SpartanNash Co (SPTN) 2015 Q3 法說會逐字稿

Good morning and welcome to the SpartanNash Company third-quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

Thank you, good morning, and welcome to the SpartanNash Company's third-quarter 2015 earnings conference call. By now everyone should have access to the earnings release for the third quarter ended October 10, 2015. For a copy of the release please visit SpartanNash's website at www.SpartanNash.com/investors.

This call is been 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 amongst food retail and distribution companies, the uncertainties inherent in implementing strategic plans, and general economic and market conditions.

Additional information about the risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's third-quarter earnings release, fiscal annual report on Form 10-K, and in the Company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statement. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statement.

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 most directly comparable GAAP financial measures and the other information as required by Regulation G is included in the Company's earnings release, which was issued after market close yesterday.

It is 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 third-quarter 2015 earnings conference call. With these this morning are Dave Staples, our Executive Vice President and Chief Operating Officer as well, as other members of our executive team. Today, I will begin by providing you with an overview of our business for the third quarter and then Dave will share some additional details about the third-quarter's financial results, as well as our outlook for the remainder of FY15.

Finally, I will provide some closing remarks and we'll open up the call, take some questions. We are again please with our ability to generate improved third-quarter adjusted earnings in a challenging sales environment. We believe that this is a result of our team's ongoing effort to strengthen our value proposition and the quality and service that we offer customers across to our Retail, Food Distribution, and Military segments, combined with our ongoing commitment to drive efficiency.

In our Food Distribution segment, we've continue to make significant progress on streamlining our network, which is one of our major supply chain initiatives. We have continued the integration of our military and food distribution transportation fleets and the initial results are promising. Although we're still in the early stages, we are encouraged by the potential economies of scale we can achieve as we reduce empty miles and improve efficiencies.

At this time, all of our tractors and over 100 of our trailers have been rebranded as SpartanNash, which facilitates them being utilized in the most efficient manner. On our warehouse front, we continue to explore opportunities, including further consolidation that will benefit both our customers and the Company. We're also implementing plans to significantly reduce costs related to shrink, duplicative handling, and other warehousing functions as we believe there continues to be meaningful benefits to be gained.

We've also continues to roll out our merchandising and marketing strategies to all of our independent customers. We're pleased that certain elements of our virtual chain go-to-market strategy, including our value-added and expanded private brand programs, are beginning to resonate with existing distribution customers. Given the increasing importance of natural and organic products to consumers, we have expanded and begun to roll out our private label Full Circle brand to all of our independent customers.

With Full Circle products, we are committed to delivering great tasting, 100% natural, organic, and environmentally friendly products at affordable prices. Additionally, I'm please report that the Company and the union representing our Grand Rapids, Michigan warehouse, transportation, and maintenance associates ratified a new two-year labor agreement that was set to expire in October. This agreement will continue to provide our associates with a competitive wage and benefit package, while enabling the Company to continue to increase operational efficiencies.

While the independent food distributor market remains highly competitive, our well-positioned distribution network and highly relevant product offering will allow us to grow our business organically, as well as label us to take advantage of consolidation opportunities that may arise. Net sales in our Retail segment remain challenged, as we continue to face a low inflationary environment, competitive openings and cannibalization from new and remodeled store activity predominantly in our Western markets, as well as lower fuel prices.

We estimate that competitive openings and cannibalization had a negative impact of approximately 220 points on comp store sales. The majority of this impact should be cycled by the end of third quarter FY16. Reduced oil prices and impacted -- also impacted the economy and unemployment rates, particularly in North Dakota, where some markets are heavily influenced by the regional oil industry.

During the quarter we continued to execute our strategy to invest in our Western store base by completing six remodels and rebanners of Family Fare in the Nebraska market. We've been pleased with the positive customer response, particularly on new in-store features, including expanded variety throughout the store with an emphasis on natural and organic products, fresh store-made sushi and Starbucks Cafes in three store locations.

In the quarter, we expanded the rollout of our Yes Rewards loyalty program to our Fargo, Dickinson, and Family Fresh stores, as well as our recently remodeled Nebraska stores. While the rollout of the loyalty program is a process and not an event, we are encouraged by the initial acceptance rates and the number of new households that continue to sign up for the program.

