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SUPERVALU, Inc. (NYSE:SVU)

F4Q 2014 Earnings Conference Call

April 23, 2014 10:00 AM ET

Executives

Steve Bloomquist - Director, IR

Sam Duncan - President and CEO

Bruce Besanko - EVP and CFO

Analysts

Scott Mushkin - Wolfe Research

John Heinbockel - Guggenheim Securities

Ajay Jain - Cantor Fitzgerald

Meredith Adler - Barclays Capital

Edward Kelly - Credit Suisse

Karen Short - Deutsche Bank

Operator

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the SUPERVALU Fourth Quarter Earnings 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 session. (Operator Instructions) Thank you.

I would now like to turn the call over to your host, Mr. Steve Bloomquist, Director of Investor Relations. Please go ahead, sir.

Steve Bloomquist

Thank you, and good morning, everyone. I want to welcome you all to SUPERVALU’s fourth quarter fiscal 2014 earnings conference call. Joining me today are Sam Duncan, Chief Executive Officer and President; and Bruce Besanko, Executive Vice President and Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. So that we can accommodate as many people as possible, I would ask you to limit yourself to one question with one follow-up.

The information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our most recent 10-K filing. A replay of today’s call will be available on our corporate Web site at www.supervalu.com.

With that, let me now turn the call over to Sam.

Sam Duncan

Thanks, Steve. And let me welcome everyone to SUPERVALU’s fourth quarter conference call. This morning we reported fourth quarter earnings per share from continuing operations adjusted for one-time charges of $0.18. Pro forma adjusted EBITDA was $187 million. On a full year basis EPS from continuing operations again adjusted for one-time charges was $0.58 per diluted share, while pro forma adjusted EBITDA was $783 million, somewhat stronger than we anticipated.

Looking back on the year I am pleased with what we achieved and where we are now as a Company as we head into fiscal ’15. We accomplished a great deal this past year, stabilizing the Company, giving it a strong sense of direction, installing a new management team and raising the level of our operational controls and now we’re beginning to see the benefits of this work in our results. With year one behind us we can more confidently focus on driving sales and cash.

For the fourth quarter sales trends improved sequentially compared to Q3 in each of our operating segments. One of the real highlights was our Retail Food segment where identical sales were positive 0.2% the first time we have delivered positive retail ID since fiscal 2008. Save-A-Lot network ID sales were a positive 2.1% while corporate store IDs were positive 3.5%. Licensee wholesale purchases on an ID basis were positive 1.1% in the quarter.

Lastly total independent business sales were negative 0.6% with a 310 basis point sequential improvement in sales trends from Q3 largely reflecting improvement in sales to existing customers. Before I move to the segment results, let me take a moment to stress on an important point. I hope everyone knows that I have high expectations for how this Company can perform. We’re not there yet, but overall I’m really proud of this leadership team and all of the 35,000 employees for what they have delivered this past year.

Let me now move to the independent business segment. Fourth quarter net sales were down year-over-year by $11 million or 0.6%. As I’ve mentioned we did see a 310 basis point sequential improvement and our sales trend relative to Q3 partly driven by favorability from the winter storms that impacted a large portion of the country and what’s drove a degree of stock up behavior on the part of our consumers. Military sales remain down on a year-over-year basis although the declining sales trends soften somewhat in the fourth quarter. Lastly new affiliations lagged our plan.

We announced in March a new organizational design for our wholesale operation that divides the businesses in two geographic regions. The east region based in Mechanicsville, Virginia and the west region based on Hopkins Minnesota. As part of this new organization design we have established several new key senior level roles within each region that we believe will help us in both affiliating new independent retailers and driving sales growth with current customers. We have put the leaders in place and we’ll focus entirely on driving our professional services offerings a good sales opportunity for us that creates value for our retailers.

We also have new positions overseeing produce, fresh and grocery in each region. Overall this creates an organization that is more closely aligned with our growth plans and priorities while eliminating duplicative work and lowering our cost structure. Fourth quarter operating income was up from last year as a result of lower bad debt expense and cost management initiatives. Similar to last quarter we again saw higher revenue and operating profit from professional services a key point of differentiation between SUPERVALU and other wholesalers. Overall I continue to be pleased with the efforts of our entire independent business team. Having said that growing sales remains our number one priority and I am confident our new organizational structure will help us deliver on this goal.

Let me move on to Save-A-Lot or network identical store sales which, includes both corporate stores and wholesale sales to licensee stores we’re positive 2.1%. In identical store sales or corporate stores within the Save-A-Lot network we’re positive 3.5%. Within our corporate stores Q4 was the third consecutive quarter where both customer counts and basket size increased over the prior year.

Wholesale purchases by licensees which is included in the network ID has continued to build since we first lowered our inside margin earlier this year and came in at a positive 1.1% in the fourth quarter. The first increase since fiscal ’12 a very encouraging trend. Fourth quarter operating income excluding last year’s asset impairment charges declined 6 million year-over-year due to the margin investments made earlier in the year offset in part by the benefit from cost reductions.

Save-A-Lot’s results this quarter continued to reflect the impact from the heightened confidence level of our licensees and many of the initiatives I have previously discussed, the fresh cut meat program being introduced into our corporate stores, our renewed focus on produce and the reduction to inside margin made during the first two quarters of the year.

