Caseys General Stores, Inc.

Good day, and thank you for standing by. Welcome to the first quarter fiscal year 2022 Casey's General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. If you require any further assistance, press star 0. I would now like to hand the conference over to your speaker today, Brian Johnson, Senior Vice President, of Investor Relations and Business Development. Please go ahead.

Good morning, and thank you for joining us to discuss the results from our first quarter ended July 31, 2021. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today is Darren Rebellis, President and Chief Executive Officer, and Steve Bramlich, Chief Financial Officer. Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities, performance at our stores, and the potential effects of COVID-19, there are a number of known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including but not limited to the integration of the Buchanan Energy acquisition, our ability to execute on our strategic plan, or to realize benefits from the strategic plan, the impact and duration of COVID-19 and related governmental actions, as well as other risks, uncertainties, and factors which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events. and Casey's disclaims any intentions or obligations to update or revise forward-looking statements, whether a result of new information, future events, or otherwise. A reconciliation of non-GAAP to GAAP financial measures referenced in this call, as well as a detailed breakdown of the operating expense increase for the quarter, can be found on our website at www.casey.com under the investor relations link. Before I turn the call over to Darren, I'd like to point out that we changed the titles of two categories that we routinely disclose and discuss. Grocery and other merchandise has been changed to grocery and general merchandise, and prepared food and fountain has been changed to prepared food and dispensed beverage. We believe these changes provide a better description of the categories. There's been no change to the products within the categories, nor the calculation of sales and margin. With that said, I'd now like to turn the call over to Darren to discuss our first quarter results. Darren?

Thanks, Ronnie. Good morning, everyone. We're looking forward to sharing our results in a moment, but I would like to start with the top priority for Casey's, supporting our team members and their safety in the continuing battle with COVID-19 due to the Delta variant. It's been a long 18 months, and after a summer that seemed nearly normal, our team is again experiencing COVID-19 case increases and related challenges. In spite of these obstacles, our team has performed exceptionally well and truly makes life better for our communities and guests every day. I couldn't be more proud of their resiliency and commitment to Casey's. As our guests and communities shift gears from summer and head back to school, commuting to work and engaging in fall routines, Casey's will be here ready to serve them. The return to school is a time to come together in our communities. In August, Casey's Cash for Classrooms giving campaign raised almost a million dollars thanks to our generous guests and passionate team members. These funds will support grants to local schools in our footprint. The grant applications open in October, so we look forward to hearing from our communities on what their schools need. I'd also like to provide some exciting updates with respect to our board of directors. I'm proud to share that Greg Trojan, former CEO of BJ's Restaurants, has joined Casey's board. He brings 25 years of experience leading national restaurant, retail, and consumer products companies like Guitar Center, House of Blues Entertainment, and California Pizza Kitchen. Adding Greg to the Casey's board adds strategic expertise in areas that fuel the growth of our business, focusing on the guest, leading an exceptional restaurant-caliber food service program, and being a retail leader. We look forward to leveraging Greg's unique perspective and industry expertise to support Casey's growth and success. Additionally, our board of directors recently received recognition from 50-50 women on boards. This organization recognizes companies where female directors hold 50% of its corporate board seats. At Casey's, we're committed to equity and diversity and are honored to be recognized and appreciate the female leaders who hold position on our board. Finally, in July, we published our inaugural Environmental, Social, and Governance, or ESG, reports. I'm grateful to the entire Casey's team and our board for their support as we developed and delivered this first report. We understand the responsibility that comes with our role at the heart of the communities, and we are committed to creating long-term value for all stakeholders. We look forward to sharing our progress along the journey. Now let's discuss the quarter's results. As you've seen in the press release, we're off to a great start to the fiscal year. Diluted earnings per share were $3.19, just off slightly from the all-time high quarter one year ago. Adjusted EBITDA was $243.2 million, the highest quarterly EBITDA in company history. Sales volumes and margin improved dramatically as guest traffic began to rebound, driving an all-time high gross profit dollar quarter for the company. We also successfully completed the closing on two highly strategic acquisitions in the first quarter and are already seeing good performance. I'd now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 8% for the first quarter, with an average margin of 40.5%. Grab-and-go items such as pizza slices, packaged beverages, and snacks were up significantly throughout the quarter as guest traffic improved. Same-store grocery and general merchandise sales were up 7%, and the average margin was 33%, compared to 32.2% for the same period a year ago. The store resets completed towards the end of last fiscal year continue to significantly benefit this category. Packaged beverages outperformed despite high comparisons during the pandemic, achieving a two-year stacked same store growth of 17.6%. Although alcohol sales have moderated and were about flat versus pandemic-driven buying in the prior year, they still achieved a 20.2% two-year stacked sales growth. Gross profit margin improved due in part to our strategic sourcing efforts from our centralized procurement team. This category also benefits from our private label effort as we exited the quarter with a 4.4% penetration rate of the grocery and general merchandise category. Same-store prepared food and dispensed beverage sales were up 10.8%. The average margin for the quarter was 61% versus 59.7% from a year ago. Sales were up double digits in bakery items and dispensed beverages. Pizza slices were the star of the show, up close to 29% in the quarter. During the first quarter, same-store fuel gallons sold were up 9% with a fuel margin of 35.1 cents per gallon as Casey's continued to achieve strong fuel margins. The company took advantage of a favorable renewable fuel credit environment and sold $18.7 million in RINs. The fuel team has done a tremendous job balancing fuel volume and margin to optimize the profitability of the category. I would now like to turn the call over to Steve to go into some detail on the financial statements. Steve?

