Caseys General Stores, Inc.

Thank you for standing by. Welcome to the Q4 fiscal year 2022 Casey's General Store 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 the session, you will need to press star 1 on your telephone. Please limit yourself to one question and a follow-up. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Chad Brunt. Please go ahead.

Good morning, and thank you for joining us to discuss the results from our fourth quarter and fiscal year ended April 30th, 2022. I'm Chad Bruns, Senior Analyst, Investor Relations, filling in for Brian Johnson, who is under the weather. With me today are Darren Rebellas, President and Chief Executive Officer, and Steve Bramlage, Chief Financial Officer. Before we begin, I will 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 recent and pending acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine 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 intention or obligation to update or revise forward-looking statements, whether as 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 fourth quarter, can be found on our website at www.caseys.com under the Investor Relations link. With that said, I would now like to turn the call over to Darren to discuss our fourth quarter results. Darren?

Thanks, Chad, and good morning, everyone. I'm looking forward to sharing our results in a moment, but I'd like to start by thanking our 42,000 CASES team members for their tireless efforts and contribution to a fantastic fiscal year. Our team members have done an outstanding job navigating through these challenging times, and the team's ability to be nimble and perform at a high level under difficult circumstances It's something I'm especially proud of and grateful for, and we certainly would not have delivered another record year without their efforts. At Casey's, our purpose is to make life better for our communities and guests every day. As a rural Midwestern operator, we play a significant role in the towns we operate in. It is a privilege and responsibility we take to heart. Throughout the fiscal year, we have truly been here for good. We raised $1 million in funds for organizations helping veterans and our families. We raised $1 million to help local schools through our Cash for Classrooms grant program, and we enable over 5 million meals for our neighbors in need. We are here for our communities, and we want to give back to those communities and guests that support us. Now let's discuss the results of the past fiscal year. Fiscal 22 was a record year for diluted EPS, finishing at $9.10 per share, a 9% increase from the prior year. The company also generated a record $340 million in net income and $801 million in EBITDA, an increase of 11% from the prior year. Inside sales and gross profit were each up 14% versus the prior year, as guests returned to the store to buy pizza slices and items from our refreshed breakfast menu, among other Casey's favorites. Inside gross profit margins remained flat compared to the prior year, an impressive outcome given the merchandising cost pressures impacting the industry. Inside gross profit grew more than fuel gross profit in fiscal 22, a trend we expect to continue as we add kitchens to our recently acquired stores. Total fuel gallons sold increased 18% in the fiscal year. and fuel gross profit increased 22%, averaging a $0.36 per gallon margin over the course of the year, despite rising fuel prices as consumer demand improved. Free cash flow was impressive, $462 million, proving that we can grow the business while preserving the balance sheet. We closed three large strategic acquisitions that were a significant part of the 228 new units opened this year. Through these acquisitions, we have strengthened our presence in the Nebraska and Illinois markets through the Buc-ee's acquisition and acquired immediate scale in the Oklahoma City and Knoxville, Tennessee markets with the Circle K and Pilot acquisitions, respectively. These acquisitions also fit seamlessly into our existing distribution network with the addition of our third DC in Joplin, Missouri in May of 2021 and continued our expansion into the southwest portion of our footprint. We're excited about the strong progress we've made integrating all three strategic acquisitions and realized approximately $15 million in run rate synergies on the Buc-ee's acquisition this year. Casey's Rewards continues to grow and has become a significant part of our guest experience. We recently exceeded 5 million members and are poised to leverage this platform to communicate with our guests more effectively than ever. Our private brand program exited the quarter at 5% penetration of the grocery and general merchandise category. We currently offer over 250 items and are confident in our ability to achieve 6% penetration next year and our long-term goal of 10% over the next several years. I'd now like to turn the call over to Steve to discuss the fourth quarter and our outlook for fiscal 23. Steve?