We continued to invest in the digital space, as we upgraded our store banner websites and mobile apps and worked to develop digital platforms that will allow our independent customers to offer similar programs. We anticipate launching our new digital distribution platforms in early 2016.

As you know, pharmacy and fuel programs are a key part of our offer and we continued rolling out our $4 and $10 generic pharmacy offering, as well as free prenatal, antibiotic, and diabetic medications to the Western store base during the quarter. We anticipate fully implementing the program in these markets by the end of the year. In Michigan, our pharmacies posted a [1.1]% increase in comp script count for the quarter, marking our 19th consecutive quarter of positive script count growth.

Our Michigan fuel centers posted a 1.2% in comp gallons sold for the quarter and we continue offering fuel promotions in our Western markets by participating with third-party fuel centers. We continue to look for innovative offerings to provide additional savings and better engage our retail customers.

On the product side, we continue to roll out expanded private brand programs for our retail and distribution customers, and the feedback has been very encouraging. In the quarter, we launched approximately 380 new private brand items and our private brand unit penetration in our unique retail operations was 23.2%, which continues to place us above the national average.

We ended the quarter with roughly 7,140 private brand offerings, as we fine-tune our assortment. For the remainder of the year, we expect to introduce approximately 50 new items. The program remains a key element of our strategy to increase our value proposition, and we continue to see upside in terms of unit penetration, particularly in our Western store base.

Sales in our Military segment were down 3.4% in the quarter due to a corresponding decrease in sales at the DeCA-operated commissaries. Although commissary sales remain soft, we are pleased to be presented with opportunities to bid on new lines of business. While breaking into new areas is no easy task, our reputation and superior positioning in this industry will hopefully allow us to capitalize on these opportunities.

In an effort to continue to improve our efficiency, during the third quarter we closed our Junction City distribution center. This facility was underutilized and not strategically located and all of the existing business was easily transferred to our Oklahoma City facility. As a result of this move, we anticipate better service and product quality for the military customers that were affected.

Moving onto our capital plan during the third quarter, as I just mentioned, we completed the six remodels and re-banners to Family Fare in the Nebraska market. In the fourth quarter, we plan on completing seven additional remodels, mostly in our Michigan market, as well as close two stores in our Western markets, one of which is already closed. These were the result of a lease termination and the expiration of a lease that we chose not to renew as part of our store rationalization plan.

With that, I'll turn the call over to Dave for some more details about our financials and for the outlook on the fourth quarter. Dave?

Thank you, Dennis, and good morning, everyone. Consolidated net sales for the 12-week third quarter decreased 1.9% to $1.78 billion compared to $1.81 billion in the prior-year quarter. The decrease was primarily due to lower sales in the Military and Retail segments. Consolidated gross profit margin for the third quarter was 14.6% compared to 14.4% in the prior year, and primarily reflects an increase in fuel margin rate, partially offset by the impact of lower inflation-related gains in the military segment.

Third-quarter operating expenses would have been $224.3 million compared to $227.7 million, or 12.6% of net sales in both periods, if the merger integration and acquisition expenses, asset impairment, and restructuring charges, and one-time costs related to cost reduction initiatives were excluded from both periods. The adjusted third-quarter results exclude $4.4 million in expenses related to merger integration, $800,000 in net asset impairment asset and restructuring, and $300,000 in one-time expenses related to cost reduction initiatives.

One-time expenses were higher this year due to retail systems conversions, remodeled retail stores, and the loyalty program roll-out in the Western division, as well as the repositioning of the distribution network. The prior-year third quarter excludes $1.4 million in expenses related to integration and $1.3 million in [net] restructuring gain.

Adjusted EBITDA for the third quarter was $55.2 million compared to $55.9 million last year, or 3.1% of net sales in both periods. Adjusted earnings from continuing operations for the third quarter increased to $18.6 million, or $0.49 per diluted share, compared to $17.2 million, or $0.46 per diluted share last year. These results exclude the impact of the previously mentioned charges of $0.09 per diluted share for this year's third quarter and $0.01 per diluted share for the prior-year third quarter.

Turning to our operating segments, third-quarter net sales for the Food Distribution segment were $762.3 million compared to $764.3 million in the year-ago quarter. Third-quarter adjusted operatings for the Food Distribution segment increased 12% to $17 million versus $15.2 million last year. The increase was primarily due to merger synergies and lower operating costs, including the impact of lower healthcare costs.

