Ingles Markets, Incorporated (IMKTA) 2009 Q1 法說會逐字稿

Good day, everyone. Welcome to the Ingles Markets Incorporated first 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.

Thank you. Good morning. Welcome to Ingles Markets's fiscal 2009 first 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 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. 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 27, 2008.

In accordance with the longstanding company policy, and in recognition of the extremely competitive nature of our industry, this call will not address competitive issues or Ingles's marketing strategies other than what is included in the company's public filings.

This morning I will provide you with a summary of our first quarter results followed by additional comments. After that, we will be pleased to take your questions. Our press release issued this morning is available on our web site at www.ingles-markets.com. We filed our 10-Q for the quarter yesterday afternoon. It is available via our web site, as well.

Net income for the December 2008 quarter totaled $11.1 million compared with net income of $12.7 million for the December 2007 quarter. Predominant factors affecting comparative net income include higher costs related to the company's accelerated pace of store expansions in fiscal year 2008 and the first quarter of fiscal year 2009. Our long term focus has been and will continue to be driving top line sales through product offerings, customer satisfaction, and expanded store offerings. This long-term sales and customer focus, as well as a recessionary economy, can temporarily depress operating results. But we believe it is important to maintain customer loyalty.

Net sales increased 3.6% to $804.9 million for the quarter ended December 27th, 2008 from $777.1 million for the December 2007 quarter. The retail price of gasoline declined substantially during the current quarter, resulting in lower total gasoline sales dollars over the comparative quarters even though total gallons sold increased. Excluding gasoline sales, grocery segment comparable store sales growth rose 5.4%.

We are pleased with our sales growth during a recessionary time when consumer spending has declined. Both average weekly customer visits and the average purchase amount, excluding gasoline, increased over the comparative first quarters. We operated 199 stores and approximately 10.4 million square feet of retail space at the end of December 2008 compared with 197 stores and 9.9 million square feet at the end of December 2007.

Gross profit for the first quarter of fiscal 2009 totaled $197.1 million, an increase of $16.4 million, or 9.1% compared with the first quarter of fiscal 2008. Gross profit as a percentage of sales was 24.5% for the first quarter of fiscal 2009 compared with 23.3% for the first quarter of fiscal 2008. Excluding lower margin gasoline sales, grocery segment gross profit as a percentage of sales was relatively constant at 26.5% for the first fiscal quarter of 2009, compared with 26.4% for the comparable fiscal 2008 quarter.

The Consumer Price Index for food and beverages increased 6% for the twelve months ended September 2008 but increased only 1.7% for the three months ended December 2008. As noted earlier, retail gasoline prices declined during the quarter, as did milk prices. We are pleased to pass these price decreases through to our customers and still achieve sales growth and level gross margins.

Total operating expenses were $167.9 million for the first quarter of fiscal year 2009 compared with $150.3 million for the comparable fiscal year 2008 quarter. The growth in operating expenses was due in part to 11 stores that were opened or remodeled during the past nine months. Bringing a larger number of stores online in a short period often results in higher personnel costs and promotional expenses to insure a successful start for new and remodeled stores. Additions to and remodeling of retail square footage also results in higher depreciation, distribution, utility and supply expenses. Increases in these line items accounted for approximately 85% of the dollar increase for the comparative fiscal 2009 and fiscal 2008 first quarters.

Operating expenses as a percentage of sales were 20.9% for the three months ended December 2008 compared with 19.4% for the three months ended December 2007. Net rental and other income totaled $2 million for the first quarter of fiscal 2009 compared with $1.9 million for the 2008 first fiscal quarter, primarily due to lower rental income partially offset by higher sales of scrap cardboard and packaging materials. Asset disposal transactions were insignificant for the comparative quarters.

Interest expense increased $1.5 million for the three month period ended December 27, 2008 to $13 million. Total debt at December 27, 2008 was $753.4 million compared with $605.1 million at December 29, 2007. In general, new debt added over the past 15 months has been at interest rates lower than existing or repaid debt. This additional debt was incurred primarily to fund capital expenditures. Over the past 15 months, capital expenditures totaled $309 million, including $60.2 million for the three months ended December 27, 2008.

Given the current state of various debt markets, the company is pleased to have been able to complete and finance this increased level of capital expenditures before the recent economic restrictions on credit availability. Ingles currently has lines of credit totaling $185 million. At December 27, 2008, a total of $24.2 million was outstanding with $160.8 million available for future borrowing. The company believes its financial resources, including these lines of credit and other internal and anticipated external sources of funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future. Recent volatility in the credit and equity markets could affect the timing and type of financing the company seeks.

The company's effective tax rate was 38.8% for the December 2008 quarter compared with 38.7% for the December 2007 quarter. Net income for the December 2008 quarter totaled $11.1 million compared with net income of $12.7 million for the December 2007 quarter. Basic and diluted earnings per share for the company's publicly traded Class A common stock were $0.47 and $0.45 per share, respectively, for the December 2008 quarter, compared with $0.54 and $0.52 per share, respectively for the December 2007quarter.

