Caseys General Stores Inc (CASY) 2002 Q4 法說會逐字稿

Good morning, my name is Antria and

I will be your conference facilitator.

At this time, I would like to welcome everyone to Casey's General Stores fiscal year end earnings release 2002 conference call.

All lines have been placed on mute to avoid any background noise.

After the speakers remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number two on your telephone keypad.

Thank you, Mr. Shaffer.

You may begin your conference.

Good morning.

And thank you for joining us on this call to discuss Casey's results for fiscal 2002 ended in April.

I'm Jim Shaffer.

Ron Lamb, CEO, and John Harmon, Secretary-Treasurer, are also here.

I hope all of you have already seen the press release.

If you haven't, please let me know and I will fax a copy to you. My direct telephone number is 515-965-6107.

Before I begin, I will remind that you certain statements may constitute forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995.

As discussed in the press release and the 2001 annual report, such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from future results expressed or implied by those statements.

Casey's disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

I'll take a few minutes to summarize and then we'll open for questions.

The year was one of strong top line growth, but weak margins, resulting in earnings per share of 64 cents, down from 71 cents last year.

While the year was disappointing, we had some improvement in the margins in the fourth quarter over the third quarter, giving us more confidence looking forward.

For the year, gasoline gallons were up 16% with a 9.6-cent margin.

The result was gasoline gross profit of $89 million.

If we had achieved the 15% growth with the 10.5 cent margin, the gasoline gross profit would have been $96.5 million, that's a difference of about 9.5 cents per share.

Gasoline was extremely competitive during the year.

We believe we gained market share with the combination of meeting that competition and the expansion of pay at the pump.

The margin was above average during the last few weeks of the year and has continued above average for the first six weeks of this fiscal year.

We are working to balance the growth in gallons with the margin per gallon to achieve growth in gasoline gross profit.

We are emphasizing this balance with every store manager, and reinforcing the concept with the manager compensation system.

We are also making enhancements to improve purchasing and delivery efficiency.

We expect to sell nearly a billion gallons this year, and even a half cent difference in the margin is over 6 cents per share in earnings.

We ended the year with 467 stores with pay at the pump.

We will have nearly all stores converted by the end of this fiscal year.

The benefits include improved growth in gallons, quicker checkout at the register, and improved inside sales.

Grocery and merchandise sales were up 18.1% for the year, with a margin of 32%.

While sales were ahead of goal, the margin was down 200 basis points from last year.

Cigarette pricing has been volatile in recent quarters, primarily due to manufacturer promotion as well as competition.

In order to improve controls and margins for this product, we recently began installing scanning equipment in the stores.

While still limited, we have seen improved margins in those stores.

The scanners now being installed are intended to very quickly address the most pressing issue, cigarettes.

These are inexpensive, easy to install and easy to train employees.

They have limited capacity.

They will not handle all merchandise within the store.

We have installed the first full POS System in a store and have several others scheduled.

We expect to gradually convert to this system.

At the end of the fiscal year, we had 322 stores scanning cigarettes.

By year end, the system should be rolled out to virtually all stores.

By then, we will have added a few other products to the scanners and we hope to have a number of stores converted to a full POS by year end.

The prepared food sales were in line with expectations for the year, with growth of 13.2%. The margins suffered during the first two quarters due to high cheese prices, but returned to a more normal 56.2% in the fourth quarter. for the year, the margin was 55.4.

The shortfall was about 100 basis points.

We are monitoring cheese prices this summer.

So far, the prices are favorable.

We are also taking some price increases in some products, both grocery and prepared food, to improve margins.

Our goal is to get back to the fiscal 2000 level of 37.7% margins for total inside sales.

We believe we have the potential to improve on that as we get the Point Of Sale technology rolled out.

Operating expenses increased 11.6% in the year, while gross profit increased only 8.1%.

The problem was margin, not expenses.

The same store operating expense increase was 5.5% for the year, down from 8.4% the prior year.

The goal for this year is to keep the rate of increase of operating expense below the rate of increase in gross profit.

We believe we can report record net income this year and show significant growth in earnings per share if we are successful in achieving our goals.

With our focus on improving the returns on our store with technology, and with modest growth primarily through acquisition, we are optimistic about this year.

While we have already seen some benefits, the significant benefits will come over the next few quarters in terms of the cigarette margins and beyond that, in terms of other products and more efficient inventory control.

We ended the year with 1258 corporate stores, and expect that number to be around 1300 at this time next year. The balance sheet is strong, long-term debt is now under $174 million, and the long-term debt is 32% of total capital.

We will now take your questions.

At this time, I would like to remind everyone if you would like to ask a question, press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q & A roster.

[ pause ]

Your first question comes from Gary Gibman.

