Ingles Markets, Incorporated (IMKTA) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to the Ingles Markets, Incorporated conference call. Today's call is being recorded and at this time for opening remarks, I would like to turn the conference over to the Chief Financial Officer, Mr. Ronald Freeman.

Good morning. Welcome to Ingles Markets 2006 third quarter conference call. 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 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 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 statement 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 24, 2005 and March 25th, 2006.

Net income for the third quarter of fiscal 2006 totaled 13.8 million - 108.9% higher than net income of 6.6 million for the same quarter of last year. For the nine months ended June 2006, net income increased 80.9% to 31.1 million, compared to 17.2 million for the same period last year.

The overwhelming factor behind these net income figures is increased sales. Our sales growth was broad-based. Comparable store sales increased, customer count was up, average purchase for customer visit increased. Virtually every department showed growth and we had a positive contribution from our new replacement and remodeled stores.

The sales growth also allowed us to better leverage our fixed store distribution and administrative costs. It's important to note that all of the growth factors mentioned above were positive both with and without our gasoline operations.

I'll provide more numbers and details momentarily, after which we will be happy to take your questions. Additional information can be found in our press release issued earlier this morning and the Form 10-Q that will be filed later today. These documents are available on our web site at www.InglesMarkets.com.

As previously mentioned, our financial performance has been driven by sales growth. Net sales increased to 92.5 million or 16.3% to 659.2 million for the three months ended June 24, 2006, from 566.7 million for the three months ended June 25th, 2005. Ingles operated 197 stores at June 24, 2006 compared to 195 stores at June 25th, 2005. Retail square footage was approximately 9.6 million at June 24th, 2006 compared to 9.3 million at June 25th, 2005.

Gross resegment comparable door sales for the three-month period grew 80.8 million or 15.2%. Sales comparisons for the three-month period were affected by the timing of the Easter holiday. In fiscal 2006, Easter fell in the Company's third fiscal quarter. In fiscal 2005, Easter related sales were included in the three-month period ended March 2005.

The Company estimates that comparable store sales increases are slightly lower at 13.8% for the June 2006 quarter adjusted for the effect of the Easter sales.

Net sales for the nine months ended June 24th, 2006 increased 12.2% to 1.89 billion compared to 1.68 billion for the nine months ended June 25th, 2005. Gross resegment comparable store sales for the same period grew 174 million or 11%.

Fuel price inflation and an increase in total gallons sold increased gasoline department sales in the June 2006 three- and nine-month periods compared to the previous year. Excluding gasoline sales, comparable store sales increased 10.2% for the three months and 7.7% for the nine months ended June 24th, 2006.

Gross profit for the three-month period ended June 24th, 2006 increased 20 million or 14% to 163.3 million or 24.8% of sales compared to 143.1 million or 25.3% of sales for the three-month period ended June 25th, 2005. Gross profit for the nine months ended June 24th, 2006 increased 44.1 million or 10.3% to 471.2 million, compared to 427.1 million for the nine months ended June 25th, 2005. As a percentage of sales, gross profit decreased to 24.9% for the nine months ended June 24th, 2006 from 25.4% for the nine months ended June 25th, 2005.

The increase in gross resegment gross profit dollars was primarily due to the higher sales volume. Gross resegment gross profit as a percentage of total sales was lower for the June 2006 quarter and nine-month period, primarily due to higher relative sales growth in our gasoline and pharmacy departments.

These departments generally have lower gross margins. Excluding gasoline sales grocery segment gross profit as a percentage of sales was 27.2% for the three months ended June 24th compared to 26.7% for the same quarter of last fiscal year. Also excluding gasoline sales, gross resegment gross profit as a percentage of sales was 27% for the nine months ended June 24th, 2006, compared to 26.7% for the same period of last fiscal year.

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 third quarter and the nine months ended June 2006 versus the comparable periods last year.

Operating expenses as a percent of sales were 19.9% for the third quarter of fiscal 2006 compared to 21.6% for the third quarter of fiscal 2005. Operating expenses were 20.6% and 21.8% of sales for the nine months ended June 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 process to interchange fees continued to increase and the volume of credit and debit card transactions grows.

Outside of those factors we are pleased with our efforts to control cost. Operating and administrative expenses declined as a percentage of sales both with and without considering gasoline sales.

Combined net rental income and other income, net totaled 1.8 million for the June 2006 quarter - compared to 2.4 million for the June 2005 quarter - and 5.3 million for the nine-month 2006 period, compared to 5.7 million for the nine-month 2005 period. Lower rental income and higher shopping center expenses accounted for most of the decreases.

Interest expense totaled 12.2 million and 36.7 million for the three- and nine-month period ended June 2006, respectively, compared to 12.6 million 38.6 million for the same period ended June 2005.

These reductions and interest expense are due to a $24.3 million reduction in total debt from 579.7 million at June 25th, 2005 to 555.4 million at June 24th, 2006.

To recap, the previously mentioned factors resulted in net income for the third quarter of fiscal 2006 of 13.8 million, more than double net income of 6.6 million for the same quarter last year. For the nine months ended June 2006, net income increased 80.9 million to 31.1 million.

Capital expenditures totaled 66.8 million for the nine-month period ended June 2006. Major transactions for the nine months include the following. One new store, three replacement stores, seven store sites purchased, one store closed, eight fuel stations added - including those added at new or replacement stores - and three pharmacies added, also including those added at new or replacement stores.