Now to update our investing and financing activities. As noted above, capital expenditures totaled $60.2 million for the three months ended December 2008. The majority of these capital expenditures were for projects begun in the previous fiscal year. During the quarter, Ingles opened two new stores, one replacement store, and added five fuel centers. Ingles capital expenditures plans for the remainder of fiscal 2009 include nine new replacement or remodeled stores and to add four fuel stations at either new or existing stores. Most of these projects are already underway with a portion of the expenditures included in last year's CapEx. Future CapEx will largely depend upon overall economic conditions and credit availability. Total fiscal 2009 CapEx is projected to be between $140 million and $160 million.

We are in difficult and uncertain economic times. As we have done throughout our history, we will focus on delivering value and service to increase sales and financial performance.

We will now take your questions.

Thank you. (Operator Instructions). Our first question is from Bryan Hunt from Wachovia.

Hi. This is actually Meredith Fowler in for Bryan. Can you quantify the gallons increase during the quarter?

No. We don't quantify gallon increases on any quarterly or annual basis.

Okay. Can you discuss your competitive environment? Have you seen any increased competitive openings or closing or face any pricing pressures that could impact you going forward?

We compete on a lot of different fronts with a lot of different types of stores so it is difficult to quantify. And as we mentioned at the start of the call, for competitive reasons, we prefer not to discuss our competition.

Could you just give us a direction, higher or lower, from what you have seen in the past?

I am really not able to do that.

Okay. That's it for me. Thanks.

Moving on, our next question comes from Emily Shanks from Barclay's Capital.

Hi. Good morning. I had a question around the current lines of credit outstanding of $24.2 million. I know that's one of the first maturities on those lines of credit begins October '09. Is any of the amount drawn a portion of what is coming due in October?

Again, we have got these lines with different banks and we really don't get into where the individual draws are from. But our lines are secure. We are fine.

Okay. So should that balance be coming due on October '09, do you think you will have the ability to simply just draw on one of the other lines to fund it?

Or we will renew the line. That's our intent.

Okay. And then around the letters of credit facility that is maturing in April of '09, what are your plans around that?

We intend to renew that as well.

Okay. And are you currently in discussion with your banks around that?

Yes.

And are they -- excuse me, are you getting positive indications from them that they will be doing that?

They're just normal discussions that we have with our banks on an ongoing basis. We stay in very close touch with them on how we are doing and they keep in very close touch with us on how they're doing. It is nothing out of the ordinary.

Okay. Thank you.

(Operator Instructions). We are will hear next from Wayman Harris from [Semaphore Management].

Actually Paul Carpenter asking the question. Our firm has been a shareholder on and off for about five years and right now we have about 1% of the A shares. And I have a broad question about strategy. From my point of view, looking at the increased capital spending in the last couple of years, '07, '08 you spent about, call it $375 million or so, which is up from the previous capital spending rate of, maybe $60 million, $70 million, $80 million a year. And looking at how your cash flows have changed since you embarked on that increased level of spending, haven't really gone up very much. You had EBITDA of about $180 million or so and now it is about $190 million.

So my question to you, from a strategic standpoint is, how do you review those expenditure decisions? It has not been a great return on investment. It would have been better maybe to buy back those high yield bonds, you could have got a 9% return or 10% or 11% if you bought them back during the last few months when the high yield was down instead of spending all of this capital and not getting very much to show for it.

We believe that it is important to keep our store-base modern. It is something that you have to do if you want to remain successful in this business. And we had some great opportunities to develop some new stores in the past couple of years and it was very important for us to do that. Certainly the environment has changed now from a credit availability standpoint. And also from a consumer spending standpoint. And we are reacting to those changes. And in addition, the bonds aren't due yet. They don't mature until December 2009.

No, I understand that. I think they're callable. I think they mature later than that if I'm not --

You are correct. December of 2011. I'm sorry. The call (multiple speakers) goes away in December 2009.

Right. But at the same time, I am not as interested in the sort of month to month competitive openings against you as a broad corporate strategy. The company, the hidden gem of the company has always been these real estate assets, some hidden value. You never really got credit for it. Maybe you could have realized some value when times were good but they're not good anymore.

But the CapEx of the company really ramped up a lot in the past 24 months. Maybe that was because the credit was available and cheap, maybe not. At least in the short term, the report card is that that was not a great return on investment, and having seen that now is that going to substantially change your strategy going forward? You have a lot of surplus land parcels available for future development. In my mind you probably don't have to spend that much now to still have that good pipeline for new sites. You could do some replacements, you could do some remodels, but it would seem to me that you have the option to dramatically lower the capital spending without disadvantaging the competitive position of the stores because of all of these expenditures in the last couple of years.

So I just wanted to know if that is something that is being considered. Do you evaluate these expenditures, do you evaluate these expenditures on a one or two year basis or are you just going to keep spending like that as you see the sites come up without regard for the near term return on investment?

I believe we addressed that during the call. We believe in driving top line sales and we have reduced our CapEx guidance for this year partially in reaction to general economic conditions. I believe I have answered your question.

Anything further, Mr. Harris?

No, that's fine. Thank you.

I have no further questions at this time but I would like to give everyone another opportunity. (Operator Instructions). It appears there are no more questions today. Mr. Freeman, I will turn the conference back to you for additional or closing remarks.

Thank you very much for joining us today. We appreciate your interest and we will speak to you after next quarter. Thank you very much.

That does conclude our conference call today. Thank you all for your participation.