Meat sales on both corporate and licensee basis continued to be strong as the produce sales for both dollars and units were up compared to last year. On the licensees side one of the driving forces has been our improved level of collaboration with our licensees on store operations and merchandizing. With the success our corporate operations are achieving licensees have shown a greater willingness to our programs into their stores, including new directional sign packages, more prominent displays of price investment items and our newly introduced horizontal merchandising sets.

In a multi-store test with one of our larger licensee groups we have seen high single-digit sales increases after working with the Save-A-Lot team on store resets and improved store merchandising. We will continue to push hard where we see opportunities to strengthen the performance of licensee stores and make our operations more successful.

We are also more vigorously holding ourselves and our licensees to Save-A-Lot high level of operating standards. For our corporate fleet in addition to our normal internal audit standards we implemented this year a mystery shop program, where each store is visited unannounced at least two times a month with immediate feedback to our operation team on the store’s performance.

For our licensees we’re also more thoroughly reviewing their operational levels and in those situations where the licensees chose not to comply we may exercise our right to convert them into our corporate fleet. As we continue to more strictly adhere to these operational standards, we expect that we will have an increase from the number of stores converted to the corporate fleet as we move in ’015.

I am also pleased with the progress being made in Save-A-Lot’s private label penetration which has increased approximately 300 basis points compared to Q4 last year. We continue to introduce relevant private label items into our store sets, many of which are converted on new items we initially tested as a packer label which helps drive home Save-A-Lot to value messaging while giving us the opportunity to strengthen gross margins. As an update on the impact from snap changes made last November, our analysis continues to suggest that sales impact of Save-A-Lot is less than 1% as customers continue to largely offset lower EBT benefit levels with cash purchases.

Lastly let me provide some perspective on how we see the growth at Save-A-Lot unfolding. This past fiscal year was very important to strengthening Save-A-Lot’s operating model and improving licensee’s confidence in both Save-A-Lot as well as SUPERVALU, both critical elements necessary to drive future expansion. As we look to fiscal ’15 we expect to open up to 65 new stores including corporate and licensee locations. Beyond the current year we fully expect our growth rate to accelerate as we continue to improve the model, expand our footprint with a new distribution center outside Denver, staff-up our development team and build off the necessary infrastructure.

There could be upside to this trajectory if any retail real estate opportunities arise that provide us the chance to open a number of stores in a shorter period of time. Also note that these figures do not include the roughly 30 stores that will likely close in ’015 based on the recent history.

Turning to Retail Food, I am very encouraged by the progress made as we finished the year. Fourth quarter ID sales were positive 0.2%, while gross margin was essentially flat to last year. Customer counts were negative 0.6%, the strongest traffic figure in the past 8 quarters, while basket size was 0.8%. Fourth quarter operating income adjusting for asset impairment charges and employee severance increased 24 million year-over-year as a result of cost reduction initiatives and stable gross margins.

Looking back over the year, our Retail Food segment is where the largest changes were made and where it took our banner sometime to adapt to the new structure. After we rolled out the decentralized operating model in the first quarter, our banners moved through the second and third quarters, learning and refining the relationship between promotional investment, expected sales and the appropriate levels of inventory. We still have work to do in our retail segment but our fourth quarter results demonstrated the team’s ability to develop promotional plans that create the desired customer behavior which we believe will help us drive sustainable sales growth in fiscal ’15. Key to our performance is the improved store level execution I have observed across our 190 store network. The model store program has clearly improved the shopping environment and we will continue to make incremental changes that will make it even more appealing.

Last quarter I talked about the opportunities we have in categories such as pet, baby and seasonal and we are well underway on our efforts to resize and re-merchandise these departments in an effort to optimize sales in these important categories. Similarly, we will be more aggressively remodeling our retail stores with plans to update more than 40 stores this fiscal year. We are also doing a much better job at executing the display schedules negotiated by banner merchants which is helping us restore the vendor community’s confidence in us. In addition, our private brands continue to show a solid progress as our sales penetration is up nearly 100 basis points versus last year. We will continue to promote our increasingly well accepted labels including Essential Everyday and Wild Harvest which bring great value to our customers.

Finally, I am excited about a new load-to-card program we are introducing this week in our stores in cub stores in Minnesota. This program gives customers the ability to download digital coupons directly to their phone or their cub rewards card, making their shopping experience faster, more convenient and more consistent with what customers are telling us they want from their grocery store. This is another important step for us in the digital space and we’ll be watching and reviewing this program closely to determine how to leverage this capability across the rest of the Company.

Let me now turn the call over to Bruce for his comments in the quarter and our financial condition. Bruce?

Bruce Besanko

Thank you, Sam and good morning everyone. As outlined in this morning’s press release for the fourth quarter fiscal ’14, we reported net earnings from continuing operations of $40 million or $0.15 per diluted share. This figure included $8 million in after tax charges primarily from employee severance and debt financing activities. Excluding these items, net earnings from continuing operations was $48 million or $0.18 per diluted share. Pro forma adjusted EBITDA as outlined in Table 5 of our release, totaled $187 million for the quarter and $783 million for the full year. Consolidated net sales in the fourth quarter were $3.95 billion, an increase of 1.4% compared to last year.

As a reminder, net sales for all periods now include fees earned under the transition services agreements what I will refer to as TSA for short. Independent business sales were 1.82 billion, a 0.6% decline from last year’s 1.83 billion, although profitability in this segment was up year-over-year which I’ll cover in a minute. ID sales were down compared to last year due to several factors. First, sales were impacted by lost accounts including of two larger customers we discussed last quarter one of which we won’t cycle until the middle of fiscal ’15. Second, we again saw softness in our military sales which is consistent with overall trend reported by the Defense Commissary Agency, the government entity that operates commissaries throughout the world.

