Ingles Markets, Incorporated (IMKTA) 2011 Q2 法說會逐字稿

Good day, and welcome to the Ingles Markets, Inc. 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. Ronald Freeman. Please go ahead, sir.

Thank you. Good morning. Welcome to the Ingles Markets Fiscal 2011 Second Quarter Conference Call. With me today are Robert Ingle II, CEO and Chairman; Jim Lanning, President; and Tom Outlaw, Vice President of Sales.

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, likely, goal, seek, 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 and declines any obligation 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 25, 2010.

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

We wish to acknowledge the passing of the Company's founder, Robert Ingle, on March 6 of this year. We are grateful for his vision and dedication to bringing the best to Ingles customers, employees, and shareholders.

This morning, I will provide you with a summary of our Second Quarter and Six-Month Results, followed by additional comments. After that, we will be pleased to take your questions. Our press release issued this morning and is available on our website at www.ingles-markets.com. We expect to file our 10-Q for the quarter after the markets close this afternoon. It will be available via our website as well.

We'll begin with our second quarter results. Net income for the second quarter of fiscal 2011 totaled $7.7 million compared with net income of $5.6 million earned for the second quarter of fiscal 2010. Increases in total sales, comparable store sales, and gross margin, plus decreases in interest expense, more than offset increases and operating expenses and resulted in higher net income.

Inflation in food, including dairy products and gasoline, influenced the sales in margin increases. In the near term, we expect inflation to exert a strong influence on certain product costs, customer behavior, and the competitive landscape.

Net sales increased by $33.4 million to $870.4 million for the three months ended March 26, 2011, from $837 million for the three months ended March 27, 2010. Ingles operated 203 stores and 11 million square feet of retail space at March 26, 2011, compared with 202 stores and 10.8 million square feet at March 27, 2010.

Excluding gasoline, where retail prices were substantially higher than in the March 2010 quarter, total sales increased 2.4%, and grocery segment comparable store sales increased 1.9%. The number of customer transactions, excluding gasoline, increased 0.8%, while the comparable average transaction size increased 1.5% compared with the same quarter last year.

We are pleased with the sales, customer count, and basket increases during a time when consumers are under increasing pressures.

Beginning with this quarter, we changed our methodology for comparable store sales, customer count, and transaction size, to be more in line with the majority of our grocery peers. Prior periods have been recalculated for consistency.

Gross profit for the March 2011 quarter increased 4.7% to $194.6 million, an increase of $8.8 million compared with the second quarter of last fiscal year. Gross margin as a percentage of sales was 22.4% for the March 2011 quarter versus 22.2% for the same quarter last year.

Excluding gasoline sales, grocery segment gross profit as a percentage of sales was 26% and 25.5% for the March 2011 and 2010 quarters, respectively.

Operating and administrative expenses for the March 2011 quarter totaled $168.6 million, an increase of $6.7 million, or 4.2% over the March 2010 quarter. Excluding gasoline sales and its relatively low associated operating expenses, which are primarily payroll, operating and administrative expenses, as a percentage of sales were 22.4% for the three months ended March 26, 2011, compared with 22.0% for the three months ended March 27, 2010.

The expense increases reflect sales growth and improvements to the store base -- personnel, taxes, and licenses, and depreciation. Bank charges also increased due to ever-increasing costs of debit/credit card transactions.

Interest expense decreased to $0.9 million for the three-month period ended March 26, 2011, to $15.7 million from $16.6 million for the three-month period ended March 27, 2010.

Total debt at March 26, 2011, was $875.6 million compared to $833.5 million at March 27, 2010. The net increase in total debt reflects the issuance in December 2010 of $99.7 million of bonds to construct an additional distribution facility adjacent to the current facility. Offsetting this increase were principal debt payments of $57.7 million over the past 12 months.

Income tax expense totaled 35.6% of pretax income for the March 2011 quarter, substantially level with the 35.5% in the March 2010 quarter.