In our Retail segment, third-quarter net sales were $507.2 million compared to $521.7 million last year. The reduction in sales was due to a 3% decrease in comparable store sales excluding fuel, $13.2 million in lower sales due to the closure of retail stores and fuel centers, and $11.4 million due to significantly lower retail fuel prices compared to the prior year, partially offset by sales of $22 million from the recently acquired stores.

Comparable store sales reflect the low inflationary environment and increased competition and cannibalization in the Western market. Retail segment adjusted operating earnings for the quarter increased to $13.2 million from $12.9 million last year. The increase was due primarily to the contribution from stores acquired in the second quarter, lower healthcare costs, and improved fuel margin, partially offset by the impact of negative comparable store sales, grand reopening cost, and higher shrink levels in our Western stores.

In our Military segment, third-quarter net sales were $506 million compared to $523.6 million last year due to lower sales at DeCA-operated commissaries. Military adjusted operating earnings were $4.5 million compared to $5.7 million last year. The decrease was primarily due to the lower sales volume and lower inflation-related gains, partially offset by reduced healthcare costs.

From a cash flow perspective, our current year-to-date operating cash flow was $129.9 million compared to $117.4 million for the comparable period last year, primarily due to improvements in working capital. Total net long-term debt was $539.4 million this quarter versus $563.8 million at the end of last year. We remain committed to reducing leverage towards the 2 times multiple EBITDA and ended the quarter at 2.3 times.

In the fourth quarter, we will redeem for cash the entire outstanding $50 million aggregate principal amount of our 2016 senior notes, using borrowings under our revolving credit facility. One-time charges of $1.1 million are expected to be incurred in the current-year fourth quarter, consisting of the redemption premium and the write-off of unamortized issues bonds. As a result of the redemption, we expect to reduce ongoing annual interest expense by approximately $2 million, barring any future interest rate increase.

I will now provide further detail on our outlook for the fourth quarter of FY15. Based on expectations of continued low inflation levels and challenging sales environment, we are slightly revising our fourth-quarter guidance for adjusted net earnings from continuing operations to approximate $0.44 per diluted share, excluding merger integration and any other one-time expenses, which remains within the annual range previously provided.

We now expect capital expenditures for FY15 to be in the range of $75 million to $80 million, with depreciation and amortization of approximately $83 million to $84 million, and total interest expense of approximately $21 million to $22 million, excluding one-time charges. This concludes our financial discussion and I will now turn the call back to Dennis for his closing remarks. Dennis?

Thanks, Dave. In conclusion, we are encouraged by our programs on a number of fronts as we continue to execute our strategy and improve on our operational efficiencies. We expect to end the year with momentum and built on this in 2016, as we focus our efforts on initiatives that will help drive sales and margins, in what we expect will be a challenging operating environment. We plan to make additional capital investments in our Western markets and we look for to the continued roll-out of our marketing and Yes Rewards loyalty program to all of our stores in the Western market.

On the distribution side of the business, we plan to further optimize supply chain in our Food Distribution and Military channels and we believe we are well-positioned to generate incremental business in both segments. We are committed to providing our Retail, Food Distribution, and Military customers with the convenience, quality, and service that they have come to expect from SpartanNash.

With that, we will open up the call and take some questions.

(Operator Instructions)

Chuck Cerankosky, Northcoast Research.

If you could, could you get into a little bit about the 3% decline in comps as to where it came from geographically? And then also, you talked about an opportunity to improve shrink. Could you discuss that in a little bit more detail, please?

I will take the comp and I will let Dave respond on the shrink question. On the comp the, the 3.2% that we had in Q2 was about the run rate we ended up in Q3, so there wasn't material change, so the business stayed on the same pace. I'm a little bit hesitant to start doing a geographic breakout of the [console] because some of these geographies are pretty small and competitive set isn't all that large.

What I would say to you, and maybe this helps, hope it helps a little bit, that in the Michigan market, we were just barely negative. Maybe that helps context the 3% comp. Dave, do want to take the shrink question?

Chuck, as we look at the shrink, you have two issues. In our low inflationary environment, certainly that exasperates shrink in the retail world, as you are well aware, even to some extent in the rest of our businesses. As we look forward to it, we think we have an opportunity long-term, or over the next year to 18 months to make an improvement in the shrink we are experiencing overall.