Yeah, hi, good morning.

I was just wondering, there is a lot of talk about convenience stores, you know, outsourcing distribution, or, or changing distributors. There's been a lot of activity there.

So, you know, I know Casey's, you know, runs their own distribution and seems to be efficient in doing so.

But is there any, any thoughts looking at alternatives where you would outsource to a Fleming or somebody else?

We have always looked at that.

This is Ron Lamb.

On outsourcing.

However, as we check prices, whether it be Fleming or any of the other grocery wholesale houses, we find that we buy much better by direct buying. As a matter of fact, we have bought some competitors' stores that we had their grocery order book, and it looks like we're buying about 8% better than the competition by having our own distribution.

Okay.

And, I mean, is that because you're particularly good at distribution, or would it be to something that should be there for convenience store chains or... I mean, I guess is why does 7-11 use outside distribution and other people, you know, Clark, whoever it may be....

Uhm... One reason, I have talked to the Clark people also, and they had a problem with Fleming the way I understand, and they're moving to McLane. I've also had the McLane's books, and we feel we can operate our distribution on float.

So we're better buyers, having our own distribution.

Okay.

Thanks.

And just one more separate question is, there's more and more supermarkets that are building out fuel stations.

So is that happening? Do you have any modified number of as to what degree that's happening, overlapping in your market areas or what's been the effect when you have had, let's say, uhm, one store do that, how many bases does it impact and to what extent?

Yes.

We have had the Wal-Mart's, Murphy's move into our market area.

And we find that we can market with those folks.

As a matter of fact, we just bought a competitor that was right next to a Wal-Mart store in Newton, Iowa.

And he felt that he could not compete with the Wal-Mart store.

We bought this store, remodeled, and found that we could compete with them, and actually make a good return on the investment.

We can compete with the Wal-Marts.

Now, the supermarkets has not really affected our gasoline business.

We have several, whether it be the High V's or some of the Safeways I understand is getting into it. And we haven't had a problem.

Gary, just one other remark on that line.

Keep in mind that, you know, over 60% of our stores are in smaller towns.

And less subject to that competition than the larger towns would be.

Right.

So in fact, there aren't that many new sites developing that would overlap with trade areas of Casey's, right?

No.

Okay.

That's key.

Okay.

Thanks, very helpful.

I appreciate it.

Thank you.

Your next question comes from Patrick Forkins.

Good morning, Jim.

Good morning, Pat.

I want to make sure I've got an apples-to apples comparison for the fourth quarter here.

In the fourth quarter of 2001, when you guys reported 3 cents, that was net of an 8 cents charge for lifo, is that correct?

Well, yeah.

A year ago, we got history very hard with lifo because gasoline prices jumped so much in the last month of the year.

It was just a dramatic jump.

It did hit us pretty hard.

That didn't happen this year.

So, so we didn't have that effect.

We had a small lifo charge, but it was pretty minimal this year.

Okay.

So sort of on an operating or a controllable basis, then, the 9 cents is really comparable to 11 cents last year?

Uhm... It's really hard to just net out one item, Pat.

The reason for that is, you know, there's an offset to that.

You know, uhm, as, as gas prices jump up, you have some benefit on the inventory side and you have a hit on the lifo side.

As they go down, it's the flip, so it's kind of hard to net out just that single item.

But if you do net out just that item, that would be about right.

Okay.

On the language in the release with respect to guidance, there was a mention of for 2003, you know, if everything comes in line, record earnings per share.

Is what is that number? That like 77 cents or....

I think we said record net income.

But a, that number is about $41 million.

Okay.

And then on the guidance points that you put forward, you did not -- last year, you stated a, I mean, you quantified what you wanted to do in margin per gallon.

This year, you know, you basically said, you know, you just want to do better.

That bogey last year was 10.5 cents.

Can you give us any guidance as to what you're shooting for this year?

Well, the important thing in gasoline is to, we think, is to achieve a reasonable balance between growth and margin.

And we're striving to do that.

So we are really more focused on trying to grow the gasoline gross profit dollars by balancing the growth in margin.

So we don't get too focused on either the growth or the margin.

It's the combination and the total gross profit that's important to us.

OK. Last year, you quantified that number and obviously, the volatility has, you know, can have a big impact on earnings here.

I mean, would it be, do you think, are you shooting for a number lower than 10.5 cents or higher than 10.5 cents?

It's pretty tough to throw out a number on gasoline.

However, we have seen a big improvement in the fourth quarter on gasoline.

Also, in the first quarter, we're seeing improvement. Hopefully we can go back to historical numbers of 10.5 cents.

But it has to do with the competitive marketplace on gasoline.

As everybody knows, you have to be competitive.

So it has to do with competition.