Finally our affiliation dollars continue to run at approximately the same level as I’ve discussed in the past two quarters. For the year this amounted to roughly 25% of historical levels. Remember too that this decline in sales includes the slower place of new business from prior quarters that would have contributed to the fourth quarter. As Sam previously stated now that we’re past the holiday season we’re more optimistic we can add new customers to our ID business. Partially offsetting these items we did see sales to existing customers increase over last year partly as Sam stated from the pantry loading behavior tied to anticipated winter storms.

Network ID sales at Save-A-Lot were positive 2.1%, a sequential improvement of 40 basis points from the third quarter. ID sales from corporate stores within the Save-A-Lot Network were positive 3.5%. We also experienced positive light sales to our licensees in the fourth quarter. Both sales figures include the impact of the 100 basis point reduction in inside margin we made earlier in the year. For the corporate stores as Sam noted we’re happy to see fourth quarter where both traffic basket size were positive. We fully believe that Save-A-Lot stores are now in a sustained churn and are now poised for greater growth overtime.

Within our Retail Food segment ID sales in the quarter were positive 0.2%, the first time in over 5 years this company has posted a positive retail food comp. Customer counts were down 0.6% while basket size increased by 0.8%. Our overall estimate for cost inflation was approximately 0.5% for the quarter. This sales result is great news for our retail teams who have worked hard to make this performance happen.

Consolidated gross profit was 14.9%, up 60 basis points compared to last year. Both this year and last year now include the TSA fees, which increased $37 million compared to last year and was the primary driver of the overall change in gross margin. Excluding the TSA fees gross margin declined 20 basis points primarily reflecting incremental investments to lower prices. Consolidated SG&A expense was 11.7% of sales compared to 13.4% last year, both adjusted for impairment charges and severance.

This 170 basis point decline was a result of our cost reduction initiatives and lower surplus property charges. As a reminder our SG&A expense for all periods no longer includes a reduction attributable to TSA fees as we moved these fees into revenue. Net interest expense for the quarter adjusted for cash refinancing cost and financing cost write-offs was $50 million compared to $58 million in fiscal ’13. The overall change was driven by lower average rates and lower outstanding balances on our senior notes.

Moving from our consolidated P&L to the segment results, independent business operating earnings excluding impairment charges last year and severance charges that impacted both this year and last year were up $8 million this quarter versus last year. As a percentage of sales this result equated to a 50 basis point improvement primarily due to lower bad debt expense and cost reduction initiatives. At Save-A-Lot operating earnings were $43million for the quarter or 4.3% of sales compared to $49 million last year or 5% of sales with last year’s figures adjusted to exclude asset impairment charges.

The decline in operating earnings which Sam touched upon earlier reflects incremental investments to lower prices to our customers offset impart by the benefits of cost reduction initiatives. For retail food operating earnings for the quarter excluding last year’s impairment charges and severance cost that impacted both last year and this year was $38 million or 3.5% of sales compared to $14 million last year or 1.3% of sales. This 220 basis point improvement in operating margin primarily reflects cost reduction initiatives including lower depreciation.

Finally corporate showed an operating loss of $12 million compared to a loss of $78 million last year excluding severance cost in both years. Similar to prior quarters, the change from last year was primarily driven by the $37 million in incremental fees into the TSA, as well as lower employee-related expense due to cost reduction initiatives. Also as a reminder last year’s expense included administrative costs relating to the sold retail banners that were not covered by the prior TSA.

Now let’s turn to the balance sheet. At the end of the quarter our outstanding debt totaled 2.78 billion, a decrease of approximately $240 million compared to last quarter. This debt reduction in the fourth quarter is very typical as we sell through the higher inventories associated with the holiday season. The cash flow we generated in the fourth quarter allowed us not only pay off the existing ABL balance but we were also able to prepay the term loan amortization payments scheduled for ’015. So I am happy to report that we have zero borrowings on our ABL and available capacity of approximately $785 million at year-end.

Looking back we made great progress in fiscal ’14 on lowering our refinancing risk and significantly reducing our interest expense. Let me briefly describe these actions. First, last spring we completed a tender offer for $372 million of our 8% senior notes due in 2016. This tender was financed with the issuance of $400 million of senior notes due 2021 with a rate of 6.75%. We then re-priced and amended our 1.5 billion senior secured term loan saving 100 basis points on the LIBOR spread and lowering the LIBOR floor by 25 basis points.

Next in the fourth quarter we re-priced this 1.5 billion senior secured term loan again, saving an additional 50 basis points. This latest refinancing also eliminated the springing maturity feature that would have accelerated the term loan maturity to 90 days prior to May 1, 2016 if more than $250 million of our 8% senior notes remained outstanding as of that date. Finally last week we announced the amendment and re-pricing of our $1 billion secured revolving ABL facility, saving 25 basis points on the LIBOR spread. This amendment also eliminated the springing maturity feature related to the 8% senior notes due in 2016 and extended the maturity of the facility by nearly a year.

