Ingles Markets, Incorporated (IMKTA) 2013 Q2 法說會逐字稿

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'd like to turn the call over to the Chief Financial Officer, Mr. Ronald Freeman. Please go ahead sir.

Thank you. Good morning. Welcome to Ingles Markets' fiscal 2013 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, seeks, 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 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 29, 2012.

In accordance with the long-standing 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.

This morning, I'll 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 was issued this morning and is available on our website at www.Ingles-markets.com. We expect to file our 10-Q for the quarter later this week. 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 2013 totaled $8.1 million compared with net income of $6.5 million earned for the second quarter of fiscal 2012. We experienced good sales growth along with stable margins and operating expenses. This quarter's results were also helped by extra Easter sales and by the sale of a former store property. Net sales increased $36.9 million, or 4.2%, to $918.6 million for the three months ended March 30, 2012 from $881.7 million for the three months ended March 24, 2012. Ingles operated 203 stores out of 11 million square feet of retail space at the end of both March 2013 and 2012.

Excluding gasoline, grocery segment comparable store sales grew 3.8%. Excluding gasoline and the effect of Easter, comparable store sales grew 2.7%. The number of customer transactions, excluding gasoline, increased 3.3%, while the comparable average transaction size, excluding gasoline, increased 1.9% compared with the same quarter last year.

Gross profit for the March 2013 quarter increased 3.1% to $198.3 million compared with $192.4 million for the second quarter of last fiscal year. Gross profit as a percentage of sales was 21.6% for the March 2013 quarter compared with 21.8% for the March 2012 quarter.

Gasoline margins were lower. Excluding gasoline sales, grocery segment gross profit as a percentage of sales decreased 32 basis points for the three months ended March 30, 2013 compared with the same quarter of last fiscal year.

Operating and administrative expenses for the March 2013 quarter totaled $175 million, an increase of $5.9 million, or 3.5%, over the March 2012 quarter. Excluding gasoline sales and associated operating expenses, which are primarily payroll, operating and administrative expenses as a percentage of sales were 22.1% for the three months ended March 30, 2013 and 22.4% for the three months ended March 24, 2012. We are pleased with our expense control measures.

During the quarter, we sold a former store property for $7.5 million and recognized a pretax gain of $3.9 million on the sale.

Interest expense increased $0.8 million for the three-month period ended March 30, 2013 to $15.7 million from $14.9 million for the three-month period ended March 24, 2012. Total debt at March 30, 2013 was $860 million compared with $833.5 million at March 24, 2012. Interest expense increased due to higher total debt and last year's capitalization of interest on the construction of our distribution center that opened last summer.

Income tax expense totaled 36.5% of pretax income for the March 2013 quarter compared with 32.9% in the March 2012 quarter.

Net income of $8.1 million for the March 2013 quarter represents 0.9% of sales. Net income of $6.5 million for the March 2012 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 $0.35 and $0.33 per share, respectively, for the March 2013 quarter, compared to $0.28 and $0.27 per share, respectively, for the March 2012 quarter.

Next, I'll discuss our six-month results. Net sales increased $51.5 million, or 2.9%, to $1.85 billion for the six months ended March 30, 2013 from $1.8 billion for the six months ended March 24, 2012. Excluding gasoline and the extra Easter 2013 sales, grocery segment comparable store sales increased 2.4%. The number of customer transactions, excluding gasoline, increased 2.3%, while the comparable average transaction size, excluding gasoline, increased 0.6% compared with the March 2012 six-month period.

Gross profit for the six months ended March 30, 2013 increased 3.1% to $406.2 million, an increase of $12 million compared with the first six months of last year. Gross profit as a percentage of sales was 21.9% for both the March 2013 and 2012 six-month periods. Excluding gasoline sales, grocery segment gross profit as a percentage of sales increased 8 basis points for the six months ended March 30, 2013 compared with the same period of last year.

Operating and administrative expenses increased $8.9 million, or 2.6%, to $349.8 million for the six months ended March 30, 2013 from $340.9 million for the six months ended March 24, 2012. As a percentage of sales and excluding gasoline, operating and administrative expenses were level at 22% for the six-month period ended March 2013 compared with 21.9% for the six-month period ended March 2012. Operating expense dollar increases were driven by store development activities and higher insurance expense.

