Ingles Markets, Incorporated (IMKTA) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Ingles Markets, Incorporated 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 Chief Financial Officer, Mr. Ronald Freeman. Please go ahead, sir.

Good morning. Welcome to the Ingles Markets 2005 fourth quarter conference call.

With me today are Jim Lanning, President and Tom Outlaw, Vice President of Sales and Marketing. Robert Ingle, founder of our Company and Chief Executive Officer and Robert Ingle II, Chairman of the Board, have been unavoidably delayed and should join us soon.

Statements made on this call include forward-looking statements as defined by and subject to the Safe Harbors created by federal securities laws. The words expect, anticipate, intend, plan, believe and similar expressions 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 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 24, 2005.

Now I will give you a brief overview of our fiscal 2005 fourth quarter and year-end results. Then we will be happy to take your questions.

Our Form 10-K was filed Thursday, December 8, and our press release issued this morning is available on our Web site at www.ingles-markets.com.

For the 42nd consecutive year, net sales grew reaching 2.3 billion. This represents a 6.4% increase in net sales and a 6.1% increase in comparable store sales over fiscal 2004.

Comparing fourth quarter fiscal 2005 to fiscal 2004, net sales grew 8.4% to 590.7 million. Quarter-over-quarter comparable sales growth was 7.5%.

Gross profit dollars increased 8.2% for the quarter and 4.9% for the year, primarily as a result of the increase in sales while gross profit margin declined 7 basis points in the fourth quarter and 36 basis points for the year. As we mentioned in previous quarters, growth in lower margin gasoline and pharmacy sales contributed to a lower gross margin percentage.

Operating expenses increased 6.8% for the quarter and 4.4% for the year, but decreased as a percentage of sales by 32 basis points for the fourth quarter and 42 basis points for the year. The increased sales volume resulted in lower operating expenses as a percentage of sales as certain fixed costs were spread over higher percentage volumes.

Net rental income decreased $0.9 million for the year. The sale of shopping centers in fiscal 2004, in which Ingles was not a tenant and the relocation of several tenants from shopping centers to stand-alone sites, all decreased gross rental income in fiscal 2005.

Income from operations totaled $91.6 million for fiscal 2005, a record for our Company. This amount was 5.6 million, or 6.5% higher than fiscal 2004 operating income.

For the fourth quarter, income from operations was 26.8 million in fiscal 2005, 14.8% higher than the 23.4 million of operating income earned in the fourth quarter of 2004.

Other income and net income comparisons for the fiscal year and fourth quarter are heavily influenced by net gains on the disposal of assets during fiscal year 2004. Other income for the fourth quarter of fiscal 2004 included $6.7 million of gains on the sale of real estate.

Other income for the full fiscal year of 2004 included net gains on the disposals of property and equipment totaling $11.8 million. There were no significant property sales in fiscal year 2005.

For the fourth quarter interest expense decreased $750,000 over the same quarter last year. For the full-year interest expense decreased by $2.8 million.

No new debt was incurred during fiscal year 2005, and existing debt was paid down by $33 million during the year. We currently have committed lines of credit totaling $135 million.

No amounts are borrowed on these lines, however, letters of credit totaling $12.9 million reduced the amount available to be drawn under the lines to $122.1 million at September 24, 2005. These lines of credit mature in October and November of 2006.

We had unencumbered property with a book value of $407.6 million of which $289 million is real estate at September 24, 2005.

Capital expenditures for the year totaled $59.9 million.

During the year, we opened four new stores, completed two major remodel or expansions and closed three older stores. In addition, we purchased three store sites and opened five new fuel stations.

Capital expenditure plans for fiscal year 2006 are expected to be approximately $75 million, including five new replacement stores and the addition of three fuel stations at existing stores.

To recap, we achieved record sales and income from operations during fiscal year 2005. Our comparable store sales grew. We are extremely pleased with this performance in a very competitive environment.

Our net income comparison was affected by having no significant real estate sales during fiscal year 2005. Real estate ownership continues to provide both operating flexibility for the Company and a sound base for our shareholders.

We attribute our sales and earnings growth to customer loyalty that reflects the efforts of our team to meet customer needs and exceed their expectations.

We will now take your questions.

[OPERATOR INSTRUCTIONS] We'll go first to Brian Hunt at Wachovia Securities.

Thank you very much. I was wondering if, Ron, you can expand maybe on how many stores Winn-Dixie had that were closed that overlapped with you all in Q4?