In addition to the progress we made on our funded debt, we also dramatically improved the funding levels of our corporate pension plan. The under-funded amount at the end of fiscal ’14 was approximately $460 million compared to the approximate $860 million of underfunding at the end of fiscal ’13. In percentage terms we moved the funding status from approximately 70% to approximately 83%. In fiscal ’15 we expect to contribute approximately $130 million to $140 million to our pension and post-retirement benefit plans which includes the incremental $25 million under our agreement with the Pension Benefit Guaranty Corporation.

While we still have a long way to go, I am delighted with the progress we made this year. To reiterate what I stated last quarter moving forward as the plans funding status improves our asset allocation policy which more closely aligns fixed obligations with fixed income securities is expected to reduce the level of funding status volatility.

Turning to cash flow, we generated $120 million in cash from operations this fiscal year compared to $417 million last year. Cash tax payments were nearly $100 million higher this year compared to fiscal ’13 and we’re carrying higher levels of working capital consistent with the investments we’ve made in our retail stores. Capital expenditures for the year were approximately $110 million well below last year’s level as we focused on maintenance items related to our retail stores and distribution centers.

Next let me turn to the TSA where in fiscal ’15 we’ll cycle the $60 million transition payment we received this past year. Approximately $55 million of this transition TSA payment was booked in the first two quarters of fiscal ’14 the timing of which will create a headwind for us during the first half of the year. However, our administrative cost structure is lower than it was last year and we carried additional headcount until the reduction in force was complete approximately mid-way through fiscal ’14’s second quarter.

The TSA income is planned to be approximately $190 million in fiscal ’15 based on the current number of NAI and LLC stores to be supported which is subject to change depending on demand from NAI and LLC going forward. From our perspective, we continue to managing the Company’s cost structure and the TSA support infrastructure to make it as efficient as we can without compromising our service levels. As we’ve said in the past, it’s incumbent on us to now ensure that our TSA support costs aligned with or are favorable to the TSA revenue. We believe we have the right management team in place to deliver on this effort and we’re proactively working towards this end.

Finally let me provide a few comments on how we see fiscal ’15 unfolding. First we’re pleased to report that we stabilized the business and it’s a top priority of ours to drive positive sales. To accomplish this priority we’ll invest in price and EBITDA in fiscal ’15. We’re encouraged by the results we’ve seen in fiscal ’14 and we’ll continue to invest in a measured, prudent and thoughtful manner.

As you have heard from us repeatedly over the past year our focus is to drive sales and cash but because of the dynamic nature of this process we won’t put specific numbers on our expectation for full year adjusted EBITDA. Our capital plan of $230 million to $240 million calls for a more robust spending, which will help drive sales and grow the business. Fiscal ’15 will be a 53 week year with the additional week coming at the end of our fourth quarter. Finally we have approximately $45 million in debt and capital leases that mature this fiscal year which we expect to pay off with cash from operations.

And with that let me turn the call back to Sam.

Sam Duncan

Thank you, Bruce. Last year was about stabilizing the organization, de-risking our balance sheet and getting our teams in place to set the foundation for the new SUPERVALU. Now in year two we can focus on our direction and growth plans so that really starts with my vision for this Company. I want us to build on our heritage as a great wholesaler the core of who we are. We plan to strengthen our independent business segment in numerous ways. We expect organic growth from our existing retailers who as a group want to expand their businesses.

Our new organization structure was designed to assist them with these aspirations. We continue to build the new customer pipeline and remain optimistic that we can move back to historical levels of bringing new customers into the SUPERVALU family of independent retailers. And we will continue to focus on how we can bring additional value to our customers our potential customers in non-traditional ways such as introducing new services or product offerings.

Save-A-Lot continues to be an exciting growth opportunity for us and as I outlined earlier we are pushing to expand its footprint over the coming years. The limited assortment channel is one of the fastest growing in the retail grocery space and we are all well positioned to take advantage of this opportunity. We have seen great success with the changes made in both meat and produce and I believe we still have further upside as we further look at new merchandising opportunities and focus on even stronger in-store execution. We are also working to continue the improvements in our private label program as well as introducing additional and more relevant SKUs and allocating more space in our weekly circulars and in-store display space to these items which will improve our overall price perception and boost margins.

Lastly we are in the early stages of developing a modular general merchandise program that will allow us to selectively supplement our core grocery program in our larger footprint locations. Overall we are excited about the prospects for Save-A-Lot. Our third segment retail food will complement the distribution business and I believe the banners we operate are generally well positioned in their markets. We clearly have opportunities to improve their performance and we’ll continue to focus on that in fiscal ’15.

Moving forward we will invest more capital in these banners and consider adding stores to strengthen our value offering to customers. Strategically I remain committed to driving improvement on sales and growth across all of our segments and delivering value to our customers and shareholders. We will be laser focused on operational excellence while considering a wide variety of opportunities to strengthen our business segments. We’re also committed to building and improving the many relationships we have and which are so critical to our success and I am proud of the great progress we have made in many areas.

Our independent business customers continue to tell me how pleased they are with us as their supplier and the changes they have observed over the year. Our continuing goal as I stated earlier is to add more customers to our base and utilize our supply chain expertise and professional services offerings to help them grow and prosper. Our Save-A-Lot licensees are equally happy with the changes Ritchie and the team in St. Louis have made these past 12 months. We have listened to their concerns and strive to understand what is important to them. And we acted with a sense of urgency in implementing new ideas to make them more competitive.

