Ingles Markets, Incorporated (IMKTA) 2008 Q2 法說會逐字稿

Please stand by for a realtime transcript . Good day and welcome to the Ingles Markets Incorporated second quarter 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. Ron Freeman.

Good morning, welcome to Ingles Markets fiscal 2008 second quarter conference call. With me today are Robert Ingle, founder of our company and Chief Executive Officer, Robert P. Ingle, II, Chairman of the Board, Jim Lanning President and Tim 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 performances 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.

Ingles Markets, Incorporated does 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 29, 2007.

This morning I'll provide you with a summary our second quarter and six month results followed by additional comments. After that we'll be please pleased to take your questions. Our press release issued this morning is available on our website at www.ingles-markets.com. We filed our 10-k for the quarter on Monday May 5th. It is available on our website as well.

First, our second quarter results. Pre tax income for our second fiscal quarter ended March 29th, 2008 totaled $21 million. An increase of $4.3 million or 26.1% over pretax income $16.7 million for the second fiscal quarter of last year. We are discussing pre tax income for the second quarter and six months during this call due to the recognition last year of a $3.2 million reduction of second quarter 2007 income tax expense stemming from settlement of certain state income tax issues. This settlement affects the comparability of net income for 2008 versus 2007.

Net sales totaled $782.8 million to the march 2008 quarter, an increase of $101.6 million or 14.9%, compared with $681.2 million for the quarter that ended in March 2007. This increase incurred in all major categories. Grocery segment comparable store sales grew 15% over the same quarterly period. Easter occurred during the company's second fiscal quarter of 2008, but in the third fiscal quarter of 2007. Excluding the effect of additional Easter sales and excluding gasoline sales, comparable store sales increased 8.4%. In a period of increasing food costs, the number of customer transactions excluding gasoline increased 9.7% while the average transaction amount changed by less than one half of 1%.

Total square footage increased from 9.6 million square feet in March 2007 to 9.8 million square feet in March, 2008. Total gasoline gallons sold increased approximately 19%. While the average price per gallon increased $.85 comparing to March fiscal 2008 quarter to the same period of fiscal 2007. Fluid dairy sales increased in total dollars due primarily to double digit percentage increases in raw milk prices off set by an increase in case volume sales.

Gross profit for the March 2008 quarter increased 10.8% to $184.5 million and increased to $17.9 million compared to the second quarter of last year. Higher relative sales growth in lower margin gasoline resulted in a lower gross profit as a percentage of sales of this quarter. Gross margin as a percentage of sales was 23.6% for the March 2008 quarter versus 24.5% for the same quarter last year. Excluding gasoline sales, grocery segment gross profit as a percentage sales was 27.4% and 27.0% for the March 2008 and 2007 quarters respectively. We are pleased with this margin stability during a time costs and purchasing behaviors can change quickly. Operating expenses as a percentage of sales improved to 19.6% for the March 2008 quarter, compared to 20.5% for the March 2007 quarter. In dollars, operating expenses were $13.6 million higher in March 2008 versus March 2007, but were lower than the sales and gross profit dollar increases.

Higher energy costs and bank charges per credit and debit card sales make it increasingly difficult for companies to sustain overall expense leverage against non-gasoline sales. Net rental income, losses on asset disposals and other income totaled $1.2 million for the March 2008 quarter compared with $1.5 million for the March 2007 quarter. Most of the decrease is attributable to lower rental income as the company's expansion activities have resulted in less tenant space available for lease.

Interest expense decreased $300,000 for the 3-month period ending March 29, 2008 to $11.6 million from $11.9 million for the 3 month period ending March 31, 2007. Total debt at March 29, 2008 was $626.1 million compared to $548.1 million at March 31, 2007. New debt incurred by the company is generally at lower interest rates compared to existing debt and debt repaid over the preceding 12 months. Because of the company's increased pace of store development more interest is being capitalized as part of store construction costs.

