for the quarter ended December 25, 2004. On March 16, 2005 the NASDAQ listing qualifications panel granted the Company's request for continued listing on the NASDAQ national market subject to three conditions.

First by March 31, 2005 the Company must file its Form 10-Q for the quarter ended December 25, 2004 and the 10-Q will be filed today. Second, the Company must provide the panel with additional information regarding the Securities and Exchange Commission's informal inquiry. And third, the Company must timely file all periodic reports with the SEC and NASDAQ for all reporting periods ending on or before December 31, 2005 and demonstrate continued compliance with all other NASDAQ continued listing criteria.

We are very pleased with the great start for fiscal year 2005. We will now take your questions.

(OPERATOR INSTRUCTIONS) Jonathan Feldman (ph), SPC Select Investments.

Just a couple questions. I was wondering if you could just talk about -- a little bit about the competitive environment; what you're seeing and perhaps you could comment what impact you're seeing on your business from the Winn-Dixie bankruptcy.

Tom, do you want to address that?

Sure, I'd be glad to. It looks like the competitive openings is fairly much the same that we've seen in previous years. Right now we see on the horizon about 30 new competitors; 12 of them are going to be open in the next 12 months, three of them have already opened this previous quarter and 14 we're just not sure about opening dates. As far as Winn-Dixie, there are two closings that have affected us in a positive way. There's also been a Harris Teeter closing and there's also a BI-LO closing that's going to affect us in a positive way.

Also, it's my understanding that a new Wal-Mart supercenter opened in Ashville (ph). Are you seeing any significant impact from that?

Yes, a Wal-Mart supercenter did open this previous month and so far our sales seem to be holding up fairly well.

Okay, I appreciate that. Just a couple other quick questions. I have you guys generating some free cash flow this year and certainly would expect that to increase in the out years. Have you given any thought to what you think the best use of that free cash flow is going forward, whether that be debt reduction or potential share buybacks?

I think we certainly have been focused on trying to work on our balance sheet and do some debt reduction. We don't have plans at the moment for shareholder buyback but it will be certainly something that we would consider.

And in terms of debt reduction, it looks like, as I recall, most of your non bond debt is not prepayable but there is about 30 million coming prepayable in 2005. Is that right? And would it be fair to expect that you would be able to refinance that debt at significantly lower interest costs than you've historically been paying? I think you're non bond debt average cost is around 9%, whereby your bonds are trading in the market around 7%. To me it would stand to reason that your interest costs should come down going forward.

Yes, it should and the 30 million that is maturing is really just current maturities of existing debt. Primarily there are some loans that will be retired which when you completely payoff that frees up for collateral for the future if you needed additional debt. But I think in the following year we have some more debt that balloons that we should be able to take down as well. And we continue to try to look at the debt and try to prepay it whenever it's possible and whenever the prepayment penalties become not prohibitive.

That's helpful. Just one other question. You had talked briefly about your CapEx budget for '05. Can you more specifically quantify I guess in buckets the CapEx spend I guess between new stores, how much remodel, how much purchase of additional land? I guess I'm just trying to get a sense of what you might consider the level of CapEx that you need to spend for maintenance versus the level of CapEx that you're using to open new stores or really expand the business.

Well, certainly the majority of the CapEx is built on stores and whether they are new or -- when we do major remodels, we're doing the same thing as a new store. We're taking an older store and we're spending -- other than buying the land we're spending as much money on the store as we would if we were building a brand new store. So we kind of look at that bucket together of --.

So if there's four total, is a new store 1.5 to 2 million approximately or what's your total cost?

It would be a lot more than that. A new store would be -- with equipment and inventory and land probably about $8 million.

Per store?

Yes.

Alright, that's all I have for now. Thank you so much. Once again, congratulations on the continuing strong results.

Andrew Berg, Financial Management Advisors.

Yes, Brenda, can you just give me what the number was for sales for dairy? And then secondarily, you talked about having good benefits from your perishables. Is there something that you did differently in the quarter to drive perishables or just good luck in that people were buying a lot this quarter?

