SpartanNash Co (SPTN) 2014 Q2 法說會逐字稿

Good day and welcome to the SpartanNash Company second-quarter 2014 earnings conference call and webcast.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Ms. Katie Turner. Please go ahead.

Thank you. Good morning and welcome to the SpartanNash Company's second-quarter FY14 earnings conference call.

By now everyone should have access to the earnings release for the second quarter ended July 12, 2014. For a copy of the release, please visit the SpartanNash website at www.SpartanNash.com under For Investors. This call is being recorded, and a replay will be available on the Company's website for approximately 10 days.

Before we begin, we'd like to remind everyone that comments made by Management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

Internal and external factors that may cause such differences include, among others, competitive pressures among food retail and distribution companies, the uncertainties inherent in implementing strategic plans, and general economic and market conditions. Additional information about risk actors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's second-quarter earnings release, fiscal annual report on form 10-K and the Company's other filings with the SEC.

Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements.

This presentation includes certain non-GAAP metrics and comparable period measures to provide investors with useful information about the Company's financial performance. A reconciliation of these non-GAAP financial measures to their mostly directly comparable GAAP financial measures and other information required by Regulation G is included in the Company's earnings release which was issued after market close yesterday.

And it's now my pleasure to introduce Mr. Dennis Eidson, President and CEO of SpartanNash Company, for opening remarks.

Thanks, Katie.

Good morning and thank you for joining our second-quarter FY14 earnings conference call. With me this morning are Dave Staples, our EVP and CFO, as well as other members of our executive team.

Today I will begin by providing you a brief overview of our business and highlights of our financial performance for Q2, and Dave will share some additional details on second-quarter financial results and our outlook for the remainder of FY14. Finally I will provide some closing remarks and then open up the call, and we will take some questions.

We've been hard at work at completing our merger integration plan with Nash Finch and delivered a better than expected performance in the second quarter, despite a challenging landscape. As a result of the significant efforts by our associates, we're beginning to realize merger synergies slightly earlier than expected in many areas, and remain confident that we will exceed our current year synergy target of $20 million and are likely to exceed our total $52 million target by 2016 as previously communicated. I continue to be pleased with how the two companies are coming together, and I'm proud of what our team has been able to accomplish while continuing to operate the day-to-day business.

Now reviewing our distribution segment results, we posted another quarter of significant growth over the prior-year period as a result of the sales contributions from the merger. These gains were partially offset by the change in timing of Easter holiday, which resulted in the post-Easter week of low-volume sales moving out of the first quarter and into Q2 this year and a reduction to the Supplemental Nutrition Assistance Program or SNAP.

As we look to the second half of the year in food distribution, we are continuing our focus on enhancing the efficiencies of our extensive distribution network. These efforts include leveraging our geographic scope in combined project and logistic competencies to reduce network costs and increase business with existing customers while taking advantage of our larger platform to pursue additional wholesale grocery accounts at a regional as well as national level.

We also continue to enhance our programs and services offered to the independent retailers and are developing a plan to roll out more of our unique programs across the entire distribution network. We believe that this is a meaningful opportunity to grow our business as we help our independent customers stay competitive, productive and profitable.

Net sales in our retail segment were also significant due to the merger in remodeled stores. Comp store sales in our Michigan retail operations, excluding fuel, ended up even with the prior year primarily as a result of two factors that negatively impacted retail sales in the second quarter. These factors were the change in timing of the Easter holiday this year and the impact of the cutback in the SNAP benefits. We estimate that the shift of the post-Easter week of sales in the second quarter had an approximately 80 basis points negative impact on our comp store sales.

We continue to move forward with our loyalty analytics and are currently engaged in testing our new processing system in select categories and are encouraged by our progress to date. We're also beginning to introduce to our Western stores some of the merchandising and promotional programs that have served us well in our Michigan retail operations. We are excited to connect with our consumers and to provide them with the value and the shopping experience that they desire.

On the product side, we continue to drive both retail and food distribution sales through the expansion of our private brand program. During the second quarter, we added approximately 100 new products, and we continue to expect to add approximately 300 unique new items for the full year.

Sales in our military segment remain challenged due to the ongoing softness in commissary sales. Despite these topline pressures, we're focused on the significant efficiency opportunities that exist to improve our operations.

We also continue to believe that our worldwide network gives us a distinct competitive advantage by providing unique efficiencies to the commissary system. As we previously discussed, in March, we completed a major expansion of our military DC in Landover, Maryland. We are pleased that the facility is progressing nicely and is beginning to deliver some of the operational efficiencies and increased produce that we anticipated.

