Ingles Markets, Incorporated (IMKTA) 2014 Q4 法說會逐字稿

Good day and welcome to the Ingles Markets fourth-quarter 2014 earnings release conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Chief Financial Officer, Ron Freeman. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Ingles Markets 2014 fourth-quarter and year-end earnings announcement and conference call. With me today are Robert Ingle II, Chairman and Chief Executive Officer; Tom Outlaw, Vice President of Sales; and Jim Lanning, President.

Statements 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 27, 2014, that will be filed later this week.

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 fourth quarter and annual results, followed by additional comments on each period. After that, we will be pleased to take your questions. Our press release, issued this morning, is available on our website at www.ingles-markets.com. Our Form 10-K will be filed later. Upon filing, it will be available on the website as well.

We are very pleased to report that this was our 50th consecutive year of record sales, totaling $3.8 billion. Fourth-quarter sales totaled $964.8 million. Net income for the fourth quarter of FY14 totaled $17.6 million, 13.1% higher than net income of $15.6 million for the fourth quarter of FY13. For the full fiscal years, net income was $51.4 million in 2014 compared with $20.8 million in 2013. FY13 results included a $43.1 million pre-tax charge, which was $26.2 million net of tax, for debt extinguishment costs incurred as part of the refinancing of the Company's major credit arrangements on more favorable terms.

First, I'll discuss our fourth-quarter results. Net sales rose to $964.8 million for the quarter ended September 27, 2014, compared with $948.9 million of sales for the comparable quarter in FY13. Comparable store sales, excluding gasoline, increased 0.9%. The growth in grocery segment sales benefited from increases in average purchase amount compared with the fourth quarter of FY13. Gallons of gasoline sold increased, while the average price per gallon was substantially the same for both fourth quarter periods.

Gross profit for the fourth quarter of FY14 increased to $220.4 million, compared with $210.3 million for the fourth quarter of FY13. Gross profit as a percentage of sales was 22.8% for the fourth quarter of FY14, compared with 22.2% for the fourth quarter of FY13. Grocery segment gross margin, excluding gasoline, was 84 basis points higher this quarter compared with last year's fourth quarter.

Total operating expenses were $184.4 million (sic -- see press release "$184.1 million") for the fourth quarter of FY14 compared with $178.9 million for the 2013 fourth quarter. Operating expenses as a percentage of sales were 19.1%, and 18.9% for the fourth quarters of FY14 and FY13, respectively.

Ingles operated 202 stores, and approximately 11.1 million square feet of store space at the end of FY14. During FY14, the Company opened one store and closed two stores. The Company's other store improvement capital projects this year focused on improving merchandising, convenience, and the range of products offered to our customers.

Interest expense totaled $11.5 million for the fourth quarter of FY14, compared with $11.9 million for the fourth quarter of FY13. Total debt was $937.3 million at the end of FY14 compared with $912.5 million at the end of FY13. The Company's effective tax rate was 30.2% for the fourth quarter of FY14 compared with 23.8% for the fourth quarter of FY13. The change in effective rate is primarily due to changes in certain state tax rates and to the greater influence of tax credits on pre-tax income for the fourth quarter of last year.

Net income for the September 2014 quarter rose to $17.6 million, compared with net income of $15.6 million for the September 2013 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A common stock increased to $0.82 and $0.79 per share, respectively, for the September 2014 quarter, compared with $0.71 and $0.68 per share, respectively, for the September 2013 quarter.

Now I'll go over our annual results. Net sales totaled a record $3.84 billion for the fiscal year ended September 2014, compared with $3.74 billion for the fiscal year ended September 2013. FY14 was Ingles' 50th consecutive year of record sales. Comparing FY14 with the previous year, grocery segment comparable store sales increased 0.9%, excluding gasoline sales. Gallons and dollars of gasoline sold increased while the average per gallon sales price decreased slightly, comparing the full year of FY14 with the same period in FY13.

Gross profit for the fiscal year ended September 27, 2014 increased $17.4 million, or 2.1%, to $845.2 million, compared with $827.8 million for the fiscal year ended September 28, 2013. As a percentage of sales, consolidated gross profit totaled 22% for FY14, and 22.1% for FY13. Grocery segment gross profit as a percentage of total sales, and excluding gasoline, increased 36 basis points in FY14 compared with FY13.