I'll address the dairy then I'll let Mr. Lanning address the perishable issue. Let me find my footnote here on the segment information that'll be in the Q that's filed today.

I'll going ahead and address the perishable issue while she's looking for that. We have had increased value, increased quality and variety in our perishables which have driven the sales and with the higher gross margin, that's what that stemmed from.

And can you comment on whether or not you're seeing that continued trend in this quarter?

I'm sorry, I couldn't hear you.

Can you comment as to whether or not you're continuing to see good perishable sales in this quarter?

No, sir. I can't comment on that.

Okay, thank you.

On the dairy sales, the sales to outside customers for the quarter were 26.5 million with sales to Ingles of 11.4 million, so a total of 37.9 million.

Okay, great. Thank you, Brenda.

Kent Shaw (ph), Buckhead Capital.

Brenda, I just wanted to congratulate everybody on the great quarter first of all. And I suppose you're going to be cutting the cake later this afternoon as you pack some things up -- unfortunately. But I wanted to ask if there was any other -- you and I had discussed potential for the dairy going forward and looking at some other areas about maybe how to sort of leverage that. Has there been anymore discussions about that in this past quarter?

We continue to look at -- I think what you're seeing some in the milk business is you're seeing some change in the way consumers are purchasing milk and that there's emphasis on soy milk, there's emphasis on organic milk, flavored milk, so there is a lot of change I think going on in the milk industry as opposed to just the normal white milk that people have been drinking. So that is something we continue to look at is look at the variety and what do we need to do to match those demands of the consumer? So yes, we are continuing to look at that.

Okay. But it's still just on the table I suppose based in what you're telling me? Has there been any discussion about more offering of organics and have you seen any either customer interest or demand maybe at other competitors in your regions?

I think certainly there is an increased demand for organics and it is something that we've been trying to integrate into our stores and we always look at what the customers are wanting and try to look at the trends and that is certainly something that we are focusing on and we've done some improvement in. And that's another thing that drives your perishable departments is that organic -- those organic sales as you expand into that.

And one final question. At some point, I can't remember exactly what quarter it was, there is a pretty substantial benefit to gross margins because of increased beef sales and just sales in general at the meat counter as part of this low carb diet craze that's starting to take off. Have you seen any of that slack off at all as a result of some other changes in the market? Or does that seem to be continuing?

It actually seems to be continuing. Our meat department, whether it's we're running it very well or whether the low carb diet craze is still going on. But we do still seem to have a really good growth in the meat area which over -- for years the meat sales were falling off and that trend has certainly turned around.

Okay, thank you very much.

Bryan Hunt, Wachovia Securities.

Let me reiterate -- I hate to see you go, Brenda. But no one's asked -- what is the timing or is the Company actively seeking a new CFO? And again, what's the anticipated timing of having an announcement?

Jim?

Bryan, we're reviewing resumes now and the search continues as quickly as we can. Of course we will have someone in place, but we're being very careful in our search to make sure that we get the right person in this place.

Alright, great.

I'm going to be off for the next two weeks but then I'm going to be around on a part-time basis until we do get somebody in here and work with them as much as is needed to get them transitioned. So I'm not completely disappearing as of today.

Alright, well eat two pieces of cake. Second question, with regards to your fuel centers, how many do you have today and is there a meaningful impact on the comparable store sales because of inflation in gasoline?

We have 24 today -- or at the end of the quarter we had 24. I don't -- there is an impact certainly in the fuel cost, but I estimate that that impact is probably around 1%, one to -- when gas prices go real high it might be 1.5 and in normal times about 1% impact on comps.

Okay. And then with regards to the fuel centers, you kind of broke out what you anticipate CapEx for a store at 8 million a pop. How about on the fuel center side? You're opening seven of those this year. I'll have to go back and look.

They will typically cost about $600,000 if we already have the land. And we typically do already have the land because we build them on the shopping centers that we own.

Okay. Seasonally does the timing of Christmas this year have a negative impact on your results because it fell on the last day of the quarter? And also since it was on a Saturday?