Thank you, Darren, and good morning. Before I jump into the financials, I would also like to take a minute to acknowledge the entire team, given the strong performance both in the quarter and for the record-breaking fiscal year. The excellent financial results wouldn't have been possible without their hard work and dedication. The fourth quarter was the first one where we are fully consolidating the results from all three of the significant and it's easy to see the impact of the unit growth along with the strong mothership execution on our total results in the quarter. Here are just a few examples to help contextualize the magnitude. Total fuel gallons sold rose by almost 86 million gallons, or 16%. Total inside sales revenue rose over $120 million, or 14%. Total revenue for the quarter was approximately $3.5 billion, which is an increase of $1.1 billion, or 45%, from the prior year. Now, in addition to the increase in gallons sold and inside sales, higher retail prices of fuel contributed to this increase as well. Total gross profit rose $96 million, or 17%. This exceeded the rise in total operating expenses of $65 million, or 15%. And as a result, total EBITDA rose $31 million, or 23%. Diluted earnings per share for the fourth quarter were $1.60, which is up 43% from the prior year. While the new units had a significant influence on our overall results, it's important to highlight the healthy performance of our existing fleet this quarter. Same-store sales were strong for both inside sales and fuel as guest traffic continued to improve. Inside, same-store sales were up 5.2%, while fuel gallons increased 1.5%. Our inside margin decreased 50 basis points versus the prior year, primarily due to wholesale cost inflation, and that was partially offset by retail price increases. It was a very strong quarter by all accounts, but it didn't quite reach the level that we had anticipated at the time of our most recent business updates. The end of April proved to be quite volatile in terms of fuel cost, and ultimately we finished several million dollars, or about a penny a gallon, below our expected fuel profitability level for the quarter. Total inside sales rose 13.6% from the prior year to a billion dollars, with an average margin of 39.4%. For the quarter, total grocery and general merchandise sales increased total prepared food and dispensed beverage sales rose by $30 million to $293 million, an increase of 11.3%. Same store, grocery, and general merchandise sales were up 4.3%, and the average margin was 32.5%, which is an increase of 70 basis points from the same period a year ago. The merchandising team continues to do an excellent job inflation in the center of our stores. Sales were particularly strong in our non-alcoholic and alcoholic beverages, and we experienced a favorable mix shift in these categories as single-serve and smaller package sizes outperformed. Non-alcoholic beverages in total were up over 32% on a two-year stack basis. Alcohol same-store sales were up high single digits and and up over 18% on a two-year stack basis. Same-store prepared food and dispensed beverage sales were up 7.6% for the quarter. The average margin for the quarter was 56.9%, which is down 320 basis points from a year ago. Pizza slices continued to perform well, up 21% for the quarter, while hot breakfast sandwiches were up close to 41% as part of the company's breakfast menu relaunch that began in September. Margin has been adversely impacted by cost increases in our food ingredients, partially offset by menu price increases, along with an uptick in waste as stores kept the warmers full of grab-and-go items to keep up with the higher demand. Cheese costs were meaningfully higher than the prior quarter, up 33 cents per pound to $2.26. The adverse impact of higher cheese to gross profit was about $3.5 million, or 118 basis points on margin. We took a further series of price increases in the middle of the quarter and another round at the start of fiscal 23 to further offset these cost increases. The team remains committed to maintaining profit margins at historical levels over the long term inside the store. During the fourth quarter, same store fuel gallons sold were up 1.5% with a fuel margin of 36.2 cents per gallon, up approximately 3.2 cents per gallon compared to the same period last year. Wholesale cost rose 74 cents a gallon, causing an extremely challenging margin environment, especially in the last few weeks of the quarter. Yet our fuel team did a remarkable job responding quickly and maintaining strong fuel margins while preserving and balancing gallons growth. Retail fuel sales were up $900 million in the fourth quarter, driven by a 16% increase in total gallons sold to 621 million gallons, as well as a 40% increase in the average retail price per gallon. That average retail during this period was $3.77 a gallon compared to $2.70 a year ago. As a reminder, reported fuel results do not include the Buchanan Energy wholesale business, which is included in the other revenue category and is responsible for the vast majority of the $57 million increase that we saw this quarter in this line item. Total operating expenses, excluding credit card fees, were up 13% to $438 million in the fourth quarter. Total operating expenses were up 15.2%, or $65 million, which was consistent with our expectations. Approximately 9% of the operating expense increase is due to unit growth, as we operated 209 more stores than the prior year. Approximately 4% of the increase is due to same-store employee expense, and 2% of the increase is due to higher credit card fees from high fuel prices. As an aside, we have incurred approximately $55 million of additional credit card fees in fiscal 22. Evened off for the quarter was $165.8 million, a 23% increase. This represents a record high fourth quarter for the company. Depreciation in the quarter was up 11.4 percent, driven primarily by the store growth, along with the new distribution center that was placed in service at the start of this year. Net interest expense was $15.3 million in the quarter, as compared to $11.2 million the prior year. The increase is due to the additional debt taken on to fund the Buchanan Energy and pilot acquisitions, as well as approximately $1 million in a non-cash write-off of previously capitalized loan prepayments. The effective tax rate for the quarter was 17.8% compared to 22.2% in the prior year, driven by a one-time benefit from adjusting the company's deferred tax liabilities for lower state income tax rates within our footprint that were enacted during the quarter. Net income was up versus the prior year to $59.8 million, an increase of 43%. The Buchanan Energy, Circle K, and Pilot Acquisitions were all accretive to EBITDA in the fourth quarter as we expected. Our balance sheet remains strong at April 30th. We have ample liquidity of $634 million. We were also able to prepay $168 million in variable rate debt due to strong cash flow. Our total floating rate exposure is currently about 16% of our portfolio, which insulates us quite well in the current rising rate environment. And furthermore, we have no significant maturities coming due until fiscal 2026. Our leverage ratio decreased to 2.1 times, and our balance sheet has plenty of capacity to make good strategic investments as they present themselves to us. For the quarter... Net cash generated by operating activities of $252 million less purchases of property and equipment of $98 million resulted in $154 million in free cash flow. PP&E spending levels in the quarter were constrained by supply chain challenges. At the June meeting, the Board of Directors voted to increase the dividend to $0.38 per share, marking the 23rd consecutive year that the dividend has been increased. We will continue to remain balanced in our capital allocation going forward, primarily leaning in to the many EBITDA and ROIC accretive investment opportunities that are in front of us. We expect to naturally reach our target leverage ratio of two times debt to EBITDA during fiscal 23, and therefore we do not anticipate further discretionary debt repayments at this time. And we will remain opportunistic related to our $400 million share repurchase authorizations. Although uncertainty remains, given the all-time high fuel costs and the potential impact the current macroeconomic conditions may have on consumer behavior, the company is providing the following fiscal 2023 outlook. Casey's expects same-store inside sales to be up 4% to 6%, with an inside margin of approximately 40%. Same-store fuel gallons sold are expected to be between flat to up 2%. Total operating expenses are expected to increase 9% to 10% based on current fuel prices, and approximately half of that increase is same-store related, and the other half will be from unit growth. Total OPEX will be up low teens in the first quarter of the year and should fall back to mid-single digits in the second half once we cycle through the acquisition activity of FY22. We expect to add approximately 80 new units in fiscal 2023. Interest expense is expected to be approximately $55 million, while depreciation and amortization will be roughly $320 million. We expect to purchase $450 million to $500 million in PP&E. and that includes approximately $135 million related to one-time investments for remodeling the recently acquired stores, largely to put in kitchens. We expect a tax rate between 24% and 26%. We also expect to realize $20 to $25 million in run rate synergies in fiscal 2023, from our recent acquisitions as we complete the remodeling activities with more of a second half bias based on the current permitting timelines. We also expect free cash flow of at least $250 million. Given the unprecedented fuel cost volatility that we've seen in the past few months, we're not guiding to a CPG figure at this point. For model calibration purposes only, however, at the midpoint of this guidance, annual fuel profitability in the mid-30s CPG would lead to EBITDA growth for the year of at least 5% to 6%. Our first quarter experience to date is as follows. CPG is slightly below prior year levels. Same-store gallon growth is at the low end of the annual range. and same-store inside volumes are at the midpoint of our annual expectations. Cheese costs remain elevated on a year-over-year basis, and they're currently running approximately 30% higher than in the prior year. With that, I'll turn the call back over to Darren.