We had about, this is Jim Lanning. We had about 35 Winn-Dixies go away, and there was probably eight that reopened as something else. And that would be within maybe a eight mile radius of our stores.

And when you said opened as something else, opened as another supermarket operator or just?

Yes.

Could you, there is any possible way for you to segment how those stores performed relative to the overall group from a same store sales perspective?

No, I don't have it.

Would you say that their same store sales were better than the company average in the fourth quarter?

Most of the Winn-Dixies that went away weren't doing a whole lot of business. And I would say that they picked up probably a little better percentage than our other stores as far as the sales increase.

Thanks. Delhaize has said they're going to open roughly eight stores in the Greenville market. Have you seen their activity in that market so far and could you --

Could you repeat that? I'm sorry. We lost you.

Delhaize America has said they plan on opening roughly eight Food Lion stores in the Greenville market and filling in that market. Could you talk to us about their activity in that market, how many stores you have in Greenville?

They really haven't opened those yet, Brian, this is Tom Outlaw. We're expecting to see future stores opening, but they have not opened them yet.

And if I'm not mistaken, Winn-Dixie had a similar number of stores in the market so it's more of a replacement as opposed to new store additions. Is that a fair assessment?

I would think so, yes.

Could you talk about other competitive openings, particularly over fiscal 2005, how many competitive openings you saw and then how many you anticipate for fiscal 2006?

We had about six Wal-Marts open on us and probably, let's see here, getting pretty close. Three Kroger's, probably four or five Auties, couple of the Dollar General markets. I think that's pretty much it.

So it sounds like a, 2005 sounded like a relatively benign year for openings. Is that a fair assessment?

Yes, sir, I would think so.

What about 2006? What are all you anticipating?

Right now just from communication with our stores and what we've seen out there, we're looking at probably about 17 openings against us.

And how many of those would be Wal-Mart?

Seven.

Okay. Looking at your gross profit for the fourth quarter, Ron, you all saw the deterioration in gross profit that declined a merely 7 basis points. Can you talk about grocery gross profit relative to pharmacy and gasoline? What caused the improvement in the trend?

Well one thing to keep in mind, if you look at the quarterly footnote that's in the 10-K, we did have some extra vendor allowance income in the fourth quarter itself that was caught up from previous quarters, so that had the effect of narrowing that margin decrease down to the 7 basis points. It wasn't all that, but certainly that contributed to it.

There weren't any huge differences outside of that in fourth quarter margins compared to the trends that we saw for the first three quarters.

Was that an abnormal vendor allowance that hit in the fourth quarter and would you expect that to normalize going out to 2006?

Yes, it will normalize.

Okay. And I'll ask a couple more questions and I'll let someone else get on the line.

You didn't sell any real estate of any significant amount in fiscal '06. Do you expect anything, or excuse me, in '05. Do you expect any significant real estate sales or potential real estate sales in '06?

Those tend to happen when they happen. Not really much else I can say about that.

Is the Company actively marketing anything at this time?

No.

Okay.

Then lastly, your bonds become callable next year and you've got this recurring maturity on your six bank facilities. Have you all began to explore with your banks particularly refiing the Company or is that an exercise that will happen later in the year?

It will happen later in the year.

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

Once again if you do have a question please press star one. We'll go next to Susan Jansen at Lehman Brothers.

Hi. Thank you. This is actually Emily Shanks for Susan Jansen.

Just want to ask around the percent of sales that gas and pharmacy makes up. Do you have that breakout for the last fiscal year?

We traditionally have not disclosed the individual segments of our sales, but again as we've said throughout the year, those gas and pharmacy sales have been little higher than the Company average for total sales. So that's had an influence.

Okay. And can you give any sense of what the impact of gas and pharmacy was on comp store sales? Was it half of the increase or a third, can you give any sense around the magnitude?

We can say that we had comp store sales increases even without gas or pharmacy or without gas and pharmacy. We were up anyway you want to look at on comp store sales.

Okay. And just as a follow-up, were they in excess of inflation?

I'm not sure.

Okay. All right. Thank you.

We'll go next to Glenn Cutler at ING Clarion.

Good morning. I just had a few quick questions.

First, concerns the SEC investigation. I'm wondering if you can provide color as to when you would expect that to be resolved? Is it going to be a second half of '06 thing?

And secondly, I'm wondering if you can comment on whether you've perhaps been approached by any financial sponsor, shops in taking the Company private and if you would actually consider taking the Company private if the price is right? Thank you.

