Thank you. Good morning.

Welcome to the Ingles Markets Fiscal 2012 First Quarter Conference Call. With me today are Robert Ingle II, Chief Executive Officer; and Jim Lanning, President.

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, 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 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 24, 2011.

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 for the quarter this afternoon.

It will be available via our website as well.

Net income totaled $10.6 million for the quarter ended December 24, 2011, compared with $7.7 million for the comparable quarter ended December 25, 2010. The net income increase was driven by increased sales and improvements in gross margin and expense leverage.

Net sales totaled $918.2 million for the quarter ended December 24, 2011, compared with $872.8 million for the comparable quarter ended December 25, 2010. That represents a 5.2% increase in total consolidated sales.

Grocery segment comparable store sales grew $41.7 million or 5.0% in the first quarter of fiscal 2012, compared to the first quarter of fiscal 2011. Excluding gasoline sales, comparable store sales also increased 3.4%.

Retail gasoline prices increased and the number of gallons sold decreased during the first quarter of fiscal 2012, compared with the first quarter of fiscal 2011. The number of customer transactions, excluding gasoline, increased 2.0%; and the average transaction size, excluding gasoline, increased by 1.3%.

We're pleased with our sales growth during the first quarter, which included the Thanksgiving and Christmas holidays. Our long-term objective remains focused on driving top line sales and maintaining customer loyalty through product offerings, customer satisfaction and expanded store offerings.

Gross profit for the 3-month period ended December 24, 2011 increased $8.2 million to $201.7 million or 22.0% of sales, compared to $193.5 million or 22.2% of sales for the 3-month period ended December 25, 2010. Excluding gasoline sales, gross profit totaled 25.2% of sales for the December 2011 quarter compared with 25.0% for the December 2010 quarter.

It was a very competitive holiday quarter, and we're pleased with the success of some of our promotions and favorable changes in the mix of products our customers purchased. Inflation in certain products also helped stabilize margins.

Total operating expenses were $171.8 million for the first quarter of fiscal 2012, compared with $167.3 million for the comparable fiscal 2011 quarter. The dollar growth in operating expenses was comprised primarily of increases in repairs, depreciation, insurance and payroll.

It's too early to tell the amount of any savings that may be achieved from bank card reforms that were effective in October 2011. Excluding gasoline sales and associated operating expenses, operating and administrative expenses as a percentage of sales were 21.6% and 21.8% for the 3 months ended December 24, 2011 and December 25, 2010, respectively.

Net rental income, gains or losses on asset disposals and other income totaled approximately $1.5 million for both the December 2011 and 2010 quarters. There were no individually significant trends or transactions for either first fiscal quarter.

Interest expense decreased $0.9 million for the 3-month period ended September 24, 2011 to $15.0 million from $15.9 million for the 3-month period ended December 25, 2010. The decrease in interest expense is attributable to lower interest rates on floating rate, refinanced and new debt, and also to capitalized interest.

Total debt at December 24, 2011 was $882.5 million, compared with $784.5 million at December 25, 2010. The increase in debt is primarily attributable to financing the construction of a new distribution facility scheduled to open during calendar year 2012.

The company currently has lines of credit totaling $175 million with $44.2 million borrowed at December 24, 2011. The company believes its financial resources, including these lines of credit and other internal and anticipated external sources of funds, will be sufficient to meet planned capital expenditures, debt service and working capital requirements for the foreseeable future.

Net income for the December 2011 quarter increased 38.5% to $10.6 million, compared with net income of $7.7 million for the December 2010 quarter. Basic and diluted earnings per share for the company's publicly traded Class A Common Stock were $0.45 and $0.43 per share, respectively, for the December 2011 quarter compared with $0.33 and $0.31 per share, respectively, for the December 2010 quarter.

Capital expenditures totaled $63.7 million for the first quarter of fiscal year 2011. Most of these capital expenditures were for the new distribution facility that will open in calendar year 2012.

Our store capital expenditures are currently devoted to smaller improvement projects at a larger number of stores. Since the first quarter of last fiscal year, we also completed a project at our fluid dairy operation to increase capacity and efficiency.

The company's capital expenditure plans for fiscal 2012 include investments of approximately $120 million to $160 million. The number of new replacement and remodel stores completed in fiscal year 2012 will somewhat depend upon the timing of the distribution center expenditures.

Accordingly, fiscal year 2012 capital expenditures will also include investments in stores expected to open in fiscal year 2013, as well as technology improvements, upgrading and replacing existing store equipment and transportation equipment improvements to the company's milk processing plant.

To summarize, we are off to a good start for fiscal 2012 and have a number of long-term initiatives in progress to benefit our customers and shareholders.

We will now take your questions.

I just had a couple of follow-up questions. First, just on the housekeeping front.

I want to make sure I caught this correctly. Did you indicate that the new DC is slated to open in calendar year 2012?

Yes, that's correct.

Okay. And then in terms of actual new stores that are locked in and ready to be opened this year, I recognize that the number may change, but what are the ones -- what's the count that you know for sure will open this year?

Well, again, the timing is going to depend upon the timing of these distribution expenditures. But we currently have 3 stores and about half a dozen fuel stations that are in process now.

But again, we're not real certain on the timing at this point.

Okay, that's helpful. And then in terms of the food inflation that you called out, can you give us some color around what rate you're seeing and what your outlook is for the remainder of this year around food inflation?