Thanks, Steve. I'd like to again say thank you and congratulations to the entire Casey's team for delivering another record year. The hard work of the team and dedication to Casey's gives us confidence in our ability to execute on our three-year strategic plan. As you can see, our business has performed exceptionally well in a challenging macroeconomic environment. Casey's has shown tremendous resiliency, and we're positioned especially well to deliver future value to our shareholders through our strategic plan, which is being enhanced with our commitment to technology. As a reminder, the three pillars of our strategic plan are reinvent the guest experience, create capacities through efficiencies, and be where the guest is via disciplined store growth. All three pillars are supported by investing in and growing our talented team. We're leveraging technology more now than ever before to reinvent the guest experience. We've built a well-respected tech, digital, and data team that will position us for the future as we embark on our Casey's modernization journey. Our focus on technology is centered around three primary areas, drive guest engagement and experience, improving team member engagement and impact, and supporting our growth via supply chain, merchandising, and fuel capabilities. The goal is to create a guest experience that is best in class. Our mobile app now represents 65% of all digital revenue, which is currently driven by Whole Pies. We recently added 700 stores that can now deliver beer and hard seltzers along with their pizza orders. We also rolled out a car wash subscription program for our 200-plus car washes. We plan to utilize technology to ease manual functions within our stores and enable our team members to spend more time on our highest priority, our guests. Merchandise ordering efficiency, inventory management, along with more robust data analytics will create efficiencies in our stores along with improving accuracy and communication between our stores and our supply chain. Regarding creating capacities through efficiencies pillar, our efficient self-distribution model has served us well through these trying times and is poised to help us navigate through the challenging near-term inflationary and supply chain environments. Our fuel pricing and procurement teams have navigated through the last two years of unprecedented fuel volatility tremendously well and will continue to play a critical role in growing EBITDA as we look to fiscal 23. Finally, our recently created central procurement team, as well as the new asset protection department, are hitting their stride. Obviously, our store growth pillar, be where the guest is via disciplined store growth, was on full display in fiscal 22. We more than doubled our previous record high unit growth with 228 newly constructed and acquired stores. Our two-pronged approach to growing the business by taking advantage of strategic acquisitions when they are available, alongside organic growth, should give our shareholders peace of mind that we can ratably grow the business year after year. Our dedicated M&A team is still sourcing more stores, whether it be a single store owner or a 100-store regional chain. In the meantime, our real estate team is actively pursuing sites for new store construction. This strategy enables Casey to remain disciplined, We do not need to overpay or chase non-strategic acquisitions to hit our growth targets. With respect to our people, we've filled out the leadership team with the right amount of legacy experience and fresh perspectives to drive the long-term strategy. In fact, about 60 percent of our leadership team reflect diversity in ethnicity or gender. The diverse background of our leadership team has made a positive impact on how we think through critical issues, support and develop our people, and reflect Casey's values. Our team's diversity also ensures we take into consideration a wide range of perspectives and experiences when we build our strategic plan and set goals, lead our teams, and navigate challenges. Our shareholders can also look forward to our second annual ESG report to be issued in July with our annual report and proxy statement. We received positive feedback from our shareholders after our first ever report last year. Shareholders should expect progress from last year, particularly with respect to more quantifiable metrics, as well as the completion of our first ESG materiality assessment. As we look ahead to fiscal 23 and beyond, I remain confident in Casey's business model in the face of uncertain times. People are still returning to work, and that will continue to drive increased foot traffic to our stores. In addition, if you look back to the last two recessionary periods of 2008 and 2014, our company performed very well. And during those times, we did not have the value proposition of a private brand program like we do now, nor did we have a loyalty platform like Casey's Rewards to effectively communicate meaningful promotions to our guests. During inflationary times, people tend to shift buying habits toward basic needs, such as food, beverages, and fuel. Also, our products are considered a relatively low-cost indulgence and is the very last thing a consumer is going to give up when looking to cut costs. These are two significant capability improvements that will offer a competitive advantage in favor of cases. I can assure you that our leadership team is excited to take on fiscal 2023. We'll now take your questions.

Certainly, ladies and gentlemen. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please limit yourself to one question and a follow-up. Our first question will come from Anthony Bonadio of Wells Fargo. Your line is open.

Hey, good morning. Thanks, guys. So for starters, I just wanted to ask a bit about the guidance. Looking at the OpEx guide, it looks like costs are running quite a bit higher than your guidance. I think you guys said something like 30% quarter to date. I guess what gives you confidence that that's going to decelerate so much? And then beyond that, how are you thinking about the labor piece of that figure?

