Ingles Markets, Incorporated (IMKTA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ingles Markets second quarter results conference call. Through the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Thursday, May 4, 2006. I would now like to turn the conference over to Ron Freeman, Chief Financial Officer - Ingles Markets. Please go ahead, Sir.

Thank you. Good morning.

Welcome to Ingles Markets 2006 second quarter conference call. With me today are Robert Ingle II, Chairman of the Board, Jim Lanning, President and Tom Outlaw, Vice President of 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 expect, anticipate, intend, plan, believe and similar 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 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 24th, 2005 and the Form 10-Qs for the quarters ended December 24th, 2005, and March 25th, 2006.

Net income for the second quarter of fiscal 2006 totaled 9.4 million, 72.5% higher than net income of 5.5 million for the same quarter of last year. For the six months ended March 2006, net income increased 63.3% to 17.2 million.

Sales and comparable store sales have increased, margins are stable and expenses have decreased as a percentage of sales. All of these factors contributed to higher profits. I'll talk about these factors in more detail; then we will be happy to take your questions.

Additional information can be found in our press releases issued April 27th and the Form 10-Q filed May 2. These documents are available on our website at www.Ingles-markets.com.

We are very pleased with our financial performance for the first half of fiscal 2006, beginning with sales growth. Total sales growth was 8.9% and comparable store sales growth was 8% for the March 2006 quarter. For the March six month period, total sales growth was 10.2% with comparable store sales growth of 8.0%. In dollars, total sales were $606.6 million for the quarter and just short of $1,250,000,000 for the first six months of fiscal 2006.

Sales increased in every department except video with the largest quarter and year-to-date percentage increases in gasoline, pharmacy, deli and produce. Compared to last year the Company operated four additional pharmacy departments and seven additional fuel stations at the end of March 2006. These departments experienced both volume growth and price increases while sales growth in other departments was primarily volume-driven.

Comparisons for the three- and six-month period were affected by the timing of the Easter holiday. Easter sales occurred in the March quarter of fiscal 2005 but will occur in the upcoming June quarter of fiscal 2006. Of note, sales for the last week of March 2006 were actually higher than the comparable March 2005 Easter week sales. Accordingly, comparable store sales increases were higher at 8.7% and 9.2% for the March 2006 three- and six-month periods, respectively - adjusted for the effect of Easter sales.

Gross profit was 25.5% of sales for the second fiscal quarter of both 2006 and 2005. Gross margin percentage increased in seven of the 10 areas tracked by the Company. These broad-based margin increases offset the effect of higher sales growth in lower margin pharmacy and gasoline departments. Total growth profit dollars for the quarter increased 12.5 million or 8.8% to 154.5 million compared to 142 million for the second quarter of last year.

For the six-month period ended March 2006, gross profit was 25.0% of sales compared to 25.4% of sales for the first six months of fiscal 2005. In addition to the factors mentioned above affecting the second quarter, extra promotions during the calendar 2005 holidays and competitive factors contributed to the slightly lower gross margin during the first half of this fiscal year. In dollar terms, gross profit increased 24.1 million or 8.5% to 308.1 million for the six months ended March 25th, 2006.

Increased sales have enabled the Company to achieve a certain amount of leverage over its cost structure. While the dollar amount of operating expenses has increased, operating expenses as a percentage of sales decreased for both the second quarter and six months ended March 2006 versus the comparable period last year.

Operating expenses as a percent of sales were 21.1% for the second quarter of fiscal 2006, compared to 21.8% for the second quarter of fiscal 2005. Operating expenses were 21.0% and 21.8% of sales for the six months ended March 2006 and 2005, respectively.

Petroleum cost increases affected both the cost of delivering items to our stores as well as the cost of plastic-based supplies and packaging. Bank charges increased as processor interchange fees continue to increase in the volume of credit and debit card transactions grows.