It's really hard to gauge an overall number because it tends to be -- it's not consistent. Some products, there's no inflation.

Some, you'll hit a little spike and then nothing else. So I really couldn't say that it's going to be X% and count on that across the board for the rest of the year -- wish I could, but I just can't.

Okay, understood. Any way you could give us color around what the sort of overall rate was you experienced in the first quarter?

I really couldn't -- we got in our 10-Q what overall food inflation was. I'm flipping through right quick to make sure that I can find that, and this is off the Bureau of Labor -- Department of Labor, Bureau of Statistics.

They had food inflation for the quarter only at 0.1%. But again, I know we had some categories that were bigger than that.

I was wondering if you could provide some more color on the CapEx for the DC expansion. One, is it -- could you give us a guideline on maybe what anticipated CapEx is for the expansion; and two, it seems like we've had some really good weather relative to a year ago, far fewer weather events.

Is that allowed you all to proceed faster than anticipated on the DC as well?

Yes, we're in good shape and we're on schedule, but it's only the end of January.

Okay. And then how about, could you give us a gauge on what the anticipated CapEx is for the DC expansion?

Well, the bonds that we did to finance it were at $99.7 million and of course, those plans were drawn a long time ago. We've had some changes to them, but not comfortable giving an overall cost at this point.

Okay. Is there any way you can give us an idea what the potential or hurdle rate is for returns or cost savings on the DC expansion?

We have our own internal projections, which we haven't shared publicly. The best thing to keep in mind is that this is a very good long-term strategic move for this company to make.

So DC is a big deal. You don't do one of those every year.

Not at all. And then when you look at the CapEx you all spent on Milkco, was that facility capacity-constrained, and can you talk about the incremental capacity that this CapEx provides for Milkco?

Milkco never had any capacity issues. We always met our commitments and we always produced for everything that we needed to.

But again, going long-term, we've been able to put in some more efficient packaging equipment and expand our capacity. And so we're set for a number of years now at the milk facility.

Can you give us an idea what you spent on Milkco in the period for the capacity and efficiency benefits?

Yes, we don't provide that granularity on our CapEx.

Okay. And then looking at weather overall, I mean, again, last year, we had a significant amount of snow in the Carolinas.

It's close to a record. Could you talk about the weather impact a year ago and how it negatively or even positively impacted your sales and your expenses?

Well, we had a great sales quarter despite going up against some weather last year that took place in December. So I think in some respects, weather is kind of a zero-sum game.

You may get a pick-up couple of days before the snow and then you give it back a couple of days afterwards. But there's no question that up here in Asheville, we haven't made -- we haven't even had a significant snowfall yet for the entire winter.

Okay. And then on your balance sheet payables, saw a sizable increase in Q1.

Is that a timing issue, or is there something more permanent changing on the balance sheet?

That's a timing issue.

Okay. And then with regards to maybe overall, you mentioned in your press release that you received more promotional dollars or at least, it appears that CPG companies are more inclined to give you more promotional dollars.

One, do you think that's a recurring event, because it doesn't seem like there's as much pressure on pricing this year from inflation? Could you just talk about the promotional environment and what you're seeing from CPGs?

Well, again, we had a good quarter for that, but it seems like you start over about every month. So I'm not sure you can say there's any particular trend is taking place right now.

And then with regards to list price increases, do you see any trends? In terms of the magnitude of the price increases, are you seeing fewer price increases coming out of this fiscal year versus the year ago, as well as with regards to price increases you all have traditionally shared and maybe some of the pain of those price increases from CPGs, does that continue?

That always continues. You got to take into effect competitive factors, you got to take into account what kind of promotions you're doing with your vendors.

And so you've always got to be very aware of what you're doing with pricing. And it's not particularly different right now from the way it's been for the last couple of years.

Sorry if I missed it, but what have you said about consumer behavior? Just any changes that you're noticing.

I assume if the basket was up, I think 1.3% in the quarter, I'm sort of guessing that volume was probably down and -- because I'm not sure where cost inflation is running. I don't know if you can highlight that.

We had both an increase in customer transactions and in average transaction size, so I think you put those 2 together, and we were very pleased with our sales performance.

But do you actually talk about whether volume was up and down, meaning number of items because -- what's the inflation component of the basket size increase?

Again, with so many products that we have out there, we really don't segregate that. I mean, we focus on the top line sales and we're very pleased with the way those performed, especially given that, that was an increase both in customer transactions and in basket size.

Okay. And then I know you were just asked about promotions from your vendors, is that driven by, again, volume not performing to what they were expecting, and so they're sort of out there promoting more?

Damian, I can't personally answer that one. I'd have to check with some of the buyers and everyone, but I personally don't know the answer there.

Okay. Is your private label growing faster than national brands?

Yes.

Okay. And is that changing at all in terms of what you're seeing, or is that sort of been steady outperformance?

It's been steady outperformance and we're adding more private label products in more areas of the store all the time. So that's been a help, no question.

And I know you won't comment on individual competitors, but any changes in the competitive behavior? I think, thus far, it seems like things have been rational.

I'm not sure if you're seeing any changes there.

Well, there's little more going on out there right now than in recent memory. But outside of that, I can't comment.

Okay. Well, thank you very much.

We appreciate everyone joining the call today, and I also appreciate your time and your interest. We look forward to speaking with you soon.

Thanks very much.