Net income of $7.7 million for the March 2011 quarter represents 0.9% of sales. Net income of $5.6 million for the March 2010 quarter represents 0.7% of that quarter's sales.

Basic and diluted earnings per share for the Company's publicly traded class A common stock were $0.33 and $0.32 per share, respectively, for the March 2011 quarter compared with $0.24 and $0.23 per share, respectively, for the March 2010 quarter.

Now I'll discuss our six-month results. Consistent with our quarterly results, six-month performance began with increased sales. Net sales for the six months ended March 26, 2011, totaled $1.74 billion compared with $1.68 billion for the first six months of fiscal year 2010.

Grocery segment comparable store sales increased 2.4%, excluding gasoline sales, where retail prices were significantly higher during the first half of 2011. The number of customer transactions, excluding gasoline, increased 0.7% while the comparable average transaction size increased 2.2% compared with the March 2010 six-month period.

Gross profit for the six months ended March 26, 2011, increased 4.6% to $388.1 million, an increase of $17 million compared with the first six months of last year. Gross profit, as a percentage of sales, was 22.3% for the March 2011 six-month period compared with 22.1% for the March 2010 six-month period.

Gross profit dollars increased due to the higher sales volume and the effects of inflation on certain products.

Excluding gasoline sales, grocery segment gross profit as a percentage of sales was 25.6% for the six months ended March 26, 2011, compared with 25.2% for the same period of last fiscal year.

Our fluid dairy operations generally experienced higher sales, raw milk costs and gross profit over the comparable three- and six-month periods. Case volume is down slightly consistent with lower dairy sales experienced throughout the United States.

Operating and administrative expenses increased $13.4 million, or 4.2% to $335.8 million for the six months ended March 26, 2011, from $322.4 million for the six months ended March 27, 2010. As a percentage of sales and excluding gasoline, operating and administrative expenses were 22.1% for the six-month period ended March 26, 2011, compared with 21.8% for the six-month period ended March 27, 2010.

The components of the six-month increase are generally the same as those cited earlier in the three-month discussion.

Interest expense totaled $31.6 million for the six-month period ended March 26, 2011 compared with $32.8 million for the six-month period ended March 27, 2010.

Principal debt payments totaled $41.6 million during the March 2011 six-month period.

Income tax expense as a percentage of pretax income decreased to 35.4% for the March 2011 six-month period compared with 35.9% for the comparable March 2010 period due to lower state taxes and increased tax credits.

Summarizing our six-month results, net income totaled $15.4 million for the six-month period ended March 26, 2011 compared with $11.6 million for the six-month period ended March 27, 2010.

Net income, as a percentage of sales, was 0.9% for the first half of fiscal year 2011 compared with 0.7% for the first half of fiscal year 2010. Basic and diluted earnings per share for publicly traded class A common stock were $0.66 and $0.63 for the March 2011 six-month period compared with $0.50 and $0.48 for the March 2010 six-month period.

Next I'll update our investing and financing activities, and then I'll take your questions.

Capital expenditures totaled $42.9 million for the six-month period ended March 26, 2011 including the opening of one new store and three remodeled stores. Capital expenditures totaled $34.2 million for the six months ended March 27, 2010.

Ingles capital expenditure plans for fiscal 2011 include investments of approximately $100 million to $140 million. During fiscal year 2011, the Company expects to begin construction of the distribution center addition adjacent to its current distribution center. The project, expected to be completed in fiscal 2012, will be funded with bonds that were issued on December 29, 2010, in the amount of $99.7 million.

During fiscal 2011, the Company has emphasized interior improvements to a larger number of stores. These improvements do not result in increased square footage or new buildings. Fiscal 2011 capital expenditures will also include investments in two new stores and three replacement stores expected to open in fiscal 2012 as well as technology improvements, upgrading and replacing existing store equipment, warehouse and transportation equipment, and improvements to the Company's milk processing plant.

