Caseys General Stores, Inc.

Good day, and thank you for standing by. Welcome to the Q1 fiscal year 2024 Casey's General Store's 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 that session, you will need to press star 11 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded and we'll now like to hand the conference over to your speaker today, Mr. Brian Johnson. Sir, please go ahead.

Good morning and thank you for joining us to discuss the results for our first quarter ended July 31, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rivelas, Chairman, President, and Chief Executive Officer, as well as Steve Bramlage, 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, and business and integration strategies, plans and synergies, growth opportunities, and performance under stores. 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 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 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. With that said, I would now like to turn the call over to Darren to discuss our first quarter results. Darren? Darren?

Thanks, Brian, and good morning, everyone. We'll get to the excellent first quarter results in a moment. First, I want to thank our team for their dedication and to getting the fiscal year off to a great start. As our guests and community shifted into back-to-school season, Casey held its annual Cash for Classrooms giving campaign in August. Thanks to our generous guests and passionate team members, we raised over $700,000. These funds will support needs and projects for schools, students, and teachers in our local communities. The grant application process opens in October, and we encourage schools, teachers, and parent-led organizations to apply. Now let's discuss the results from the quarter. Eluded EPS finished at $4.52 per share, an 11% increase from the prior year. Inside sales remained strong, driving inside gross profit dollars up over 10% to $556 million. The company generated $169 million in net income, an increase of 11%, and $316 million in EBITDA, an increase of 8% from the prior year. As you may have seen in our investor day presentation, we launched a thin crust pizza offering in the first quarter. This addition to the lineup has been a great success and demonstrates the blueprint for innovation at Casey's. Our guest insights team identified a gap in our menu. Our culinary team created a delicious product. Our marketing team worked with our advertising partner to create a great marketing campaign. And ultimately our operations team brought to life in our stores and communities across our footprint. And I think the results speak for themselves. This type of strategic innovation and teamwork is something that will help us achieve our goals for the three-year strategic plan. On the fuel side of the business, we continue to strike an appropriate balance between volume and margin. However, one notable difference with this course performance is there were no significant macro events that influenced margin. It was a relatively benign quarter from a wholesale cost perspective, and we believe this is a strong indicator that higher industry fuel margins are here to stay. Overall, I think this quarter truly illustrates the strength of the unique Casey's business model, particularly in a more normal times, and shows our three-year strategic plan objectives are very achievable. The team continues to do an excellent job operating the business efficiently and effectively, both inside and outside the store. I would now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 5.4% for the first quarter, or 12.1% on a two-year stack basis, with an average margin of 40.6%. We saw notably strong performance in whole pizza pies and bakery, as well as alcoholic and non-alcoholic beverages. Our team, with support from our supplier partners, continues to find the right product mix and promotional activity to drive sales and profitable results. Same-store prepared food and dispensed beverage sales were up 5.9 percent, or 14.8 percent on a two-year stack basis, with an average margin of 58.2 percent, up approximately 260 basis points from the prior year. The previously mentioned innovation with thin crust pizza helped drive sales as we saw great results with our whole pizza pies in addition to strong performance in bakery. Margin was favorably impacted by softening in commodities, notably cheese, during the quarter. Same-store grocery and general merchandise sales were up 5.2% or 11% on a two-year stack basis with an average margin of 34.1%, an increase of approximately 20 basis points from the prior year. We continued our strong momentum in beverages with non-alcoholic beverages, specifically energy drinks, showing fantastic results. Alcoholic beverages also performed quite well as we continued to leverage our competitive advantage of approximately 1,500 stores with liquor licenses. For fuel, same-store gallons sold increased 0.4% with a fuel margin of 41.6 cents per gallon. Our fuel team is striking the right balance between margin and gallon volume, and the results speak for themselves. This quarter marks the ninth quarter in a row with fuel margins above 34.5 cents per gallon, and four of the last five quarters have been over 40 cents per gallon. I would now like to turn the call over to Steve to discuss the financial results from the first quarter. Steve?

