Caseys General Stores Inc (CASY) 2003 Q3 法說會逐字稿

Good morning.

My name is Jinka.

I will be your conference facilitator.

At this time I would like to welcome everyone to the Casey's.

Good morning.

My name is Jinka.

I will be your conference facilitator.

At this time I would like to welcome everyone to the Casey's General Stores third quarter earnings release conference call.

All lines have been placed 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 the pound key.

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 third quarter ending January 31st.

I'm Jim Shaffer.

Ron Lamb CEO and John Harmon secretary/treasurer are also here.

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 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 open for questions.

The quarter was in line with expectations with earnings of 14 cents a share.

Up from five cents a share in the second quarter a year ago.

In the third quarter a year ago.

Year-to-date earnings are 66 cents a share, up from 55 cents for the same period a year ago.

Our gasoline goal was to increase gross profit by balancing growth in gallons in margin.

Gasoline gross profit increased $6.9m year-to-date.

Gallons were down one percent and same-store gallons is down five percent.

The margin improved to 10.8 cents per gallon from 9.7 cents in the first three-quarters a year ago.

The inside goal was to increase same-store sales four to six percent and improve the margin 100 basis points to 36.5.

While we are falling short of the sales goal with same-store sales up only seven tenths of a percent, we are exceeding the margin at 37.3.

The result is a gross profit from inside sales of $235.9m, up 11.3%.

Total gross profit year-to-date is $314m, up 10.2%.

In the same period, operating experiences are up 8.8%.

The system initiatives, along with a focus on improving the returns on existing stores, are now being reflected in the bottom line.

In the grocery and general merchandise category, year-to-date sales are up 5.3%.

The margin is up 130 basis points, and gross profit up $14m.

The primary reason for the gain is improvement in the cigarette margin.

Also contributing were increased sales of general merchandise and improved [POP] Margin.

Prepared food sales year-to-date were up 6.6%, the margin up 460 basis points, and gross profit up $9.9m.

The largest contributor was improved pizza margins due to lower cheese and topping costs.

Fountain sales and margins also improved.

We now have pay at the pump and cigarette scanning in 870 stores.

Those stores account for nearly 80% of our gasoline gallons.

By the fourth quarter we should approach 90% of gallons.

We will continue to convert some more locations next year, but will likely end up with a few locations with either low volume or low credit card usage that are not cost-effective to convert.

We do expect to convert all locations to cigarette scanning.

We have the full point of sale system with scanning and touch screen in 54 locations.

We expect that number to grow to around 80 by the end of April.

We're enthusiastic about the system and the information we are gaining.

We are seeing benefits in purchasing, store operations and promotional opportunities.

While it may take a couple of years for the full -- another couple of years for the full roll out, we expect to see benefits throughout the rollout and beyond.

Through the third quarter, we have added 17 corporate stores.

We expect another 14 in the fourth quarter for a total of 31.

We have active negotiations with others that will probably not be completed until after this fiscal year.

As a result, we expect to be under budget for capital expenditures this year.

We now estimate capital expenditures to total around $70m for this fiscal year.

Long-term debt stands at $166m, and the ratio of long-term debt to total capital is 29.4.

That concludes my remarks we'll now take your questions.

At this time I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone keypad.

We'll pause for a moment to compile the q-and-a roster.

Your first question comes from Pat English (ph).

Good morning.

On the gallons, Jim, how much of the same-store sales decline do you think is just the absolute price of gas going up so high, just sort of any [Inaudible] of demand will?

No, I don't think it's that.

We had some tough comparisons from a year ago.

Our same-store gallons a year ago in the third quarter were 17.7.

That was a very tough comp.

We get much easier in the fourth quarter.

Last year in the fourth quarter our same-store was two percent.

So we have kind of an unusual quarter in the third quarter a year ago, which gave us a difficult comp.

I think you'll see positive trends in the fourth quarter and beyond.