Thank you, Darren, and good morning. Total revenue for the quarter was near This was primarily due to an increase of retail sales of fuel of $881 million, driven by a 21.5% increase of total gallons sold to 667.5 million gallons, as well as a 49% increase in the average retail price per gallon. The average retail price of fuel during the period was $2.95 a gallon, compared to $1.98 a year ago. Reported fuel results do not include the recently acquired Buchanan Energy wholesale fuel business, which is included in the other revenue category. Total inside sales rose 14% to $1.1 billion. Grocery and general merchandise sales increased by $104 million to $835.5 million, an increase of 14%, and prepared food and dispensed beverage sales rose approximately $38 million to $308.4 million, also an increase of 14%. Please note the reported figures are favorably impacted by approximately 7.5% more stores being operated on a year-over-year basis. As a reminder, we define gross profit as revenue, less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $723.9 million in the first quarter. That's an increase of over $100 million from the prior year. This represents the highest quarterly gross profit in Casey's history. It is primarily attributable to higher inside gross profit of $66.3 million, or nearly 17%, as well as an increase of $24.4 million, or 11.6% in fuel gross profit. Fuel gross profit benefited by nearly $19 million from the sale of a larger quantity of RINs than in a typical quarter. Our grocery and general merchandise gross profit increased $39.8 million, while prepared food and dispensed beverage gross profit increased $26.5 million. We also saw a $9.7 million lift in other gross profit. This is primarily due to the dealer network activities and car washes acquired from the Buchanan Energy acquisition that we now record in the other category. In addition to higher revenues and gross profit, it was encouraging to see inside gross profit margin expansion as well. Our merchandising and logistics teams are performing exceptionally well in the face of a broader inflationary and supply chain challenged environment. Inside gross profit margin was 40.5%, which is an increase of 90 bps from the prior year quarter. The grocery and general merchandise margin was 33%, up 80 basis points. Prepared food and dispensed beverage margin was 61% of 130 basis points from prior year. Casey's enjoyed favorable sales mix shifts both within and across the categories as packaged beverages along with the chips, meat snacks, and candy performed well in addition to the resurgence of grab-and-go items within the prepared food and dispensed beverage category. Finally, the company enjoyed a favorable wholesale cheese cost comparison. Cheese costs were $1.97 per pound this quarter compared to $2.12 for the same quarter a year ago. This positively impacted segment margins by approximately 50 basis points and it offset inflationary pressures we received in other commodity products. Total operating expenses decreased. We're up 24 percent. We're $92.8 million in the first quarter, and that's consistent with our expectations. Approximately 11 percent of the increase is due to same-store employee and store operating expenses increasing. We added 2 million labor hours back. We're approximately 14 percent into the system on a year-over-year basis as stores returned to near pre-COVID operating hours. These additional hours accounted for more than half of the same store increase, followed by wage rate increases and store operating expenses, which are also due to higher hours, such as repairs and maintenance and higher utility costs. On a two-year stack basis, we continue to mind our labor utilization as same store labor hours remain down approximately 4% versus pre-COVID levels. Approximately 8% of the operating expense increase is due to growth in units, as we operated 166 more stores than the prior year. And this also includes approximately $8 million in one-time deal and integration costs, which was several million dollars lower than we originally anticipated. With the large rise in retail fuel prices, same-store credit card fees also rose and thus accounted for another 3% of the operating expense increase in the quarter. As mentioned earlier, the operating expense increase was in line with internal expectations as the company anticipated that the most significant quarterly increase for fiscal 22 would occur this quarter given the increase in store count and operating hours relative to last year. Importantly, I'd like to reemphasize that the company still expects the full-year operating expense increase to finish within our previous outlook, which is a mid-teens percentage increase. Depreciation in the quarter was up 15%, driven primarily by the store growth, along with placing our third warehouse into service. The effective tax rate for the quarter was 23.3%, compared to 23.8% in the prior year. This includes an approximately $3 million one-time charge associated with revaluing our deferred tax liabilities as part of the Buchanan energy closing, and that was several million dollars lower than we initially expected. Adjusted EBITDA for the quarter was $243.2 million compared to $237.8 million a year ago. That's an increase of 2.3%. This also represents the highest quarterly EBITDA in the company's history. Net income was down very slightly versus the prior year record to $119.2 million. The acquisitions that we completed in the first quarter were dilutive to earnings as we expected. We remain confident that we will achieve the synergies anticipated with these transactions and that they will be accretive for the remainder of the year. Our balance sheet remains strong. At July 31st, cash and cash equivalents were $199 million, and we have the full capacity of our $475 million lines of credit, giving us ample available liquidity of $674 million. Our leverage ratio ticked up as we had expected upon the closing of the two transactions to 2.4 times. For the quarter, the company generated $197 million in free cash flow, which we define as cash flow from operating activities, less purchases of property and equipment. This compares to $307 million in the prior year. The primary difference versus prior year was lower contribution from working capital, as the prior year benefited from a favorable fuel price impact on accounts payable, as well as the deferral of FICA contributions under the CARES Act. At the September meeting, the Board of Directors increased the dividend to 35 cents per share, which represents the 22nd year in a row of raising the dividend. We will remain balanced in our capital allocation going forward, leaning into the many growth-related investment opportunities that we have, but continuing to repay debt gradually and tending to the dividend. The company has opened 142 stores so far this year, which includes three new store openings, the 137 stores from the Buchanan Energy and Circle K acquisitions, and two independent acquisitions. Obviously, there continues to be a growing uncertainty around consumer behavior and traffic volumes as the Delta variant continues to spread throughout the country. The industry is also dealing with product outages and supply chain challenges, both with respect to fuel and merchandise. However, we feel confident in our previously disclosed fiscal 22 outlook and do not believe it's necessary to make any adjustments other than that we now expect the effective tax rate for the year to land between 24% and 26%. As previously mentioned, we expect total operating expenses to finish the year up mid-teen percentages, and that the quarterly year-over-year increases will gradually decline as the year progresses, with a small improvement in the second quarter and more substantial changes in the second half. The company will continue to endeavor to offset labor inflation with gross profit adjustments, and Darren will talk about what we're doing to address the tight labor market shortly. Looking ahead to the very near term, we expect second quarter earnings to be lower than the prior year due to higher operating expenses and depreciation, which will be partially offset by higher gross profit, primarily from inside the stores. I'll now turn the call back over to Darren.

