Caseys General Stores Inc (CASY) 2003 Q1 法說會逐字稿

Good morning.

My name is Mashasta.

At this time I would like to welcome everyone to the Casey's first quarter earnings release 2003 conference call.

All lines have been on mute to prevent 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 1 on your telephone keypad.

If you would like to withdraw your question, press star and the number 2 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 the first quarter ended July 31.

I am 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 or e-mail a copy to you.

My direct telephone number is 515-965-6107.

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

As discussed in the press release and the 2002 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 to 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 will take a few minutes to summarize and then open for questions.

It was a good quarter with earnings of 25 cents, down 1 cent from the first quarter a year ago.

Gasoline gallons were down slightly and same-store gallons down 5.4%.

But the margin for gallon was up and gross profit from gasoline was up $900,000 to $23.5 million.

Our goal this year is to continue to increase gross profit dollars.

Grocery and general merchandise sales were up 9.9%, and same-store up 4.2.

The margin was down 190 basis points from the first quarter a year ago, but down only 30 basis points from the prior fiscal year.

The margin should improve over the next four quarters as we roll cigarette scanning out.

Only a small number of stores have had scanning long enough to show the benefit.

They need to go through a full cycle, including a quarterly inventory, to show the better margins expected.

Prepared food sales were up 8.8%, same-store 2.8.

With the margin of 59.1, up 420 basis points from the first quarter, and up 370 basis points from the prior fiscal year.

The reason was unusually low cheese prices, compared with unusually high prices in the first quarter a year ago.

We do not believe that 59 margin is sustainable but we have locked in cheese prices for the year, and all other things being equal, we should show margins above 57 for the remaining three quarters.

The combined inside sales including grocery and prepared food have same store sales increase of 3.9%, very close to our goal of 4.6%.

There is a typo in the press release, the same store inside sales was 4.2% rather than 3.9.

The 4.2 is grocery instead of the combined.

We now have pay-at-the-pump and cigarette scanning in about 640 stores and we believe we will meet our goal of having it in virtually all stores by fiscal year end.

We have installed a full point-of-sale system in ten stores and are pleased with the installations.

We will accelerate this program and expect to have around 40 by the end of the quarter.

In the press release we discussed the classification changes.

The first was to adopt the FAS emerging issues task force regarding accounting for certain sales incentives.

This involves coupons.

We made the classification change including the effect on the first quarter of the prior year.

The change was to reduce both sales and cost-of-sales by approximately $700,000 with no effect on income.

The second reclassification was a change in our presentation of services provided to both franchise and corporate stores.

Many years ago when half or more of the stores were franchises, a decision was made to classify the transportation, distribution center and store maintenance services as revenue.

Each quarter the internal profit was eliminated.

Now that most of the stores are corporate, it seems that the results would be clearer by reclassifying.

There was no effect on income or earnings per share.

It did decrease the gross profit and decrease the operating expenses.

With the classification change, the grocery margin went down 160 basis points from 34.5 to 32.9.

For the first quarter a year ago.

We have a goal to improve the inside margin, the combination of grocery and merchandise and prepared food.

The goal was to increase the inside margin by 100 basis points, from 36.7 to 37.7.

With the reclassification, the goal would be to increase by a hundred basis points from 35.4 in fiscal 2002 to 36.4 this fiscal year.

In the first quarter, we had an inside margin of 36.5.

During the next three quarters, we believe we can further improve the grocery margin with the roll-out of cigarette scanning.

We are not likely to sustain the high prepared food margin.

On a combined basis, we think the grocery improvement will more than offset the prepared food.

If that is the case, we will improve the margin by more than the 100 basis point goal.

Operating expenses increased 8.5% in the year, while gross profit increased only 6.1%.

The issue here is margin, not expenses.

The same store operating expense increase was 2.8%.

We remain optimistic that we can keep the rate of increase of operating expense below the increase in gross profit for the fiscal year.

We added three stores during the quarter, we did not acquire any franchise stores but we have active dialogue with several franchisees.

The balance sheet is strong, long-term debt is now under $174 million and long-term debt is 31% of total capital.

That concludes my remarks.

Our second quarter release is scheduled for December 3.

We will now take your questions.

At this time, I would like to remind everyone if you wish to ask a question, press star then the number 1 at this time.

We will pause for just a moment to compile the question-and-answer roster.