Interest expense totaled $31.3 million for the six-month period ended March 30, 2013 compared with $30 million for the six-month period ended March 24, 2012. As noted in the three-month discussion, interest expense increased due to higher total debt and last year's capitalization of interest on the construction of our distribution center that opened last summer.

Income tax as a percentage of pretax income increased 37% for the March 2013 six-month period compared with 34.3% for the comparable March 2012 period primarily due to decreased tax credits in the current year.

Dollar-izing our six-month results, net income totaled $19.7 million for the six-month period ended March 30, 2013 compared with $17.1 million for the six-month period ended March 24, 2012. Net income as a percentage of sales was 1.1% for the six months ended March 30, 2013 and 1.0% for the six months ended March 24, 2012.

Basic and diluted earnings per share for publicly traded Class A common stock were $0.85 and $0.81 for the six months ended March 30, 2012 compared to $0.73 and $0.70, respectively, for the six months ended March 24, 2012.

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

Capital expenditures for the March 2013 six-month period totaled $47 million compared with $103.5 million for the March 2012 six-month period. The decrease is attributable to the construction of the new distribution center that opened in mid 2012. Capital expenditures for the entire fiscal year are expected to be approximately $100 million to $130 million, including expenditures for stores to open in fiscal 2013 and 2014 as well as for the Company's ongoing remodeling program to multiple stores. Just after quarter end, we opened a new Ingles store in Mills River North Carolina, bringing our store total to 204.

At March 30, 2013 the Company currently has lines of credit totaling $175 million with $62 million borrowed and $8.2 million of issued but unused letters of credit at March 30, 2013.

The Company's $575 million of senior notes with the yield of 9.5% become callable at a price of $104.438 of par on May 15, 2013. We're monitoring market conditions to determine the best mix of debt arrangements to fund our current operations and future growth.

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.

We recently celebrated the 50th anniversary of the first Ingles store. The focus of that celebration has been for our customers and for our more than 20,000 associates. These owners and managers of Ingles deeply appreciate both relationships and look forward to many more decades together.

And we'll now take your questions.

(Operator Instructions). Damian Witkowski, Gabelli & Co.

Let me just start off with the thing you mentioned last, which is the debt. You know, it is becoming callable about a week from today. Just remind me. Is it the entire $575 million face value of the debt that is callable, $104.4 million or so?

Yes, it is.

And have you done any -- do you have a sense of what rate you could refinance it at in today's market versus the almost 9% you're currently paying?

Yes, we do have a good sense of what we can pay in the market right now.

Okay. I mean, can you share that or not yet?

I can't share it yet, but suffice it to say it's a good bit below the 9.5% we are currently paying.

Okay. And then in terms of the property gain, what is the tax rate on a gain, a real estate sales gain like this one, which I assume is obviously long-term?

Yes, it is a long-term and we'll have to check with our tax accountants on that when we do next year's tax return. But it was a property we owned where we had not operated a store in a number of years, had a very interested buyer and it was a really good transaction for the Company.

Okay. And if you look at that property, I mean is it, I know it's hard to generalize, but is it different than your -- the average store that you own currently? Is it better or worse?

well, again, it's not -- it hasn't had an open store in it for a while, so it's different from a lot of the properties where we currently operate. But when you have as many properties as we do, it's hard to make one general case for every property.

Okay, but essentially that wasn't helping? You could instead of think about it from your perspective at least the location itself wasn't as good as your other stores, which are our obviously opened and operating?

That's a reasonable assessment.

Then just lastly on the distribution center, what kind of savings did you get during the second quarter?

Well, we don't quantify the savings but, strategically, it's cut down on our distribution expenses because this center is right here where the rest of our distribution capabilities are. We already have our own trucks. We're doing more of our negotiations with our vendors. So both strategically and in the short term, it has been a very, very good investment for the Company.

Okay. In terms of if you look at it -- where it is today and where it's been running in terms of ramp-up, in terms of what you have planned for it ultimately, where are we? Are we -- we're not at 100% utilization yet, but is it 50%, 60% at this point?

We built it with room to grow, and we made it through our busiest holiday season quite well. So we think we're really well positioned to handle what we're doing now as well as have a lot of capacity for future growth.

Thanks. Let me get back in the queue. Thank you.