Outside of these factors we are pleased with our efforts to control cost. With a settlement of the SEC investigation and with last year's Sarbanes-Oxley implementation behind us, we have additional opportunities for cost savings. Net rental income and other income totaled $1.4 million for the March 2006 quarter and $3.4 million for the six-month period. Both amounts are approximately 5% higher than the corresponding fiscal 2005 totals.

Leasing activities has been stable and there have been no significant property sales for the six months ended March 2006 or March 2005.

Interest expense totaled $12.2 million and $24.6 million for the three- and six-month periods ended March 2006, respectively, compared to 12.9 million and 26 million for the same period ended March 2005 due to a $26.5 million reduction in total debt from 586.5 million at March 26th, 2005, to 560.6 million at March 25th, 2006.

To repeat the net income figures mentioned earlier on the call, net income for the second quarter of fiscal 2006 totaled 9.4 million - 72.5% higher than net income of 5.5 million for the same quarter of last year. For the six months ended March 2006, net income increased 53.3% to 17.2 million.

Capital expenditures totaled $43.7 million for the six-month period ended March 2006. From the beginning of this fiscal year through April 2006, we opened one new Savemore, one new convenience store and carwash, and two replacement stores. We also closed one store in Georgia and purchased four land parcels. We currently own nine parcels for future development.

For the balance of the fiscal year, Ingles expects to open one remodeled store, one replacement store and add four new fuel stations. Capital expenditures for the entire fiscal year are expected to be approximately 80 million, including expenditures for stores to open in fiscal 2007.

We currently have committed lines of credit totaling 135 million, all of which are unused. However, letters of credit totaling 15.6 million reduced the amount available to be drawn under the lines. These lines mature in October and November 2006. The first optional call date for our $349.8 million of 8 7/8% Senior Subordinated Notes occurs in December 2006 at a call price of 104.438%.

We are currently evaluating financing options for the lines of credit agreements, the subordinated notes and our future capital needs. The Company had unencumbered property with a book value of 441 million of which 306 million is real estate at March 25th, 2006.

During April 2006, the Company settled a civil complaint with the Securities and Exchange Commission in connection with the previously disclosed private investigation regarding certain vendor contracts entered into in fiscal years 2002 and 2003. The settlement does not require Ingles to pay a monetary fine and the Company neither admits nor denies the SEC charges.

We are pleased to be done with this matter and look forward to completely focusing on the opportunities ahead of us.

It's been a pleasure to shares so much good news with you and with our customers and co-workers this morning as well as over the past few days. We want to continue the momentum for the rest of the fiscal year. And we will now take your questions.

(OPERATOR INSTRUCTIONS) Bryan Hunt, Wachovia Securities.

Thank you. And at 72.5% earnings growth you would like to repeat that don't you?

Yes you want me to say it again, Bryan?

I would enjoy saying it too if I was the CFO. Looking at competitive openings what were the competitive openings in the quarter and year-to-date? And what are you looking at for the rest of year?

It's about the same. We are running into the same competition that we normally run and we don't see a lot of changes from previous quarters.

Could you talk about what the differential and same-store sales between stores where you had a window seat closure and stores where you had more of a static competitive pressure? What that differential may be?

We haven't calculated the differential on just those stores but certainly the Winn-Dixie closures last year were beneficial for us.

And you don't anniversary those closures until what? The months of October, November, December? Is that approximately correct?

Just as quick as it comes around. I'm not sure I understand your question.

When do you anniversary all those closures?

(indiscernible) around the year.

August?

Yes.

All right.

You know they kind of roll those out a little bit.

How many -- you know food Lion is going to do a big opening like I believe eight -- six to eight stores in Greenville, South Carolina. Based on what you know about those locations how many of those stores will be in direct competition with your stores in that market?

Six.

Six of them?

Yes.

And have you all done some spruce up on those stores in anticipation of the competition? Or what is your plan as they come to market?

You know we don't discuss promotional activity. We would be foolish not to spruce them up. I think everybody would know that but as far as what our specific promotional activity is going to be to combat that, we really can't talk about that.