On the SEC, as we disclosed in the 10-K, our last communication with them was in August. We're not in control of the timing of what they decide to do.

And as far as the second question that you brought, we can't say anything about that one way or the other. Hadn't thought about it.

Thanks.

And one final reminder, if you do have a question please press star one. We'll go next to Jonathan Feldman at SBZ Select Investments.

Good morning.

You had said on past calls that you had received an expression of interest in some of the shopping centers in Atlanta. In terms of your comments earlier on no anticipated real estate sales, have you definitively concluded not to sell those properties?

I don't think you can say we've definitively concluded anything regarding those centers again.

We actively evaluate everything that comes along. But we aren't out there pushing to sell any of it. But as of right now, we don't anticipate anything.

Okay. Second question.

You had said in the 10-K that you expected your comp store sales growth to moderate in '06. Can you be more specific in terms of the magnitude or the increase that you're looking for in '06 pursuant that that comment?

Sure We've had two years of really strong comp store sales growth. And, you know, it's ambitious to keep that rate going.

Any range that you're forecasting for next year?

No. We're continue to push for sales as one of our key factors, but we don't have a number out there that we won't share as far as where we're hoping to be.

Okay. Just also another follow-up question on the real estate side.

There's been a pretty active sale/lease back market out there. We're seeing cap rates at almost all time lows. Have you given any consideration to sale lease backs on any of the owned property?

No, not at all.

Thank you very much.

We'll go to a follow-up to Brian Hunt at Wachovia Securities.

Thank you.

Could you talk about the hurricanes in your Q4 and whether that had any impact on your fuel availability considering you're a private label buyer? And in that context, do you all have a fuel supply contact with any major company and if so, who is that?

We're not in a contractual basis right now, but during a hurricane, I know everybody in our fuel department was working night and day to try to line up loads. We did experience a few stations running out, but actually I don't think anybody could have done any better than our fuel people with the amount of problems that the hurricane brought on.

I don't think we had anybody out more than a eight, nine hour period. And once we made it through that first week, I think we were back up and everybody pumping and clicking right along.

The industry overall experienced a nice expansion in margin in Q4 from all of the publicly traded players that we've seen their numbers from on a margin per gallon basis. Would that be a fair statement for you all that you saw margin per gallon expand in Q4 relative to a year ago?

It may be a little bit.

Okay.

Looking at your operating expenses, now granted you all have leveraged them with nice sales growth. Considering that you're experiencing or expecting moderating sales growth in fiscal '06, would you expect your SG&A or operating expense dollars to moderate as well in terms of the amount of growth you've seen there?

I would think so.

All right. And then considering the competitive pressures you've seen which haven't been significant, could you talk about the promotional environment or the promotional activity your key players, key competitors such as Bi-Lo, Food Lion and others? Has it intensified in the last quarter?

It's really nothing out of the ordinary from our competitors. It's pretty much the same promotions as we've seen in the past.

So in terms of the intensity, nothing more intense on the promotional front than you've seen in the past?

No, we haven't seen that.

Okay.

And then lastly, in your K you mentioned some Cap Ex dedicated to the dairy business. Are you all expanding capacities there and how is your overall capacity usage?

There's been some nice growth there looks like from a gallon basis. Could you talk about what those drivers have been?

Well we did introduce organic milk processing this year. So we added some capacity for that and that part of the business is running quite well. We want to make sure it's got the resources it needs to continue to grow.

And are you all running at capacity at your dairy operations?

No.

And so what's the Cap Ex dedicated for in the dairy side?

Yeah, I mean again, there was a pretty significant investment to bring on the organic milk. And that was the biggest chunk of it.

Okay. Thank you very much.

Thank you.

We'll go back to Jonathan Feldman at SBZ Select Investments.

Thank you.

Were there any extraordinary expenses that should be a benefit next year in terms of Sarbanes-Oxley compliance and the SEC investigation?

We certainly anticipate those expenses will be lower.

Can you quantify, approximately quantify what the benefit next year might be?

No. I mean, again, we've got a table in the K that shows what we spent on professional fees this year, but how much lower we might expect that to be in '06, I would hate to speculate.

Okay. Thank you very much.

And gentlemen, there are no further questions at this time. We'll turn the conference back to you for closing remarks.

Thank you very much for listening today. We have our next quarter end in about two weeks now so sometime in early February we will be back to you. Thank you very much.

And that does conclude today's conference. Again, thank you for your participation.