Thank you. Good morning.

Welcome to Ingles Markets Fiscal 2012 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, 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 Inc. 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 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 second quarter and 6 months 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 2012 totaled $6.5 million compared with net income of $7.7 million earned for the second quarter of fiscal 2011.

Excluding gasoline, second quarter sales were essentially flat with the second quarter of last year. The winter of 2012 was mild in comparison to 2011.

Last year in our market area, we benefited from school closings and from people being at home more due to the bad weather. Gasoline margins were lower this year and contributed even less to net income.

We controlled expenses well, even with some ramp-up costs related to the new distribution center that will open later this year.

Net sales increased by $11.3 million to $881.7 million for the 3 months ended March 24, 2012, from $870.4 million for the 3 months ended March 26, 2011. The growth in sales benefited from higher gasoline prices and more customer transactions compared with the second quarter of last year.

Ingles operated 203 stores out of 11.0 million square feet of retail space at the end of both March 2012 and 2011. Excluding gasoline, Grocery segment comparable store sales were essentially flat.

They decreased by 0.1% compared with the second quarter of the prior fiscal year. The number of customer transactions excluding gasoline increased 0.7%, while the comparable average transaction size decreased 0.8% compared with the same quarter of last year.

Gross profit for the March 2012 quarter decreased 1.1%, to $192.4 million compared with $194.6 million for the second quarter of last fiscal year. Gross profit, as a percentage of sales, was 21.8% for the March 2012 quarter compared with 22.4% for the March 2011 quarter.

Gross profit contributed by gasoline sales was lower this quarter due to a spike in gasoline prices compared with the second quarter of last year.

Excluding gasoline sales, Grocery segment gross profit, as a percentage of sales, was level at 25.9% for the 3 months ended March 24, 2012, compared with 26.0% for the same quarter of last fiscal year.

Operating and administrative expenses for the March 2012 quarter total $159.1 million. This amount was only $500,000 higher than expenses for the March 2011 quarter, an increase of only 0.3%.

Excluding gasoline sales and associated operating expenses, which are primarily payroll, operating and administrative expenses as a percentage of sales were 22.4% for both the 3 months ended March 24, 2012, and the 3 months ended March 26, 2011. We are pleased with our expense control measures.

Interest expense decreased $800,000 for the 3-month period ended March 24, 2012, to $14.9 million from $15.7 million for the 3-month period ended March 26, 2011. Total debt at March 24, 2012, was $833.5 million compared with $875.6 million at March 26, 2011.

Over the past 12 months, the company has repaid a number of smaller fixed rate loans. Any replacement debt has generally been for a longer-term at floating rates.

Income tax expense totaled 32.9% of pretax income for the March 2012 quarter compared with 35.6% for the March 2011 quarter.

Net income of $6.5 million for the March 2011 quarter represents 0.8% of sales. Net income of $7.7 million for the March 2011 quarter represents 0.9% of that quarter's sales.

Basic and diluted earnings per share for the company's publicly traded Class A Common Stock were $0.28 and $0.27 per share, respectively, for the March 2012 quarter compared with $0.33 and $0.32 per share, respectively, for the March 2011 quarter.

Now I'll discuss our 6-month results. Net sales increased $56.8 million to $1.80 billion for the 6 months ended March 24, 2012, from $1.74 billion for the 6 months ended March 26, 2011.

Excluding gasoline, where retail prices were significantly higher than the March 2011 6-month period, Grocery segment comparable store sales increased 1.6%. The number of customer transactions, excluding gasoline, increased 1.4%, while the comparable average transaction size increased 0.3% compared with the March 2011 6-month period.

Gross profit for the 6 months ended March 24, 2012, increased 1.6% to $394.2 million, an increase of $6.1 million compared with the first 6 months of last fiscal year. Gross profit as a percentage of sales was 21.9% for the March 2012 6-month period compared with 22.3% for the March 2011 6-month period.

Gross profit dollars increased due to higher sales volume, even though gasoline contributed less gross profit dollars in 2012. Excluding gasoline sales, Grocery segment gross profit as a percentage of sales rose to 25.7% for the 6 months ended March 24, 2012, compared with 25.6% for the same period of last fiscal year.