Thank you, Darren, and good morning. Each of the three areas of our business performed well in the quarter, and that's a testament to our business model and the execution of our teams. Total revenue for the quarter was $3.8 billion, a decrease of $585 million, or 13%, from the prior year due to the lower retail price of fuel. Total inside sales for the quarter were $1.4 billion, an increase of $103 million, or 8%, from the prior year. For the quarter, grocery and general merchandise sales increased by $74 million to $997 million, an increase of 8%. Prepared food and dispensed beverage sales rose by $29 million to $373 million, an increase of 8.5%. Results were also favorably impacted by operating approximately 3% more stores on a year-over-year basis. Retail fuel sales were down $669 million in the first quarter due to a 24% decrease in the average retail price per gallon. That was partially offset by a 3.6% increase in gallons sold to $714 million. The average retail price of fuel during this period was $3.40 a gallon compared to $4.49 a year ago. As a reminder, we define gross profit as revenue less cost of goods sold by excluding depreciation and amortization. Casey's had gross profit of $878 million in the first quarter, an increase of $42 million, or 5%, from the prior year. This is driven by higher inside gross profit of $52.2 million, or 10.3%, partially offset by a decrease of $11.2 million, or 3.6%, in fuel gross profit. Inside gross profit margin was 40.6%, up 80 basis points from a year ago. The grocery and general merchandise margin was 34.1%. That's an increase of 20 basis points from the prior year. Slight increase was due to a favorable mixed shift with further penetration of private label products, a lower LIFO charge than in the prior year in favorable vendor funding. Prepared food and dispensed beverage margin was 58.2%. That's up 260 basis points from prior year. The category margin benefited from lower commodity costs, specifically cheese, which was $2.04 per pound for the quarter. That compares to $2.49 per pound last year, a decrease of 18%. This positively impacted PF and DB margin by approximately 130 basis points. Margin also benefited from a lower LIFO charge than the prior year as our input costs softened, which had an approximate 120 basis point impact. We are in the midst of adjusting certain benefits associated with our Casey's Rewards platform. And during the quarter, these one-time changes positively impacted PF&DB sales and margin by approximately $4.9 million. However, because we were concomitantly running a summer-long promotional campaign of 89-cent fountain drinks, we did not see much of a net benefit from the program change. Fuel margin for the quarter was 41.6 cents per gallon. down 3.1 cents per gallon from the all-time high prior year's quarterly cpg fuel gross profit benefited by 20.2 million dollars from the sale of rins and that's up two and a half million from the same quarter in the prior year total operating expenses were up 3.2 percent or 17.6 million dollars in the first quarter Nearly 3% of the total operating expense increase is due to unit growth as we operated 82 more stores than the prior year. Credit card fees decreased approximately $6 million due to lower retail fuel prices, and that offset essentially all remaining operating expense increases. Same-store employee expense was approximately flat as the increase in wage rates was offset by the reduction in same-store hours. Depreciation in the quarter was $82.9 million. That's up $6.6 million versus the prior year, primarily due to operating more stores. Net interest expense was $12.5 million in the quarter, down $1.3 million versus the prior year, aided by rising interest rates on our cash balances. As a reminder, about 16% of our debt is floating rate. The effective tax rate for the quarter was 23.6%. compared to 24.6% in the prior year. That decrease was driven by a one-time benefit that we recorded due to an income tax rate reduction in the state of Nebraska. Net income was up versus the prior year to $169.2 million, an increase of 10.7%. EBITDA for the quarter was $316.9 million compared to $293 million a year ago, an increase of 8.2%. Our balance sheet remains in excellent condition, and we have ample financial flexibility. On July 31st, we had total available liquidity of $1.3 billion. Furthermore, we have no significant maturities coming due until fiscal 2026. Our leverage ratio, calculated in accordance with our senior notes, is now 1.7 times. For the quarter, net cash generated by operating activities of $229 million less purchases of property and equipment of $69 million resulted in the company generating $160 million in free cash flow. That compares to generating $194 million in the prior year. At the September meeting, the Board of Directors voted to maintain the quarterly dividend at $0.43 per share. During the first quarter, we also repurchased approximately $30 million of stock and have $370 million remaining on our existing share repurchase authorization. Investing in EBITDA and ROIC accretive growth opportunities remains our primary capital allocation priority, but as we mentioned at our investor day, our balance sheet affords us the opportunity to be more opportunistic than in the recent past with regards to share repurchase. In our press release and during this call, we have and will mention several pending acquisitions. These acquisitions will be funded with cash on hand. The pending transaction with EG Group is subject to regulatory approval and is expected to close this calendar year. As a result of the pending transactions, Casey's expects to add at least 150 stores in fiscal 2024. We will revisit the entire annual outlook following our second quarter earnings call. Our August results for the current quarter are as follows. same-store sales, both inside and fuel gallons, are slightly below the midpoint of their respective annual outlooks. Fuel CPG through August was in the high 30s. At current spot, cheese prices are modestly favorable versus the prior year, but less so than we experienced in the first quarter. Total operating expenses will be near the high end of our annual growth range in the second quarter, and that's primarily due to timing. I'd now like to turn the call back over to Darren.