Our vendor relationships are stronger than they were at this time last year. For example we have made commitments to key produce growers that are meaningful to both parties and we will no longer interrupt item supply for nominal per case savings. Our financial partners including banks as well as debt and equityholders continue to support SUPERVALU and express confidence in these efforts we are making to create long-term value. And lastly there is most clearly a new kind of confidence level in our employees who I sincerely want to thank for their efforts.

The past several years have been challenging but without the hard work and dedication of our people we could not have accomplished what we have over the past 12 months. As Bruce stated earlier, we plan to drive sales in fiscal ’15 and we’ll invest further to accomplish this. SUPERVALU has historically been unwilling to make necessary price and operating investments which are so critical to long-term success, but that is no longer the case. We have well thought out plans around the amount and the nature of these investments across our business segments and we believe that investing in EBITDA to better position the Company for future growth is the right strategy.

Finally before Bruce and I take your questions I want to say the proposed merger of Safeway and Albertsons is a noteworthy deal for the industry. However, SUPERVALU is not part of this transaction and I cannot provide any insight other than what those companies have publicly stated. Also most of you are aware that we have a TSA with new Albertsons Inc. and Albertsons LLC that has a base term running through September 2015 and includes renewal options thereafter. We are proud of the work we do to support the TSA and we’ll be prepared to continue beyond the initial terms are to manage the business in the event future renewals do not occur.

With that, let me open the call up for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Scott Mushkin with Wolfe Research. Please go ahead with your question.

Scott Mushkin - Wolfe Research

Hi guys. Thanks for taking my questions. I just want to conceptually understand I know you’re not providing guidance but I think there has been some emphasis on investing next year in both prices and EBITDA than of course the first couple of quarters we got a reduction in the TSA and we’re also cycling through some lost customers on the distribution side, so it is a long winded way of saying is it possible next year to grow EBITDA or is it something that we shouldn’t even be thinking of that these are just two -- these headwinds are too high or strong?

Bruce Besanko

Hi Scott, good morning, it’s Bruce. Let me make a couple of comments and I’ll answer your question more directly. So first, as you have stated we’re not give guidance for fiscal ’15 while we’re pleased that the business has stabilized we’re just not ready yet to begin articulating a forecast and it’s just so a little too early in our game plan. But what both Sam and I have said in our prepared remarks so that in order to drive sales in fiscal ’15 we’re going to invest in price and we’ll invest in EBITDA to do so. And so do we expect F15’s EBITDA to be lower than F14? Yes, that is our expectation. The largest variance will be Q1 when we cycle Sam’s first quarter as a CEO where the changes that he began to implement hadn’t yet gotten momentum behind them. As one final comment I’d say our investment in price will be done very thoughtfully and very prudently and if we don’t see the sales that we would expect then we’ll discontinue that effort. And so that’s my response.

Sam Duncan

Scott, and this is Sam also and we - after being a year and [inaudible] over here we have made a lot of great progress and I feel confident of where we’re at today, the stability and also the improvement that we’re seeing in all three parts of the business so I feel very good about what we’re going to do in ’015 as far as investment that are going to protect us for the long-term.

Scott Mushkin - Wolfe Research

Okay, that’s perfect. And really appreciate the answer. So then I just want to understand the operating cash flow kind of free cash flow expectations. It seems to me that I think you’re up in CapEx and I might be wrong over couple of 100 million is that what you said?

Bruce Besanko

Yes. Our CapEx Scott it’s going to be this year between $230 million and $240 million versus prior year and that’s F14 of about 110 million.

Scott Mushkin - Wolfe Research

So it seems unless you may be free cash flow negative, is that true?

Bruce Besanko

Here is what I’d say about cash flow so we have a very benign - let me start by saying we have a very benign debt schedule in fiscal ’15 it’s approximately $45 million in activity there. I think the operating spend that we’ve put together for the business I think from a cash flow perspective I think our investors will be happy with it. And so we’re going to execute against this plan and to the extent that there is cash flow we’re going to either pay down debt or invest in the business that’s the plan.

Scott Mushkin - Wolfe Research

Okay. And then the final one I think Sam mentioned and then I’ll yield the -- that you may be buying in some Save-A-Lots, does that cost you any money to do that if they need to be bought in?

Sam Duncan

So what we have to do is and we have a default process that we go through and at the end we might have to offer them some cash to buy them out in any CapEx that we think would be required to update the store but we are very firm in what we believe in here this the company did not really do this the prior year’s holding these licensees accountable. I will tell you the majority of our licensee is 90 somewhat percent are absolutely outstanding but like anything else you have outliers out there and we’re going to be much stronger in dictating what we expect. And if we want to [double our play] [ph] out there then we’re going to convert them to a corporate store. And those that we’ve already converted the few we’re showing very good responses to and to me it creates an opportunity for us and we’re going to take advantage of that.

Scott Mushkin - Wolfe Research

Okay, listen guys thanks so much and great quarter.

Sam Duncan

Thanks.

Operator

Your next question comes from the line of John Heinbockel with Guggenheim Securities. Please go ahead with your question.

John Heinbockel - Guggenheim Securities

So let me start with Save-A-Lot, Sam you talked about testing you’ve been doing with resets and remerchandising right that drove the high single-digit comps, a little more color on that, what kind of activities is that adding assortment? Is it changing allocation? What exactly are you doing and then as the -- do you think the high single-digit is that something that can be replicated across a lot of the stores or you don’t think so?

Sam Duncan

You’re talking about the licensees where we’re going to help them I think it’s what you’re referring to is that right John?