Yeah, Anthony, maybe I'll start on just the cadence, and Darren can chime in, obviously. You know, I think the primary influence on the way optics will play out over the course of the four quarters next year is what we're lapping in fiscal 2022. So, you know, half of our increase will still be from new units, and that includes the units that we lapped in the prior year, and so we didn't close yet. the Buchanan acquisition until the middle of May last year. We didn't close the Circle K acquisition until the end of May. So we will pick up, you know, at least a month, as the case may be, of kind of incremental optics just from those two acquisitions. And then we still have to lap the pilot later in the year. So that's what drives most of it. And then really face quite a bit of labor inflation in the middle of the first quarter in the prior year, where we put into place a variety of referral, retention type of bonus structures in our field. And so as we lap that, that puts a little bit more pressure on the first quarter lap. And as it cost inflation. Cheese cost is not operating expense for us. That sits in our gross profit line in our prepared food business, and so that would not be relevant to the operating expense number. Darren, do you want to comment on just kind of what we're seeing in the labor market?

Yeah, I think from the labor side, things have somewhat started to normalize. We still have inflation on wages, but that has moderated a bit from what we were experiencing, but still we have to lap over some significant increases from prior year. The other thing I would add is that credit card fees are a bit of a wild card at this point in terms of, you know, the high fuel, high retail price of fuel and what that impact can be. And to put that in context, for every 10 cents in retail price increase, that equates to about $4 million in incremental credit card fees on an annualized basis. So as fuel prices are continuing to kind of soar into record high territory, we'll still feel that impact on credit card fees, and it's hard to predict at this point where the top is and when that may start to decline. So we've factored in some of that into the OPEX guide for the year.

Got it. That's really helpful color. And then I also just wanted to touch on fuel margins. Clearly, Q4 continued to be strong for you guys. I know it trailed off a bit in the end, and it seems like industry data in May showed pretty significant declines. Sounds like you guys are seeing something better than that quarter to date, but just any color you can give us on how you're thinking about the path from here.

Yeah. You know, I thought a lot about how I wanted to talk about fuel margin and how that's looking. This is an extremely volatile environment right now. And when I was in the military, we would call this a VUCA environment, which is an acronym for volatile, uncertain, complex, and ambiguous. I think all of those words describe what we're experiencing in fuel right now. As we mentioned, we'd seen an increase of about 74 cents in costs through the quarter. If you were to shift that from the beginning of the fiscal year to now, it's about $0.80 in cost increase. But on the path of that $0.80 increase, we've had a couple of periods where cost declined over $0.20 a gallon. So the volatility is pretty extreme, and we're working hard to overcome that. And so what I tell you is we feel confident in our ability to manage through it. we've spent a lot of time over the last couple of years building the fuel pricing team and building up their capabilities, and I think they've proven themselves to be adept at managing through volatility, certainly through COVID, and now we have different drivers of that volatility, but we feel confident in our ability to do that. Now, that being said, it's not going to always neatly line up with quarter end or any other artificial timeline that we draw to, so I think over time, over the course of the year, we will manage it well and we will be able to navigate through it. But as you saw in the fourth quarter, we gave some guidance in a business update and margin changed pretty dramatically over the couple of weeks after that. And so we missed it by about a penny or so. But overall, we think we'll be able to navigate through it. It'll just be how that plays out quarter to quarter that's really the big wild card here.

I may add, Anthony, to that. I do think it's important to reiterate, though, the structural dynamics that kind of underpin the historically high levels of CPG for the industry remain in place, right? I mean, the fact that the operating costs of the business for the industry, for all the reasons we talked about in the OPEX discussion of just higher labor and higher compliance costs and higher credit card fees, those still exist. And those exist whether CPG moves by a penny or two from a near-term perspective. And so we don't see any change as we sit here today from an industry perspective, though, around, you know, what has really driven kind of the industry to a different platform level of fuel profitability. None of that's changing. And for small operators, all of those issues are even more acute than they are for the larger players.

Got it. That's really helpful, guys. Thanks, and good luck. Thank you.

And our next question comes from Ben Bonvenu of Stevens. Your line is open.

Hey, thanks. Good morning, guys.

Morning, Ben.

Morning, Ben. So I want to ask about the in-store merchandise margins. You pointed to 40% margins, which I think is, notable given all the cost pressures that you and your peers are seeing. When we think between grocery and prepared food, I would think the margin compression would reside in the prepared food business. Maybe there's margin expansion in grocery, but please correct me if I'm wrong. And then if you could talk about what, if anything, you've done to afford to buy cheese and mitigate any price or cost volatility there, that would be helpful.

Yeah, Ben, this is Darren. I'll go ahead and start, and Steve can kind of fill in the blanks. I think with respect to the margin, we certainly have the intent to stay ahead or try to stay at pace with inflation throughout the year and maintain that margin in that 40% range. The grocery and general merch side is going to be a little bit more manageable because, as we've discussed before, those Those agreements with the major CPG manufacturers are on a calendar year basis, and we took some of those cost increases kind of January 1, and we had planned retail price increases to mitigate those. And so, as you've seen, we've still been able to have margin expansion in grocery and GM in spite of the inflation. So we think we're pretty solid on that side of the ledger. On the prepared foods, it is more commodity-based. And so that tends to be a little bit less rateable. But we've taken three retail price increases so far since October of last year, one of them most recently in the last couple of weeks. And we think we have more pricing power there because it's a little less commoditized in retail, meaning nobody really knows what the proper price for a slice of pizza should be or for a breakfast sandwich. We believe we have a little more pricing power there. It'll be a matter of being able to keep ahead of it. As we sit here today, we believe we're caught up to that. We just need to continue to see how commodity prices impact, and then we'll have to manage through the pricing piece of it. Steve, any other?