Thanks, Steve. First, I'd like to congratulate the entire Casey's team for delivering impressive results in the first quarter. We couldn't have done it without their hard work and dedication, and given the resurgence of the Delta variant, we'll continue to need their perseverance to perform at a high level. Total inside sales were trending up low to mid-single digits through August. For fuel, we have experienced low single-digit positive gallon growth, while fuel margins remain over 30 cents per gallon. The team has done a great job executing the strategic plan. If you recall, the pillars of the strategic plan to deliver top quintile EBITDA growth are reinvent the guest experience, create capacities through efficiencies, and being where the guest is via disciplined unit growth. All of this is going to be driven by an investment in talent to strengthen the team and add capabilities to the business. Given the inflationary pressures most retail industries are currently experiencing, I think it's appropriate to start with creating capacity through efficiencies as it is top of mind for the team right now at Casey's. Our distribution center in Joplin, Missouri is fully functional. This will help reduce over 1.8 million miles annually from our supply chain and will enable us to keep total GNA and distribution expenses flat for the fiscal year. This has also brought about more operational flexibility as we manage through broader supply chain challenges with our vendor partners and adapt real time to keep stores stocked. Our centralized procurement team is up and running with new software that's enabling better vendor management and strategic sourcing initiatives. Our fuel team continues to drive profitability through retail price optimization and procurement efforts. Our merchandising team has proven they're capable of navigating through this inflationary environment by effectively managing cost of goods negotiations and making retail price point adjustments as needed. They've also successfully driven sales to more profitable categories from the store resets completed last fiscal year. And finally, private label products continue to grow market share inside our stores. Not only is this a better value option for our guests, but it also improves gross profit margin for the category. With respect to being where the guest is, we're off to a great start integrating the two highly strategic acquisitions that we completed in the first quarter. Specifically regarding the Buchanan Energy transaction, we've begun to move their merchandise and fuel onto our contracts. We've also started to realize some operating expense savings, and just last week rebranded four stores to Casey's that includes our pizza program. Synergy expectations remain on track for both deals, and our dedicated M&A team is actively pursuing more opportunities. We continue to make great strides as we reinvent the guest experience at Casey's. Expanding our digital guest engagement remains a high priority as digital sales were up 14% in the first quarter, cycling a 162% increase last year. We recently expanded our delivery business to include Uber Eats Marketplace at 750 stores. DoorDash Marketplace is up to 890 stores. We have also implemented DoorDash White Label Delivery, a third-party service that takes orders through our systems at 830 stores. This enables our Casey's Rewards members to fully participate with their member benefits on our own app and receive delivery services throughout the entire day. We still utilize our own delivery drivers at 400 stores and still offer in-store pickup and curbside pickup at over 2,200 stores. Our Casey's Rewards enrollment continues to grow, and we just eclipsed 4 million members in August. We have also begun to utilize segmented marketing campaigns where we offer personalization and day part content on both the web and app. We believe we can effectively optimize guest behavior with this type of targeted promotional activity. With respect to investing in our talent, the company has held several mass hiring events to address our staffing challenges and continue to offer retention and referral bonuses. We believe these efforts are working. Application rates per store rose over 60% from April 30th to the end of the first quarter. As the special federal unemployment benefits expire this month, we expect this trend to continue. We will remain competitive in the market with respect to pay to adequately staff our stores so we can continue to deliver the outstanding experience our guests have come to expect from Casey's. We're also incentivizing our team with a $50 bonus to get vaccinated as the health and safety of our team members and our guests is our top priority. Before I open up the call to questions, I'd like to take a moment to recognize Julie Joukowsky, our general counsel. Julie is a 27-year Casey's team member and has been a key member of our senior leadership team since 2010. She plans to retire later this quarter after a long and distinguished career. In addition to serving Casey's, she's been a tremendous advocate for the convenience store industry, serving on various committees and volunteer roles with the National Association of Convenience Stores including chairperson of the board. I'm going to personally miss her advice and counsel, and I wish her and her husband, Tom, the best. Congratulations, Julie, on a well-deserved retirement. We will now take your questions.

Thank you. As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up. Our first question comes from Brian Griffin with Raymond James. Your line is open.

Good morning, Bobby. This is Bobby Griffin. Thanks for taking my questions and congrats on a great quarter. I just want to follow up on the comments around OpEx. Really great to see you guys reaffirm the target, you know, despite probably or not probably a tougher labor environment than when we originally talked last. But, Can you maybe just give some detail on what the drivers are for the back half of the year OPEX to slow down from a year-over-year growth perspective? Is there some internal initiatives going on? Is it just a function of the year-over-year comparisons with the hours? Anything there to help us think about what would slow down the growth as we move through the year in OPEX?

