Earnings Transcript for IMKTA - Q4 Fiscal Year 2014

Executives: Ron Freeman - Chief Financial Officer

Analysts: Damian Witkowski - Gabelli & Company Hale Holden - Barclays Kevin Seagraves - Fort Washington Investment Advisors

Operator: 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 the Chief Financial Officer, Ron Freeman. Please go ahead.

Ron Freeman: 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; 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 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. 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're 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 fiscal '14 totaled $17.6 million, 13.1% higher than net income of $15.6 million for the fourth quarter of fiscal 2013. For the full fiscal years, net income was $51.4 million in 2014 compared with $20.8 million in 2013. Fiscal 2013 results included a $43.1 million pre-tax charge, which was $26.2 million net of tax for debt extinguishment cost incurred out 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 and fiscal 2013. 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 fiscal 2013. Gallons of gasoline sold increased, while the average price per gallon was substantially the same from both fourth quarter periods. Gross profit for the fourth quarter of fiscal 2014 increased to $220.4 million compared with $210.3 million for the fourth quarter of fiscal 2013. Gross profit as a percentage of sales was 22.8% for the fourth quarter of fiscal 2014 compared with 22.2% for the fourth quarter of fiscal 2013. 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 for the fourth quarter of fiscal 2014 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 fiscal 2014 and '13 respectrively. Ingles operated 202 stores and approximately 11.1 million square feet of store space at the end of fiscal 2014. During 2014, 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 and products offered to our customers. Interest expense totaled $11.5 million for the fourth quarter of fiscal 2014 compared with $11.9 million for the fourth quarter of fiscal 2013. Total debt was $937.3 million at the end of fiscal 2014 compared with $912.5 million at the end of fiscal 2013. The company's effective tax rate was 30.2% for the fourth quarter of fiscal 2014 compared with 23.8% for the fourth quarter of fiscal 2013. 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 a 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. Fiscal year 2014 was Ingles' 50th consecutive year of record sales. Comparing the fiscal 2014 with the previous year, grocery segment comparable store sales increased 0.9% excluding gasoline sales. Gallons in dollars of gasoline sold increased, while the average per gallon sales price decreased slightly comparing the full year of fiscal 2014 with the same period in fiscal 2013. 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 the fiscal year ended September 28, 2013. As a percentage of sales, consolidated gross profit totaled 22.0% for fiscal 2014 and 22.1% from fiscal 2013. Grocery segment gross profit as a percentage of total sales and excluding gasoline increased 36 basis points in fiscal 2014 compared with fiscal 2013. Operating expenses increased $16.1 million in fiscal 2014 compared with last year and were 18.9% of sales for fiscal 2014 and for fiscal 2013. Excluding gasoline sales and associated gasoline operating expenses, which are primarily payroll, operating expenses were 22.3% of sales for fiscal 2014 compared with 22.1% of sales for fiscal 2013. Gains and losses on asset disposals and other income totaled $3.8 million for fiscal 2014 compared with $7.2 million for fiscal 2013. The decrease is attributable to a $3.9 million gain on the sale of a former store property that took place last year in fiscal 2013. 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 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 fiscal 2013. Income tax expense as a percentage of pre-tax income was 35.5% for fiscal 2014 compared with 20.8% for fiscal 2013. The previously mentioned debt extinguishment cost resulted in 2013 tax credits offsetting a greater portion of fiscal 2013 income, resulting in a lower fiscal 2013 effective tax rate. Net income for fiscal 2014 totaled $51.4 million compared with a net income of $20.8 million for fiscal 2013. Basic and diluted earnings per share for the company's publicly traded Class A common stock was $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 in financing activities. Capital expenditures totaled $110.1 million and $101.5 million for fiscal years 2014 and 2013 respectively. Major capital expenditures for fiscal 2014 included a new store, store remodels and the opening of nine fuel stations. Ingles' capital expenditure plans for fiscal 2015 include investments of somewhere in the range of $100 million to $140 million. We have $175 million line of credit facility that is in place through mid-2018. After deducting outstanding borrowing and [ph] unused 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 second 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: [Operator Instructions] We'll take our first question from Damian Witkowski with Gabelli & Company.