On the cheese specifically, we have a little bit of cheese bought forward in the fourth quarter of fiscal 23, but we really don't have anything bought forward in the first three quarters. I wish we were able to secure cheese at a reasonable price in the forward market. The company has a history, obviously, of buying forward where it makes sense for us. We watch it like a hawk every single day. The last six months have proven to be very difficult to find forward pricing that really makes any sense. And so we've not been a big player in that space. And so going into fiscal 23, it's a de minimis level of locked-in pricing as we sit here today. Hopefully that changes, and obviously we will take advantage of it if we can do that on reasonable terms.

Okay, great. That makes perfect sense. Darren, you alluded to some of the pricing increases you've taken. When we think about your 4% to 6% in-store sales growth in 2023, if you could disaggregate price versus volume in that, that would be helpful as we think about the composition of growth this next year.

Yeah, I guess, Ben, probably the way I'd look at it is if we took a look at the fourth quarter, what we saw is about 4.5%. of the increase was from price and about half a percent was from unit velocity, which equated to the little over 5% same-store sales increase. I would expect an equation similar to that. We have a lot of different consumer dynamics going on right now with inflation the way it is. We're seeing that consumers are buying less take-home size packages of things and more single-serve items, which tends to accrue to our benefit on the margin side. And so we think that that will continue to help us out. And it helps out on the sales side with frequency. So I think people are making more frequent trips but buying less per trip. Now, in Inflation and price increases have kind of mitigated that average retail, so the average retail is still up. But we think it's going to be mostly driven by price and flat to higher, slightly higher traffic.

Okay, great. Thank you, and best of luck. Thanks.

And our next question comes from Irene Mattel of RBC Capital. Your line is open.

Thanks. Good morning, everyone. Just one point of clarification on your answer to the last question. With respect to sort of the trade down in package size, does that apply to tobacco as well as beverage?

Yeah, Irene, it does. Yeah, it does. Actually, over the last couple of quarters, we've seen that mix of cartons to pack really start to get back closer to pre-COVID levels and If you recall during COVID, things swung a little bit heavier on the carton side, less on the pack side as people spent fewer trips going to stores. That's all reversed, and we are almost back to normal on that mix, which is about 85% single packs and about 15% cartons.

That's really helpful. So essentially what you're seeing is what you've seen previously when we've had consumer spending being pinched. Is that a reasonable comment?

Yeah, I think so. You know, when cash is a little bit tight, people just buy less per occasion than they normally do. That doesn't mean they really stop. They just don't pantry fill as much as they used to. And so we're seeing some of that behavior begin.

Yeah, thanks. That's really helpful. I also wanted to come back to a question about gas margins. And, you know, clearly we all recognize the challenge with forecasting those. But I was really intrigued by your comment around kind of if we use the mid-30 range, then, you know, you get to 5% to 6% growth. Is it safe or should we infer from the way in which you phrased it, that as a result of all of the initiatives you've put into place, you think that on a longer-term basis, that mid-30 range could be sustainable?

Well, Irene, I've referred, you know, I've talked about crystal ball and fuel margins before. You know, it's a difficult one to say. What I do believe to be true is, is what Steve referred to earlier. The underlying cost of operating a business in this industry is high now and is going to continue to stay high and potentially increase when you look at the cost of labor, the cost of regulatory compliance, and everything else that's going on in the world. So I don't see those margins retreating anytime soon. Now, there is a bit of a wild card in there, and that's with the retail price of fuel, because I think margins tend to expand a bit to compensate for the credit card fees associated with higher retail prices. So I would anticipate that those can maybe go up in the short term as we see these really high fuel prices, and then they could come back down a little bit to offset that. So net-net, you end up in the same place, but on a cents per gallon, it may look a little bit higher to overcome those inflated credit card fees.

That's very helpful. And just one final question. On the GAS volume guidance, you know, if we take that plot to plus 2%... Our next question comes from Bonnie Herzigol from Goldman Sachs.

Your line is open.

Oh, hi. Hello, everyone. So I kind of wanted to go back and just kind of ask a little bit differently on the fuel margins. I just wanted to understand that what you laid out in terms of the mid-30 CPG margins, and you noted this implies the 5% to 6% EBITDA growth. But, Darren, you know, how are you guys thinking about your medium-term EBITDA growth target of 8% to 10%? Is that, you know, something that you see as still doable? And I guess I'm also... asking in the context that, you know, this target assumed, I believe, OPEX growth of 7% or lower. So just given your guidance this year or next fiscal year for high single-digit OPEX growth, you know, how at risk is that, you know, EBITDA growth target of 8% to 10%?

Yeah, Bonnie, the 8% to 10% was a tager over a three-year period. And as we sit here today, Steve, keep me honest, I think we're 11 to 12 percent, somewhere in that range, over the first two years of that plan. So we're cycling over, I think it was a 12, then an 11 on top of a 12, and now we'll put a 5 or 6 on top of an 11. So the math will work out very favorably for the three-year CAGR of 8 to 10 percent. So we feel very confident in our ability to do that. And, you know, look, there's There's just a lot going on in this environment right now that makes it volatile. So we think we've taken the right approach in terms of giving the guidance where we think we can land it, and that will still help us to land on our commitments from investor day over that three-year CAGR. Steve, you can talk about topics.

giving EBITDA guidance for next year. It's just a modeling exercise to calibrate folks. Darren's points are all 100% valid, right? Over the medium term, our algorithm holds. We feel very confident about our ability to do that. That algorithm includes growing OpEx at a slightly lower clip than we would grow EBITDA. We feel very good about doing that. Some of that's going to come from the same store. Some of that will come from new units. As it relates to fiscal 23, it just so happens because we're still lapping non-same-store acquired units from fiscal 22, you get a little bit of extra new unit pressure associated with that. Obviously, it's a super high credit card environment, but our confidence in that medium-term algorithm is is unchanged from where I sit, for sure.