Thanks, Steve. I would like to express my gratitude to the entire CASES team for delivering another great quarter. We're off to an extremely strong start to our fiscal year in our three-year strategic plan. Our M&A and real estate teams have been hard at work as we are very excited about the pending acquisition with EG Group and their 63 stores in Kentucky and Tennessee. These stores are located in rural and suburban markets, and we look forward to bringing more of our delicious pizza to Kentucky and Tennessee. It is complementary to our existing footprint and within our distribution center's radii, further leveraging our scale and infrastructure. In the first quarter, we also introduced a refreshed app design that makes it easier than ever for our loyalty members to track their points, redeem for rewards, and see how much they've saved by shopping with Casey's Rewards. The program is nearing 7 million members, and we're excited to see the way our value proposition is resonating across the Midwest. Our guests have also gravitated to our private label products, and we exited the quarter approaching 350 items in the assortment with over 40 new items in the pipeline for the remainder of the calendar year. And the results are there, achieving nearly 10 percent unit share and over 10 percent gross profit share in the first quarter with same-store sales up 26%. On the ESG front, we released our third annual sustainability report in July, and it's available on our website. Our team has put in a lot of work to build a more sustainable business for Casey's, and we're excited to share our progress on this journey. As we look ahead to the second quarter of fiscal 24 and beyond, I'm excited about what Casey's has to offer. Our balance sheet gives us the ability to be disciplined but opportunistic with store growth, and our capabilities throughout the organization will allow for that growth to be efficient and innovative. The plan we laid out in June has been well received, and we have the team in place to execute on that plan at a high level and continue to deliver the kind of results our investors have come to expect from Casey's. Looking forward to seeing the results of our hard work in the quarters and years ahead, and we will now take your questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. We also ask that you please limit yourself to one question and to one follow-up question. Stand by as we compile the Q&A roster.

One moment, please, for our first question.

Our first question will come from Anthony Bonadio of Wells Fargo. Your line is open.

Yeah. Hey, guys. Congrats on the nice quarter. I guess just starting with fuel margins, clearly a lot stronger than some of us were expecting. Seems like a pretty normal environment in terms of price action, but there does seem to be a growing consensus that break-evens are sort of drifting higher. I guess Just any thoughts on underlying drivers of that dynamic, and then how are you thinking about that mid-30s number that you talked about as a modeling assumption when you gave 24 guidance?

Yeah, Anthony, this is Darren. I'll start with that. Like you said, it was a relatively normal quarter from a fuel margin standpoint. We had a little bit of volatility here and there, but nothing of note. I'd first just say that I think our team did a really great job of balancing that volume and margin. And when we look at volume numbers for the industry, you know, Opus Midcontinent had those volume numbers down about 4.1% in our geography. So I think our positive gallon growth was great. You know, in terms of the outlook moving forward, you know, I would prefer to be a little more on the conservative side, but I have to say that the more recent history, as I mentioned in the prepared remarks, of nine quarters over 34.5 cents, I think it would suggest that those margins may tick up a bit higher. And the pressure that we've talked about over the last couple of years with the smaller operators is still there. You know, the cost of operating the business is still a challenge for a lot of those folks that don't have scale. And I think in the current environment, the continued erosion of the cigarette category is putting additional pressure on those smaller operators. So I would say, if anything, there's probably an upward bias on fuel margin moving forward.