But we've seen starting off this first quarter, that competition is keeping their prices a little bit higher than they have in the past.

So as the price moves up, the rack price in the barrel, they are moving the retail prices along with it.

So we hope to see improvement on the gasoline gross profit.

One other comment along that line is we have seen gas margins above our historic averages for the last -- for the most recent 12 weeks.

So, you know, that's a long enough period that he gives me some encouragement going forward.

Historic in the sense for the same time period?

Or on an annual basis or....

Historic gas margins.

Our 6 or 7 or 8-year average would be 10.5 cents.

Okay.

Still on gasoline and in the last call, there was some talk of you guys looking at different ways of buying gasoline, maybe buying gas better, and also taking a look at how you were pricing, you know, the gasoline in your 1300 stores to make sure that, you know, there was consistent pricing or consistent methodology.

Could you give us an update on progress you have made in that area?

We have made a lot of progress in the buying of the gasoline.

We're meeting with several and have suppliers whether it be Koch Refineries or Williams Brothers on e-commerce, and we're bringing a, an analyst in to help with this buying of gasoline. But we, we think we are going to be able to buy much better this year, and already we're seeing some good results from it.

Okay.

Last question on the guidance. The guidance you're giving for inside sales, same store inside sales, using the 4 to 6% range, and that compares to what you actually realized in fiscal '02 of 10.9%. can you tell me, you know, what the dynamics are that are, you know, causing you to lower that guidance?

Well, you know, the real wild card in that number is what happens with cigarette prices because cigarettes represent about a third of inside sales.

So, you know, that could change if we have another big cigarette price increase, then that number is likely to go up.

If we don't, then I'd be pretty comfortable with that kind of a number.

And I think we did see a pretty big increase in that in fiscal 2002.

So.

I'm not sure how significant that is because if you get that big increase in cigarette revenue, you don't necessarily get a big increase in gross profit. You know, that tends to be a pass-through.

Okay.

On the rollout of scanning for cigarettes, you think you'll have that done at the end of the year.

But I just wanted to clarify, you're not really going to be able to use those scanning systems for any other products in the store, is that correct?

We are right now working to see if we can add a couple items to the scanning which would be pop and beer.

Which is actually at a lower margin also.

So we can track sales on those three items, we can control inventories and be sure that we don't have the mis-rings.

So right now, we are working on two other items along with the scanning, and right now we also are testing POS in a few stores.

So hopefully, by the end of the year, we can be having POS in quite a few stores.

And what you referred to as full POS would basically mean scanning for everything that goes through the register?

It would be everything in the stores, so we'd have a complete retail accounting system. And that's what we're working for right now.

Okay.

And then you think you might have full POS what, in a couple of hundred stores maybe?

I would hate to use 200.

I think I would like to use somewhere around 100 stores.

We want to have someting on POS System that gets our customers in and out of the store fast.

Some of these POS Systems and are geared for supermarkets and not convenience stores.

And our particular type operation, you have to get your customer out in and out very fast.

Last question: CAPEX for system type work like the POS and the scanning. Can you give me an idea what you're looking at for '03?

Uhm... The POS CAPEX for fiscal '03 probably won't be all that significant, if you know, if we are talking ballpark 100 stores.

And the scanning is very inexpensive.

I think as we move into this in a bigger way, like most computer equipment we'll tend, we'll tend to lease those systems that are fairly. So I don't think it's going to have too much of a CAPEX effect.

And to the extent it does, we've made some room for that CAPEX by reducing our new store construction.

You know, our thinking this year is to invest in our existing stores through technology and we'll make room for that by adding fewer stores.

Getting more out of what we have.

Okay.

Thank you.

Thank you.

Your next question comes from Andrew Fairbanks.

Good morning, guys.

Good morning, Andrew.

I wondered, you talked about how the margins are looking so far this quarter.

How are the volumes coming through over the last say, six weeks or so?

Uhm... We're seeing single-digit, same-store gallon increases.

Kind of low, mid-single digits.

Right.

And then, uhm, during the quarter in your particular region, were there any, you know, weather impacts or any other sort of extraneous events to be aware of?

No.

That's a pretty simple quarter on the weather front.

Well, that's good.

And as you look at the 40 stores you are planning to build or create this year, do you have a good split on how many will be actually built and how many you project may be purchased from franchisees just in rough terms?

As a matter of fact, just last, the 6th of June, we sent an offer out to the franchisees on 56 franchise stores and hopefully we can be successful in picking up 35 to 40 franchise stores if that happens, then we'll cut down the new store expansion to 10-15 new stores, because of the costs we are going to have at pay at the pump, the scanning, the point of sale.

But hopefully, we are successful in the franchise stores. Because as we look at the retun of investment on the franchise stores, you know, everything's in place on these stores.