I don't think so. I think you always have such a boom right there on Christmas Eve and the week or two before Christmas and then after Christmas, whether the last quarter ended on the 27th and this one ended on the 25th, the sales like the day after Christmas aren't that great anyway, so I don't think it really had much of an impact.

Okay. And then seasonally, the last several years with the exception of one -- if you go back and look at five -- the gross margin of the Company always seems to get a pickup in the second quarter, first calendar quarter. Is that trend firmly in place again this year?

I think a lot of that -- that is holiday related because in the first quarter of the year you're doing so much promotional activity around Thanksgiving and Christmas and you're losing money on your turkeys and that type of thing, which impacts your growth and so typically the first quarter has the lowest growth of the year and then it starts to come back.

And with regards to promotional activity, have you seen a change in the promotional tempo of your key competitors, BI-LO, Winn-Dixie, Wal-Mart, over the last quarter? Or would you say the promotional activity continues at a similar pace? Or is the number of promotional items, items in the circular increased?

We haven't seen any change, anything obvious at all.

I think maybe Wal-Mart is doing a little more television advertising than normal, but that may just be because they opened a store in this area. I don't know whether that's something they normally do.

Well, on the 26th they opened a lot of stores throughout the United States and they picked up their national covers.

I think that's about all we've seen.

Okay, I'll get back in the queue. Thank you.

Sanjay Rama Krishna (ph), ING Clarion Capital.

Just wanted to ask a couple questions, one if you could kind of provide some color on the rating review process that Moody's is currently undertaking with regard to your debt rating. And then I'll ask a second question regarding I'm sure you guys have taken note of the interest in real estate values or real estate with respect to some of the major transactions that are going on across the country. I wanted to know if that is impacting at all your strategy on how you deploy your asset base.

Well, on your first question, can you repeat it -- can you repeat the question?

I basically wanted to get an update on the review that Moody's is currently commencing on your debt rating.

I think what we're experiencing with both Moody's and Standard & Poor's, which is I guess kind of disheartening as a company because I think we're in one of the best financial conditions we've been in in a very long time and a better financial condition than we were in when we received the original ratings. And I think the problem is the industry as a whole is being viewed negatively in light of the Winn-Dixie's and that type of thing going on that the rating agencies are really backing off on grocery store ratings. And I think we're just being hurt by that.

Certainly, you look at our numbers and everything looks fine and I've had the conversation with them -- in particular Standard & Poor's as to how could your rating be going down when we just had the best financial year in our history? And I really do think it's more of the outlook of the sector that the rating agencies have taken on because of some of the things that have been happening.

I don't disagree with that in light of obviously the news this week where they've put all the investment-grade guys on notice for review at S&P and clearly there is industry wide competitive conditions. But you guys have appeared to experience contrary performance owing to your -- the strong operations that you've produced over the last year and some debt reduction. Obviously there's been some concern with respect to the SEC investigation and timely financial statements and so forth, but I agree with you. I'm just wondering where and when Moody's may complete their process and what your expectations are.

I'm not sure. Moody's had requested a meeting with us and I had told them I'd be glad to meet with them here before I left or we could arrange another time. But I don't have a time scheduled on that right now.

So the review has commenced but you guys have yet to have a chance to sit down with them?

That's correct.

And then the second question, just curious on your observations on what's going on with respect to real estate, motivated transactions and how that may impact your financial strategy going forward?

Mr. Ingle is going to speak to that.

We think that real estate is really taking a big rise in prices. When we go out to find new locations everybody seems to want top dollar. But we are selectively taking these locations and putting them on the option to buy them later. We're also getting a tremendous amount of interest in buying some of the centers that we bought about 20 years ago down in the Atlanta area and we're contemplating on I guess sometimes the real estate becomes more powerful than the retail grocery store, so we might do some changing there.

Okay, thank you and that's all I have.

(OPERATOR INSTRUCTIONS) Kent Shaw, Buckhead Capital.