Moving on to our capital plan, during the second quarter, we completed three major remodels and began construction on two new stores. Additional, two supermarkets were sold to distribution customers and one underperforming supermarket was closed as part of our plan to ensure that all locations meet our brand and profitability requirements. This brings our store count to 166 supermarkets and 32 centers at the end of the quarter.

During the third quarter, we plan to complete two major remodels and re-banners and open one new store in West Lafayette, Indiana. Additionally, we are continuing construction on one new store that is scheduled to open in North Dakota in early 2015.

So for all those all of FY14, our plans are to complete 10 major remodels, open one new store and begin construction on another and expand the previously noted military DC. As a result of the re-banners in the Michigan market, we will have completed our conversion all of the Glen's Market stores to Family Fare.

With that overview, I will turn the call over to Dave for details on the financial results and an outlook for the remainder of FY14. Dave?

Thank you, Dennis and good morning, everyone.

Consolidated net sales for the second quarter increased 178% to $1.8 billion, compared to $651.1 million in the year-ago quarter. The increase is due to $1.2 billion in sales from Nash Finch partially offset by the later timing of the Easter holiday this year and the impact of cutbacks to SNAP benefits.

Consolidated gross profit margins for the second quarter was 14.7%, compared to 20.5% in the prior year, and primarily reflects the change in segment mix due to the merger and the impact of continued low inflation in the nonperishable department. Second-quarter adjusted operating expenses were $229.1 million or 12.7% of net sales, compared to $114.9 million or 17.6% of net sales last year.

On an absolute basis, the increase was due to the inclusion of the Nash Finch operations, while the decrease in rate was due primarily to the shift in the segment sales mix as a result of the merger. These results exclude $2.6 million in expenses related to merger integration and $1.1 million in restructuring charges in the current year's second quarter. And $2.4 million in expenses related to the merger and $1 million in asset impairment charges in the prior-year second quarter.

Adjusted EBITDA for the second quarter increased 97.8% to $58.3 million or 3.2% of net sales, compared to $29.5 million or 4.5% of net sales last year. Adjusted earnings from continuing operations for the second quarter were $19.1 million or $0.50 per diluted share on approximately 37.8 million shares outstanding, compared to $10.2 million or $0.46 per diluted share on approximately 21.9 million shares outstanding last year.

These results exclude expenses related to the merger of $0.04 per diluted share and restructuring charges for store closures of $0.02 per diluted share, partly offset by a tax benefit of $0.02 per diluted share related to the favorable settlement of an unrecognized tax liability established in the prior year.

For the prior-year second quarter, adjusted earnings from continuing operations exclude expenses related to the merger of $0.06 per diluted share and an asset impairment charge of $0.03 per diluted share. These better than anticipated results were driven by our continued favorable synergy realizations and $2.3 million in favorable insurance adjustments due to the latest actuarial evaluation, partially offset by incremental LIFO expense of $900,000, and $500,000 in pension settlement charges.

Turning to our operating segment, second-quarter net sales for the food distribution segment were $767.9 million, compared to $271.9 million in the year-ago quarter. The increase in sales was due to $501.4 million in sales from Nash Finch, partially offset by the factors Dennis mentioned earlier.

Second-quarter operating earnings for the food distribution segment increased 53% to $14 million when adjusted to exclude $2.9 million in expenses related to the merger integration and restructuring -- current year second quarter, versus $9.1 million last year, excluding $2.4 million of merger expenses. The gains from the sales volume of Nash Finch food distribution operations were partially offset by the step up in depreciation expense resulting from the revaluation of assets acquired in the merger of $2 million, $500,000 in higher LIFO expense and lower inflation related gains.

In our retail segment, second-quarter net sales were $539.8 million, compared to $379.2 million last year. The increase in sales was due to $184.9 million in sales from Nash Finch, partially offset by $17.1 million in fewer sales due to store closures.

Comparable store sales excluding fuel were flat for our Michigan retail operations. As Dennis mentioned, we estimate that the negative impact of the shift of the Easter holiday accounted for approximately 80 basis points in comparable sales.

Retail segment operating earnings for the quarter increased 65.8% to $15.6 million when adjusted to exclude $800,000 in restructuring charges, versus $9.4 million last year when excluding asset impairment charges of $1 million. The improvement in adjusted operating earnings was primarily due to the merger.

In our military segment, second-quarter net sales were $502.4 million, and operating earnings were $6.7 million, including $400,000 in LIFO expenses. From a cash flow perspective, our current year-to-date operating cash flow was $64 million, compared to $47.4 million for the comparable period last year. The increase was the result of contributions from the merger.