Yeah, Bobby, this is Darren. I'll start off and then Steve can fill in the blanks for me. Yeah, as You recall last year, you know, we kind of pulled back hard on operating hours in our stores and in our kitchens as kitchens were restricted or even required to shut down early on. As things wore on through the pandemic and things started to open up gradually, we started to add back some of those hours. So the biggest year-over-year delta really took place in the first quarter. And as Things progressed throughout the year. We started adding more operating hours back. And so those year-over-year comparisons start to soften a little bit from an absolute growth standpoint. And so that's why you see that start to get a little bit better in the back half of the year. Steve, anything?

Yeah, I think some of it is just the math to Darren's point. So we won't have the add-back of hours anymore. that we had in the first quarter in the last three quarters. But we will start to feel a little bit more of the wage pressure year over year. Delta last year in the first quarter, we were still paying some special COVID pay to people that that's gradually worked its way out of the system. And so the change in hours is going to be less impactful to us, but the change in rate will become more impactful as we move forward in the remainder of We've added most of the new units. We think we're targeting 200 units into the system this year. Obviously, more than half of those have already come into the system, so that will become a little bit less impactful incrementally going forward. And then the credit card fees, you know, that's going to follow the price of fuel to a large extent. little bit better year-over-year than what we saw in the first quarter, but we'll start to see significant improvement in terms of the year-over-year increases as we get into the second half of the year.

The other thing I'd add to that is in the first quarter, we had the one-time deal and integration cost for the two acquisitions that obviously don't repeat themselves in the back half of the year, so you see some softening there as well.

Yep, very helpful. I appreciate the detail. I guess just a quick follow-up for my follow-up question just on the hours. I think you called out same-store hours down a little bit versus, you know, pre-COVID period. Is that just a function of – you mentioned efficiencies, always looking at the labor hours. Is the mix of the business and kind of demand over the breakfast, lunch, and dinner period also driving some of that? And is that mix close to back to normal, still not back to normal? And then how do you see – bringing hours back? I understand, you know, the year-over-year comparisons are different, but do you see opportunities to kind of keep pre-COVID hours a little lower, even if we go back to a normal mix environment inside your store from business?

You know, what I would say, Bobby, is that we were doing a lot of work around labor management. really pre-COVID and then throughout COVID in terms of time motion studies, standing up a new labor management tool, implementing that. So I think we were getting more efficient with the deployment of our labor hours in the base case. And then what we've got going on right now is just difficult comparisons as we cycle unusual circumstances year over year with COVID. With respect to the breakfast business, we are not all the way back to where we expect to be. I think we're going to learn a lot here in the next, uh, several weeks, you know, post labor day with school fully back in session, people going back to work or not, depending on the Delta variant. But, um, We just announced today we've launched a new breakfast lineup and new coffee program, so we're encouraged by the potential that that program has to offer, and so hopefully we'll get back, but we're not anticipating having to significantly invest more in labor to meet that need.

Thank you. I appreciate the details. Very helpful. Best of luck going forward here.

Thanks, Bobby.

Thank you. Our next question comes from Ben Benvenu with Stevenson. Your line is open.

Hey, thanks. Good morning, guys. Good morning. Morning, Ben. So I want to start on the prepared foods business. Obviously, we're seeing the comps come back. You talked about the improvement in slices. If I look at the margin profile of the business, it's on a recovery track for sure. but it's still below kind of where we were pre-COVID. And I'm wondering if that's a function of mix that we, you know, maybe are a little bit lighter on the dispensed beverage side of the equation as you talk about mobility improving as the morning day part potentially starts to improve as dispensed beverage improves with mobility and the slice mix improves. Would you expect that margin to start to grind its way back to that pre-COVID level? Or is there anything else that we should be mindful of there?

Yeah, I think it's going to take some time, Ben, to get back to pre-COVID levels. But certainly, you know, with the morning day part still under pressure, we're seeing better bakery and coffee sales than we were a year ago. We're still not all the way back to where we were before. And then the same applies to the other dispensed beverages, Fountain and Frozen. While improving over prior years, still not all the way there. And so we're still working our way towards getting back to that margin rate. The other thing is that we have seen some inflation in some of the ingredients that we use in our prepared food. So while we've been able to mitigate that to a certain extent through our cheese lock or through pricing, we have seen inflation in a lot of the other ingredients and toppings involved. for our various food products, which has put a little pressure on those margins. Yeah, OK. That makes sense.

And then you noted that you sold some additional RINs this quarter. It doesn't look like it was a huge amount, but it's tough to tell with specificity. I'm curious if you could offer any color on what the kind of surplus balance of RINs is that you're carrying forward, and You know, maybe not when you expect to sell them, but just give us some sense of what's remaining out there so we can think about appropriately modeling deal margins.

Yeah, I'll take that, Ben. So we carried over a little more than 4 million physical RINs from the fourth quarter into the first quarter of this year that, you know, normal course we probably historically would have sold those RINs in the fourth quarter. Those had a value at average prices in the fourth quarter, you know, roughly $5 million. So we kind of carried that $5 million of value into the first quarter. When we did sell those, we have completely sold all of those in the first quarter. Market prices had continued to go up. So, you know, we realized somewhere in the neighborhood of $7 or $8 million of value. from those 4 million plus of RENs. I would tell you we're pretty much caught up in terms of being balanced with the bank. I don't anticipate that we will. We did not carry anything forward of note from 1Q into 2Q. I don't think we have any plans currently to carry anything forward. And so I would expect we'll sell, you know, whatever we generate. And so that's a function, obviously, of the type of fuel supply. that we end up selling and whether we splash-blend it or not. But I wouldn't expect the carryover to impact, you know, RIN monetization going forward. I think this was a one-off event just given the circumstances of what was happening with prices at that point in time. Okay. Very helpful. Thanks very much.