At March 26, 2011, the Company had $185 million of undrawn committed credit facilities. The Company believes, based on its current results of operations and financial condition, that its financial resources, including existing bank lines of credit, short and long-term financing expected to be available to it, and internally generated funds will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future including any debt service requirements of additional borrowings.

Over the next 12 months, scheduled principal debt payments total $88 million.

We will now take your questions.

William Reuter, Bank of America Merrill Lynch.

In terms of the 1.5% increase in ticket that we saw in the quarter, I'm wondering if this was due more to price increases or to more items?

Well, certainly, price increases had something to do with it, but it wouldn't be the full extent of it.

Okay. And, in general, when you guys have pushed through price increases, how have you seen consumers respond to those increases?

Well, it really depends upon the product. It's a precarious situation right now because there is inflation out there. We're seeing costs go up. The customers are certainly looking very closely at what they spend, so there's no one predominant factor out there right now.

Okay. And then in terms of the $88 million of principal payments that we have for the next 12 months, I'm wondering how you guys are planning on dealing with those -- whether it will just be a draw on the credit facility or if you have something else in mind?

We're considering refinancing alternatives right now, and we also have, of course, the $185 million of undrawn facilities. So it will not be a problem to deal with that $88 million. We're just figuring out the best way to do it.

Okay. And then, lastly, in terms of the restricted investments that are on your balance sheet, can you talk a little bit about what those are and what those are going to be used for?

Sure. When we closed the bonds in December at $99.7 million, the proceeds were placed in an account with the trustee primarily in money market accounts and US Treasury securities. So that's the line item for restricted investments on the balance sheet.

As we incur project costs, we'll submit requisition forms to the trustee, and we'll get funds out of those restricted investments to pay for those project costs.

Bryan Hunt, Wells Fargo Securities.

Good morning. This is Kevin standing in for Bryan. Ron, just to follow up on William's question about the price increases. On the last conference call you mentioned you saw some trade-up during the holidays. Are you seeing that trend continue, or are you starting to notice people trade down to private label in response to inflation?

I don't think it's necessarily a trade down. It's just different behavior following the holiday season.

So you have not seen that type of activity continue? That was more of a one-off occurrence?

I believe so, yes.

Okay. Then moving on -- can you give us a little more color on the pace of the spending of the restricted cash and whether you're timing a front half or a back half 2012 opening of your distribution center?

Well, the distribution center will open in 2012, probably right at the end of the fiscal year. So there will be more of the spending that will take place in fiscal year 2012 than there will be in 2011. But it's very difficult to say what the quarterly spend will be at this point. It really depends upon the pace of the construction.

Got you. Okay, and then a couple of your competitors have recently commented on using fuel promotions to drive inside store sales. Could you maybe give some color on how you are crafting promotions around fuel given the (multiple speakers).

Yes, again, we don't talk about our competitors' activities.

Well, how are you using fuel to drive traffic?

The same way we always have. We have approximately 70 fuel stations. They've been very successful for us both on their own and in driving traffic, and we'll continue to use that.

Okay. Do you believe that the industry is being successful in passing through all of the CPG inflation? Or are you seeing -- are you having to absorb some of that and then pass along the pricing in stages? Asked another way, my question is should we see margins slowly improve as you stage pricing increases? Or are you able to pass through all of that cost inflation (inaudible).

It's something that we have to look at every week depending upon the products that are affected. The one thing you absolutely cannot do is just automatically pass through every cost increase on every product. That's not good for our customers. We don't believe our competitors are doing that. But, really, you have to watch it every week on both the buy side and the sell side.

Fair enough. Then, lastly, how frequently are you holding discussions with some of the package (inaudible) companies about price increases? And do you expect those discussions to continue throughout the rest of the year?

Well, we have those conversations daily. I know Tom Outlaw has been working really hard dealing with the vendors and dealing with all those discussions. So it's an everyday thing.