Total net long-term debt was $577.2 million as of July 12, 2014, versus $142.2 million at the end of the second quarter last year due to the incurrence of $436.1 million in debt as a result of the merger and the acquisition of two supermarkets offset by the positive cash flow from operations. Net long-term debt decreased $19.2 million from $596.4 million at December 28, 2013.

I will now provide further detail on our outlook for the remainder of FY14. As we look to the second half of the year, we continue to believe that we are in a position to deliver our sales and earnings outlook for FY14.

Although we expect that the consumer will remain challenged, particularly those that see receive SNAP benefits, and sales will be affected by store closures, we will continue to benefit meaningfully from the merger. We were encouraged by the improving sales trend in the second quarter, two additional competitive openings will impact the run rate in the second half of the year.

On the expense side, we expect to continue to see some pressures associated with increase in the minimum wage that took effect in Minnesota in August and will take effect in Michigan in September. However, we expect those to be offset by continued favorable merger synergies.

For the third quarter, we expect that adjusted net earnings from continuing operations per diluted share will be at or slightly below last year's comparable adjusted third-quarter results of $0.43 per diluted share, excluding merger integration costs and any other one-time expenses. On a full-year basis, we continue to expect FY14 consolidated net sales to increase to between $7.9 billion to $8.04 billion.

Adjusted EBITDA to be in the range of $230 million to $239 million, and we are narrowing the range of adjusted earnings per share from continuing operations to approximately $1.70 to $1.75, excluding integration costs of approximately $7.4 million after-tax and other one-time expenses, which is a $0.05 per share increased to the low-end of our previously disclosed range.

We expect the capital expenditures for FY14 will now be in the range of $77 million to $82 million, with depreciation and amortization in the range of $87 million to $91 million and total interest expense in the range of $24 million to $25 million.

This concludes our financial discussion, and I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave.

In closing, we've made significant progress with our merger integration efforts, and we remain encouraged by what we're seeing as a combined entity and the realization of merger synergies. We certainly have a lot of work to do yet, but I'm very pleased with the team's spirit of collaboration and enthusiasm.

We're beginning to roll out merchandising and promotional sales at all of our retail banners and to leverage our combined distribution competencies and larger platform to increase business with existing customers and attract new business. We're also focused on enhancing efficiencies across all segments of the Company and are beginning to recognize additional prospects for synergies in sourcing, distribution and back office functions.

We remain confident in the significant opportunities that lie ahead and the benefits for our customers and shareholders as we continue to provide excellent service and value to all of our retail food distribution and military customers.

So with that, we will now open up the call for your questions.

(Operator Instructions)

Chuck Cerankosky, Northcoast Research.

Dennis, if we look at the P&L for the quarter, the operating earnings with a few adjustments were about 80, 85 basis points lower than the year-ago operating margin. I'm wondering -- I know there is change in the mix of business, but I'm wondering, with enough time and the synergies, you get back to that level of margin? Or is there too much economic headwinds to expect that much?

Chuck, I don't think it's about economic headwind. It really is a mix discussion that you're having there. The segments are totally different in terms of how they contribute to the overall operating profit.

So I'm not sure that it's realistic that the expectation would be that we go back to the historic legacy operating market rates. Dave, I don't know what other color you'd put on that.

No. I think that's fair. You just look at the different businesses and they type operating margins they run -- different mix. And we certainly believe there will be improvement over time as we continue to pull the companies together, but I don't think the previous benchmark is the right one to look forward to.

If you did by segment, where say, the retail segment's down about 50 bps, to me that might be one of the cleaner ones to compare because of intersegment elimination is not so much being a factor as it is in distribution. Do you see yourself getting from the roughly 2.9% operating margin in retail more towards 3.5%?

I think over time, we will continue to improve that mix as -- but we have work we're doing obviously in the West division as we speak. And so I don't think we're prepared to put any targets out at this point, but I think we expect long-term we will be able to improve.

It's also fair -- you're trying to do your modeling, chuck. As you know, legacy start being -- had a philosophy, a method of allocating distribution profit to retail that is different than the Nash Finch model. So I think until we get consistently on one platform, those are going to be hard to compare.

And then we expect to accomplish that over this current third quarter. By the end of the quarter, we're reevaluating how we handle distribution profit between the distribution operations, retail operation, and as we've noted in the Q, probably have some revisions to that allocation as we get to the end of the quarter.

It's a lot about some of these moving parts when you merge the two companies together, it does make it difficult for you to model for sure. But we will do the best we can and be as transparent as we can.

All right. Thanks.

Karen Short, Deutsche Bank.