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Good morning. I have a question on Bucky's. I was just hoping for a little more color on the integration process. It sounds like it's been going well so far and you mentioned synergies are on track, but maybe you could highlight a few of these synergies and where you might have more upside than you thought previously now that you guys have had more time to analyze the business. Then as we look forward, do you have a a better sense yet of the upside potential to, you know, Bucky's margins. I'm thinking about, you know, food, grocery, or even fuel, and, you know, the timing of that as you start to layer in some of your capabilities. Thanks.

Yeah, Bonnie, you know, like I mentioned in my opening remarks, yeah, we feel really good about the integration process so far, and it's This is a little more complex because this was a stock deal, so we have the entire G&A infrastructure of the company. And we're still very early days. We've only had it about 90 days at this point. So the process is working according to plan. We have started to wind down some of the operations in their office. Part of what we acquired there was a small distribution center. that they have and we're starting to wind down those operations and expect to be out of that by the end of the year. We are in the process of converting stores over to Casey's from Bucky's and we've got the first four open and operating. We're seeing encouraging results there, but obviously very early days. I would say probably from an upside perspective, there's probably a couple of areas that we feel good about. One is on fuel and fuel margins. We've really seen an uptick in the fuel margins in that business, particularly in the Illinois stores versus what we had originally anticipated. So that's been a positive upside. We also have a reverse energy opportunity with car wash. They really put a lot of focus and emphasis on their car wash business, which is something that we've been getting into but, frankly, haven't done a great job of. And so we've been able to take some of their folks that are – or experts in that area, and help us apply some best practices. So we think there's some upside there. We're not really changing any of our modeling expectations from this. I think it would be a little bit too premature to do that, but suffice it to say we're encouraged with what we've experienced so far. We're confident this is going to work out according to plan.

Okay, I appreciate that, Collar. Thank you.

Thanks.

We have a question from Kelly Benia with BMO Capital. Your line is open.

Hi, good morning. Thanks for taking our questions. Good morning, Kelly. Good morning. Wondering if you could talk a little bit more about the breakfast, the new breakfast line, and maybe just kind of walk us through some of the potential mass there and what What does breakfast account for today in terms of that day part of within prepared foods? And where do you think this could go over time? And just any impacts to margins or your labor model from this initiative?

Yeah, Kelly. We're really excited about the breakfast launch. We've done a couple of things. We've focused on improving some of the existing products that we already had, just getting higher quality ingredients in different builds. So in some of our breakfast sandwiches, our breakfast biscuits, our croissant sandwiches, improving some of the quality there. We've also rationalized some of the lower performing SKUs out to make it more efficient to operate the kitchens. And then our culinary team developed a new product, a breakfast handheld product that leverages our made-from-scratch dough in unique builds with sausage and egg and cheese or bacon and egg and cheese, but leveraging that dough in a unique way. So it's handheld. It's very portable and car-friendly. You know, as we go into the fall, you've seen a lot of QSR concepts lean into breakfast because everybody's trying to get their breakfast business back. But I would argue there's not been any real innovation. In the breakfast, it's all the same stuff. We think we've got a unique product with this handheld that is differentiated in the marketplace. Nobody else will be able to produce this because it's made from scratch in our kitchens every day. So we really like that. We've rebuilt a breakfast burrito that is really, in our consumer testing, has been a fan favorite. So we've got high expectations of that. And then probably the single biggest thing we did was we upgraded our coffee platform. So over the summer, we replaced the equipment at all 2,300 of our stores to a bean-to-cup coffee program. So the coffee technology grinds the beans and brews each cup of coffee fresh, so that will enable us to reduce waste, make it easier to execute in the stores from a labor standpoint, and provide fresh coffee 24-7. And so we're really excited about that process as well. So we think when you take all of that, we've got a little bit of labor efficiency on the coffee piece. We've got a little bit more complexity on the food side. We think that's a wash from a labor standpoint, but providing a much better experience for the guests. Thank you.

I think we lost Kelly. Did we lose you, Kelly?

Oh, sorry. Just following up on that, as you think about your guidance for the year for mid-single-digit comps, are you baking in any contribution from this new initiative? And just if you could elaborate, I think you commented on the low single-digit through August. Is that in line? It sounds like it's in line with your expectations.

Yeah, low to mid-single digits for inside sales, and that's what we're experiencing now and would anticipate at this point. We knew this breakfast lineup was coming, so that's been baked into our expectations for the year, and it's going to be a very competitive breakfast environment in the fall, like I mentioned before, with most every QSR concept that has breakfast trying to get back into that business, so We expect we need this to be competitive. We think we're differentiated and we'll outperform, but we have that baked into our numbers for the year.

Thank you.

Thank you. Our next question comes from Matthew Fishbein with Jeffries. Your line is open.

Hey, good morning, guys. Thanks for the questions.

Morning.