(Operator Instructions) Damian Witkowski, Gabelli.

Our condolences, again, regarding Mr. Ingles (ph). That's sad news. I wanted to sort of go back to -- I don't know if missed it, if you did talk about it, but your balance on fuel in the second quarter -- were they up or down versus a year ago?

They're down a little bit.

Oh, they're down. So as prices increase, you are buying less fuel?

I believe so.

And then if -- I know you're basket size increased year-over-year. But sequentially, and I don't know if you have that information, but sequentially is the basket size bigger than it was in the first quarter? Or has it declined?

I don't have that information in front of me, so I can't answer that.

Okay. And so you opened out by saying inflation is going to have certain effects on the consumer, and sort of sounded like -- you sort of implied to stay tuned. And, obviously, I think inflation is increasing and, for the most part, everyone in the industry has said that they will be passing those increases along to the consumer, and it's probably happening at a, you know, various pace. But if you are looking at your gross margin in the second quarter, and you have inflation throughout the quarter increasing, your margins actually improved. So it seems like you are able to pass it along fairly easily.

I would not agree with "fairly easily."

Oh, (inaudible).

The (inaudible) increases are out there, but you've got to be in tune with what your customers are buying and with what your competitors are doing.

But are you -- I mean -- is there anything else in there that might be helping your gross margin other than that your -- you know -- so maybe you're not passing on the prices, but are you getting a lift from another bucket in that?

Well, Damian, that's a difficult one to answer. I mean, we, again, we certainly are very aware of what our costs are. We are also very aware of what our customers are buying every week, and we try to provide the promotions to keep the traffic count up. And we think we've done okay with that. But it's not something that you can lay out what's going to happen over the six months and go execute it without expecting it to change. Things are just too volatile right now.

And then, you know, I mean, one of the things that surprises me in the last few months, as companies have reported, no one seems to be really noticing any negative effects from rising fuel prices. And whether that changes or not, I'm not sure, but it seems as though the consumer is used to now seeing higher prices, and they put it on their credit card, and they still go in the store and continue shopping the way they used to.

You're in the more -- you're sort of -- it's tied to a certain geography more than others, and so would you agree that that's the same thing you're seeing right now?

I think that's pretty true right now, but if the price continues to go up as you hit vacation season, you could be looking at a completely different dynamic.

Okay. And the last time we had this a couple of years ago, I mean, what's the first thing that customer really cut back on when the prices hit $4 per gallon? What did you notice inside the store?

We didn't really notice anything inside the store, but they certainly changed their driving habits.

Okay. And then, just lastly, if I could, the $99.7 million for the new distribution center -- is that enough? Or will you have to get other monies, or is that enough to build the DC?

That's enough.

Okay. And the $88 million that's coming due, I assume whatever you end up refinancing it with is probably going to be at a lower rate?

I think that's a good assumption right now.

Okay. What are you paying on that $88 million right now that's -- on average?

Well, there are a number of different individual pieces there, and it's a wide range.

Emily Shanks, Barclays Capital.

Hi, this is Mike Perez on behalf of Emily. Thanks for taking our question. I'm just wondering -- one more follow-up on the increase in ticket. You said that that was partially due to a pricing increase. Can you comment a little bit more on what else is driving that? Is it a difference in quantity of items or mix? Any color you could provide would be helpful.

Well, again, I think there's less eating out as gas prices have gone up and some of the other pressures are hitting. And that helps some of our higher-margin product sales and higher dollar product sales.

Okay, that's helpful. And do you expect that trend to continue as gas prices stay high? Is it something that's sustainable throughout the year?

If gas prices stay high, I think so.

(Operator Instructions) With no other questions in queue, I'd like to turn the conference back over to Mr. Freeman for any additional or closing comments.

Okay. Well, again, thank you very much for all of you joining us on the call today, and we look forward to speaking with you again in about three months. Have a great day, everyone.

And that does conclude today's conference call. Thank you for your participation.