Great.

It's nice to see you balancing the profit with the gallons sold.

That's all I had.

Thanks.

I think we are doing exactly what we intended to do this year and I think we're seeing that in the gasoline gross profit.

Terrific.

Your next question comes from Mark Lawrence (ph).

Good morning.

I had a couple of questions.

First is, the SG&A line which was very impressive this quarter, I was wondering if you could give us a little more color as to how you were able to control expenses so well starting this quarter and the outlook for that component of your cost structure.

You know a couple of key numbers I look at when I look at expenses.

One is the operating expenses are growing at a rate lower than gross profit, which is an important metric that we're watching.

The other numbers I look at with operating expenses are same-store operating expenses.

And this year our same-store operating expenses are running up four percent, which is a favorable comparison with the last three years.

The biggest component of operating expenses is wages.

And our same-store wages year-to-date are running just under one percent.

So I think by and large the operating expenses are under control.

We still are watching carefully the insurance expense, as I'm sure everybody is.

And we have some increases in credit card expenses.

But I think looking forward, I'm optimistic about the relationship of operating expenses and gross profit for the next few quarters.

Right.

But specifically, which part has contributed to the decline?

I'm just looking at the Q3 this year versus Q3 last year which was basically the same in absolute terms in SG&A whereas the last couple of quarters you were tracking at $5-6m more than the previous year.

Well, I think the biggest single component is probably wages.

I think we have much better comparisons there.

That does make up a big chunk of the number.

That's the biggest expense we have.

But you said wages were up one percent?

Well, for the year they're up seven tenths of a percent.

For the quarter they're actually down.

Okay.

So you're hiring the same number of people but the wages are going down?

I think we're also seeing some efficiency.

Okay.

So it's all at the store level, though?

Yeah, it is.

And you know, one thing that might be contributing, and it's early yet.

Earlier this year we put in a new store manager compensation program, which really was a method of getting our store managers focused on store efficiency, store expenses.

And we are now three-quarters into that program and we may be now seeing some real benefits in that program.

I think it's controlling the wage expense as well as I think overall operating expenses in the store.

I think there's more focus this year on operating expenses at store level than there has been in past years.

That's great.

I had a second question which was comps.

You had given some guidance that you were having a positive outlook regarding the gallons sold comps.

I also have noticed that the grocery and food comps have been weak the last quarter or two.

And I'm just guessing that they've been down based on the nine month figure being about flat, whereas in the first quarter you were up and second quarter you were up.

I was wondering if you could give us your outlook for reversing the decline in same-store sales.

The grocery same-store sales for the quarter was a minus 3.1.

And that, again, as I mentioned on the gallon side, we were up against an incredibly difficult comp.

Same-store groceries in the third quarter a year ago were up 18.9.

So we had an extremely difficult comp.

That gets easier in the fourth quarter.

We're up against a 9.7 instead of an 18.9.

So your comp in Q3 last year is 18% and then nine in the –

Yes.

What was driving the sales increases of 18% in those categories?

We had some very high sales in the third quarter a year ago, both in gallons and inside the store.

And we also suffered from some low margins in the same period.

So I think both of those comps were a little bit unusual and I think that's part of the reason for the negative same-store in the quarter.

And we had a very, very positive margin comparison in the third quarter.

So I think you'll see a more normal comparison as we go forward.

Great.

Just one last housekeeping question.

I don't want to tie up too much time.

You had mentioned the ads for the quarter were 17 and next quarter 14.

Do you have the last six quarters just handy by any chance?

The last six quarters for what?

For store additions because you were reporting the store count in the annual --.

Oh.

Well, what if I just give you the store count?

That would be the ending store count?

End of the quarter store count.

Great.

I'll begin with the first quarter fiscal 2002 and then take.

July '01, right.

First quarter 2002 was 1208, then 1228, 1248, and 1258.

The end of the first quarter this year 1261, 1268 and now 1275.