Your first question comes from Gary Gibblan with C.L. King.

Good morning.

There has been some signs of a general restaurant slowdown in the restaurant industry, and since your doors often function as a town center and restaurant, are you seeing some of that?

It was actually an extremely good quarter for our prepared food.

You know, our same stores was 2.7, nearly 3%, pretty close to goal.

And the margin was strong.

I think the prepared food is a very successful operation for Casey's and we continue to be very optimistic about it.

We are continually rolling out new products and one thing you might keep in mind is probably as people slow down going out to eat, they may slow down at the higher end places, but less so for a carryout pizza, that's probably the last thing they give up.

Okay.

And on the cost of cheese, the -- you said you locked in cheese prices, so I mean --

I am sorry, Gary, you are fading out.

On cheese prices, you have locked in the cheese, does that completely protect you from I guess what has been a sharp pickup in the spot market on cheese, but that wouldn't affect you this year?

That's correct.

We -- what we have essentially done is contracted for what we think our cheese needs will be each month through next June.

And we have done so at a cost below what our historic costs are and that would be significantly below what our cost was a year ago.

So I think we are protected on that and, you know, we think we can get a better than average prepared food margin as a result of doing that.

Keeping all other things equal.

Okay.

Thanks.

I mean, your results are so resilient, it is -- you know, it is great to see.

I am just wondering, is there any -- anything out there, I mean the farm economy in general has been, you know, soft, in other words that is one of the softer regional economies, does that affect your stores or not?

If people feel a little bit pinched in the farm belt.

No, we haven't a slowdown in that regard.

Yeah.

Again we are a basic business.

Sure, of course.

Okay, well, you are doing great, keep up the good work, thanks.

Your next question comes from Andrew Fairbanks with Merrill Lynch.

Good morning, guys.

Good morning, Andrew

I wondered if you could comment on the overall gasoline volume growth figures on a same-store basis and overall was there anything unusual in the quarter that repressed those levels in terms of growth, or do you think that it was a pretty clean quarter?

No, I think -- you know, we had an unusually high growth in gasoline gallons a year ago, and a low growth of the year before that, and when we set our goals this year, we said what we are really trying to do is balance this gasoline operation, balance the gallons against the margin and focus on the gross profit dollars.

So, you know, we are willing to give up a little bit of gallons, but we are really focused on the gross profit dollars.

I think we are moving the direction we intend to move.

Right, I think that's great.

There wasn't any weather or other factors that sometimes crop up from time to time, you know, rain or other events that would have impacted the numbers one way or another?

No.

Excellent, thanks, guys.

Thank you.

I would like to remind everyone if you wish to ask a question, please press star, then the number 1 at this time.

Your next question comes from Patrick English with [inaudible] Sheridan.

Almost.

Finnish Share Management.

Good morning.

Jim, would you comment, or Ron, on the competitive --

I'm sorry, you are fading out.

Just a general comment on what you are seeing from competition in the gasoline area?

What are you seeing?

We talked about it in the past with respect to, you know, the Wal-Marts and the Sam Clubs, anything new on that front?

No, Pat, there isn't.

We had a few of the Wal-Marts in our market area that have got into gasoline, very few.

However, the Wal-Marts actually -- we have seen customer accounts up in our stores.

We can compete with the Wal-Marts, our sales are up, but any other new competition, no, we haven't -- we haven't seen much.

Ron, in the markets where you are seeing Wal-Marts or Sam's Clubs that offer gas, what is the price differential now in those markets?

And if you are seeing still good results in those areas, is it just -- again, is it attributed to just the convenience factor?

On the gasoline side.

On the gasoline, I think that if -- if we have somebody that is going into a Wal-Mart store, they might buy their gasoline at the Wal-Mart stores.

However, on the margin side, we haven't seen our margins down that much.

In the areas where the Wal-Marts are at.

Okay, thanks.

Your next question comes from Patrick Forkin with Wonder Lynch Research Partner.

Good morning, a follow-up question on the gasoline volume and the competitive landscape.

Are you seeing any of the weaker players, maybe perhaps some of the independent stations in a town where you've got four or five stations that are going away, or what is your outlook from that perspective?

In some of the real small towns that we are in, we are seeing some of the very small competitors closing their shop up.

Now if they've got a service center where they change oil, whatever, no.

Now, they might stay open, but they don't really compete in the gasoline market.