Okay, that's helpful. And I then wanted to ask about prices at the pump, which continue to go up quite a bit. And curious to hear, what's your expectation of where prices could head this year? And I guess I'm asking because trying to understand what would be implied or assumed. you know, based on the guidance you laid out, you know, where do you see prices going? I mean, do you think they could go above $6 a gallon? And, you know, thinking about when we may hit true demand destruction, you know, do you guys have a level that you think that will occur at? Thank you.

Yeah, Bonnie, you know, it's really hard to predict where we're going to see those prices ultimately peak out. And I would say it's very – geography specific, we have a pretty wide range from the most expensive areas in our geography to the least expensive. And so if you were to take a look at the greater Chicago suburbs where we just acquired some Bucky stores, those retail prices are well north of $5 and approaching that $6 range that you referenced. At the other end of the spectrum, we have some areas that are just slightly over $4 a gallon. So it's a pretty wide range. In terms of demand destruction, we've kind of modeled this out based on our quartiles, so on retail prices. So where we look at our top quartile of retail prices, which is well north of $5 a gallon at this point, we are starting to see some erosion in volume in the low single digits. In the middle two quartiles, we're kind of flat-ish to maybe slightly down. And then in the bottom quartile, we're still seeing gallon growth. So to throw all that together, you know, we feel like that flat to 2% is a solid number for guidance. But, again, we'll have to see how this plays out. You know, $6 a gallon is uncharted water for everybody, so I'm not sure what to expect with that, but I would imagine there is some demand destruction at that point.

And our next question comes from Chuck of North Coast Research. Your line is open.

Good morning, everyone. Great quarter. Talk about, please, if you can, how the customer who's pumping gas and then stopping in for prepared foods, how they're maybe trimming down what they buy. And is that reflected in your comment before? with pizza slices being up so much? Are they giving up other purchases that may be going with the pizza or beverages or the other items that are available?

Yeah, Chuck. We haven't seen any reduction in what people are buying or the frequency of people coming into the store. What we have started to see is some trading around within the store. Certainly our private brand products have resonated well, and we exited the quarter at 5% penetration. As we sit here today, we're at 5.2%, so we've increased 20 basis points in about a month with that shift towards private brands and just some more affordable options. So we haven't seen that behavior shift there. What we have seen on the fuel side is – A few things in terms of change of behavior. People aren't initially just pulling back on buying fuel. What they are doing is changing their fuel buying behavior. The average fill-up is down about a gallon versus where it was the same time last year. People are purchasing just a little bit less fuel than they had historically per visit, but they'll end up having to make more visits to the store over time, which we believe gives us a better opportunity to get people inside the store to buy more stuff. The second thing they're doing is shifting over to higher blends of ethanol because the ethanol economics are actually working out pretty favorably right now from a consumer perspective. So they'll shift over to an E15 type of product versus what most of the fuel is blended at E10. And so we've seen about a 200 basis point shift and mix on E15. And then the last thing is, you'll see some customers trade down from premium into regular fuel to save money that way. But overall, those are some of the behaviors we're starting to see right now.

David Morgan And I was going to ask about that fuel sales mix. So, when the latter occurs, that hurts your margins, but increased purchases of a richer ethanol mix, helps your margin, correct?

Yeah, that's correct.

All right, thank you. Good luck for the new year.

Thanks, Chuck.

And our next question comes from Bobby Griffin of Raymond James. Your line is open.

Good morning, Bobby. Thanks for taking my questions. First one is on fuel. I apologize. I know we've asked a lot about it, but I'm just curious. There's been a nice inflection point in Casey from pre-pandemic into the pandemic where you guys have outperform the Opus average for the Midwest. And as us as investors and analysts, is it fair to hold that outperformance going forward? Is that like a goal or should we think about that you guys can continue to outperform, understanding, predicting the actual margins a lot harder, but can we keep the outperformance based on a lot of the structural changes that you guys have made to your fuel practice? Is that something you can comment on or talk a little bit about?

Yeah, sure, Bobby. I would say that we expect to outperform our competitors on every category that we compete in. And fuel certainly is one of those we've made significant investment in, and we have had some good success over the last couple of years. I don't see that changing. I think We've really stood up some strong capabilities and a very, very talented team that has proven that they can execute an environment. I think these more volatile environments are really where you see the talents of that team start to shine. And so, yeah, I would certainly expect that we would outperform our competitors in our geographies.

Okay. And then Dan, your, your quartile data was, was very interesting. And I don't know if the, the prices match up on directly as, as my question is going to go from a, you know, location standpoint, but in the quartiles that you see the higher gas prices and you have more wool based stores, are you seeing higher trips to your kind of grocery stores as the larger grocery stores probably further away for that customer? So they're shopping more frequently with you, given that they can, you know, um, you know, given that it's a much further trip to the Walmart or whatnot in those small markets?

Yeah, Bobby, I don't have any data in front of me that would tell me that. I certainly would expect that as retail prices get higher. I think where we've really seen the extreme retail prices, like I said, are in more of those Chicago suburbs. That's probably not the dynamic you're referring to. In the rural areas, particularly outside of Illinois, we haven't seen those extreme prices like we're seeing in Illinois. So it's, we'd have to get back to you on that data point, but don't have that in front of us right now.