Damian Witkowski: 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 is this simply higher-margin categories that you're selling?

Ron Freeman: There is 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 that's helped our margin some. Beneficial changes in product mix contributed as well. So we had a lot of factors going our way there.

Damian Witkowski: Putting a number on inflation, what it was in the quarter?

Ron Freeman: Well, I can tell you the Department of Labor Statistics, the exact impact on our operations is difficult to isolate.

Damian Witkowski: But it is positive obviously and it sounds as though you're able to actually pass most of the higher cost along to your consumer?

Ron Freeman: Yeah, that's true.

Damian Witkowski: And then on the fuel side, so how many gas stations are you up to now? It was nine out of this year. Obviously the environment for people who sell fuel has been pretty a good one in the third quarter and it probably continues in the fourth quarter. I'm just trying to figure out how much of a positive impact did you get from fuel?

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

Damian Witkowski: I forgot what numbers you disclosed. You haven't disclosed how many cents per gallon you make or how many gallons you can sell.

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

Damian Witkowski: But obviously Q3 was better this year than a year ago?

Ron Freeman: Yes.

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

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

Operator: We'll go next to Hale Holden with Barclays.

Hale Holden: The upper end of your CapEx guidance for $140 for next year, I was wondering what was included in that or if there was a store opening number you were thinking about?

Ron Freeman: There is 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 in the last couple of years.

Hale Holden: Are there any updated thoughts on the health of the consumer?

Ron Freeman: Well, I think with gas prices dropping, the consumer has more money to spend elsewhere, including inside the store. So I think consumer sentiment is pretty good right now.

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

Damian Witkowski: 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 defunct?

Ron Freeman: Yes, we are.

Damian Witkowski: 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 shovel on the ground on some projects. Is there a way to think about how many stores you'll have three, four years out? If it's you feel like 202 today, would you expect to have sort of an average opening at least one a year?

Ron Freeman: We did have one new store opened right at the end of the year, right before the end of the fiscal year that will really impact '15. It's coming up. We've got three to five and one more that will be opened. So I still don't think you'll see a huge increase in our overall store count, but we do have some new projects going more than we tended to have in the last couple of years. And we're pretty optimistic about that.

Damian Witkowski: You spent a lot over the last few years keeping new stores fresh and replacing and remodeling different things. Any changes to that going forward? I mean do you feel like you're mostly done or is it sort of a continuous cycle?

Ron Freeman: It's a continuous cycle.

Damian Witkowski: Is there a way to think about how often you can get to remodel a store?

Ron Freeman: Well, it's really going to depend upon the location and age. I mean 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 for them to continue to benefit the customer. So we absolutely can't say every x years we're going to do y stores and here's they are. It's a constantly changing model.

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

Kevin Seagraves: I was just trying to understand the change in debt in the fourth quarter. It was a little bit [indiscernible] expecting just given where CapEx and EBITDA came in. Was there working capital change or maybe some stock buyback or something? I was just trying to understand changing debt from 3Q to 4Q.

Ron Freeman: Sure. Well, you go into the latter part of the year, we do have some extra working capital needs just for extra inventory in stores and extra inventory on the warehouse. And so that's the majority of it. We'll expect to see those levels come back down some once we get through the holiday season.

Kevin Seagraves: In general, I think most of you guys invested a little bit in working capital. Is that just a tie-back to the sales growth and the store openings and things like that? I was just to trying to understand big numbers and just trying to understand kind of what drives that year-to-year.

Ron Freeman: 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, our sales that we had been getting from the third party. So that kind of 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.

Kevin Seagraves: Can you talk about next year in terms of cash taxes? How to kind of think about that? Are there percentage profits we should think about or a number overall you can talk about in terms of cash taxes?

Ron Freeman: Well, 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 taxes and again just given what we do in capital expenditures. So until they get some things like that resolved, it's really difficult to say.

Operator: 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.

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

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