Okay.

So, Jim, if I heard you right, I think what you are saying is that gallons were down a little bit but margins are up, and that is really a result of the process that you are managing?

Yeah, we -- we were probably a bit more aggressive a year ago pricing, getting the gallons back from the year before that, and I think the margins suffered some as a result of that.

So that is the reason we are so focused on what we say is the balance between gallons and margin.

We don't have to go after every last gallon but we are focused more on the gross profit.

I think this is the direction you should look for us to move this year.

Okay.

And in that process of managing margin better, are you doing anything different on the purchasing side?

We are working on several things on purchasing gasoline.

However, we haven't come up with anything solid on it now.

We are working with F.C.

Stone, also with Koch on purchase of gasoline.

We think in the future we -- in this fiscal year that we will do something on gasoline on the purchasing and we need to do it without a lot of risk.

But if we can lower our cost on say 25, 30% of our gasoline, penny, penny and a half, that is a big deal.

Sure.

Okay.

On the technology side, the ten stores you have got full POS implemented, I mean, is it too early or can you talk about, you know, the type of information, any benefits, are you learning anything different about, you know, how to manage the business?

Yeah, really we do have ten stores up and operating.

It is probably a little too soon to say just how much we have learned from that.

What we have been trying to concentrate on at the beginning is to take all the operational problems out of it, work all the kinks out, and that has worked out very well.

We feel good with where we are at right now.

As far as really being able to utilize a lot of the additional data that we've got, we are just now really beginning that process, we are kind of learning as we go along.

And I think we will start reaping benefits from that in the quarters to come.

Okay.

On cigarettes, what kind of impact have you felt in the states where the taxes have been raised significantly in the last quarter or two?

Actually our cigarette sales are up, and with this realtime information that we have on scanning, we have found that it definitely has changed gross profit on those cigarettes, because so many deals they have had out there that when you have got 14,000 employees out there, so now we can download and be sure that when they scan those cigarettes, that it is at the right retail price.

So we have seen a big change in that now, but it will take the full year to effect that and it should affect the inside gross by a hundred basis points for the year.

Patrick, a follow-up, our number of -- our unit count of cigarette sales is up as well as our sales dollars.

Does that surprise you?

No.

Okay.

No, we have -- that's been a trend for the last several years.

I think the c-store industry is gaining market share and we are just part of that.

We seeing a better trend also in the cigarette category.

For the last two years, the customer has been buying a lot more cartons than they had in the past.

Right now we are seeing with this realtime information on scanning that now they are favoring packs, where we make more money on the pack than we do the carton.

Okay.

With respect to the scanning projects that you've got going on, are you doing anything at your DC and obviously you have to label, but are you using any scanning at the distribution center?

Not yet.

Is that something that over time, as more stores get online, that you will, I mean, will that facilitate the shipping and receiving process?

I think that might.

But that's a ways down the line.

I think, before we get to that we would have to be pretty well rolled out and that's going to take some time.

So, I think that's a future decision.

However, with the scanning, it gives us good information at store level and we can cut inventories, whether it be store level or at the distribution center.

Okay.

Last question, I haven't gone back to the guidance for new stores in '03, but any update on, you know, some of the franchise operations that you were looking at potentially acquiring?

We are having a lot of dialogue going on with franchisees right now.

I think we had, like, 21 stores that we are working on.

There is a lot of interest out there.

We did send a letter to a number of franchisees that represented well over 50 stores, and hopefully we can end up getting 25 or 30 of those stores.

You think that will be in fiscal '03 here?

Yes, I do.

Okay.

All right, thank you.

Thank you, Patrick.

You have a follow-up question from Patrick English.

Ron, I want to circle back to gasoline purchasing initiatives that Pat Forkin was talking about earlier.

Now, you know, when we poked around, you know, it appeared to us from a margin standpoint that there is at least one competitor out there that was consistently achieving upwards of 2 cents a gallon better margins than you guys.

And the intelligence we received is that it's basically been on the purchasing side.

I know in a previous conference call, this subject was discussed.

I wondered if you could give us, you know, more details as to, you know, why, you know, you haven't been able to put in a hedging program that, you know, that would allow you to achieve these better margins?

It seems like some competitors are out there, again, without taking a lot of risk, have kind of consistently put up better margin numbers than you guys.

Can you give us more detail as to why you haven't made nor progress in that area?