Got it. That's really helpful. And then just quickly on operating expenses, obviously a very impressive quarter on costs. But on guidance, you raised your unit growth guidance by it looks like about 2% for fiscal 24. but less OPEX growth unchanged. So I guess one, why is that? And then two, assuming that still holds and fiscal Q1 is certainly a good data point, I guess what makes you more constructive about your progress there?

Yeah, hey, Anthony, this is Steve. I'll maybe start with what's in or out of the guidance. So we did raise the unit number that we expect to close for the year just based on the strong start to the year that we've had. You know, we don't know the timing of exactly when any of those units are going to come into the system, so to speak, and the EG transaction, as we mentioned, that does. require us to get regulatory approval, and so all of our guidance that we gave at the beginning of the year was predicated on that initial unit number, and so our numbers from an OPEX standpoint are still based on that original unit count. We haven't adjusted total OPEX revisit the total outlook at the end of the second quarter. We'll be halfway through the year. I think we'll have a lot more clarity around exactly when those units come in and, you know, what impact they may have on all of the various metrics. And we'll try to be as transparent as we can at that point in time.

Thank you. One moment, please, for our next question. Our next question will come from Ben Bienvenu of Stevens, Inc. Your line is open.

Hey, good morning, guys. Good morning. So I'm going to ask, you provided helpful color on quarter-to-date trends. My understanding or recollection is that August was probably a reasonably difficult comparison, just given last year that was a period where we saw a precipitous drop in fuel prices off of a very high base following the onset of the Ukraine war. So I'm wondering... What did that mean for the compare and the period? And I know it's just the first quarter in the year and you typically don't revisit guidance until you get a little bit further into the year. But how much does kind of what you're seeing quarter to date play into the, you know, the decision not to address full year guidance?

Yeah, Ben, this is Darren. I would say that that's got nothing to do with our decision to not update guidance at this point. It's just been our standard practice to wait until the midpoint of the year where we have a bit more visibility into what's going on. So I would just emphasize you should read nothing into the fact that we didn't update guidance other than the fact that we're one quarter into it and we have another quarter before we typically do that. We did make the adjustment on the stores. because we already have under contract more stores than we had planned to open for the year. So that one, just mathematically, we felt obligated to adjust. But everything else, we're just going to wait until second quarter. And with respect to how August played out, it was just like Steve mentioned in his remarks, we were just slightly below the midpoint of our guidance on fuel. and inside the store, and so I think that's what you should read into that.

Okay, fair enough, great. My second question is on M&A. You noted the balance sheet's still in a great position. The performance of the underlying business continues to improve. I know you've already had a pretty brisk pace of M&A to start the year, But, uh, presumably, you know, your appetite is still there and are there options out there in the market that are intriguing to you?

Yeah, I would, I would say yes to both. I mean, we, we definitely have the flexibility on the balance sheet to, to do more deals and, and we have the appetite for that. Um, we're really only limited by what's available out there. And I think the macro environment is setting up really favorably for us, like we've mentioned. you know, costs have still been higher to operate, especially for those that don't have scale. The tobacco mix is starting to have an impact on folks, we believe, and so we've seen a pretty good uptick in the opportunities that are out there for us to pursue, and we have our dedicated M&A team has been busy looking at all of those that make sense for us and We'll just have to see how that process plays out, but we're definitely in the market for that.

Thank you. One moment, please, for our next question. Our next question will come from Bonnie Herzog of Goldman Sachs. Your line is open.