And our next question comes from Anthony Levitsky at the Dodian company. Your line is open.

Yes. Good morning. And thank you for taking the question. So I just wanted to switch gears a little bit here. So, You talked about private label doing well and exiting the year with 5% penetration. So, as you look forward here, which product categories are you mostly focusing on as you look to expand the private label portfolio?

You know, Anthony, we're working on a lot of different categories right now in private brand. We're actually participating in 26 different categories of private brands, and Some of those are underpenetrated. Some of those are more penetrated. But I can tell you where we've seen some successes so far. In the last quarter, we launched a line of Casey's Candy Bars, which is something we had never played in before. And they have become the number one standard size bar in dollars, units, and margin within the category. And when I say that, I mean that's outperforming Reese's, Snickers, all of those national brands. And so I think it really illustrates the quality and the value that those products provide. The other thing that I tell you about, you know, we've had this longer-term goal of getting 10% penetration over time. And within the grocery and general merch category, and that is a – it doesn't sound as big an order – as it is, but when you factor in the fact that tobacco plays a pretty significant role in that grocery and general merch category, and that tobacco category gets four cost increases per year, so that math becomes more challenging on a mixed perspective. But the point I'd like to make is on the 26 categories that we play in today with private brands, We are already at a 10% penetration in 14 of those categories. So I think when you kind of take the tobacco equation out and you look category by category, we're having some really good success in there. And we launched 23 new items in the fourth quarter. We have another 20 items coming out in this quarter. So we're very bullish on private brands. And now in this inflationary environment, we think that's a little bit of a tailwind for us as we continue to expand on those products.

Thanks for that. And then just going back to the labor commentary, so you talked about labor costs before, but as far as labor availability, can you give us some comments as to what you're seeing there?

Yeah. You know, labor still remains tight, although I think our operations and HR teams have done a really good job of managing that. We haven't had any issues where we're closing stores or limiting hours because of of team members, and as we sit here today, we've actually seen an uptick in applications, and we are just below one person per store opening. So I would, in a historical context, I'd say that's about average. That's kind of normal. So I feel really good about where we're sitting from a staffing standpoint at this stage of the game.

And our next question comes from Kelly Bonilla of BMO Capital. Your line is open.

Hi. Good morning. Kelly Bonilla here. Thanks for taking our questions. Wanted to see if you could shed some light on your total merchandise sales growth outlook, obviously the 4% to 6% comps. from a non-comp perspective, given still some M&A and some of the kitchen remodels, just to help us understand kind of what you are expecting on the total merchandise growth outlook?

Yeah, hey, Kelly, good morning, Mrs. Steve. I'll start with that. I mean, it's certainly going to be higher than the same store number. I mean, if you just think of the way we lap stores, Those won't come in, you know, all in the first quarter like a lot of them came in last year. But you'll get a benefit associated with those. And you're correct in that the remodeling benefit that we get in these new stores, you know, the day we close the store, depending on the permitting timeline, it's not in the same store number. And when we open that kitchen, you kind of get a step up. as we start to sell a lot more prepared food from a base, usually up close to zero. And so we haven't quantified, and I don't think we'll disclose the specific number associated with that, but clearly your instinct is correct in that the total merch sale number should be noticeably better than what that inside run rate turns out to be.

Okay, that's helpful. And also just wanted to ask about the prepared food. You talked about I think the March price increases, sounds like another in April. Just one, the response in terms of elasticity, it sounds like you thought you had more pricing power. What is in your plan as you look at that comp guidance? And what have the recent price increases done to help offset some of the pressure in the prepared food gross margin line?

Yeah, this is Steve. I'll start and let Darren chime in in terms of just kind of what's in our expectation. If I do the two categories separately because we've behaved a little bit differently in the grocery versus prepared food, most of our grocery price increases, excluding tobacco, I think were put into action at the beginning of this calendar year just based on the contractual nature of that business. And so we know what the inflation is across most of the center of the store through our joint business planning exercise. And most of those price increases category is, those will run through the end of the calendar year, which is reflected in our expectation. We'll have to renegotiate all of that as we get into the latter half of this calendar year, but I would expect we will continue to price in the grocery business consistent with maintaining margins as we enter the next calendar year, and so I don't think we would take a lot of pressure Preparations turn out. Prepared food is a little more complicated, so to Darren's point, we have mid-single-digit type of price increases on average rolling through the prepared food category. They've started at different points in time. Some of them started later last calendar year, and the more significant ones started either in the middle of the fourth quarter for us or literally at the beginning of this quarter. It is rolling through over the course of the year. We'll get the benefit of most of that the entire year. We do think once you lap the cost increases, we've covered the dollars of inflation. that we know about right now. But to the extent cheese gets better or worse, as an example, or proteins, I would expect we will need to continue to kind of turn those dials on prepared food over the course of the year. But ultimately, we have enough pricing in the system now based on the inflation that we know about to give us confidence that kind of 40%-ish number for the year inside the store is sustainable and doable as we sit here today.

Yeah, and Kelly, the only thing I'd add to that from an elasticity standpoint is that I think we're not the only ones experiencing commodity inflation. Everybody that's in the restaurant business, fast casual, what have you, is experiencing the same thing. And so When you put us into that spectrum, we tend, even with the recent retail prices we've taken, we tend to be a more affordable option for most people than a QSR or certainly than a fast casual restaurant. So we would expect that over time we will benefit from that and we'll see some switching, some channel shifting from QSR fast casual into our channel, which should help us on the volume side.

And our next question comes from John Royale of JPMorgan. Your line is open.