Operating and administrative expenses increased $5.1 million, or only 1.6%, to $394.2 million for the 6 months ended March 24, 2012, from $335.8 million for the 6 months ended March 26, 2011. As a percentage of sales, and excluding gasoline, operating and administrative expenses were 22% for the 6-month period ended March 24, 2012, down from 22.1% for the 6-month period ended March 26, 2011.

Operating expense increases were driven by store development activities, including higher personnel costs, repairs and depreciation.

Interest expense totaled $30 million for the 6-month period ended March 24, 2012, compared with $31.6 million for the 6-month period ended March 26, 2011. Principal debt payments totaled $24.9 million during the March 2012 6-month period.

Income tax expense as a percentage of pretax income decreased to 34.3% for the March 2012 6-month period compared with 35.4% for the comparable March 2011 period, due primarily to increased tax credits.

Summarizing our 6-month results, net income totaled $17.1 million for the 6-month period ended March 24, 2012, compared with $15.4 million for the 6-month period ended March 26, 2011. Net income as a percentage of sales was 1% for the 6 months ended March 24, 2012, and 0.9% for the 6 months ended March 26, 2011.

Basic and diluted earnings per share for publicly traded Class A Common Stock were $0.73 and $0.70 for the 6 months ended March 24, 2012, compared to $0.66 and $0.63 respectively for the 6 months ended March 26, 2011.

Next, I'll update our investing and financing activities. Capital expenditures for the March 2012 6-month period totaled $103.5 million compared with $42.9 million for the March 2011 6-month period.

The increase is attributable to the construction of the new distribution center that will open later this fiscal year. Capital expenditures for the entire fiscal year are expected to be approximately $160 million, including the expenditures for the new distribution facility, store improvements and for stores to open in fiscal 2013.

During fiscal 2012 and 2011, the company has emphasized interior improvements to a large number of stores. These improvements have been very popular with our customers and do not result in increased square footage or new buildings.

At March 24, 2012, the company had $175 million of undrawn committed credit facilities and also has $23.2 million of undrawn investment funds to be used for the completion of the distribution center. Over the next 12 months, scheduled principal debt payments total only $30.1 million.

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 will now take your questions.

This is actually Jon Kahnowitz filling in for Emily. I just wanted to ask on your CapEx plan.

It looks like you're now looking for CapEx a little bit towards the higher end of the range previously laid out. Can you give us a sense of what areas account for that increase, if that's more maintenance or if that's more toward the distribution centers?

It's both, actually. We have expanded some of the things we're going to have in our distribution center from the original plans, and we are continuing with our store interior improvement program.

Okay, perfect. And then my last question is on the gross margins, looking to the back half, it seems like the comparisons maybe get a little bit easier.

Is there anything else we should be thinking about in terms of the gross margin, or you think we might start to see a little bit of moderation in the gross margins?

Well, don't think we'll see quite the volatility that we've seen. Inflation seems to be kind of easing off a little bit but we're still getting hit in some areas.

So I'd really hesitate to make that kind of projection at this point. Yes, and gas, of course, who knows?

Ron, inflation, however you define it, whether cost inflation or what you're passing on, what was it running in the quarter?

Let's see here. I'm going to have to flip to the page [indiscernible] you for that.

We're showing for food and beverages, it was 1.3% for the 3 months ended March and 3.3% for the 12 months ended in March. So from that measurement, we had a little bit lighter quarter compared to the last 12 months.

And this is your cost?

No, these are the U.S. Bureau of Labor Statistics.

Okay, because I'm trying to look at your basket size and the transactions continue to be positive, but the average size, obviously, declined. And considering the inflation that I think you have in the industry, I'm just trying to figure out what the consumer is doing.

Are they simply trading down or buying fewer units?

Well, I think you've got to recall that the quarter that we just finished was unusual in a lot of respects. And I think that affected not only overall sales due to the mild weather, but it certainly has some effect on transaction size and basket size, excluding gasoline.

Now if you look at the 6 months, we're positive on sales, transaction count and basket. So again, this past 3 months was pretty unusual for us.

Okay. So you don't feel like there's a change in consumer behavior, and the second quarter is more of a trend versus looking at the -- maybe the first half of the year.

I'm sorry, say that again, please?

So you don't feel like there's a change in consumer behavior in the last quarter, meaning that gas prices went up, are -- you don't think it's that they're simply shopping less. It's more to do with weather and having a lot less snow that affected the basket size.