All right, thank you. Good morning, everyone. I wanted to ask about your inside sales, which were quite healthy. So maybe just hoping for a little bit more color on some of the key categories where you saw, you know, maybe the most growth and then also on your private label performance, you know, maybe you could share with us just, you know, sort of where you're at with that, that, you know, business that you've rolled out, you know, and maybe how it trended throughout the quarter, especially in the context of the consumer. Thanks.

Yeah, Bonnie, I, I'd say the, it was really happy with the inside sales performance and it was, uh, We had strength across a lot of categories. I'd start with our prepared foods, you know, 5.9%, and that was cycling over 8.5% from the prior year. So really, really strong performance there. And what we really like about that is that it was led with our core with whole pizza pies. And so the innovation around thin crust was something that was a gap in our menu and has really resonated well with our guests, and we've hit about 15% mix right out of the chute with that product, and that's about where we expect it to be, actually a little bit higher than what we expect it to be compared to the industry overall. So that was strong. We had some other innovation in the hot lunch sandwich category with our barbecue brisket sandwich. On a King's Hawaiian Buns, we did a nice collaboration from there, and that category was up 30% during the quarter as a result of that innovation. On the Grocery & General Merch side, we saw real good strength in non-alcoholic beverages up about 8%. Our grocery category was up 7%, and alcoholic beverages were up 6%. So really, really good strength across the board. Really, the only area where we had some softness was in tobacco. And I think that's more of a driven by an industry dynamic more than anything else. With respect to private label, again, we're up 26% same store in private label. Units were up close to 16%. So what that indicates is that we had good velocity on the unit side, but we're also able to take a little bit of price and still keep that relative value proposition for the guests. that's been resonating with our guests, and we're really happy with where we're at on that one.

Okay, a helpful call, and if I may, just a follow-up on that. Just thinking about your inside margin expansion, which was also quite healthy. You did attribute a lot of it, it sounded like, to the softening of ingredient costs, specifically cheese. So curious to kind of hear how we should think about your margin performance for the rest of the year, and then you know, thinking about some of what you just mentioned, Darren, and some of the innovation that's driving, you know, growth, you know, how has that been, you know, impacting margins? Is it accretive, you know, as you think about as you continue to evolve, you know, what you're offering in your store? Thanks.

Yeah, with respect to the innovation, I'll start there and I'll let Steve talk a little bit more about the margin cadence. But with the innovation, we've really leaned heavier on that to drive traffic and to drive sales and less focused on some of the more aggressive value offers. We did do a little bit of that over the summer, a fountain drink promotion, and that worked out really well to drive traffic. But when we look at innovation on the food side, we've not had to discount that innovation, and we've been able to drive volume. And so we think we're We think our team is really hitting its stride in terms of understanding what the guests' needs are, and our culinary team is really developing those products that are specifically hitting those needs, and that's what's resonating with the guests. And so it's allowing us to drive that incremental growth without having to do a lot of discounting to get there.

And, Bonnie, this is Steve. I think we certainly continue to do that. to improve year over year. That's reflected in the guidance on the grocery side of the business. You know, the private label mix change in conjunction with, you know, generally speaking, tobacco becoming gradually a smaller part of the mix is going to naturally flatter the grocery margin. And the real opportunity, as you know, is on the prepared food side of the business. And so we're 80%. hedged on our cheese buy for the remainder of this year and so less exposed to spot variability here in the out quarters you know we were 18 percent to the good on cheese in the first quarter we're kind of mid to high single digits to the good and q two three and four as we sit here right now with spot but the 80 percent hedge will you know won't give us quite as much upside year-over-year deflation generally on the cheese side of the business. And by and large, there's still less pressure on the protein side of that business. And so I think we still feel good that we will, you know, continue to show improvement year-over-year on the margins, on the prepared food side of the business as the year progresses.

Thank you. One moment please for our next question. Our next question will come from Kelly Banya of BMO Capital Markets. Your line is open.