1275 then 14 in Q4?

Yes.

Terrific.

Thank you very much.

Your next question comes from Andrew Fairbanks.

Thank you.

Good morning, Jim.

I wondered if you had a thought on what the weather impact would have been for this fiscal quarter.

We've got more snow here in New York.

So given that this has been a pretty cold winter versus last year, would you say there's any impact there in the numbers as well to be aware of?

I think while it's been cold, we haven't had a lot of snow.

We've had some snow recently, but not like we did a couple of years ago.

So I don't know that weather played a major part this year.

It was colder than the prior year.

But I don't know if it made much difference.

It might have had a small effect.

Great.

Thanks.

Your next question comes from Ken Castdy (ph).

Good morning inventories up 20% since the beginning of the year is a lot of that a function of gasoline price?

That would be the biggest variable.

We often end the year with a fairly low inventory.

And this is not an unusual inventory for third quarter.

When I look at weeks of inventory, for example, we're sitting at 1.8, and we typically run somewhere between 1.5 and 1.8 weeks.

But the biggest variable in the inventory is the cost of gasoline, which probably has the biggest effect of that.

Are you at all protected going out on price or conversely the war stories about the gasoline how the prices go down 30 cents a gallon.

Any impact there?

No, we are not.

How about the franchisee or licensee stores?

We currently have 69 franchise stores and the 14 that we're talking about in the fourth quarter are franchises that we expect to close in the fourth quarter.

Good.

So that number basically is going down over time?

Yes.

Thank you.

Your next question comes from Gary Gibblan (ph).

Good morning.

Just wondering, with gas prices having gone up in the new quarter, the April end quarter, typically that will reduce gas consumption for variable or discretionary expenditures then you lose some traffic in the stores.

In other words, is there a risk to comps and to making another 14 cents for the April quarter because of the high ratcheting up of gas comps, which also can cause dislocations in gas margins as well?

You're right.

Upward prices puts pressure on our margin.

And then we generally we get it back as it comes back the other way.

As far as the elasticity of gas, I think gasoline is elastic at the extremes, but at least in the Midwest we haven't seen the extreme prices that you see on the coast.

We don't see two dollar gasoline in the Midwest at this time.

And I think it has to be more extreme than we've seen so far to have a significant downward effect on demand.

Okay.

And would your gas margins likely -- I mean be coming in appreciably less than the ten and a half cent range that you've been achieving?

Well, it's a little early to predict that at this point.

I would just say that what happens in the next few weeks could have an impact.

The wild card in all this is a war.

And that remains to be seen how that's going to play out.

How have margins looked so far?

This is pre-war, but with gas having skyrocketed, I guess you said it hasn't skyrocketed where you are.

It hasn't skyrocketed but we've seen them ratchet up and that typically has some negative effect on margins.

And our third quarter margin was 11.2.

We are not showing that kind of a number.

Okay.

But it's pretty early yet for me to comment on the fourth quarter margin.

Just to clarify on the merchandise same-store sales.

You were saying some of it is, I guess how much of the difference in the negative same-store sales that we see in this quarter is due to the consumer and the economy as opposed to weather or –

You're fading out on me Gary.

I'm sorry.

How much of the weakness in the same-store sales on the inside sales is due to the economy and presumably ongoing impact versus things like weather or more fleeting considerations?

In other words, are we likely to see negative comps for the April quarter?

I'm not looking for negative comps in the fourth quarter.

I don't attribute it so much to the economy as I do just an extremely tough comparison with the third quarter a year ago.

And I think now that we have that behind us, going forward I'm more optimistic.

Okay.

That's good.

And are there any convenience store -- there's a number of convenience store companies that are kind of the deconsolidating and some of them are in the southeast where you're not interested in going.

But are there any store, groups of stores that might be attractive purchases for Casey's?

We look at opportunities all the time.

And occasionally we'll pick off one or two.