John Heinbockel - Guggenheim Securities

Yes.

Sam Duncan

Yes so what we’re doing is, and Ritchie and his team are just doing a fabulous job at it. So we’re going in and offering just our advice, we’re not going on to run the stores for them, but giving our input and I think there is a tremendous opportunity out there for us to help our comps by going out and assisting. And it has been such a success that we’re now having the licensees want us to help on more of the stores and we’re willing to do that but we have a limit on the amount of people that we have. So we’re encouraging the licensees to do a lot of it themselves.

And what we’re doing out there, we’re just going in and we’re converting them if they haven’t done it to the horizontal merchandising that we have done on our corporate stores. And also some of them may have been trying to focus more on margin rate instead of margin dollars and we go out there and give them advice on pricing to get their pricing more in line. And also making sure that they display the price investment items on their end displays like we’re doing in our corporate stores and that’s where we’re seeing the great success that when we do these and helping the licensees. But this is an excellent opportunity for us and Ritchie and his team are doing just a fabulous job and we’re going to keep pushing on this.

John Heinbockel - Guggenheim Securities

So it sounds like it’s a lot of kind of sizable kind of logical things. There is not, it’s not itemization and kind of how you look at assortment and allocations? It’s some very -- a couple of real big items it sounds like?

Sam Duncan

Yes John we’re not adding items or anything like this; this business is not that hard. And we’re just trying to simplify it, and what you got to do is just do the right things. We’ve got to do what Save-A-Lot is known for or should have been known for, that’s been a great hard discount retailer. And that’s what we’re focusing on and we’re going to continue to do that and Ritchie and his team have just done a terrific job in doing that.

John Heinbockel - Guggenheim Securities

So when you think Save-A-Lot strategically, in sort of strategic direction how is that what you want to do -- how is that influenced, when you think about all the accelerating expansion you think about [little] [ph] coming in. Does that cause you to think anything differently about Save-A-Lot or how aggressively you want to accelerate expansion before some of that stuff happens? So what does that mean for your thinking?

Sam Duncan

Well what it means is I want you to be talking about Save-A-Lot in future and all those other ones are going to be in the background. This year our job was to stabilize the Company and get to right direction there with what we have done. I am incredibly excited about the future of Save-A-Lot, now that we’re working on getting the blueprint the way it should be, and we’re going to continue to focus on that. And as I said in my comments after this year, well last year was a year of settling down and getting the right blueprint. Now the second year we’re going to make more investment, we’re going to build more stores, licensees or corporate and this is like the starting point. And then as I said in my comments we can look to accelerate the growth starting next year on the out years and that’s going to be my focus. But this is a part of our company that is incredibly exciting because it’s a hard discount format. And if you look at the map of the United States it’s no secret there is a lot of areas where we’re not and it’s just a very exciting time for our Company and for Save-A-Lot.

John Heinbockel - Guggenheim Securities

Alright and then just lastly in corporate -- in the traditional retail was there much of a weather benefit in that positive 0.2 or not really?

Sam Duncan

Weather?

John Heinbockel - Guggenheim Securities

Yes, was it much of a -- I guess would you have been negative without, I guess you might have been without weather or no?

Sam Duncan

No we would have been fine, that’s just -- and when you have the weather like that you have really big days and really, really bad days. The big days are before the snow hits and then the bad days are afterwards. But it all averages out, sometimes because people are locked in and kids out of school, they buy more, but what they do is they eat it faster. We experienced that here in Minnesota this year with the, all the brutal days below zero. But you know what it evens out it’s another great benefit it’s not a great loss.

John Heinbockel - Guggenheim Securities

Okay, thank you.

Bruce Besanko

John this is Bruce just to add on to what Sam said about the weather impact was less than a point so we would have been positive nonetheless.

John Heinbockel - Guggenheim Securities

Okay, thank you.

Operator

Your next question comes from the line of Ajay Jain with Cantor Fitzgerald. Please go ahead with your question.

Ajay Jain - Cantor Fitzgerald

Yes thanks for the question. I know you’re not giving guidance today but can you give any color on where things stand with your cost reduction initiatives? And if there is some way to quantify any incremental impact that you were looking at for this year? I think headcount reduction related cost savings were supposed to be I think around 160 million last year. You can correct me if that figure is wrong. But can you put a dollar figure on what was achieved last year in cost savings and what your outlook is for expense reduction this year especially now that you’re streamlining your wholesale operations?

Bruce Besanko

Hi Ajay, this is Bruce let me make a couple of general comments. I am not going to answer directly the question in regards to how much it was in savings this year, but let me give you some color. So first of all we had an extraordinary effort over the course of this year by all of our team to reduce our expense structure and we were in our view the management team very successful in doing that it started in the early part of this year with Sam’s leadership and we got some great reductions early on from a difficult task of reducing headcount.

That continued throughout the year, it continued in all of our departments what we -- some examples that we cited publicly we most recently we had a tough decision to close a distribution center in the east region we recently closed an office facility out west in Utah we’ve gone from three regions to two regions our independent business that we talked about not long ago. We have more opportunity at the go in terms of our SG&A cost structure and so our focus now is not so much on a dollar figure as it is on a percentage of sales for our overhead and we’re not going to issue a specific target but internally that’s what we’re focused on.