Good morning. Thanks for taking our questions. Just wanted to, good morning. Wanted to just circle back to the inside comps in August. Sounds like maybe a little bit of a deceleration there, but can you give color on what you're seeing with traffic, ticket, grocery, prepared food, or is this just maybe a little bit of cycling off this fountain drink promotion that was done over the summer or just anything that we should think about that's impacting kind of the trend near term?

Yeah, Kelly, you know, we still saw... Well, first I'd say we had good traffic throughout the quarter. We were up a little over a percent in actual foot traffic into the store. And we saw that trend continue into August. And we were running that fountain promotion at the same time throughout August. So really nothing there. I mean, it is really a cycling issue more than a deceleration issue, in my opinion. And the two-year comps, I think, were – we're pretty consistent with where we had been in the first quarter. So, um, so, and again, we, we've got some, some higher comps coming in September as well. So I don't, um, you know, when we, when we cycle over those higher comps, I start to focus a little bit more on the two year stack and, and to make sure that we're, we're still maintaining that, that momentum there. And so, so far that's what we've seen. And so I don't have any concerns about that num, the absolute number being a little bit lower than,

And where we were in the first quarter. Yeah, I think, Kelly, just for reference, our inside number in the prior year was almost 8%. So, we're cycling that. And, you know, August would have been indicative of that. And so, it's really just what are you lapping in the prior year more than anything.

Great. That's very helpful. I was also just wondering if you can talk about with some of these new prepared food innovation, if you're able to use your data or your loyalty to analyze if you're getting incremental customers that you weren't maybe reaching before, or if you're simply cannibalizing kind of prior products, or maybe what your early read is on how this innovation is reaching your customer base.

Yeah, so far we've been really happy with the with the performance on the prepared food side. And we think about on the thin crust pizza in particular, we think about half of that has truly been incremental to the business. And what some of our loyalty data would suggest is that about 16% of those sales were by new buyers into the pizza category. So in other words, people that weren't buying pizza from us before. about 12% were new guests entirely. And so that's been really helpful. And that was really our hypothesis going into the SINCRUST was that there are certain guests that that's all they want, and that's going to be a veto vote in a family if we don't have that offer. And so far that's all played out, and the rewards data would validate that.

Thank you. One moment, please, for our next question. Our next question will come from Bobby Griffin of Raymond James. Your line is open.

Good morning, buddy. Thanks for taking my questions. Good morning. I guess first I wanted to maybe talk about, have you seen any small change in customer behavior or anything as we start to see gas prices move up sequentially? Still not at the peak levels we saw, you know, back last year, but we have started to see them move up. So just anything curious about if you're starting to see behavior similar to what was happening in the prior period of very high gas prices.

You know, Bobby, we haven't seen a dramatic shift in that and, you know, gas prices are still about a dollar a gallon below where they were last year when we hit the peak. So the pressure is probably not as acute on gas. Where we do see some changes in behavior is really on the lower income consumer. As a reminder, we are not overly exposed to that consumer. We only have about a quarter of our guests would fit in that category, about three quarters make more than $50,000 a year. And so they're out of that lower income. And so for that lower income consumer, we do see some shifting around on fuel. They're buying higher ethanol blended fuels in our E15 offering at about 15% gallon growth in the quarter. So that would be indicative of that. Private label is purchased more frequently by them, and we are seeing some pressure in some categories that are a little more EBT-sensitive, like take-home dairy and some edible grocery. But that's primarily from the lower-income consumer. And obviously, even within that grocery category, with a little bit of pressure in some subcategories, we're still up 7% year over year. So we think while there is a little bit of that behavior changing at the lower end overall for the total gas space, it's not having a big impact.

All right. I appreciate it. That's helpful. And then maybe secondly for me, it's just on the ongoing strong performance in OpEx and with the store hour reductions and optimization, just anything more detail on kind of where you are in that journey, kind of what you're still finding and where areas of the store are that are getting optimized. And I guess secondly, Is it across the network that you're seeing these savings, or is it more like, hey, we've identified a subset of stores in certain regions that we're getting better optimization out of? Just any further clarity around there, because the performance has been very strong.