Well, again we have a consultant with F.C.

Stone that is trying to help us with this.

Of course we have to watch the risk, and I think the competition you are talking about is the Qwik Trip with a Q, they have been doing it for at least ten years, they are very well educated in this category, and they do put some risk forward.

On buying that gasoline.

But I hear the same thing that they are buying a penny to a penny and a half better than we are buying.

We are trying to get to that point.

However, we need to walk into it slow because of the risk.

If you start hedging, forward-buying and everything.

How about from the standpoint of bringing in the talent from a personnel standpoint to kind of push this along at a more rapid clip?

And we are working on that right now, Pat.

Actually we are looking at bringing in one of Koch Refineries' people right into our office, like they have with United Airlines in Chicago.

They have volunteered that.

So we are meeting with Koch next week to discuss that further.

Great, I look forward to progress there, thank you.

Your next follow-up question comes from Gary Gibblan.

Hi, do you guys remember how your food service did in the early 1990s?

I realize you didn't have the full pizza program fully developed until a little after that, but in other words in a deep recession, how does that test out for you guys?

Gary, I have been around here a long time.

Back in the early 1990s I know with had a couple of periods when we got hit pretty hard on the same-store side.

But I think that had more to do with product offerings and some of those things.

I think we have come leap years in that area.

I don't look for this recession to have a big impact on our prepared foods.

Yeah, okay, sorry to dwell on it.

It is just that, you know, we are seeing it sort of go down the public company restaurant food chain, so --

I agree with Jim and John on this, that I think as the restaurants, the high-tech people, their business falls off, I think ours will pick up.

Well, that's great.

Okay, thanks.

Your next follow-up question comes from Andrew Fairbanks.

Hey, guys, just another question on this program to lower your overall gasoline purchasing costs, is what you are talking about something more along the line of longer-term supply contracts and putting in kind of security of supply for the refiners to trim a little bit out of the overall wholesale margin for the refiners or is it something that you are talking about pursuing along the lines of a dynamic hedging program where you are really trying to actively manage your absolute level of gasoline purchasing costs?

I think it is probably a combination of all of those things you just brought up.

All right, okay, thanks.

Your next follow-up question is from Patrick Forkin?

Jim, could you provide off-line the revision of the sales figures for the reclassifications for '02 for the Q2, Q3 and Q4 of last year?

The grocery margin, let me give you a couple numbers here.

The grocery margin -- this is grocery and merchandise, for fiscal '01 is now 32.4 and for fiscal 02, 30.3.

Okay.

Let me give you another one.

The total inside, this is the combination of grocery and prepared food, for fiscal '01 is 37.4, and for fiscal '02 is 35.4.

Okay.

Won't the actual sales numbers and some of the other expense items change from fiscal -- in the Q2, 3 and 4 in fiscal '02 because of these reclassifications you are doing?

We will report on those as we go.

And if you want the other individual quarters, the second and third quarters, I can provide that.

I will call you off-line for those.

And if anybody wants that, it is available.

I just -- I don't have it right here in front of me.

Okay, thank you.

I would like to remind everyone if you do have a question, press star and the number 1 at this time.

Your next follow-up question comes from Gary Gibblan.

I am really sorry to belabor this point but I would like to understand it.

The -- you offer pizza that -- I mean I know it's good quality because I have been in the stores, is it cheaper than, let's say, Pizza Hut or other lower-end restaurants?

Because the --

In some cases, in a very few towns, we will be cheaper than Pizza Hut, depending on the sales in that particular town.

But most generally, the normal price we are cheaper than a Pizza Hut.

Okay, so it sounds like that is the key to your being more resilient because we are seeing same-store sales weakness at KFC, Pizza Hut, I mean, different -- not just on the more high-concept restaurants but in the basic restaurants too.

I guess what we are saying is you are not only convenient but you are even cheaper than a Pizza Hut experience?

We don't offer any seating, we don't offer delivery.

It is carryout, but it is convenient, so I think we have a niche here in the pizza area.

Yeah, there is -- I understand.

Okay, that helps clarify things a lot.

I appreciate it.

At this time there are no further questions.

Operator, are there other questions?

No, sir at this time there are no further questions.

If there are no further questions, again, thank you all for joining us on the call and I look forward to reporting the second quarter on December 3, thank you.

Thank you for participating in today's call, you may all disconnect.