Operating expenses increased $16.1 million in FY14, compared with last year, and were 18.9% of sales for FY14 and for FY13. Excluding gasoline sales and associated gasoline operating expenses, which are primarily payroll, operating expenses were 22.3% of sales for FY14 compared with 22.1% of sales for FY13.

Gains and losses on asset disposals and other income totaled $3.8 million for FY14 compared with $7.2 million for FY13. The decrease is attributable to a $3.9 million gain on the sale of a former store property that took place last year, in FY13. Interest expense decreased $12.5 million for the year ended September 27, 2014 to $46.6 million, compared with $59.1 million for the year ended September 28, 2013. Interest expense decreased due to the refinancing of existing debt at lower rates.

In June 2013, the Company repaid $575 million worth of 9.5% effective rate debt and other borrowings with the proceeds of $700 million of senior notes due in 2023 and priced at 5.75%. Because of prepayment penalties and other costs associated with the repaid debt, the Company incurred a $43.1 million charge to pre-tax earnings during FY13.

Income tax expense as a percentage of pre-tax income was 35.5% for FY14, compared with 20.8% for FY13. The previously mentioned debt extinguishment cost resulted in 2013 tax credits offsetting a greater portion of FY13 income, resulting in a lower FY13 effective tax rate.

Net income for FY14 totaled $51.4 million, compared with net income of $20.8 million for FY13. Basic and diluted earnings per share for the Company's publicly traded Class A common stock were $2.36 and $2.28 per share, respectively, for the year ended September 27, 2014, compared with $0.89 and $0.87 per share, respectively, for the fiscal year ended September 28, 2013.

Now a quick update of our investing and financing activities. Capital expenditures totaled $110.1 million, and $101.5 million for FY14 and FY13, respectively. Major capital expenditures for FY14 included a new store, store remodels, and the opening of nine fuel stations. Ingles' capital expenditure plans for FY15 include investments of somewhere in the range of $100 million to $140 million.

We have a $175 million line of credit facility that is in place through mid-2018. After deducting outstanding borrowing and unfunded letters of credit, $134.1 million is available under this line at September 27, 2014. The Company is in compliance with all its debt agreements and has significant unencumbered [real] property and equipment as a secondary source of liquidity. At the close of another record year, we look forward to servicing our customers with more stores and more products, delivered with value and exceptional service. We will now take your questions.

(Operator Instructions)

We'll take our first question from Damian Witkowski with Gabelli & Company.

Good morning and congratulations on another good year. Ron, can you talk about, when you talk about your core grocery gross margin, it was up 84 basis points in the quarter, how much of that is benefits from the new distribution center and how much of it is just simply higher-margin categories that you're selling?

There's really three or four factors that are involved here. We do continue to realize some savings out of our distribution center. It's been open for a couple of years now. Inflation has provided a little bit of tailwind. It's helped our margin some. Beneficial changes in product mix have contributed, as well. So we had a lot of factors going our way there.

Any idea, putting a number on inflation, what it was in the quarter?

Well, I could tell you the Department of Labor statistics, but the exact impact on our operations is difficult to isolate.

Okay. But it is positive, obviously, and it sounds as though you're able to actually pass most of the higher costs along to your consumer?

Yes, that's true.

Okay. Then on the fuel side, how many gas stations are up to now, with the new nine that you added this year?

Bear with me. I'm going to need to flip through you my 10-K while we try to find that.

It's okay. I can get that later. I'm more curious, obviously, the environment for people who sell fuel has been a pretty good one in the third quarter and it probably continues here in the fourth quarter. So I'm just trying to figure out how much of an impact, a positive impact did you get from fuel?

It was a better impact, certainly, the latter part of this year than it was the first part of this year. Damian, we operate 83 fuel centers.

Okay. And you don't -- I forget what numbers you disclosed. You don't disclose how much you -- how many cents per gallon you make or how many gallons you even sell?

No, we don't. We disclose the number of stations and the dollar gasoline sales, but that's it.

Sure. Okay. But, obviously, Q3 was better this year than a year ago?

Yes.

Okay. And then I know you don't want to talk about individual competitors, but overall, would you say that the environment remains pretty rational as would be explained by the fact that you're able to pass along a majority of the costs? And the reason I ask is, again, Kroger on their last call, last week, talked about Harris Teeter investing more and more in price. We don't have to talk about Harris Teeter, but I'm just curious to hear what you're seeing on that front?