Yeah, thanks. No, I'm really, really proud of the continuous improvement team that's been working on this. And this has been going on for over a year now. And What I tell you first is that they're really taking a scientific approach to where those bottlenecks are in our store operation, where we are spending labor that is just not having an impact on the business and how we can change those processes or employ technology to make them more efficient. And so I feel really good about the fact that we've taken these hours out but our engagement scores are up among our team members and our OSAT scores are up among our guests. So it's an indication that we're just simply running this business more effectively and not having a negative impact on the guest experience or our team members. In terms of the sustainability, obviously whenever you go into one of these exercises, there's some low-hanging fruit and you get that first. But our team has a pipeline or a roadmap for the next three years of discrete initiatives that they've identified that we can implement and continue to take OpEx out of the store or give the store more slack to run the store better. So we feel this is sustainable and we still have a few years to go in terms of capturing all these opportunities.

Thank you. One moment please for our next question. Our next question will come from Irene Nettle of RBC Capital Markets. Your line is open.

Thanks and good morning, everyone. Good morning. I wanted to come back to the subject of gas margins, which obviously is of great interest to all investors. So, you know, as you noted, it's what, five quarters that you've been, you know, in and around that 40 cent range. What would it take for you guys to get more comfortable, with sort of a soft guide towards something in the high 30s or even 40 versus the mid-30s?

Well, Irene, that's a really nuanced question. You know, for me to get more comfortable, I just have to see more of it, I suppose. Admittedly, it took me a while to get comfortable with mid-30s. But we got there because we just kept doing it. And so, you know, I think we were able to get to 40 this last quarter. I would say last year, you know, with everything going on in Ukraine, you know, we saw that spike in those 40s kind of came through more of an exogenous event. So I would want to see a little bit longer timeframe of more normal, of a more normal macro environment and margins at this level before I I feel comfortable underwriting that at that level, at that upper 30s, low 40s. But the mid-30s, because we've been there for so long now, I'm very comfortable at that level.

Fair enough, and that's very helpful. Thank you. And then just a couple of follow-ups. One, you noted that you're 80% hedged on cheese prices. At what price? And you also noted an uptick in M&A activity. What are you seeing on multiples in terms of expectations?

Well, I'd say with multiple expectations, you know, it's an interesting dynamic because I would say that, you know, the EBITDA for some of these smaller operators has actually gone down. So the multiples are kind of hanging in there, but at a lower level of EBITDA. And I know that's counterintuitive given the margins that we're seeing, but I think it's really indicative of the fact that these smaller players that lack scale haven't been able to offset a lot of the cost increases in a way a company like ourselves has been able to. And so they're just under a lot of pressure, even though they've got those higher margins. And so I think that's worked out to our benefit. And I forget the second part of your question.

Maybe I'll try to answer that. So we are 80% hedged. That's correct. And at the current spot, we obviously hedge the commodity. That's a little bit different than the all-in cost that we pay. But the all-in equivalent for the out-quarters looks a lot like what we incurred in the first quarter. So kind of that $2.12 or low-teen number is about... what our strip looks like here for the rest of the year at the current spot.

Thank you. One moment please for our next question. Our next question will come from Daniel Silverstein of Credit Suisse. Your line is open.

Hi, good morning. Thanks for taking our question. Just one on the EG acquisition. So that deal adds some stores which will serve denser, larger metro areas like Bowling Green and Lexington, Kentucky. Just wondering if you're seeing more opportunities to penetrate larger markets given the landscape today and how you view the opportunities and challenges of bringing the Casey's brand to those denser areas. Thanks.

Yeah, Dan. You know, when we think about markets like Bowling Green and Lexington, Those, those aren't real or significantly larger markets than a lot of the markets we operate in today. Um, you know, Lexington is a, is a city that's comparable to, uh, in size to Des Moines where, where we're based. And so we're very comfortable at that level. This isn't a Chicago or Los Angeles or New York type of scenario by any stretch. And so I've been to both of those markets, Bowling Green, is a fantastic market for us. Lexington will be a great market for us. So we're very comfortable operating in towns of this size, so I don't have any concerns there. Thank you.