In the last year, I think maybe we've bought, what, three non-franchise stores.

So from time to time we might have an opportunity.

But not on the scale that you're talking about.

Okay.

And any competitive fall outs that help you in terms of players in your market area that are closing stores or having trouble –

It's constantly changing.

I don't know that on a macro basis we've seen a significant change.

Okay.

Good.

Thank you very much.

Thank you.

Your next question comes from Dennis Tellsrow (ph).

Good morning Jim.

You answered the question on gas margin 11.2% was pretty strong given the environment.

Any unusual events going on there?

No.

It was just pretty solid quarter for margins.

We gave up some gallons in the process.

As you saw we had some negative gallons.

But the gross profit grew and that was our goal.

I think we're doing what we trying to accomplish right now.

The merchandise margin inside the stores for the third quarter, 30.06.

Is that the right number?

That's right.

Seasonally it goes down here in this third quarter, just the mix of business changes?

It's typically lower in the third quarter.

That's product mix.

We don't have the bottled water and the beverage component to the same extent in the winter.

So it's as much as anything its mix of business.

Refresh my memory what capital spending was.

You mentioned 70.

I think it was budgeted at 80 before; is that right?

Yeah.

And I think with our prospects now, we will probably come at 31 additional stores instead of 40.

It's looking more like a $70m CAPEX for the year.

And we have a lot of transactions in conversation right now.

So I think we have a number of things that might close after the fiscal year.

Any thoughts on next year's capital spending?

Oh, I suspect our budget next year will be at least similar to our budget this year.

Probably in that range, but we haven't set that goal yet.

But I wouldn't look for a dramatic change.

You talked about cigarette scanning, improving margins.

Is there any metric we can look at, cigarette margins are up X year over year?

We don't publish cigarette margins, obviously.

But just to give you perspective: The vast majority of our gain in the grocery and general merchandise margin I would attribute to cigarettes.

Lastly, full point of sales in 54 stores, do we have all the products on the full POS or --

No, that's full POS capability.

We're actually on the system either touch screen or scanning.

We have cigarettes, beverages, everything in the cooler, ice-cream.

All the prepared food is on a touch screen basis.

On the perimeter of the store.

After we get done with that the next things we're working on now are candy and novelties and then we'll begin to phase in some of the interior part of the store, but that's -- that's lower impact than the exterior.

We're trying to go after the low hanging fruit first.

Do we have any early input on what the full point of sale has done yet or is it too soon to sort of analyze that?

Well, on an anecdotal basis we're extremely positive.

There's a lot of enthusiasm about the kind of information we're able to get and the potential that it has.

I'm not prepared yet to talk about what it's going to do for margins.

But I am optimistic about the future effect on both margins and sales as we gather this information and use it.

And I think we will get incremental benefits along the way.

So I think it's extremely positive.

I'm just not ready yet to put any metric on that.

Thanks, Jim.

Thank you, Dennis.

Your next question comes from Patrick Forkin.

Good morning, Jim.

Good morning, Pat.

Obviously the gas margins look a lot better.

Can you comment as to how much of that improvement you think is coming from the way you're pricing the product at the pump and any changes you've made in the way that you're buying the gas?

Well, a lot of the pricing at the pump really is being extremely diligent about making sure that we change promptly.

I think reacting to the market, both up and down, is very important to gasoline.

Because gasoline pricing is so sensitive.

And I think one of the things that may be helping us is the fact that now store managers are compensated on the total operation of the store.

So the gas gross profit has an impact on their compensation.

I think that makes everybody pay attention a little closer and I think that probably helps.

Just the focus we've had on gasoline.

You do think you're doing a better job on that versus a year ago?

Yeah.

I think we're executing better.

Our basic strategy hasn't changed.

Our strategy is to be very competitive in gasoline.

We don't want to lead the market we just want to be very competitive.

That hasn't changed.