Well, again, it's always competitive, and you're right, we won't speak about individual competitors, but I will say that it's a fairly rational competitive environment out there right now.

Okay. Thank you very much.

Thanks, Damian.

(Operator Instructions)

We'll go next to Hale Holden with Barclays.

Thanks for taking my call. I had two. The upper end of your CapEx guidance for $140 million for next year, I was wondering what was included in that or if there was a store opening number you could give us that you were thinking about?

There's not a store opening number I could give you, primarily due to the timing that it takes to get through the entire process. We do have new store projects planned. We'll continue to also add some fuel stations and do a lot of internal improvements, as we've done the last couple of years.

Okay. And then any updated thoughts on the health of the consumer?

Well, with gas prices dropping, the consumer has more money to spend elsewhere, including inside the store, so consumer sentiment is pretty good right now.

Excellent. Good to hear. Thank you very much.

(Operator Instructions)

We'll take a follow-up from Damian Witkowski with Gabelli & Company.

I just wanted to actually follow up on the health of the consumer question. Are you actually seeing benefits already from lower gas prices at the pump?

Yes, we are.

Okay. And then just going back to the CapEx guidance, $100 million to $140 million, I know that there are no new store openings planned for this fiscal year but you probably will start putting a shovel in the ground on some projects. Is there a way to think about how many stores you'll have, three, four years out, if you're at 202 today. Would you expect to have an average open at least one a year?

Well, we did have one new store open right at the end of the year, right before the end of the fiscal year that will really impact 2015. Coming up, we've got three to five and one more that will be open. I still don't think you'll see a huge increase in our overall store count, but we do have some more projects going, more than we've tended to have in the last couple of years and we're pretty optimistic about that.

And then just any changes in how you're thinking about -- you spent a lot over the last few years, keeping your stores fresh and replacing and remodeling different things. Any changes to that going forward? Do you feel like you're mostly done or is it a continuous cycle?

It's a continuous cycle.

How often do you -- is there a way to think about how often you need to remodel a store?

It's really going to depend upon the location and the age. We still have stores that are under 40,000 square feet that are a little bit older. We have stores that, even though they may be newer, there are some things that we want to do to that to continue to benefit the customer. We absolutely can't say every X years we're going to do Y stores and here's who they are. It's a constantly changing model.

All right. Thanks again, Ron.

Sure thing, Damian.

We'll take our next question from Kevin Seagraves with Fort Washington Investment Advisors.

Good morning. I'm sure we'll see this when the 10-K comes out, but I was just trying to understand the change in debt in the fourth quarter. It was a little bit -- it went up a little bit more than I was expecting just given where CapEx and EBITDA came in. Was there a working capital change or maybe some stock buybacks or something. I was just trying to understand change debt from 3Q to 4Q?

You go into the latter part of the year, we do have some extra working capital needs just for extra inventory in the stores and extra inventory in the warehouse. That's the majority of it. We'll expect to see those levels come back down some once we get through the holiday season.

Okay. In general it looks like most years you guys invest a little bit in working capital. Is that just a tie back to the sales growth and store openings and things like that, or is it inflation in food? I'm just trying to understand -- it's not big numbers, I'm just trying to understand what drives that year to year?

Sure. The main thing is it's going to track our sales growth. Starting back in 2012, when we expanded our distribution capabilities, we did take on more inventory ourselves that we had been getting from a third party, so that increased the working capital need there. You'll always have the seasonality when you go through the holidays, but that's going to be the big driver. But you're right, it's not a huge change one way or the other.

Okay. And then I may have missed this, but can you talk a little about next year in terms of cash taxes, how to think about that? Is there percentages, profits we should think about, or a number overall that you can talk about in terms of cash taxes?

I really can't. One of the things they're considering right now is going back and retroactively allowing bonus depreciation for this past year, and if that passes and gets implemented, that can have a huge impact on our cash tax position, again, just given what we do in capital expenditures. So until they get some things like that resolved, really difficult to say.

Okay. Great. Thanks.

Thank you.

At this time, there are no additional questions in the queue. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Great. Well, thank you. We appreciate everyone joining us today. It's always glad to have you take some time and express some interest in how we're doing. We wish all of our customers and employees and shareholders a happy and safe holiday season. Thank you very much.

That concludes today's conference. We appreciate your participation.