Morning. Some of the company's gallons per store uptick in the quarter was likely due to that addition of Buchanan stores to the mix. But I think same-store gallons still improved a bit on a per-store basis relative to 19, calendar 19, that is, while fuel margins, even excluding the, call it, 2.5 cent per gallon impact from a larger ring contribution, still sequentially increased quarter over quarter. And you did highlight your expectation to lift inside store gross margins and help offset that OPEX headwind. But given cost inflation facing the entire industry, and given most of the industry doesn't have that strong inside store lever that Casey's does to offset OPEX increases, from your perspective, where do you see industry fuel margins and their ability to remain stable or expand further from here? as gallons continue to come back? Or maybe ask a different way, if the industry cost outlook were to increase in the near term, do you believe there's still room on the fuel margin side for the industry to offset it?

Yeah, Matthew, I would say that at this point, we'd have to say that these margins are sustainable, at least in the near term. And it's for the reasons that you mentioned. The underlying cost to operate this business are going up. I mean, everything from labor, which is well-documented, everybody's dealing with that. There is some inflation we're seeing. Some are probably experiencing it more than we are, but they're experiencing it nonetheless. EMV compliance, which just kicked in in April, is another piece of the equation. And then, of course, credit card fees that we're experiencing right now. So all of those things are making it a more OPEX-heavy environment. And to your point earlier, most other retailers in the industry don't have the levers we have to offset that. So that's most likely going to find its way into the fuel price. So I would say these margins are somewhat sustainable. Whether they last at $0.30 a gallon or north of $0.30 a gallon longer term is as anybody's guess, but I would certainly expect that they're going to remain elevated from where they were historically because there's no other place for most of these folks to go to recapture this op-ex. It's got to go somewhere, and I think that's where it's most likely to end up.

Yeah, makes sense. Thanks for that. And just to follow up on inside gross margin, some of your peers are having higher than normal out-of-stocks in stores, mostly driven by their collection of distributors having their own labor and fill rate issues. And I know category and subcategory mix, the procurement opportunity, private brand products, that's already lifting inside gross margins for you. But I'm presuming there's still room for improvement just off industry supply chain headwinds, hopefully softening at some point going forward. So I guess just to clarify, given your self-distribution model in grocery, Is that additional control of the supply chain helping this environment, or would you say you're still having some of that transitory supply chain headwind from your suppliers and out of stocks in store?

Well, I'll tell you, Matthew, that the fact that we own our own supply chain has been a huge benefit to us during this whole time. I'll be the first to say we have We've experienced our own challenges with the supply chain because manufacturers are struggling to produce products. But the fact that we control the supply chain has given us a lot of flexibility. I'll give you an example. We've had some suppliers that can't get product to us because of driver shortages. Well, we have our own fleet of drivers and trucks, so we can send a tractor to a manufacturer, pick up a trailer, and get it back to our distribution centers, continue to distribute product. We have some... products that we distribute ourselves that otherwise would be DSD-supplied products. And we've seen, as we've gone into competitor stores, that these stores are out of stock on a lot of those products that we're able to self-distribute and manage. And then the last piece that you mentioned with private label, having the private label products has enabled us in some categories when we've been short within that category from a national brand supplier to flex over to and provide our own product in that same category and make up for some of those out-of-stocks. So we think we are definitely in a better in-stock position because of that flexibility than a lot of our competitors are. That being said, it has been a challenge. And it's a new challenge every day that we hear from certain suppliers. And on their end, it's anywhere from labor shortages to driver shortages. In some cases, it's raw material shortages. that have occurred. So it's across the board. But like I said, I like our spot of having positive control over the supply chain and being able to flex and adjust to keep our stores in stock.

Awesome. Thank you very much.

We have a question from Chuck Sarankoski with North Coast Research. Your line is open.

Good morning, everyone. Great quarter. Got a question about the pizza business. You mentioned that the supply, excuse me, there's a resurgence in the single slice business. How does that coordinate with the whole pie business? Is the latter dropping off or have you held on to that? Can you sort of talk about the financial impact as those parts of the pizza business move around?

Yeah, Chuck, you know, the slice business has definitely come back. We're up about 29% year over year in slices. But the whole pizza business and the slice business really don't compete much with each other. The slice business is primarily a morning and afternoon day parts of breakfast and lunch, day part occasion. As you get more into the evening time and dinner, that's when we shift over to the whole pie business. So they really kind of complement each other more than conflict with each other. Now, that being said, our whole pie business has softened a little bit versus prior year. Obviously, when everything was shut down, the whole pie business really surged. But on a two-year stack basis, we're up double digits in whole pies. So We feel like we've held on to a lot of that incremental growth that we experienced during the height of the pandemic, but, you know, we gave a little bit back. But overall, we're really happy with where the pizza business is right now, and it's continuing to grow.

All right. Thank you. That's very helpful.

Our next question comes from Anthony Lebedzinski from Sedodian Company. Your line is open.

Yes, good morning, and thank you for taking the question. So in terms of the procurement initiatives, how far along are you with that process, or maybe kind of in baseball terms, can you give us a sense as to what inning are you in now? I just wanted to get a sense as to the opportunity that you have in front of you.