For the balance of the fiscal year, Ingles expects to open one remodeled store, purchase three sites for future expansion and add four new fuel stations and a pharmacy to existing store properties. Capital expenditures for the entire fiscal year are expected to be approximately 90 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 16.7 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 line of credit agreements, the subordinated notes and our future capital needs.

The Company had unencumbered properties with a book value of 467 million of which 324 million is real estate at June 24th, 2006.

Once again it has been a pleasure to share so much good news with you and with our customers and our co-workers this morning. We will now take questions.

(OPERATOR INSTRUCTIONS). Susan Jansen of Lehman Brothers.

Good morning and congratulations on an excellent, excellent quarter. A couple of questions if I might. First of all, I noticed that your capital expenditures have has -- guidance has risen about $10 million and I wondered if that was just so you were planning on spending more towards '07, earlier in '06 and also I think you mentioned stores to open in '07. Could you give us what sort of store count you might be opening in '07?

First of all, a little bit of the increase in '06 is due to us signing some really good sites for future expansion where we haven't necessarily set a timeframe for store opening on those. But for '07, maybe five new stores.

Great and then one more question, if I could? What is the competitive environment? Obviously you are winning down in your local environment, but how many new stores do you see opening against you in the fall and maybe next spring if you have that disability?

Through the fiscal year the opening should be fairly light, the competitive openings. We are looking at maybe five different competitive openings and then a couple more by the end of the calendar year. Compared to last quarter we had quite a few openings against us, about eight different openings.

We are also being helped by some closings. Bi-Lo closed a store, Food Lion closed a store and an announcement about Southern Family Markets, I'm sure you all seen the press release where they are closing some stores. I think about five of those will affect us.

Excellent. That is very helpful. Thank you very much and congratulations again.

Thank you.

Bryan Hunt with Wachovia Securities.

Thank you. I rarely say congratulations but those are awesome numbers. Could you talk about what your original CapEx guidance was, coming into the year? And is it the only -- is it only the additional sites that are really driving CapEx here? Are you seeing inflation in some of the projects you are doing such as store remodels as well as new store openings?

No. If you recall we were a little under our normal annual CapEx range last year. And that is why we projected to the high end of our range for this year. As I mentioned earlier we have just found some really good sites for future expansion. Those are really the two factors in the change.

Other than that, our projects are costing about the same. We are running them at about the same pace we normally do.

Great. With the rapid sales growth - the 2% extra sales this quarter and the strong last couple quarters, what's the capacity utilization in both the dairy and your distribution center? And is there opportunities to grow those facilities as the Company adds stores next year? If you need to.

There is room for growth, Bryan, but we have not reached that capacity yet.

Is that both in the dairy and the distribution center?

Yes. Yes. If you look at -- there's a substantial amount of our dairy that we sell to outside sources. And we still have room there for a little bit of growth and we still have some room here at the warehouse also.

Now would those require significant CapEx dollars?

No. No. We haven't hit our capacity with what facility we have right now.

Okay. You mentioned that same-store sales benefited from traffic basket. Is it possible to carve that up between traffic basket and inflation if there was an inflation?

You know it's hard to judge on inflation. I think when our 10-Q comes out later today, we've got the Bureau of Labor statistics inflation numbers in there. We really don't try to judge what we might have been, outside of inflation, because there are so many other factors involved. So, no, I can't really carve it up for you.

All right. How about looking at it from a geographic perspective or the store size perspective because I know you all have some older, much smaller stores relative to the new full service. Was there any major difference between the full-service stores and the smaller stores as well as geographically in your same-store sales growth numbers?

As far as stores that we haven't done any kind of remodel or any kind of update to, we have been very fortunate that the sales increase has been pretty much uniform. Now where we go in and remodel a store and increase the square footage and add our gas, pharmacy, and increase our perishables, we see a larger increase in sales there.

But if you take a store that hasn't been touched in a year, whether it's a small store or whether it's a big store, and sales growth is about the same across the board.

Okay. Geographically is there any -- (MULTIPLE SPEAKERS). Geographically are you all better in the Atlanta market or up in the mountain area?

It's pretty close. As far as a percentage of growth it's pretty close across the board. We have been very fortunate all the districts are up pretty much the same amount.

All right. Just a few more question. Looking at the number of new sites you all have - and it looks like you have ten sites for potential openings - and we're talking about five stores for next year. Is there any range of capital expenditures for next year, could you give us at this point in time?

We are still working on our capital budget for next year right now. So it's a little early to talk about what it might be for next year.

Are there any other significant projects the Company has instead of -- other than five stores?

That's pretty significant.

I would say it would be safe to assume you are going to spend at least 75.

I'm sorry. Say that again, Bryan.

I said I would assume it would be safe to assume that you are going to spend over 75 million next year?

That is well within our annual range but to be any more precise than that right now I couldn't say.

Would it be possible for you all to give us any insight into how (technical difficulty) sales are running right now for the fourth quarter?

No.

Okay. Thank you very much and have a good morning.

Thanks, Bryan.

Mr. Freeman, we have no further questions at this time.

Okay. Thank all of you for listening today. It sounds like we've had a few more participants than normal and we appreciate your time and interest and we look forward to keeping you updated in the future. Everyone have a good day.

Thank you. That does conclude today's conference. Thank you all for joining.