The employees are in place.

We know what the sales are, we know what the gasoline volume is.

We have our transportation in place.

So we think we have a lot of opportunities this year on the franchise stores and also other acquisitions of small independent chains.

Right.

As you look at the franchise stores, do you typically have a lot of CAPEX, no CAPEX, to do renovations or improvements or what would be, you know, as you look at all of the franchise stores you bought since, you know, the program got a little more aggressive last year. Is there kind of an average that you can give us in terms of capital spending on the franchise stores?

On CAPEX on those, you know, that varies all over the board.

And when we value franchise stores, you know, that's one of the things we consider is how much we have to put into them.

And that goes, you know, we sort of just consider that part of the cost.

But it has not been on average, it has not been extensive.

I mean, it, uhm, and as I say, they vary all over the board.

Some are zero.

And, you know, some might be extensive.

But, on average, even if we include the remodeling capital expenditures, you know, we can generally buy for less than we can build.

But on the other side of that, as you are aware, we're not a brand-new building, either.

Right. Right.

I'm guessing probably most of the franchise stores have been seasoned for at least three years, right?

Yes.

So they have a good solid

Many are much older than that.

That's great. And I guess just this last question.

As you look forward to, you know, perhaps eventually putting a full POS Systems into the entire network, do you have any thoughts on what kind of inventory savings there might be from going through that process?

Do you think there's a lot of working capital you can take out of the system or efficiency improvements that that system should enable you to be able to achieve?

Yeah.

Andrew, this is John Harmon.

As far as reducing inventory, I wouldn't look for a lot of that to happen.

What I would like to see is, we'd have the right kind of inventory in the store.

Right now, I think there's still times when we maybe run out of some of the key items on our weekly delivery system and I think that will do a better job of making sure we have the proper amounts in there. I wouldn't look for a big decrease in inventories at the store level.

Right.

Right.

So it's really more to allow to you kind of optimize the revenues per store by avoiding stock-outs then really taking a lot of inventory out of the system.

Well, that's great.

Thanks a lot, guys.

Thanks, Andrew.

Your next question comes from Fred [INAUDIBLE].

Yes.

Can you -- the question earlier, uhm, the same store sales difference, can you back out of the same store sales in '02 the impact of cigarette prices so we get a little less noisy number?

Uhm...

[ pause ]

Can you give me just a moment on that one?

Sure.

Uhm....

Let me just try to give you a little perspective.

The same store sales for grocery and merchandise for the year was 11.7%.

Cigarettes alone were 14.8%.

So that was our fastest growing category in the stores during the year.

As it was the prior year, as well.

Just to give you some perspective.

Okay.

So I could basically weight that one around 30% and come up with the balance on the difference?

Yes.

That would be a way to ballpark it. I could..

Sure, that's fine.

And then so the 6% there, you're basically trying to use that number and I assume you're assuming some price stability in cigarettes?

What we have seen in cigarettes, and it's very competitive just like gasoline, last couple of years, with these cigarette promotions that our customers went to carton buyers, and now they seem to be going more back to the pack buyers where you make a higher gross profit. On the cartons you make a lower gross profit with the big ring.

But we are seeing a little relief already with the scanning that we are getting a higher gross profit on our cigarettes.

One thing to keep in mind in those numbers as well is, the effect of state taxes on that. 'Cause, you know, that goes through the ring

Right.

And you know, we just recently saw an increase in Illinois and Kansas.

And I think Indiana is talking about an increase.

So, you know, that's going to have an effect, and,it sort of distorts the numbers because, you know, that pretty much is just a pass-through.

Right.

Right.

And -- and -- uhm... May I ask it a different way?

The 4 to 6% same store sales, are you assuming any tax or price increases in cigarettes?

No.

That would be in addition to that.

Okay.

Thank you.

Thank you.

Oh, I have one more.

What is your CAPEX for 2003? Total CAPEX whether it be point of sale or what have you?

Uhm... We're talking in the mid 80 millions numbers right now.

And --

We think it will be in line with cash flow from operations.

Okay.

And you'll have a cash flow statement sometime soon?

Yes.

Thank you.

Your next question is a follow-up question from Andrew Fairbanks.

Oh, actually thanks.

My question was answered.

I was curious about the CAPEX, as well.

Thank you, Andrew.

At this time, I would like to give everyone an additional moment to entering a question by pressing star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the q & a roster.

At this time, Mr. Shaffer, there are no further questions.

Thank you all very much for joining us on the call, and I appreciate your questions.

Look forward to reporting a good first quarter in about two months.

So thank you.

Thank you for participating in today's Casey's General Stores fiscal year end earnings release 2002 conference call.

You may now all disconnect.