But certainly in our Western division, where our shrink rates have exceeded our overall -- our expected shrink rates. Some of that is just to do the type of work we're doing out there. With the remodeling and re-bannering, you end up with a lot more volatility in your inventory balances. When you put all of that together, that is where we get our opportunity from.

Are you seeing this in the west, as you introduce more fresh to the stores and prepared items and getting used to what the selling rates are?

There is a little bit of that in some of the departments and then it is just also the change out in some of the product you are selling, the re-merchandising, that all falls into the mix.

All right. Thank you.

Karen Short, Deutsche.

It's Shane Higgins on for Karen. Dennis, you just mentioned that the comps during the quarter were relatively stable around minus 3%, slightly improved from minus 3.2% in the second quarter. Should we still expect that to continue into the fourth quarter? Any color you can give on recent trends would be great?

There is probably not any kind of an inflection point that would suggest we are going to all of a sudden go from a negative 3% to a positive 1%. Generally speaking, we are probably in that neighborhood, and we haven't really given sales guidance -- maybe I just did on the retail side. But I don't see the catalyst. Dave [did] mention in his remarks, again, about inflation and the lack of inflation.

That's certainly is a challenge that we are feeling on both sides of the business, the Distribution, as well as the Retail side, and we're not unique to that. That is across the industry. Going from what we'd like to see and a normal pace, 2%, 3% inflation, to in some parts of this business, dry groceries, the biggest part of the business and we're clearly at retail less than 1% inflation.

It also feels like the early read on Q4 is that likely inflation is going to soften even more than it was in Q3, so that is a little bit maybe more of a headwind.

Is that -- are there particular categories that is causing that? You just alluded to the center store being slightly inflationary. Where is the deflation coming from?

We don't do this inflation metric by week, so we're trying to get prepared for these calls, to be able to identify the trends. I do know that in the first four weeks of Q4, on the distribution side of the business, we went 1.3% more negative than where we ended Q3. It was driven primarily by proteins.

In Q3, on the distribution side, the business actually was deflationary 30 points. The early fourth quarter were deflationary by another 100 points.

Okay. Thanks for the color. Last one here on the Retail operating margins for the quarter. They did improve slightly, despite the negative comp and the deflation that you just discussed. How much did the higher fuel margins help you guys and what other factors contributed to the margin improvement in the Retail side?

Shane, this is Dave. When you look at it overall, you can contribute a large part of that certainly to the fuel center margins. As you look at the dynamics in that business it is a $0.01 margin business. That is how it runs and so when you get substantial changes in the price of a gallon of fuel, it drives your rate very significantly in different directions. All in, all out, I would say that is the primary driver of the retail improvement.

You guys also called out the lower healthcare costs. Was that meaningful? Any color there would be great?

Yes. As we undertook the merger, that was an area we really saw opportunity in. You have to give a lot of credit to our HR team and our operating groups. As they executed that plan, and have really looked at this item, which is very sensitive because it is very important to our associates so we take it very seriously.

Yet at the same time, as you are aware, it is incredibly expensive and the rate of growth has been dramatic over the past 5 to 10 years. The team has done a great job of how they put the plan together and looking for ways to really manage that expense and that has been an area we have been able to really bring down dramatically with an each Company standalone perspective.

Great. Thanks so much. I'll yield.

Scott Mushkin, Wolfe Research.

Two things. Obviously, the environment is tough. We're hearing that from a lot of different people -- no inflation, not much demand. Just taking a step back and going over all three of your segments, I'm trying to understand what changes the trajectory. In fact, it seems like this deflation issue is actually [flat out] deflation now, so it is getting worse.

Could it actually spill into package goods, where we just become completely deflationary in food? I'm just trying to understand what, in your mind, maybe changes the trajectory we're on, which seems like it's actually a slowly down slope, but not just for you guys, but just generally in the industry?

That's maybe the $64,000 question. Scott, if you would have said to me that we were going to get a dramatic reduction in gas prices, which we were all predicting, and that we wouldn't see more of that accrue to us in the food channel, I would say now you are wrong. We're going to get -- fuel in Q3 was $0.87 a gallon less than prior year. That is a lot of disposable income. It just didn't come back.

I don't think the consumer feels back, with the participation rate in terms of employment is at the lowest level since 1977. So even though the unemployment rates are improving, just less people are in the workforce and then the median wage is down, not up, pre to post-recession. I just don't think the consumer has bounced back.