As mentioned earlier, income expense was higher this quarter compared to the March 2007 quarter due to the settlement of a tax position last year under an initiative offered by one of the states in which the company conducts its operations. As a result of the settlement the company reduced a previously established reserve for uncertain tax positions by $3.2 million, and reduced 2007 income tax expense by the same amount. As a result, the company's effective tax rate was 38.1% for the second quarter of 2008 compared to 18.9% for the second quarter of 2007.

Net income for the March 2008 quarter totaled $13.0 million compared with net income of 13.$5 million for the March 2007 quarter. Basic and diluted earnings per share for the company's publicly traded class A common stock were $.56 and $.53 per share respectively for the March 2008 quarter, compared to $.58 and $.55 per share respectively for the March 2007 quarter.

Now I'll discuss our six month results. Pre tax income for the six months ended March 29, 2008 totaled $41.7 million which was 23% higher of pre tax income of $34.7 million for the first six months of fiscal 2007. Most of the factors mentioned earlier during the second quarter discussion also drove the first half year results. Consistent with our quarterly results, six-month profit growth began with increased sales. Net sales for the six months ended March 29, 2008 totaled $1.56 billion, which was $193 million or 14.1% higher than the first six months of fiscal year 2007.

Grocery segment comparable store sales grew 13.9% over the same six month period, excluding the effect of additional Easter sales and excluding gasoline sales, comparable store sales increased 8.4%. The number of customer transactions, excluding gasoline, increased 9.6% while the average transaction amount changed by less than one half of 1%. Gross profit for the six month fiscal 2008 period totaled $365.1 million, an increase of $33.7 million or 10.2% over the comparable fiscal 2007 period. Gross profit as a percentage of sales was 23.4% and 24.2% for the six months ending March 2007 and 2008 respectively. Excuse me that was March 2008 and 2007 respectively.

Excluding higher growth, lower margin gasoline sales, the gross margin comparison is 26.9% year to date fiscal 2008, versus 26.6% year to date fiscal 2007. Operating expenses improved as a percentage of sales improved to 19.5% for the March 2008 six month period, compared to 20.2% for the March 2007 six month period. Operating expenses totaled $303.3 million for the first half of fiscal 2008, $27.4 million higher than the first half of fiscal 2007. The cost increase factors discussed earlier for the quarter also contributed to the first half increase.

Net rental income, losses on asset disposals and other income totaled $3.1 million for the March 2008 six month period, compared to $3.2 million for the March 2007 six month period. Decreased tenant rental income was partially offset by increased by sales of waste paper and packaging. Interest expense decreased $800,000 for the six month period ending March 29, 2008, $23.1million from $23.9 million for the six month period ending March 2007.

As previously mentioned, total debt increased by $78 million between March 2007 and March 2008, but the average interest on the new date is generally lower compared with existing non-line of credit debt and debt repaid over the preceding twelve months. We'll provide more details on the new borrowings later in the call.

As discussed earlier, during the quarterly discussion, the state income tax settlement and associated $3.2 million reduction of income tax expense in 2007 resulted in an effective tax rate of 28.9% for the six months ending March 31st, 2007, compared to an effective take rate of 38.4% for the six months ending March 29th, 2008. Summarizing our six month results, first half 2008 net income totaled $25.7 million compared with net income of $24.7 million for the first six months of fiscal 2007. Net income as a percentage of sales was 1.7% for the March 2008, and 1.8% for the March 2007 six month periods respectively. Basic and diluted earnings per share for publicly traded class A common stock were $1.10 and $1.05 for the March 2008 six month period compared with $1.06 and $1.01 respectively for the March 2007 six month period.

During the March 2008, six month period, Ingles completed four replacement stores, one remodeled store, purchased nine land parcels,added five fuel centers and purchased two shopping centers where the company operated leased stores. Capital expenditures for the March 2008 six month period totaled $114.1 million. For the balance of the fiscal year, Ingles expects to open two new stores, three remodel stores, three replacement stores and add a total of eight new fuel stations. Capital expenditures for the entire fiscal year are expected to be approximately $200 million, including expenditures for stores to open in fiscal 2009.