Sam Duncan

And Ajay this is Sam and I’ll just say that what we have accomplished this past year in the reductions is quite amazing and when I sit back and look at it we’re ahead of schedule in my timeline which is great and we’re going to continue to look at things. And we will always look at how we streamline this Company and do more with less.

Ajay Jain - Cantor Fitzgerald

Okay, yes thanks for that. And just on Save-A-Lot it looks like your EBITDA is still down slightly year-over-year. Is there any way you can talk about how much earnings variability there is between the licensees and the company-owned Save-A-Lots, you were down 12% for consolidated EBITDA for Save-A-Lot in Q4 and it looks like it was down 2% for the full year. So I’m just wondering if there is any major difference in the performance of the corporate stores relative to licensees from an earnings perspective and EBTIDA growth trends? Thanks.

Bruce Besanko

Yes, so let me may be start and then Sam you can add if you have any additional comments. So, what I’d say about the Save-A-Lot, so the Save-A-Lot business is that we have seen the turn clearly in both sides of the business, both the licensees side on the corporate side a little earlier on the corporate side with the sales pop much earlier we’ve now got the licensee business positive. From a profitability perspective what I would say is that the businesses performed differently and we’re happy with what we’re seeing on both sides of the business I don’t want to articulate anything more than that at this point but we’re both the licensees side and the corporate side a little different from what we -- from our perspective we’re operating these businesses well and we’re going to continue to drive even better performance in both sides.

Sam Duncan

And Ajay what I would add to it when you look at the past years the EBITDA was built on high prices raising here in the inside margin and that’s not the blueprint for our discount retailer we’ve got a go in and correct that and that’s what we’re doing. And we’re setting a new baseline and we’re going to make sure that we get this thing the Save-A-Lot manner the model way it should be is driving hard on low prices and sales increases and that’s going to be our focus.

Ajay Jain - Cantor Fitzgerald

Okay. Just finally I know Bruce mentioned that your expectation is that you’re going to invest in EBITDA this year again. But just again on Save-A-Lot, do you think it’s reasonable to expect EBTIDA improvement this year with Save-A-Lot on a consolidated basis?

Sam Duncan

Again our focus we’ve got a plan that we’re not going to discuss exactly what it is but we’re building for the future of Save-A-Lot that’s what the focus is this year. We’ve got the great management team there now to do it. What I look at is the out years where we’ll be and -- but we’re going to focus on that for the future and I feel good about where we’re at.

Ajay Jain - Cantor Fitzgerald

Great, thank you.

Operator

Your next question comes from the line of Meredith Adler with Barclays. Please go ahead with your question.

Meredith Adler - Barclays Capital

Hi. Thanks for taking my questions. I’d like to start just by trying to understand what you guys were talking about when you talked about professional services and that’s something that you have been adding to at the independent business. What are professional services and don’t other wholesalers provide similar services?

Sam Duncan

No. Meredith, not all wholesalers do what we’re talking about is that we do the pricing for a lot or some of our customers merchandising, there is a lot of functions that we perform for them that they do not want to invest in systems but so much now that it is on a merchandising side, the marketing side, ad layouts those type of things and not everyone does that.

Meredith Adler - Barclays Capital

Okay. And there is potential to grow that source of revenues?

Sam Duncan

Yes, we can, what we look at is that we’re going to develop catalog of stuff that we can do for companies and let the companies pick and chose from that. And we feel excited about that especially again with the team that we have here and with the addition of Randy Burdick who runs our IT he is great at that type of stuff and we’ll work with the independent business team and we’re excited about the future for that.

Meredith Adler - Barclays Capital

Great. And then I have a question I think this may be more from Bruce about your comments about the TSA it sounded like you were saying that there have been times when you were spending more than the TSA is paying you and that the goal is to get it to be either neutral and actually slightly profitable did I understand what you were saying correctly?

Bruce Besanko

Hi. Meredith, good morning, not quite, so what I said was in fiscal forecast I have said this in the past fiscal ’14 we believe that the TSA was intended to be constructed in a way so that the cost that we allocated over there were about equal the fees that we collected in ’15 I did say it’s now incumbent on us to ensure that the TSA costs are at that level or below that level and we’re going to work hard to make sure that happens. But in fiscal ’14 all I said was it was intended to be breakeven and ’15, in fiscal ’15, we’re now going to make sure that we’re at breakeven or more favorable to that.

Sam Duncan

And Meredith this is Sam we’ve been working on this for a long time now since I’ve been here and we know that that’s going to away at some point and we’re working on identifying all of the cost and everything and so that we can start flipping switches off when the services are ended. But this is a big project that we’re staying focused on and we’re going to make sure we’re ready for it.

Meredith Adler - Barclays Capital

Okay. And then my final question is there was a article in a trade publication that said that you guys were considering selling a couple of banners may be Shoppers Food and Farm Fresh. Is that source accurate at all are you looking to sell any banners?

Sam Duncan

Well you probably should contact the tabloid of whoever wrote that so they’d better luck on may be asking that question on The Ellen Show or something like that, that’s all I can say.

Meredith Adler - Barclays Capital

Alright, thank you very much. Those were my questions.

Operator

Your next question comes from the line of Edward Kelly with Credit Suisse. Please go ahead with your question.

Edward Kelly - Credit Suisse

Yes, hi good morning guys. I was hoping you could maybe shed some light on what how do you think about the long-term opportunity at Save-A-Lot in terms of the overall market size and where you think stores how big the store base can be? And also how you’re thinking about growth new market versus existing markets?