It's Shane Higgins on for Karen. My first question was just about the favorable synergy realization during the quarter. Did you guys -- I didn't hear you guys actually quantify what it was and how far along you are towards I believe you said was a $20 million target for this year.

Shane, we didn't quantify exactly where we were, and we won't. But I think the key is that we think we're nicely ahead of that target. And I think we also mentioned that we thought there was a good likelihood that we would exceed the $52 million target.

So I think at this point we feel very, very pleased with all the efforts that our associates are putting together. I mean as Ben has alluded to, they still have full-time jobs.

And so this integration on top of that full-time job, and it's just a testament to the culture of how well they're coming together, how well the team is responding to what we've asked. And the fact that we're exceeding our expectations at this point and feels like we're going to as we move forward is I think a very positive position to be in right now.

Okay. Great. Thanks for that color. And are you guys able to leverage the military business to build purchasing power? Or is the nature of that business just completely different than the retail and distribution segments?

It is different, but it is related. I think we have a great track record with our vendor partners and have had for some time. And I think they respect the way we've gone to market. And so I believe that's having some beneficial impacts to the way we're viewed as a supplier in the military segment.

And additionally, we feel we just have the best model to supply the military commissary system. Legacy Nash Finch about developing a network that was strategically geographically placed to be the most cost-effective provider of goods and services to DCA. And that's why we have such a large of that business today.

Okay. Great. Thanks. And what were comps in the Nash Finch stores during the second quarter?

We have not been disclosing comps for the legacy Nash retail. They were slightly better than the prior quarter and slightly better than a year ago. Still baked into our reported -- February, January --

Okay. Great. If I can squeeze one more in, how were the comp lift in the remodels? Are you guys still seeing a nice lift there and good returns?

We have consistently been pleased with our rebound activity in the comps. We get from them, and we have a pretty robust process before we spend capital on a major remodel, in order to make a hurdle return.

More recently we've been spending some capital up in North Dakota. We're remodeling and revising a couple stores that will be I guess grand opened at the end of this month, I think August 24th or 25th, one in Dickinson and one in Fargo.

We will be doing some rebranding over these stores up in that market. And at the same time, as I mentioned last quarter, we're excited to be in markets where there's some robust economic activity, population growth. It's a bit of a contrast on what it looked like for the past five to six years.

All right, guys. Thanks so much.

Scott Mushkin, Wolfe Research.

I guess two broad questions. One is just on the consumer, I noticed in the press release you guys said hey, things are going a little bit better even though you don't think the consumer is still doing all that well.

We've had a number of reports out of companies -- Macy's missed yesterday, Noodles wasn't so hot. Employment rate's doing a lot better, so I'm wondering to get your take broadly on the consumer? Do you think things could turn up here and maybe give you a tailwind or is it just way harder than maybe some of these headline labor numbers you're saying suggest?

I don't think it's going to get a lot better nor do I think it's going to get a lot worse. I still think we're bumping along here a little bit, Scott.

I noted IRI numbers came out yesterday for the latest four weeks. And they're showing with tonnage and grocery segment across the country was negative 2.4% for four weeks and negative 2.5% in the quarter.

That's a pretty stiff headwind, right? And I think people are feeling -- retailers are feeling the consumer stretching a bit in their budget.

So we don't feel great, doesn't feel awful either. I don't think there's going to be any tailwinds that propels us forward and the whole mix of where the inflation is coming from, I don't think is a friend either.

As we retail inflation, we show about 1.8 inflation, which was normal. Except the way you got there was anything but normal.

You're sitting there looking at 67%, meat and proteins and dairy and then center store dry grocery was actually deflationary. The mix of events that are occurring, I think we're seeing so much inflation in proteins as an example that it's affected the takeaway at the shelf.

The dollars are coming back because the inflation is so significant. But the tonnage is negative. So long-winded answer to your question.

It was actually really good. It sets the stage for my next question. Obviously you're just getting into consolidating these organizations, but two of them are bumping along here and this is the environment we're in for the next couple years.

How do we think about your growth algorithm once -- we obviously have the synergies at least $52 million, but as we think, you talked about some of the plans to own the stores at the distribution business. How do we think about the growth on the top line and on the EBIT line as we move forward? I'm not looking for next-gen, I'm looking for guidance here but conceptually, where's your head?

I think that's actually a fair question. We're operating in three distinct segments now, and so I think they have a little bit of similarity and some are not so similar. We will tell you on the military side of the business, you alluded to, soft, DCA is soft.

We're actually performing better in our military segment than DCA is in the commissary sales, so I think that's a bit of a tribute to the way we service the commissaries. And as I indicated, I truly believe we have the best model.