This increased level of CapEx reflects our confidence in our store development process even during current economic uncertainties. Our baseline annual CapEx range is between 150 and $175 million. Total borrowing availability under the company's $185 million line of credit facilities at the end of March 2007, was $175 million, this was after deducting $13.5 million outstanding on those lines. During the first half of fiscal 2008 the company entered into new collateralized debt agreements of $87.1 million. The new debt reduced outstanding balances on the company's lines credit and funded the company's increased capital expenditures. Most of the new debt is at fixed rates and can be repaid in three years or less without penalty. Our $349.8 million of 8 seven eighths percent senior subordinated notes are now callable at a call price of 102.903%, with a call price that decreases to 101.369% on december 1, 2008. We believe we have sufficient available collateral and line of credit availability to fund current and future growth in operations. And we are continuously evaluating options available to related current debt and future needs. We will now take your questions.

Thank you the question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll go first to Bryan Hunt with Wachovia.

Thank you and good morning. Hello?

Yes, Bryan how are you today?

I'm well. How about you, Ron?

I'm well thanks.

I was wondering if you could divide the CapEx into classifications in new stores, remodel, purchase land. As well as let us know how much will be spent on projects that will be open in fiscal 2009?

Well it is hard to speculate on fiscal 2009 because so many things can affect construction schedules and timing. I think the best way to characterize our capital expenditures is always most of it is devoted to store development whether it is new stores, remodels or replacement stores. And we gave those numbers a couple of minutes ago on what we've done on the first half of the year and what we expect to do on the second half of the year. And that is a large majority of the total CapEx.

Could you give us an idea of how much you spend on property this year alone?

No, we don't typically provide that kind of breakdown.

And then when I look at your new store locations throwing dirt out the window because land costs can vary dramatically. How much does it cost for you to develop a new store?

Bryan we have not disclosed in the past our per square foot construction cost and again especially in mountain-like terrain, that can have a pretty wide-ranging effect on any store construction cost. So it would be misleading to give you a number.

Well, could you give us a range though?

No, I'm sorry I can't.

Well you know looking at the current environment in your traffic numbers are spectacular, are you seeing any change in sales mix? Do you see consumers trading down to private label or do you see a growth in family-style or family-size packaging?

We haven't seen a lot of behavior changes ourselves so far. But there is certainly a lot of industry speculation that consumers are trading down. They are buying more private label. But that hasn't really been our experience. Again, I think we are seeing some decreases in restaurant dining. And that certainly helps out our bakery and deli departments.

And what is your label of private mix? And are you all trying to increase that? It is about the same as we disclosed in last year's 10 k. And again we try to maintain a good mix between national brands and private label products. It may not be the same as everyone else does, but it is a mix that we believe works for us. All right, and what is maturity of that $87 million of financing? I know you can repay it, I guess in three years without penalty. How long can you keep that in place?

We could keep some of it as long as 00 years. They're commercial mortgages.

Okay. And my last question is -- and I have asked this I guess for the last couple of quarters. Considering your sales growth and your new store expansion and how tight you are in your warehouse, are there any plans to you know, build out your warehouse? And if so what is the CapEx associated with that?

We certainly have the land and we certainly have plans that we're taking a look at. But it is way early to speculate when that process might start and what the ultimate cost might be. We're doing fine, we're getting everything out to the stores on time and we're keeping them full.

Okay, I'll get back to the key note and let somebody else ask some questions.

Thank you Bryan.

(OPERATOR INSTRUCTIONS). We'll go next to Andrew Berg with the Post Advisory Group .

I have two questions. I would like to go back to Bryan's question. At the very least can you please provide us some education as to what the average cost of the price of store is?

No, I guess that is just something that we haven't provided in the past at all. And it is not in the public documents so I can't talk about it here.

You can't talk about it here because then it would be public. At $175 million CapEx, given the interest expense and where you guys are, you're spending pretty much every dollar that you have that you are earning between interest in CapEx.. How does the company delever going forward?

Well, we're concerned about sales. And we believe that to continue to increase sales we need to improve and develop our store base. The company has always had a fairly high debt profile. And we're well within the bounds of that on the way the company has operated for a number of years.

Okay, so -- but is there a target leverage level where you say I don't want leverage to get above x, this to get too high for us? Or are we just driving this for top line growth at the expense of leverage at the balance sheet?