Yeah, I'll start with that, Anthony. I mean, we're early innings for sure with our – strategic sourcing initiatives generally. It probably varies a little bit by category. So we obviously are working on multiple facets here. Some of it for sure is supply, existing supply agreements that were already in place that, you know, we need to kind of age through. Normal course for many of our suppliers, we had more, I think, historical informed legally binding as you might expect for an organization of our size, and so we are working through most of those. I think on the grocery business, we've had a lot of success over the last year renegotiating and entering into favorable supply contracts with a lot of our CPG and DSD suppliers, and I think we're seeing that for sure in the margin improvement in that category where we don't talk and progress that we've made. On the prepared food side, there is less currently under renegotiated long-term contract. That's where most of our focus is right now. If you think of the commodity suppliers, everything from cheese to proteins, a lot of emphasis on that. I would expect by the end of the year, we will have made quite a bit of progress, not only in locking up longer-term agreements, but also making sure we have less dependency on single-source suppliers than we do today in certain categories. And given Darren's earlier comment just around supply chain challenges, I think we all would feel better with a little more redundancy. On the indirect side, things like construction, et cetera, we spend quite a bit of capital dollars. We put in some new systems that we referenced earlier that will enable us to be, I think, much more formal in creating competitive systems. continue to, I think, yield fruit for a while. So we've got a long way to go, and I would expect all of those to contribute positively to, you know, the margin improvement opportunities that we talk about over the next, really, the next several years.

Got it. Yeah, thanks for that detailed answer. So just to follow up on the part of that, so as far as cheese costs are concerned, so obviously it's a big component of your prepared food category. Where are you now as far as Cheese Plus in your term, and how does that compare versus a year ago?

We're about – we've got about half of our second quarter requirements locked in. If you look at the spot curve today, I would tell you we anticipated Cheese the commodity cost in the first quarter. I think we're looking at something similar to that in the second quarter. We are not locked beyond the second quarter. We'll continue to watch the market and try to be opportunistic around that, but I think second quarter will be a tailwind, and the spot prices today would have us have a little bit of headwind cost at the moment in the second half of the year, but it currently would not be significant.

Got it. Thank you, and best of luck. Thanks.

We have a question from John Royal with J.P. Morgan. Your line is open.

Hey, good morning, guys. Thanks for taking my question. Is there anything you can share on the pro forma year-over-year performance of the Buchanan assets this quarter and any major differences to point out between the legacy KPs and the acquisitions? You know, we see all the cases numbers varying in the same store metrics, but anything you can share on Buchanan itself, since it's not evident in the GAAP numbers, would be helpful.

Maybe I'll just start. I mean, obviously, we didn't own the assets for the entire quarter, so the comp is a little bit challenging if you're just looking at it. I would say, generally speaking, to Darren's earlier comments, I think we're about where we thought we would be, I think, as a At the highest level, we spent a little bit less in terms of kind of closing integration-related costs than we had thought we were going to, which helped us a little bit. We had a lower tax charge just once we went through all of the numbers than we thought, so I think we'll spend a little bit less up front for sure. They are, as a business... dealing with the same kind of dynamics we are. Their fuel profitability is higher than what we had originally expected it to be, which is consistent with obviously what people are seeing overall in the industry. But we feel good about it being a net contributor, about $45 million of EBITDA to us in this fiscal year by the time The dust settles there. That will include some synergy captures, as Darren referenced, starting in the second quarter. I think we'll start with G&A and fuel. And as construction progresses, we'll start to see some inside-the-store realization there. But most of that, in fairness, will probably be in the following fiscal year.

Great. Thank you. And then the second one is just a little more housekeeping. Can you talk about the cadence of CAPEX? And new build activity, I know one key was pretty light, which I think is pretty typical historically when you look back at historical years. But in this case, it's under 10% of the full year guide. So you can just talk about kind of the cadence of new build activity and how you expect it to progress through the rest of the year. That would be helpful. Thanks.

Yeah, one Q was light for sure. I think second Q will also be light. We're going to spend most of our time in the second quarter working on integrating the acquisitions, remodels, et cetera. I don't think we'll have a significant number of new to industry builds come up in the second quarter. So it will be back-end loaded, and we're somewhat dependent on making sure we successfully manage through supply chain challenges on the construction side, right, getting pieces of equipment in is not any easier than stocking the warehouses for goods for resale. So it will be a back-end loaded schedule, and most of the new units that we will end up building will come up in the second half of the year. Great.

Thank you very much.

Thank you. We have a question from Christina Cate with Deutsche Bank. Your line is open.

Hi. Good morning and congrats on a great quarter. You maintain your mid-single-digit inside sales store guidance for the year, but I was wondering if maybe you could parse out just at a higher level how you're thinking about performance at grocery versus prepared foods now that we're a quarter and a little over a month into the year. From a consumer behavior perspective, with the spread of Delta, but kids going back into school, what are you seeing in terms of store traffic and conversion trends really going back to your stores?

Yeah, Christina, with respect to traffic, I think it's a little bit early to tell with the back to school. We've kind of been back to school for a few days in most of our geography, and that was a holiday week, and now we're just coming back. So I would say yesterday was probably our first fully back to school day. So we're anticipating that our traffic will improve, but we've got to get a couple more days into it before we have a real sense. I think the... The wild card on traffic, to a certain extent, is people returning to work. And I think a couple months ago, pre the Delta variant really getting some momentum, I think most companies were planning on returning back to work after Labor Day. And a lot of those companies have sort of pushed those plans a month or two. In some cases, they've pushed all the way to the end of the calendar year. So we're just going to have to see how that progresses with the with the Delta variant and how we do that. All that being said, we expect to continue some momentum with the grocery category, but we will be cycling over the store resets here substantially in third and fourth quarter. So those comps will probably soften, and then we'll continue to pick up some momentum prepared food and dispensed beverages as those traffic patterns start to return to normal. So I would say grocery probably softening in the back half, prepared food maybe accelerating a bit. Steve, any thoughts on that?

