The Pantry, Inc. (PTRY)

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Industry: Consumer Durables
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Pantry Inc. (PTRY)

F1Q09 Earnings Call

February 3, 2009 10:00 am ET

Executives

Barry Epley – Vice President & Corporate Controller

Peter Sodini – President & Chief Executive Officer

Frank Paci – Senior Vice President & Chief Financial Officer

Steve Ferreira – Senior Vice President of Administration

Analysts

John Heinbockel – Goldman Sachs

Brian Hunt – Wachovia

Karen Howland – Barclays Capital

Karen Short – Friedman, Billings, Ramsey & Co.

Ben Brownlow – Morgan Keegan and Company

Anthony Lebiedzinski – Sidoti & Company

[Eric Wallenere] – William Blair

Presentation

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2009 The Pantry Inc. Earnings Conference Call. My name is [Erica] and I'll be your coordinator for today.

(Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Barry Epley, Vice President Controller. You may proceed sir.

Barry Epley

Good morning everyone and thank you for joining us. As you know, earlier today we announced financial results for the first quarter of our 2009 fiscal year. If anyone does not have a copy of the release and would like one faxed or emailed to them, please contact Selby Qewing in our office at 919-774-6700, ext. 7002, and she'll see that you get what you need.

Before we begin today, I'd like to point out that certain comments made during this call, may be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, comments regarding the company or management's beliefs, expectations, targets, goals, plans, outlook or predictions of the future are forward-looking statements.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by these forward-looking statements. These risks and uncertainties are detailed in The Pantry's filings with the SEC and in our earnings release issued this morning.

We refer you to the SEC's Web site or our site at thepantry.com for these and other documents. We also will discuss certain non-GAAP financial measures today that we believe are helpful to a full understanding of our financial condition.

Certain of these non-GAAP financial measures were also included in the press release that we issued this morning. We therefore, refer you to our press release posted on our Web site, which includes a presentation and reconciliation of each non-GAAP financial measure to the most directly comparable financial measure included in the press release, and an explanation of why we believe these measures provide useful information to our investors and how they are used by management.

With us today are The Pantry's Chairman and CEO, Pete Sodini, and Frank Paci, our CFO. I'll now turn the call over to Pete.

Pete Sodini

Thank you, Barry and good morning. We're pleased to report today a record quarter, in terms of range per share, EBITDA, and operating cash flow. Obviously, we had the winds at our backs with an extremely favorable environment in the energy market as oil prices fell almost continuously throughout the quarter, from $107 a barrel to $34 a barrel.

As a result, we achieved a gas gross margin of $0.0258 per gallon, and reported diluted earnings of $1.77 per share. EBITDA was $111.9 million and we generated approximately $89 million in operating cash flow.

Our results were exceptional; they were achieved during a period where we saw continual weakness in comp store volumes and a challenging gross merchandise margin environment.

Clearly our business is not immune to the intense pressures on the consumer. We have seen miles driven across the country down, despite the display of dropping gasoline prices, with the southeast down more than the average for the country; just anecdotally, as of the November DOT report, miles driven in the southeast are down 6.1%, compared to a year ago, versus 5.3% for the total country.

For the quarter we saw comparable gasoline gallons down 7.2% and comparable merchandise sales down 3%. We believe these results are somewhat misleading, due to the extreme gasoline shortages that we experienced in the first two weeks for the quarter. Just for perspective purposes, 72% of our gasoline product comes over a pipeline, versus 28% water terminal. It was a pipeline plantation in Cologne out of Texas where the major problems occurred.

We consider these weeks as no-comparable and only look at the final 11 weeks of the quarter, our buy-ins improve with comp store retail gallons down 5.1% and comp store merchandise sales down 2.7%.

Another factor weighing in the performance of our gas line is our diesel business. With the slowing economy, truck traffic was down significantly and our diesel gallons were down 18.3% in quarter one. This decline contributed 150 basis points to the decline in our total gasoline gallon comps.

The decline on merchandise margins primarily is driven by three factors, increase in cost of certain categories, a slightly unfavorable mix shipped away from some higher margin categories, and some increased promotional activity, primarily in our cigarette category.

While sales have been solid in our lower margin beer and cigarette categories, a softening economy has adversely impacted sales in higher margin discretionary areas, such as candy, general merchandise, and coffee, and in our service category, especially car washes. Frank will provide some additional details later.

We have already taken some actions to adjust prices in areas where we feel present opportunities – that present opportunities to enhance margin and continue to explore other avenues to improve margins, without impacting sales. One of the areas where we see additional opportunities is our food service business.

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