Our focus is top line growth.

Okay. Thank you.

Thank you.

We'll take our next question from Emily Shanks with Lehman Brothers

Good morning thank you for taking the question. I had a question around the disclosure and the Q, and specifically on the lines of credit that mature between October of '08 to November of 2010. Can you please let us know what the dollar amount that is that is maturing specifically October 2008 or is that pre funded by this new commercial mortgage?

I'm not sure, I understood the second part of your question. But I believe there is a table in the 10Q that outlines those maturities. We have a mix of one-year lines and three-year lines. And I do not know sitting right here at the table what the mix is right now. But I believe there is a table in the 10 Q that has what amount of those quiet lines mature in one year and what line mature in three years.

Okay, then we may have missed it. We'll take a look. How are you planning on refinancing that maturing that is coming in October of 2008?

We have been working with the line banks that we have for a number of years. And we have never had any problems with renewing those lines of credit. And I don't anticipate any this year.

And are those lines backed by the real estate?

No, those are unsecured lines.

Okay. And specifically there you mention a number of trigger events that are typically events of defaults or covenant breeches. Are the credit lines uncommitted in any way? Meaning that if the bank's see a material adverse change to the business, is the bank's option to walk away from those lines?

Those are committed lines, as long as we stay within our covenants we have the availability.

Super. Moving more to the operations. Can you comment on what type of rate of inflation you're seeing right now particularly on the grocery sales?

I think our experience has been pretty similar to what the experience has been nationwide. And the data that we're seeing is from the U.S. bureau of labor statistics is for the three month into this March, food and beverage inflation was 5.1%. And it has been 4.4% for the last 12 months. And I believe the rate of food and beverage inflation for the December quarter was like 2.3%. So it has been ramping up pretty good.

Okay great. And then if I could just one final question. Just looking at accounts payable days outstanding, it looks like they came down quarter over quarter and year over year. Are you seeing any change in your relations with year vendors on any of the terms?

No, not really.

Okay thank you.

(OPERATOR INSTRUCTIONS). We will take a follow up from Bryan Hunt with Wachovia.

According to the Q you spent money on your dairy this year. Could you talk about one, the size of the spending and two, what exactly you are doing at the dairy?

There was some land adjacent to the existing facility that we purchased. And you know there are no current capacity issues at the dairy. But when land becomes available that is adjacent to where you are and it is at a good price, you buy it. And you plan for the future. But you know, there is nothing imminent out there that you know would make sense to discuss right now.

So there is no capacity issues there either?

No, not at all.

And then you know looking at your CapEx number, we have had the pendulum swing in your favor, you are obviously doing a lot of unique things with regards to data mining and your advantage card, rolling out the fuel centers. You have had a great run. If the pendulum were to swing the other way and the markets were to become very competitive and margins were to tighten up. Where could you dial CapEx down to if you didn't have to grow the business. What is the maintenance CapEx numbers?

Well, Bryan first of all it is always competitive. So we're glad we're doing well right now but we never take the competitive environment for granted. Again, we don't necessarily have a maintenance CapEx number. I can't stress enough we focus on top line growth. And we very strongly believe that you have to keep your stores top notch, up to date, modern and the best in their market. And you know we don't want to change that.

Okay. Do you feel like there is any of your competitors that are you know going down the same path that you are going down competitively, and spending aggressively and trying to develop stores in your market. Do you feel strong competitive pressures with you know, 9% plus traffic growth it would appear that you all are taking substantial share?

Well, and Bryan I know you're tired of hearing me say this. But our policy is we don't comment on the activities of our competitors, we focus on trying to do what we do and try to do it better all the time.

Thank you.

We'll take a follow-up from Andrew Berg with Post Advisory Group. And it appears we have no further questions at this time. I now turn the call back over to Mr. Freeman for any additional or closing remarks.

Well thank you for joining us today. And we enjoy sharing these good numbers with you and look forward to seeing you in our stores. Have a great day everyone. Thank you.

That concludes today's presentation. We thank you for your participation. And you may now disconnect.