Good day, and 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. Please go ahead

Thank you. Good morning, everyone, and welcome to the Ingles Markets Fiscal 2013 First Quarter Conference Call. With me today are Robert Ingle II, Chief Executive Officer; 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 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 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 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 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 website at www.ingles-markets.com. We plan to file our 10-Q later this week. It will be available on our website as well. Net income totaled $11.6 million for the quarter ended December 29, 2012, compared with $10.6 million for the comparable quarter ended December 24, 2011. The net income increase…

[Operator Instructions] We'll take our first question from Bryan Hunt of Wells Fargo Securities.

I was wondering, in the press release and also in your comments, you all talked about how competition intensified in the calendar fourth quarter. I was wondering how was it different from the previous quarter? Is there any way you can give us some descriptors?

Well, the stakes are higher when you have a quarter that includes Thanksgiving and Christmas because those are big quarters for our industry. And so because of that, the competition heated up on a lot more fronts.

Was it -- were there more pages on the circulars? Or was there greater television advertising? Or is there any way to give us a little bit more details about it?

It was mostly in pricing.

Okay. Next, when -- if I were to look at gross profit, gross profit dollars were up in around figures $6 million, or excuse me, $7 million year-over-year. Is there any way for you to give us an idea how much of that expansion came from benefits on the distribution center expansion?

Well, we did get a pump from having a new distribution center and self-distributing those products. But depending upon how you want to do the comparison, it's really difficult to put a precise number on it. And again, the new distribution center is a long-term investment. And this was really the first holiday season we had been through with it. And really the first full quarter we have been through some parts of the new distribution centers such as health, beauty and cosmetics. So, yes, it was accretive to our margins. We don't think we've realized all the benefits were going to get from the distribution center and it's going to be a great long-term investment for us.

Are you all using MDI for any distribution at all at this point?

Basically, none. We have a few things that we're still wrapping up with them, but we've pretty much brought it all in the house now.

Okay. And just a few more questions. I mean, pharmacy, you all have a significant number of pharmacies in your stores and there's been a big generics wave, is part of the gross profit dollar improvement related to generics on the pharmacy front? Or is there any way you could segment that out for us as well?

I do not have that information in front of me. Again, we're very pleased with the progress in our pharmacies. We've devoted some remodel dollars to making those pharmacies more efficient and look a lot better for the customers and we think that's paying off for us.

All right. And then if I were to look at your states, North Carolina, South Carolina and then Georgia, is there any region for you all that is seeing greater competitive pressures overall?

Yes. Again, we don't talk about what's going on with specific competitors. I mean, obviously we have different competitors in different parts of our market area. And you're well aware of who those are. So there's nothing really specific to add there.

Okay. Okay. And then lastly on CapEx. When you look at your CapEx dollars, $100 million to $130 million, and you say you're going to -- 2 new stores or 2 major remodels. Is there any way you can give us an idea how much are is going to be spent on those 2 projects?

We don't really break down the components of our capital expenditures. We didn't really do it last year when the distribution center took up a large portion of our CapEx, but certainly with that facility being done, what you'll for 2013 CapEx is going to be much more typical of what we've done in past years. You're going to have some new store construction, you're going to continue to have a number of interior remodels at a lot of stores. You have a couple of new stores that are in process. And we've got gas stations adds as well.

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

Can we -- just on rental income, that number coming down, $1.4 million coming down to $1 million, and then I think there's a higher onetime gain in that number as well. What's happening to your vacancy rates? I'm assuming they're going up? And is that sort of the market? Or is it done on purpose because you just don't want to resign certain places because you're going to build there in the near future?

Well, some of that is a little bit due to the timing of when things like annual can [ph] bills and things like that go out. So you've got some of that. The vacancy rates have been pretty stable, once we took a drop when the recession hit. Vacancy rates have been pretty stable since then because we're not taking as much tenant space to expand stores as we used to. And again, we've just sort of hit that bottom when we had some tenants that couldn't stand the economic downturn. So it's not a huge discernible trend right now, either positive or negative.

And then on -- just going back to CapEx, I think you said you gave a range of $100 million to $130 million for the full year. 2 new stores or 2 remodels? Is that how you said it?

Well, we've got a couple of things in project -- in process right now. Certainly, 1 new store is going to open this year. The timing on a couple of the other major projects we've got going on right now could wiggle a little bit as we get a little further throughout the year and get out of the bad weather.

Okay. And when do you expect to open that 1 new store?

April, March-April, somewhere around that timeframe.

Okay. And then your senior notes, I mean, should we expect anything as they come as it become callable in March of this year at that, obviously a higher part number? But should we expect to hear something in next couple of months from you guys in terms of what you're going to do with that debt?

Well, again, the first call date is May 15. And it's something that we've been watching for a few months now and we're continuing to get very regular updates on the high-yield market, the various other credit markets. So we'll make that call so to speak, if that's what it ends up being, sometime in May.

Okay. And then lastly, just on Milkco. I don't see the numbers but you said -- you said it's -- obviously, milk prices continue to be high. And I guess there's a general decrease in demand as a result. Is that just -- so I guess the -- actually the profitability of that division has gone down in the quarter?

It's down a little bit, yes. And you'll see that when the Q is filed later on this week. And we've been through cycles like this before. I guess it was maybe 3 or 4 years ago, we had a drought, difficult to get feed, prices went up, supply went down. It's a little tough for a while. But we're working here for that.

And your store is at retail, do you actually -- are you still earning the same pennies per gallon of milk that you typically do? Or have you had to cut the prices?

It really varies on the type of product and the location. The competitors have a lot to do with that.

[Operator Instructions] It appears there are no further questions at this time. Mr. Freeman, I'd like to turn the conference back to you for any additional or closing remarks.

Great. Thank you for doing that. We appreciate everyone calling in today and thank you for your time and interest. We look forward to speaking with you again probably in latter part of April, after our next quarter. Have a great day.

This concludes today's conference call. We thank you for your participation.