Sam Duncan

Well this is Sam I’ll make a comment then I’ll let Bruce make a comment. So we haven’t dictated any number that what we would like to see in the future that’s something that we’re going to continue to work on and at some point we may identify a number but I know that as far as what the end run or the look might be but we will at some point talk about the growth that we’re going to anticipate in the out years for Save-A-Lot again what I will say if you look at the map of the United States there is a lot of areas where we’re not and there are opportunities. And what we look at and where we want to grow a lot of times if we go into new area that’s better to have a licensee to tie in with that will invest in that area. We will also at the same time we would put corporate stores in there. But we’re looking for a good mixture of both now and in the future and right we’re now we’re sitting at a 60-40 mix licensees versus corporate and that’s we like that number right now and probably won’t see that change much in the future or a very little but the new areas we really look for a licensee to partner with to help us go in there.

Edward Kelly - Credit Suisse

And any thoughts that you could share on what you look at for a site selection and also is there any preference on sort of urban versus rural versus suburban?

Sam Duncan

Well the key to anything it doesn’t matter if you’re in this business or in any other type of business sector the key is location, location, location. And we’re willing to look at any area demographics there is a theory that we can select say consider our strong point but we’re open to anything and that’s going to be our plans in the future. But we see a lot of opportunities that we need to take advantage of.

Bruce Besanko

Edward this is Bruce I’d just add the following which is, our job as the management team here supporting Ritchie at Save-A-Lot is to drive both ID sales in the licensee business and the corporate stores and at the same time support their growth in new stores and as Sam indicated in his prepared remarks this year we’re going to be adding up to 65 new stores. We’re going to work hard we’re going to peddle hard in order to make both those things happen in fiscal ’15 and beyond. The key is that we’re starting this is positive store growth this year and that’s what we’re really excited about and continuing an enhancement of the future.

Edward Kelly - Credit Suisse

And at some point I know we’ve been asking for this but at some point do you think that you can provide more color on the investment per store, the payback period, how long it takes to breakeven?

Bruce Besanko

Yes I mean I think overtime that is something that we I could see us sharing it’s not any time in the short run though we got it -- our first job is to make sure this business is sustaining itself on the top-line and then once we have some confidence that we can begin to articulate those kinds of things and we’ll do that. We want to be as transparent as we can but you just got to give us time to make sure our game plan is being executed and we just need some more time.

Edward Kelly - Credit Suisse

Okay, thank you.

Sam Duncan

And Brent we’ll take one more caller if it’s good.

Operator

Okay. Your final question comes from the line of Karen Short with Deutsche Bank. Please go ahead with your question.

Karen Short - Deutsche Bank

Hi. Thanks for taking my question. Just a couple more related to housekeeping related questions I guess the first question is you gave a lot of color on your corporate pensions wondering if you could give us an update on where you stand on the balance on your multiemployer liability?

Bruce Besanko

Well, that’s a great question we’ve got some disclosure in our 10-K that we’re going to file a little later this morning or early this afternoon. So why don’t I have you take a look at the 10-K that we’ll file later today and then you can follow backup with Steve but we’ve got some good disclosure on those things in the 10-K.

Karen Short - Deutsche Bank

And then you also gave some color on what the expense will be for next year on the multiemployer side in the case?

Bruce Besanko

I don’t think we have that disclosure and I’m not prepared to make that.

Karen Short - Deutsche Bank

Okay. And then in terms of your CapEx obviously we talked a lot about the fact that it’s ramping fairly meaningfully but can you give some kind of allocation of the CapEx?

Bruce Besanko

Well I’ll give some broad brush stroke. So part of what we’re doing here is investing back in the business we’re investing in all three of our business segments. We’re investing in our independent business in terms of things that will make that more efficient we’re investing in maintenance so that they can be productive. So there is good investment being made in our independent business as we talked about with Save-A-Lot we’re all about getting new store growth going and part of our effort in Save-A-Lot and the capital that we’re allocating this year for making them helping them to grow units up to 65 as you said. There is lots of investment in our retail banners we’re going to do as Sam said up to 40 remodels. We have a new store that we’re contemplating this year in one of our banners. So we’re going to make some significant investment in our retail business and then there is a little bit of investment in terms of our IT infrastructure to make sure that we continue to make good investments for both our own Company as well as supporting our TSA partners.

Karen Short - Deutsche Bank

Okay, that’s helpful. And then on your interest expense that 50 million adjusted for this quarter is that run rate to think about for next year?

Steve Bloomquist

Yes, I think that’s pre cost care and this is Steve and we’ve got three simple capital structure it will be in the 10-K so I think you can probably trying later on that pretty easily.

Karen Short - Deutsche Bank

Okay. And then just a last question I had what exactly if you said it I missed it what is your private label penetrate as a percent of sales and I guess retail right now?

Bruce Besanko

Yes, this quarter ended up it’s about 90% which is about 100 basis points up from last year’s fourth quarter.

Karen Short - Deutsche Bank

Okay. And that is as a percent of grocery or total sales?

Bruce Besanko

That’s as Neilson would measure it Karen, so that’s the barcoded items as a percentage of the total store.

Karen Short - Deutsche Bank

Got it. Okay, that’s all I had. Thanks very much.

Steve Bloomquist

Okay. Thanks everybody. Brent, we appreciate your help. If anybody has any follow-ups I’ll be in my office just later today and with that we’ll conclude the call.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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