Yes. And again, just -- but there is certainly an effect that when gas prices go up, there's a little bit less money to be spent inside the store.

And then Ron, on gasoline, did you -- I know you -- obviously, gross margin is lower because you have a higher price and you work towards pennies earned per gallon. But was the actual pennies earned per gallon lower than a year ago?

Yes, it was.

Okay. And is that -- you don't actually say how much you earn per gallon, right?

That's correct, we don't.

Okay. But is it a significant -- I mean, it's obviously a response to what you're seeing locally on a competitive level.

Well, again, that was one of the factors that we mentioned in our overall gross profit being down. We got less of a contribution from gasoline the March quarter this year versus the March quarter of last year, primarily because prices were a lot higher.

And then if I look at your operating and administrative expenses -- obviously well controlled here in the second quarter, but if I look at the remainder of the year, is second quarter more of the run rate or should I look at both first and second quarter?

I would look at both first and second quarter, but keep in mind that when the distribution center opens, especially in its early months, that's going to have a pretty big impact during that ramp-up time.

Okay, so if you look at the DC, how long do you think before you realize the full savings from it? I mean, is the ramp-up stage about 3, 6 months, or how long do you think it'll be?

Easily 6. I mean, we won't even be distributing all the products and having all the functions in the warehouse until towards the end of the calendar year.

Okay. And then just lastly, capitalized interest expense in the quarter, do you have the number?

I do not have that number in front of me, but again, we are capitalizing interest on the bonds. They're $99.7 million in principal, and the interest rate is a little less, somewhere around 2.25%.

Ron, this is Kevin McClure standing in for Bryan. Following on Damian's question, can you quantify for us the financial benefits of this DC in terms of what it would do for your supply chain and when you expect the payback to be realized?

Well, we haven't talked about precise numbers of payback and contribution ever since we announced the plans to build a distribution center. So it wouldn't really be appropriate for us to do it now.

But suffice it to say, it is a long-term asset. And there are benefits from a number of different areas that are going to accrue to the company as a result of opening this distribution center.

But beyond that, we really haven't publicly disclosed our expectations on a payback period.

Fair enough, okay. And shifting to the stores that you plan to open in 2013, are you willing to give us a number or a range for modeling purposes?

Well, we've got a couple in progress right now, and we really need to get a little bit further into the year to know what the timeframe's going to be there. So we'd generally stick to the current fiscal year at hand and then when we'll do the Q -- the K this fall, we'll talk about our plans for 2013.

Okay, great. And then lastly for us, it sounds like you've made progress on the remodeling front.

How many stores are you planning to remodel or have you remodeled? And what's the average cost that you're spending in the stores?

Kevin, there's not an average cost because what's done in any particular store could be a good bit different based on the age of the store, the size of the store, its current market condition. So there's not a cookie-cutter plan that we execute in every remodel.

But we will have easily, by the time we finish this process, have easily touched dozens of stores.

So just wanted to see if you had any comments about the competitive environment in the quarter, if you're seeing price actions from both traditional and nontraditional investors? And then apologies if I missed this, but did you quantify the weather impact in terms of basis points?

I'll answer the second one first. We can't exactly quantify the weather impact.

And again, recall that we're here in the Southeast, so it's going to be a little bit different than it's going to be in some of the colder areas of the country. But if you look at January of 2011, we had a significant snow event at least 3 times during the month, with kids out of school for multiple days.

So with just a normal bad weather stocking up yet, you've got kids eating at home rather than having one or 2 meals at school. And it was a good bump for us.

And we had absolutely no bad weather. I think maybe the kids here in Asheville missed one day, maybe half a day for school.

It makes an impact. And as far as your first question, as we said right at the call, we don't comment on the activities of our competitors.

We try to pay attention to our own business and doing well what we do well.

Could you comment on how you performed in terms of your market share, how you track it in the quarter?

I don't really see those numbers, so I can't comment on it.

And maybe just one last chance. Is the weather impact, do you think, if you had to guess, it's above 100 basis points or below?

I can't quantify that for you, sorry.

All right. Well, thank you very much, and we appreciate everyone who joined the call today.

And again, we will file our 10-Q later on this week, and we look forward to speaking with you again in about 3 months. Thanks very much.