Hey, guys. Good morning. Thanks for taking my question. So on the store addition guidance, just looking at the 80 stores, it's a relatively big program if you plan to do it mostly organically. And then just comparing to prior years, the CapEx at the low end seems pretty similar to fiscal 20 and 21 on a much smaller build program. So and that's before backing out the remodels for the new stores. So I'm just trying to square why the CapEx appears so low relative to the 80-store program. I don't know if there's an assumption that some of that 80 comes from acquisitions or if there's something else I'm missing there maybe.

Yeah, John, good morning. This is Steve. The answer is yes on your assumption. So I would expect the 80 units will be a mix. of new units that we build as well as units that we end up purchasing. You know, if we purchase something, it won't go through PP&E. Obviously, it'll go through a different line item on the cash flow statement. As we sit here today, it's probably directionally going to be half and half. I think, you know, we slowed down new builds in fiscal 22 mainly many acquired units. And, you know, that's the beauty of our model is we can kind of hold on the land bank. And so, you know, you're going to have at the first part of this year, some units that we frankly could have opened last year and chose not to. But as we sit here today, probably it's half and half. And that's the biggest contributor to, you know, why the why the run rate of total CapEx is kind of that 450 to 500 million. I will say one offsetting factor to that is, you know, we actually couldn't spend everything we wanted to spend at the end of fiscal 22 because of supply chain issues. We just couldn't get things. And so I don't know if that's going to get better, frankly, in fiscal 23 or not. We're kind of assuming that it does and that we're able to catch up on some things like vehicles and, and equipment for certain aspects of the store. But time will tell as to how successful we're going to be in kind of spending what we want to spend on things like that.

Great. Thanks. That's really helpful. And then, Steve, you talked a little bit about deferred taxes in the prepared remarks. I just wanted to dig in on that a little because it looks like for the full year your cash taxes were quite low. after adjusting for the deferred ad back, which was relatively large. So just looking for a little more detail on what was driving that on the low cash tax.

Yeah, I think from – if I think of how it impacted the tax rate first, there were three states in our footprint – during the year that lowered their state income tax rates, or they've announced that they're going to have lower income tax rates in the future. We immediately have to make a deferred tax entry when they announce that, even if it's not active yet, just to revalue deferred tax liabilities in Nebraska, Arkansas, and Oklahoma for us. All will have lower state tax rates in the future, and we have a tax liability, and so that provides an immediate benefit in the quarter. That was the big driver of why the rate was so low in the fourth quarter was actually Nebraska. They announced a state tax reduction. I would tell you from a cash tax standpoint, we actually probably overpaid taxes a little bit relative to what I think we'll end up owing in fiscal 22. It's part of the reason we have a tax receivable on the balance sheet, and I think that will – allow us to have a smaller estimated payment here at the beginning of the year, and it'll be a cash flow positive item for us in fiscal 23.

And our next question comes from Karen Short of Barclay. Your line is open.

Hey, thanks very much. Sorry for the background noise. I wanted to ask a question just with respect to gas margins. So I know you gave a slight indication in terms of where gas margins are trending into the current quarter to date. But you haven't really given much of an outlook in any concrete way for the year. So I wanted to get your perspective on where you think the actual run rate should be on gas margins. And then I wanted to find out if you could talk a little more about if there's any other changes to your inventory management process, because Obviously, you know, with five- to seven-day-old inventory in the ground, you benefit from days-old inventory when gas prices are rising, but you're obviously going to get hurt if gas prices fall. So I wanted to talk a little bit about how you're managing that and thinking about managing through the inventory process.

Yeah, Karen, I guess with respect to the first part of your question, you know, we're historically not given – fuel margin guidance for the year, so we're kind of staying consistent with that practice of not doing that at this point. In terms of inventory management in the ground, yeah, in the very short term when fuel costs are rising, you have lower cost inventory in the ground. That does help, but then the retail prices tend to lag moving up on that cost, too, so that typically your margin doesn't expand when the cost curve is going up, it tends to contract. And then the opposite is true on the way down when you do have higher cost inventory in the ground as it's falling, but the retail prices tend to fall slower than they rise on the upside. So the margins actually expand on the way down. So we'll probably have more upside on the way down than we do downside on the way up is the way we like to think about it.

And is there any evolution in terms of how you're thinking about managing inventories to be leaner and more, I guess, mark to market, like as in rack to retail day of? And then the second question I had is, you know, you had talked, and I'm sure you'll talk about this next week, about upstream capabilities in terms of gas margins, in terms of actual contracts on pipelines. So is there any update on that?

Yeah. You know, in terms of how we manage the fuel in the ground, you know, we're not as concerned about the mark-to-market. What we are concerned about is the competitive landscape that's going on. So we want to make sure that we're staying in our relevant pricing range and consistent with our strategy for retail pricing on the street, and then the cost is going to be the cost, and we'll manage that over time. In terms of the upstream fuel procurement, you know, we implemented some systems this past year that would allow us to get more sophisticated in the fuel procurement process, both on the risk management side as well as the accounting side and dispatching side, so that we have those foundational capabilities. We just wrapped that up this past quarter. And so this year, we're going to begin the process of building up that capability to go further upstream in our procurement processes. We don't expect to actually launch any of that in this fiscal year. We intend to launch that in next fiscal year, but this year will be one of really making sure that we've got all those systems and processes in place so we can execute on that further upstream procurement effectively.

And I would now like to turn the conference back to Darren Rebellev for closing remarks.

All right. Thank you very much, and thanks for taking time to join us today. I'd also like to thank our team members once again for their contributions in delivering another all-time record year. And for those of you who will be able to come out to Ankeny next week for our analyst day, we look forward to seeing you then. Thank you.

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