Thank you. And one moment, please, for our next question. Our next question will come from Christina Katai of Deutsche Bank. Your line is open.

Hi, good morning. Thanks for taking the question. I wanted to ask on private label, so that 10% unit share and the gross profit contribution you shared with us is a great result. Can you talk about where you are in the process of that rollout? Any particular areas where you are seeing significant strength? I think you called out 16% unit growth. So my question is, is that broad-based or are there any particular areas that are driving that performance?

Yeah, Christina, we're still continuing to evolve the private label portfolio. We've got another 40 items that will go into the assortment by the end of the year. And at the same time, we're optimizing products. So as some products start to atrophy a little bit, we'll remove them from the assortment and we bring in new innovation. And so that's a constant process that our private label team is is operating with. With respect to where we saw some strength, certainly bottled water was probably our strongest, up about 70% in sales. And now our bottled water is about 50% of that bottled water category, our private label. So really strong performance there. Obviously, that's a little bit seasonal in the summertime, but we're seeing great growth year over year in that. Another category that's been really strong is chips, and chips is usually a pretty tough one because it's a very competitive category, but we had some new innovation with some new flavors that were seasonal just for this summer and saw north of 70% same-source sales in that category as well, and now that category is about 25% penetrated, and again, with... With the competitive landscape in that category, that's a big statement. So we like where we are there, and we've seen some broader base strength, but those are really kind of the standouts that we've seen so far.

That's great. And then just my follow-up, I was going to ask around pizza, and in particular the 12% new guests that you mentioned, I think, following the thin crust introduction. Have you seen any competitive response to you taking pizza share or do you anticipate any changes in the promotional landscape or anything around pricing?

Not at this point. It's a little bit hard for me to say whether we've taken share from any of the major competitors. for the most part, Pizza Hut is our primary competitor in most of our markets, if we have one. In a lot of cases, in our more rural markets, there may not be a competitor, or if there is one, it's more of a mom and pop. So it's really difficult to say, but I couldn't tell you that we've seen an uptick in promotional activity from competitors since we've launched the thin crust. I think the other pizza players have struggled a little bit from a from a velocity standpoint, so I think they're starting to get a little more promotional anyway, but I haven't seen any change as a result of what we've done.

Thank you. One moment, please, for our next question. Our next question will come from John Lawrence of Benchmark. Your line is open.

Good morning, guys. Would you discuss a little bit about the new markets? How quickly does some of this innovation, some of the new products, does that help get those, maybe the class of new stores in the last couple of years up and running and ramping a little faster? And what have you noticed with product innovations and maybe the app in some of those new markets?

Yeah, John, I'm not so sure that we've seen a difference in terms of the impact innovation has had in the news stores. That being said, we've been really happy with the way our news stores have ramped in the last couple of years. I think that's really a testament to the real estate team and their ability to use more advanced analytics to identify high-potential sites and get those sites ramped under contract. And so we've just seen an increase in how quickly those stores have ramped in general. I think the innovation only helps in that respect, and it gets more people interested in the stores and helps feed that traffic into those stores.

Great, thanks. And secondly, remind us a little bit on that fuel margin. You talked at Analyst Day about some of the things, some of the tools you're using to help with the analytics on that data on gas prices, et cetera. Would you remind us of that, please?

Yeah, we've had for a number of years, we've had some more analytic tools. We've essentially just given the pricing analysts the information that they need to make more informed decisions. They've got real-time credit card data that allows us to see where competitors are priced. We've got information feeding to them from the commodity market so they know where cost is moving at any given time. And so, they really have a, and then they have inventory information from the store. So, at any given time, they really have a complete picture of all the factors that would influence price within a particular trade area. And so they're just simply able to make more informed decisions as a result of that.

Thank you. I see no further questions in the queue. I would now like to turn the conference back to Darren Rabelas for closing remarks.

Okay. Thank you for taking the time today to join us on the call. And before we sign off, I want to thank the team members for all their hard work this quarter. And everybody have a great rest of the day.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.