Yeah, no, I think that the math is going to be grocery will be below prepared food for the rest of the year, and that's just a function of the math, right, with what we're laughing from that.

Right. That's great. And I just wanted to, you know, follow up about, you know, how you're positioning your business going forward, you know, now that we're more out and about, you know, getting vaccinated, you know, how do you plan on really holding on to some of the new customers that you have acquired, you know, how you're thinking about layering in the loyalty program, potentially in a more personalized way and promotions to drive engagement and traffic back to the stores, even as, you know, people still continue to work from home.

We're definitely going to leverage our investment in the rewards program and our digital technology. If you think about how we've been marketing so far from a digital standpoint, we have kind of a blended strategy. We use a curation, which is where we market one message to a broad swath of people, to the majority of guests. That's about 55% of what we do today. About 30% of what we do is segmentation, where we get different cohorts of guests, and we have a specific promotional message to those guests. And about 15% of it today is individualized, where we tailor the message to an individual consumer based on what we anticipate their behavior to be. As we move throughout this year, we're going to shift that mix. So by the end of the year, we expect... About 60% of our digital activity will be individualized to each consumer. And then about 20% will be the more segmented approach or curation. So we're going to fundamentally shift our approach to being more targeted to individual needs and what we anticipate those needs are based on the affinities that we've seen through their purchasing behavior. And so we would expect that that would have a positive impact and make that experience more more sticky and more attractive to the guests moving forward.

That's great. Thank you very much.

Thank you. Our next question comes from Brian McNamara with Barenburg Capital. Your line is open.

Good morning. Thank you for squeezing me in here. You exited the quarter with private label representing, what, 4.4% of your grocery and general merchandise sales. Where do you see that penetration landing this fiscal year and over the medium term? And are new stores and acquired stores starting with a higher private brand penetration relative to the rest of the fleet? Thanks.

Yeah, Brian, you're right. The private label exited August with 4.4% penetration rate. Our goal for the year is 5.25%. So we expect to continue that migration. And then over time, we expect to get to 10%, but that's going to be a multi-year exercise. We've already launched 209 private label products since we've launched the program, and we have another 60 products in the pipeline that will be launching between now and the third quarter. So we feel confident in getting to that level of penetration. In the new stores, I'm not sure that we're seeing any significant difference between new stores and existing stores. The acquisition stores, it's very early stages. We'll bring in those products as we convert those stores to Casey, so very early days on those. But I would anticipate that they would reach the same mix as our more traditional stores.

Great. And then just a quick follow-up. Do fuel margins, I mean, XRENs, they're still pretty high. Do they continue to influence the M&A environment or are potential targets more willing to sell than they have been during this elevated fuel margin environment given potential capital gains tax treatment changing? Thanks.

Yeah, I think you hit it. You hit the nail on the head. I think it's less about fuel margins right now, more about just the underlying costs and complexity of operating the business today, particularly in this environment with COVID and and then compounding that is the potential of the capital gains tax changes, and I know they're talking about that as we speak. And so we are seeing increased level of deal flow, and so we're looking at other opportunities, but we expect that that's going to be a catalyst in the near term for increased M&A activity. Did we lose you, Brian? We lost Brian.

I think we're ready for the next question. Sorry. Thank you, guys. Appreciate it.

Thank you. Our next question comes from Karen Short with Barclays. Your line is open.

Hey, good morning, guys. This is actually Renato Basanta on for Karen. Thanks for fitting us into the call. Just one quick one for me. Can you just talk a little bit more about the competitive landscape from a breakfast day part perspective? And then if you could just remind us what breakfast is as a percent of prepared food sales, that would be great. Thank you.

Yeah, Renato. In terms of the landscape, I think what you saw a year ago when lots of businesses were shutting down, offices were shutting down, people were sheltering in places, you saw a disproportionate impact on the breakfast day part. And that hit everybody from the Starbucks of the world to McDonald's to us. Anybody that was in the morning day part was impacted by that. So now you fast forward a year later, I think everybody's – optimistic about getting that business back to normal as more, as schools are in session in person and more people are returning to work than there was a year ago. So you've seen McDonald's come out with more promotional activity. Wendy's has certainly been very active in the space. Taco Bell just announced that they're bringing breakfast back after suspending it. And so there's a lot of increased activity. So Like I mentioned before, we like our position. We think we've actually got real innovation that the others don't have. They're kind of recycling what they've been doing historically, so we think we have a niche there that we can capitalize on. Breakfast is about a third of our prepared foods business. A lot of that comes in our breakfast pizza, but a lot of other things like donuts and baked goods and coffee and And sandwiches also play a big role, and that's where we've innovated is on the coffee and on the breakfast, the other breakfast lineup. So we'll always have that base of breakfast pizza to lean on, but we've got the innovation on top of it that we think will help us accelerate our breakfast growth.

Perfect. That's great, Culler. Thanks, and best of luck.

Thanks.

Thank you, and there's no other questions in the queue. I'd like to turn the call back to Darren Rebellitz for closing remarks.

Darren Rebellitz All right. Thank you for taking the time today to join us on the call. I'd also like to thank our team members one more time for their efforts this quarter. We're off to a great start to fiscal 22, and we'll continue to be nimble as we navigate through the recent Delta variant resurgence. Fortunately, we've demonstrated our ability to deliver results on our long-term strategic plan in both normal times and during a global pandemic. and I'm confident we'll continue to drive shareholder value. So thank you, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.