(Operator Instructions). Bryan Hunt, Wells Fargo.

Some of my questions actually go through the same topics that the previous questioner had. But first of all, if you look at the property that was sold, one, can you tell us where it was located and, two, what did it consist of in terms of building square footage, et cetera?

Well, it was in Georgia, and I can't even remember the size of the building that was on it. It's gone now. So it was someone who wanted the property, not the building.

All right, that's useful. Can you tell us was it around the Atlanta market, or was it more north of the state -- north into the state?

It was outside of Atlanta.

Okay, all right. Second, when you look at the distribution center, I mean, you talked about distribution savings and capacity utilization. But in general, would you say that the savings that you are realizing so far are meeting your expectations, or are they exceeding your expectations?

Exceeding our expectations.

And then just to give us an idea, how many properties do you have that are either greenfield or dormant at this time, or even could you talk about how many you actively have for sale?

Yes, that's not in any of our public filings, so I can't talk about that here.

Okay. And then lastly, if you look at the Mills River store you opened, can you give us an idea of the size of that location as well as maybe the total CapEx associated with it?

Well, we've never talked about total CapEx with individual projects just because it can vary so much due to land costs and everything else. The size is between 70,000 and 80,000 square feet. It does have a new look and some new features to what we have done in other stores. So, you should try to get by there as soon as you can, Bryan.

I will. That's not too far away. I appreciate it.

Not too far away.

Appreciate your time. Thank you.

Sure thing, Bryan.

Damian Witkowski, Gabelli & Co.

Hi Ron, just a couple of more quick questions. On gasoline, you said margins were lower, but, you know, if you look at how you make money on gasoline on a $0.01 per gallon profits, where did those come in year-over-year?

I do not have that information in front of me, so I can answer that question, so really I'm just going to have to stick by what I said in the comment.

Okay. Then from a -- on the milk side, on your milk processing business, where are the margins there? I mean I think there still continues to be a good amount of pressure on the retail side in terms of keeping milk prices low. But are you able to pass along or recover some of your costs?

Well, and you've also got to take into account that overall milk consumption is down nationwide. So, there's a lot of pressure on that business, which creates pressure to pass along any price increases as well.

Okay. And then just lastly, going back to the property, how should I think of it in this quarter in terms of what part of the $4.6 million of income tax you paid in the quarter, how much of it is attributable to the $3.9 million gain on the property sales?

Well, right now, we didn't make any difference in our provision for possible rates on the gain of that. Our tax guys will have to figure that out many months from now.

All right. Thanks Ron.

Sure.

Bryan Hunt, Wells Fargo.

Thank you. When you look at your sales throughout the departments, can you talk about was there any individual department that had a greater lift in the period on a relative basis?

Three or six months?

For the three-month period.

Yes, they all did very well. Every one was up and we will have a table in the 10-Q when that is released that will kind of give you a little bit of breakdown of the sales increases overall. Our perishables did well. Gasoline hung in there, so again, they are all up. But we were particularly pleased with our perishables performance.

Very good. And when you look at overall traffic, is there -- I know you've got stores in Georgia and North Carolina, stuff like that. But is there any difference in the performance regionally when you look at your store footprint in terms of traffic?

No, not really.

How about store size? If you were to segment your stores by size, are the bigger stores outperforming the smaller stores in terms of comp performance?

They've all done well. Again, you can go back to the K and see sort of how the spread of our store sizes is that's out there. Certainly, anything we're building or remodeling these days has a little bit larger square footage in them, but we're pleased. We don't think there is an appreciable difference in the square foot size. We think they are all doing fine.

Very good. And then lastly, if you look at the improvement in basket and comps on a sequential basis, do you believe you all are doing anything different in terms of circulars or promotions or using your card data to drive sales, or do you think it's just an overall lift in the consumer performance at food and home consumption?

Well, we're always looking at all of those ways to drive sales. So to point to one particular piece of that, I don't think you can necessarily do that. We care about that topline growth. And whether it comes from better promotions, better circulars or whatnot, we're somewhat indifferent to that.

Okay, I appreciate your time again. Thank you.

There are no further questions at this time.

Okay. Thanks, everyone, for joining us today. We look forward to being back with you quite soon. Have a great day.

That does conclude today's conference. Thank you for your participation.