I think what's changed is just the fine tuning of the execution of that strategy, in terms of buying gasoline, I think it's helped a little bit but I'm not sure it's terribly measurable yet.

It's probably made a difference of a few hundred thousand dollars.

But it helps and we're learning and hopefully that will improve as we go forward.

Okay.

On the market share and competitive front, can you give me an update on any impact.

I don't know what the overlap was or what kind of overlap you guys have with the Clark operations.

And if you have seen any impact from their bankruptcy and your assessment, the whole hyper Mart issue and this neighborhood store that WalMart is talking about throwing up, have you seen any changes?

This is Ron Lamb.

As far as WalMart's we can price with WalMart's we see our volumes go up when inside sales go up.

So we like competition in WalMart's.

As far as Clark, we have seen a change with Clark that Clark was driving the gas business here six, eight months ago.

Since they had their problem, we're finding that they're raising the prices like everybody else.

It could be due to the war and everything that's going on right now.

But if we find competition is moving their prices faster.

And like Jim said, the biggest thing we have done.

We haven't changed the way we price gasoline, but we react a lot faster.

Okay.

And then my last question, it sounds like you're getting some pretty good results from the roll out of scanning.

If you're seeing the improved results, what is the main gating factor on a complete roll out.

And if you are really liking what you see, which makes a lot of sense to me, would you consider accelerating that process.

We're rolling out the cigarette scanning pretty fast.

We'll have most of our cigarettes in stores with scanning capabilities by the fiscal year end and sometime in maybe the second quarter.

So next year we should be approaching 100 percent on the cigarette scanning.

We probably will go 100 percent on gas, pay at the pump.

But we probably will go 100 percent on cigarette scanning.

With respect to the point of sale, yeah, I think the roll out of point of sale will pick up over the next few quarters.

I'm not prepared yet to predict when we'll have it completed.

But as we get more and more stores in the point of sale system, we gain more and more information and improve our store operation, our combination selling, our product, the pricing, the whole thing that we're getting from that basis.

I think that will be very helpful going forward, and I think you will see a little faster roll out next year than you've seen so far.

That point of sale scanning are you using scanning to unload trucks at the store level?

Versus a manual check-in.

No, we're not doing it right now.

It's check in with the truck driver and the employee.

But we haven't got it on scanning yet.

Jim, what are you looking at CAPEX per store, you know, for cigarettes and POS?

What's it cost you per store to do that?

To convert a store to cigarette scanning is $500.

That cigarette scanner is a relatively inexpensive -- that's the quick one.

A complete POS system in a store is more like 15,000.

How about pay at the pump on average?

25,000.

Okay.

Very good.

Thank you.

Your next question comes from Fred Bees (ph).

Gross margins have been moving at the pace about 20 basis points per quarter.

Are you prepared to consider them forecasting, you can get back above the 33% on a manual rate?

We believe we can continue to climb.

How far we can get, it would be pretty speculative for me to predict with that number at this point.

And we are now trying to analyze some of the benefits we're getting and trying to plan for the future to determine where we can go.

So I'm not ready to talk about that and I'm not ready to talk about goals yet.

But I think we can continue to improve.

Beyond that, I don't know if I can quantify that for you, Fred

Are your cash flows is working out, your CAPEX is not chewing it up.

But we would encourage your board to increase the growth rate of your dividend, your payout ratio is very low and maybe accelerating that growth rate would be a good signal that you've turned the corner operationally.

I'll pass those comments on to the board.

Thank you.

Your next question comes from Herb Bookbinder (ph).

Hi Jim.

Could you tell me a little about the fourth quarter historically to try to look at the fourth quarter versus the third.

It's been kind of mixed but at least looking at beating the fourth quarter last year I'm concerned, is there any chance of inventory adjustments given the price moving up?

Is that a factor that might affect the fourth quarter or not?

On the inside, I'm not at all concerned.

And as I said I'm more optimistic on same-store sales in the fourth quarter.