I just wanted to -- I haven't heard anything about this recently, but at some point you mentioned -- I think it was referred to as the 100K committee that you used to review various items of $100,000 or more in expenses. Is that committee still working? Are there things that are being reviewed right now? Or has that initiative kind of disappeared?

Well, I think one of the problems we've had over the last few months with the internal investigation, the SEC inquiry and the restatements is everybody has been so focused on that that we haven't been as focused as we'd like to the on running our business, so that's certainly something that I think we'll restart. And Jim may want to speak to that.

But as far as the reviewing of expenses, that's something we look at daily. The first thing when any report comes out that has any kind of expense-related numbers on it we always look to see where it is compared to the year before and dig in to see if there's some way of reducing it or if it has increased we dig in to see why there has been an increase. But the 100K committee is made up of the people that we're all talking to on the call right now so we're all very, very involved in it and it's a situation that it does something that will continue on as long as we are here.

That is definitely good news. I appreciate that. Thank you.

Jonathan Feldman, SBZ Select Investments.

I just wanted to pick up on the earlier comment on real estate. I was just wondering if you could tell us approximately how many centers you do have in the Atlanta area, and approximately what the square footage of the centers might be.

Of the ones we are considering now, there's about nine centers that we may consider in the future.

The approximate square footage?

I don't have that right now.

Typically one of our shopping centers could be anywhere from 50,000 square feet to 100,000 square feet strip centers.

Okay, that is helpful. Thanks very much.

Bryan Hunt, Wachovia Securities.

Thank you. You have been closing a couple stores here and there. I was wondering, is there a number of stores you have circled for this fiscal year that you may close?

No, I think we don't -- we typically make the decision to close a store and close it within a couple of weeks, so it is not really a long-range plan. We are continuing to look at the low performers and how they are doing. Are they improving? What is going on in the competitive environment? Does the store need a capital infusion? Is it worth it? Is a lease expiring? There's all kinds of things that going into that evaluation of whether to close a store or not, so I think what we try to do is just continue to look at that. And as we make the decision that we feel like the store has run its course and we don't feel like putting more capital into it will help, then we decide to close it. Typically I guess over the last few years we have closed between Maybe four and six stores. I do not anticipate that that would be a lot different.

Okay, second with all the Winn-Dixie, BI-LO closures and I would anticipate a significant number of Winn-Dixie closures coming in the next couple of quarters, would you all be interested in either buying or leasing those locations or have you assessed some of the ones that have been closed already?

I think typically those locations, the ones that are in our area, are pretty small stores that probably would not lend itself to the type of store that we build.

Also there are 43 Winn-Dixie that compete directly with Ingles, and they are within a three-mile radius of our stores. So that wouldn't make a whole lot of sense to buy one of those when they are so close to our current property.

Got you. Tom, you would not happen to have the same number for BI-LO would you, just of the top of your head?

No, I don't. We have some numbers run on --

There's probably a lot more BI-LO’s than Winn-Dixie’s.

It probably is.

Okay, and then with regards to -- what have you seen in terms of a pickup on your stores that are within a competitive radius when a Winn-Dixie or BI-LO closes? Do you feel like you pick up half of the sales or one-third of those sales from that store that has closed?

That would depend on the proximity of that store, how close it is to our store, and other competitors in the area.

It's hard to get an amount because we really do not know what they were doing prior to closing, but we have seen increases wherever they have closed.

Okay, and then with regards to the nine centers that you are considering selling, are those nine centers all operating stores today? Or are those some of the properties where you own the property and it is a pure sublease?

We're just looking at various options on that if we can replace them with other purchases of land.

I think it would be a mix of stores -- of shopping centers with stores that we operate and ones that we don't operate. We do have some shopping centers that don't have an Ingles store in them any longer.

All right, thank you very much.

And it appears we have no further questions at this time. I would like to turn the call back over for any additional or closing remarks.

Thank you for your time and interest. I have enjoyed keeping you updated in the past and I know the company looks forward to keeping you updated in the future. Have a great weekend.

Once again that does conclude today's conference. You may now disconnect.