You sold some property and equipment year-to-date. Not much but $600,000. Can you talk about what that was the first six months of the year?

It's mostly equipment we replaced.

Then in your press release you mentioned Easter maybe cost you to shift in Easter 80 bps worth of sales. Did you see that pickup? That amount of pickup in your April sales?

Yes we had a very good Easter this year.

We can't talk about anything in this quarter we are in now.

Okay. With regards you made to you are doing more promotions this year. Could you talk about the promotions you are doing this year relative to a year ago? Is it a greater number of items in your circular? Are you taking deeper discounts? Are you increasing the number of seasonal events? What exactly are you doing?

We are keeping an eye on the ball as far as focusing on our value, our service, our variety. We continue to strive to have the best quality of our products out there. And basically we are just trying to keep our focus on sales and increasing sales.

Just a couple more questions. One, you've seen some significant price declines in protein, in the protein category - chicken, pork, beef that I believe is starting to back up. And this is a big category for your Company. Are you all passing all that along to your customers or has that been a part of your margin expansion?

You are going to have to say that one more time so I can make sure I am understanding what you are talking about.

Sure. There's been a significant decline in the protein categories. Beef not as much; but chicken and definitely pork. Are you all maintaining some of that price decline or is all of that being passed through to your customer base?

We are passing through to our customer base. We are continuing -- it's like I had told you before -- to focus on making sure that we are giving the best value to our customers. When Ron was talking about the fact that our profits were up, if you noticed, our gross profits as a percentage is pretty much flat or a little bit down. We are continuing to try to grow that through our sales which we are focusing like I said on our value and our service and our quality.

Great. Given the great sales momentum the Company has had and the product term you're seeing, are you seeing more rebates from your vendors relative to a year ago?

We are trying our best to take everything to cost of goods. We are trying to have a situation where and I hate to keep going back to this but we are just trying to give the value to our customers. Getting everything to cost of goods gives us a truer picture on it.

All right. Then the last question, I don't want to dominate this any longer. Looking at your properties that you have available for lease in your strip centers and your other freestanding properties what's your approximate vacancy rate this year, relative to a year ago? And what, additionally, what direction has that been trending?

It's about the same. And we hope for it to pick up actually as our properties become more demand for them.

And do you have an approximate vacancy rate?

Not one that we disclose.

Thank you very much.

(OPERATOR INSTRUCTIONS) Emily [Schenks]. Lehman Brothers.

Good morning. Great quarter. I had a question around market share. What do you guys think you've picked up in the past couple of quarters here and specifically where you've seen gains?

We feel like we picked up some market share in all the markets that we are in but we are not focusing on market share. We are just like Mr. Lanning says, we are focusing on our share, our sales.

Okay. Great. And two more if I could? In terms of the grocery and meat department it looks like you had a nice uptick in the sales and margin growth there. What do you think you are doing differently that helps drive that?

I -- say it once more again. I didn't -- .

For the grocery and meat departments it seems like you had some mice margin uptick that helped offset the pharmacy and gas. I was just wondering what exactly you were doing there to help drive that margin increase?

First off, I don't know where you are getting the margin increase on those if you are speculating. Like I said before our total gross was pretty much flat and we are concentrating more on generating the sales instead of generating the margins. (MULTIPLE SPEAKERS) question.

I was referring just to the statement in your press release saying that during the quarter the lower margins and gas and pharmacy departments were offset by the sales and margin growth in the grocery and the department. I was just trying to get a sense of that.

I understand. I understand.

And then my final question it sounds like you closed the store in Georgia. There are no store closures planned for the second half. Right?

We can't talk about the second half. We can talk about anything that we have finished or anything up to the point when the quarter ended.

That was the last question; I will turn the conference back to you.

Okay. Thank you very much. I appreciate everyone joining the call today. Again, it is nice to have good numbers to report and we look forward to speaking with you next quarter. Thank you.

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