I think we've got some much easier comps.

So I'm not concerned on the revenue side.

I'm not concerned about the inside margin.

I think we'll continue to get gains on the inside margin.

The absolute wild card is gasoline.

If there's a potential for a negative adjustment, it would be in gasoline.

If the price just goes off the -- really climbs dramatically.

That's the risk.

Are you in a position to at least comment that you'd expect to beat the fourth quarter of last year, which was nine cents?

If you tell me what's going to happen to gas prices I'm willing to comment.

Well, I don't think I'm going to try to predict that for you.

Absent some -- gas prices I'm pretty optimistic.

If gas prices stay roughly where they are right now.

We're seeing gas prices of $1.60, $1.70 something like that, you don't if they stay there you won't be worried about the fourth quarter.

I'm not concerned about the fourth quarter in that scenario.

Thanks a lot.

You have a follow-up question from Gary Gibblan.

Any thought to going to outside distribution?

I know of course Fleming isn't really an attractive possibility for that anymore.

But a lot of the wholesalers have tried to generate that business.

So any reason.

Gary, we've had our own distribution center for 15 years or more.

And we consider it a very, very strong advantage.

We think our efficiency and our purchasing is really benefited by having our own distribution center.

And we consider that one of our competitive advantages.

So, no, there's no consideration at all.

As a matter of fact, this stuff I read about Fleming and others, I think it reinforces our strategy of having your own.

I guess Clark didn't have much fun with it.

They kind of bounced around between a couple of them.

So, no, I feel very strong about the strategy of having our own distribution center.

Secondly, are you seeing much growth, development of supermarkets with adding gasoline in your market areas?

A little bit.

There are a handful of high Vs in the Midwest with gasoline.

There's a few in Indiana.

So you see a little bit of that.

But it tends to be in the larger towns.

And, remember, we are still focused in the smaller towns.

We're probably a little bit insulated from that with our demographics.

Are your towns getting more WalMart's or mass merchants, either with or without gas or is that kind of stable?

Not smaller towns that we're in.

I think the WalMart's, they go into towns of population of 10,000 or more.

But we've even had some of those towns that haven't converted to gasoline.

But when they open, sometimes they can draw off traffic from the small town and so forth.

But are you seeing any of that or is that stable?

In other words, if they open in a county seat, then it can suck out a lot of retail traffic from the small town.

I think that's always been around, whether it was a WalMart or a high V in a larger town.

I come from a small town that hasn't got a WalMart that has a WalMart 35 miles away.

And we haven't seen any change in those type of towns.

Okay.

That's probably a testimony to the quality of your operation.

That's great.

Thanks very much.

Thank you.

Your next question comes from Kim Burkeheart (ph).

Good morning guys.

Good quarter.

Wanted to follow up on the earlier WalMart comment I thought I heard we can price with WalMart.

Jim is that with reference to gas, merchandise or both or did I just not hear it right?

I think we're talking about gasoline with that.

You know, as far as the inside operation, WalMart is not a competitor for a convenience store.

You talk about an inconvenient place to go versus a convenient place to go.

I think by definition you're at totally opposite ends of the spectrum.

As a matter of fact, if WalMart generates traffic it can generate positive traffic for us, because we are convenient.

We see our customer go up when a WalMart opens close to us.

We actually see opportunities in other towns where a competitor will not compete with a WalMart and that gives us opportunities to go in and buy that store and it has happened.

It's happened last year.

Great.

We find the WalMart's does generate traffic.

We see our gallons go up.

Our margin might go down.

Our inside sales go up but overall the bottom line is positive when a WalMart opens up.

Thanks.

At this time there are no further questions.

In that case, thank you all very much for joining us on the call and we hope to give you a similar positive call at the end of the fourth quarter.

And we'll talk to you then.

Thank you all very much.

And thank you for participating in today's conference.

You may now disconnect.