Having said that, I think there's opportunities for us to add business onto that military segment. We just completed the Landover expansion, I think there's opportunities to better serve commissaries up in the Northeast that we couldn't cost-effectively hit before.

We're also bidding on some additional government contracts for et cetera, that business that we're not serving today. So I think there's opportunities for that business to grow even in spite of the softness on DCA's part in terms of commissary sales.

I think the retail business, we indicated we've got a little bit of headwind there. West Michigan, from early March to now, we've digested four Walmart super centers into the run rate, two were converted discount stores and two ground up.

I think we're up for the fight, and so far we're somewhat encouraged by what's occurred, but it's not like they're going to have zero impact. Four supercenters in one marketplace, so that's a bit of a headwind. I think the Michigan market continues to be a little clunky.

We're still fourth in unemployment, and we are 40th in percent of adults in the workforce and we're 35th in the median income. So this is no great backdrop for accelerated growth, but I like the things we're doing.

I like the things we're doing with regards to the loyalty program. We alluded to that. We're getting far better data out of the system and very quick way, we're getting very actionable insights, and I think that's going to bear fruit.

I think on the bench retail side, it's probably the portion of the business in the merger that over time maybe got less attention relative to that other business segment in legacy Nash. And we're excited to be able to put some capital in as I alluded to in North Dakota. And we're going to do some of that as well in Nebraska.

We think there's plenty of upside, so we're excited to be able to experience some growth as we deploy capital, both -- as well as human capital into that business segment. Through distribution, I would tell you that that is the roots of Spartan and the roots of Nash Finch.

I think we're an excellent food wholesaler. I think our track record has spoken for itself. I believe that with the merger of these two companies that we've built a foundation to continue to grow that business.

I do think that's going to come a little bit from -- we're going to have to win that business from a competitive set. We also think opportunistically that there's opportunities with regard to acquisitions down the road that are going to be another vehicle for growing revenue streams. So I think there's opportunities now in all three segments, Scott.

That's perfect. I really appreciate the detailed answer. Thank you.

(Operator Instructions)

Ben Brownlow, Raymond James.

Just to follow-up on the earlier question on synergies, I know you don't want to comment on the exact dollar amount that you realized year-to-date. But can you give some color around where you're seeing that weighted towards in terms of SG&A purchasing et cetera?

Sure, Ben. We're really seeing it in a number of fronts.

Certainly SG&A has been incredibly strong, and that's not just necessarily from a headcount perspective. It's just when you bring two organizations of this size together, there just are numerous opportunities where you could become more efficient through all the various service providers you use, all the different types of products you buy.

So certainly SG&A is a major driver. I think we continue to see some operational efficiencies in our division.

And I think the procurement angle has been good for us when it comes to some of the ability to buy better buy smarter and use the size of the combined organizations to work better with our partners and develop more win-win solutions for both sides. So it's been pretty good across the board, but I think it would certainly be primarily G&A driven.

Great. That's helpful. And on the retail, you've been commenting about the how the consumers have been stretching their budgets and trading down. Are you seeing a difference between the concepts?

I'm sure you are, but are you seeing more evident trade down in the value concepts like family fare? Just give some color around the transaction movement and tonnage that you're seeing at the more upscale concepts. Thanks.

We operate the EFW fresh market brand which is upscale banner and it is the best performing retail segment brand that we have. Again, premium, super premium consumer seems to have shrugged off a little bit of the malaise. And they're spending and seemingly spending freely. So we're seeing that.

And organics continue to be an area where we're seeing growth. If you look at some of the larger categories of goods, like organic salads is a big category today. We're up 14% in that category.

Gluten-free, we're up nearly 30%. And we have a full circle brand that is natural organic and brands, centers for products -- and that's up 20%. So I think you can see that consumers are shifting a little bit in what they buy and depending on where they are, socioeconomic strata, we're feeling that.

Okay. Just one last one for me. On the EBITDA guidance that you gave, what stock compensation and LIFO are you assuming in there?

Stock compensation in LIFO for the EBITDA guidance.

Yes.

You're asking about what's the full-year LIFO and stock comp?

Yes.

I believe the full-year LIFO will be around $8 million increase over the prior year. And the stock comp is somewhere around $6 million to $7 million.

Great. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Eidson, President and Chief Executive Officer for any closing remarks.

Thanks. I'd like to conclude our prepared remarks by thanking all of our associates for their hard work and valued consumers, independent retailers, suppliers and shareholders for their continued support.

And that concludes the SpartanNash second quarter FY14 conference call. We look forward to speaking with you again next quarter. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.