It is a bit of an anomaly when you look at the whole space globally for food/groceries. There is very modest population growth, but you look across CPGs and look at the tonnage that is being reported in the most recent quarter and it is daunting. Everybody is negative. If you look at the last couple of [years] at General Mills, or Kraft, Heinz, or [Bean] Foods or Kellogg. There is this slowing into mayhem, and that is with all channels being reported that we're feeling.

So there's just less consumption for whatever reason, and it is exasperated, too, by the fact that, remember, most of those items that we're selling today are smaller sizes than they were before, right so you don't get a 0.5 gallon of ice cream, you get 1.5 quarts, and even then, you get punished. So I don't see an inflection point, Scott. I don't feel it.

The negative downward pressure from energy is a headwind, and tonnage being soft, field energy costs putting downward pressure on it. I don't think CPGs have much of a desire to take the risk of raising prices and risk losing demand even further. We're in for a bit of a challenging time.

At last quarter, I was asked a question what did I think was going to happen with inflation and I said the last one-half year might look like 0%. And you know what? Maybe we'll get lucky to hit the 0%. Feeling a little that way.

That's good color. My follow-up question, because you started talking about the median income, the wages, there is definitely, and we've been tracking the data, a lot of -- it's one of those things you don't fully understand because, you pointed out, the participation rate is pretty low, but on the low end of the workforce, there is clearly a lot of pressure on wages going up.

As we look into next year, we have seen a number of the companies that we cover talk about this issue and concern. How would you frame it for your Company and the thought of wages going up for low-end workers, whether it's forced by minimum wage increases, or just that there seems to be a shortage of low-end workers. How do we think about it vis-a-vis Spartan?

It is a real concern. We happen to have the majority of our workforce domiciled in the states of Michigan and Nebraska and we have a fair amount in Minnesota. All three states in the last year or so passed legislation to ramp up the minimum wage rate, so we have that baked into our forecasts and projections and so we are seeing, experiencing, and budgeting for those increased wage rates in our business model.

Okay. So you feel like you have taken care of that issue just because of where you are. Are you having trouble finding people? We're hearing that, too, or is that not a problem for you guys?

It is more spotty in general about that. Truck drivers, we all know, is a challenging vocation for us to be able to get drivers everywhere we would like them, so that one is clearly, yes, we are having a challenge. The balance is a little bit spotty I would say, Scott. It varies by geography a bit.

Perfect. Thanks, guys.

Mark Wiltamuth, Jefferies.

I wanted to ask a little bit about the Military segment. Obviously, you're struggling there with a structural issue, just that DeCA declines continue. Maybe could you give us an update on how steep the DeCA declines are currently? And then I am intrigued about the opportunity for expansion into new business lines, and I wondered if there were any notable RFPs for either troop feeding or post exchanges or anything like that, that's out there that we could monitor?

Yes, the color I would give you is just we reported the negative 3.4% in the quarter, despite being negative 3.4%, on a year-to-date basis, we are only slightly negative, negative 0.5%, as we have done some good work in building some of that base going into the year. DeCA in the quarter, they don't exactly match quarters like we do, so this is [approximate], but their negative store sales were greater than 6% negative, and that varies by geography, as well, so it is not the same everywhere.

That is the structurally where the business is today. The opportunities to do more with the Military resale system, you have cited a couple of different opportunities there, with troop feeding and maybe more with exchanges. And I would say to you, there are even others. Remember, we have this network that is going to many faces across the United States daily.

We think we are uniquely positioned from a logistics standpoint, plus I would just say to that we believe we operate in this military retail space as maybe the most efficient player. We've earned a lot of respect and the MDV team led by Ed Brunot really has done that, has given us the opportunity to get engaged with some bidding on some other businesses. But I just, Mark, don't think it be appropriate for us to articulate, hey, we think it is here or there. When we are successful, you guys will be the first to know.

Okay. But those are big government contract processes. Are there any sizable ones that are out there that are up for bid right now?

The government is frequently bidding contracts, so I would say that is a perpetual thing that is always going on, so maybe the short answer is yes.

Okay. All right. We will watch for news there. Thank you very much.

This will conclude our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Thanks, Laura, and I would just like to thank everyone for their participation today. That concludes our third quarter and we look forward to visiting with you at the end of Q4. Thank you.

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