Caseys General Stores, Inc.

Good day and thank you for standing by. Welcome to the second quarter FY 2025 Casey's General Stores Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. 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. I would now like to hand the conference over to your speaker today, Brian Johnson, Senior Vice President of Investor Relations and Business Development. Please go ahead.

Good morning, and thank you for joining us to discuss the results from our second quarter ended October 31, 2024. I'm Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Dan Rabelas, Board Chair, President, and Chief Executive Officer, as well as Steve Bramlage, Chief Financial Officer. Before we begin, I remind you that certain statements made by us during this investor call may constitute forward-looking statements. potential impact of the FIX transaction, 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, and performance at our 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 express 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-gap-to-gap financial measures referenced in this call, as well as a detailed breakdown of the operating expense increase for the second 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 second quarter results. Darren.

Thanks, Brian, and good morning, everyone. We're excited to discuss the strong second quarter results in a moment. First, however, I want to thank the Casey's team for delivering another outstanding quarter. In addition to officially welcoming the Fikes team to the Casey's family. Each November, we raised funds for two organizations to support veterans and their families, children to follow Patriots and hope for the warriors. This year, we raised over $1 million. Thanks to our team members, generous guests and partners at PepsiCo. As a veteran myself, I'm personally grateful for the engagement and responses campaign draws each year. Thank you for helping veterans when you shop at TASIS. Now let's discuss the results from the quarter. Diluted earnings per share finished at $4.85 per share, net income was $181 million, and EBITDA was $349 million. All of these metrics were up 14% from the prior year. Our second quarter results were an excellent example of the strength of Casey's differentiated business model. We were again able to expand gross profit dollars while simultaneously controlling operating expenses. Inside the store, innovation in prepared food continued to drive strong performance, while the grocery and general merchandise category was a primary driver of margin expansion. On the fuel side, the team is doing an excellent job balancing volume and margin, with fuel margins over 40 cents per gallon while outperforming the geographic market in same-store fuel gallons. As we discussed at our analyst day in October, we are very confident in our ability to execute on our three-year strategic plan and is showing up in the results both inside and outside the store. I'd now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 4 percent for the second quarter or 7.1% on a two-year stack basis, with an average margin of 42.2%. Same-store prepared food and dispensed beverage led the way, as sales were up 5.2%, or 11.6% on a two-year stack basis, with an average margin of 58.7%. Hot sandwiches continued their strong performance, up over 60%, and cold dispensed beverages also performed well, up nearly 10%. Margin was down approximately 30 basis points from the prior year due to a modest cheese headwind. Same-store grocery and general merchandise sales were up 3.6% or 5.4% on a two-year stack basis with an average margin of 35.6%, an increase of approximately 160 basis points from the prior year due to product mix and the excellent work of our asset protection and strategic sourcing teams. We saw positive momentum in the category. notably in both non-alcoholic and alcoholic beverages, specifically in the energy and liquor categories. Our merchandising team is doing an excellent job optimizing our assortment to meet our guests' needs. For fuel, same-store gallons sold were down 0.6%, with a fuel margin of 40.2 cents per gallon. We continue to outperform our geographic region on volume, as Opus Fuel Gallon Sold data shows the mid-continent region down approximately 5% in the quarter, indicating that we are taking market share. Our field team is doing a tremendous job balancing volume and margin, and the results continue to show it. Operating expense management remains a focus. In the second quarter, saw an increase of just 2.3% on a same store excluding credit card fee basis. Our continuous improvement team is identifying areas to be more efficient, and our store operations team is executing on those opportunities at a high level. The results speak for themselves. The same store labor hours were down 1% once again. I'd now like to turn the call over to Steve to discuss the financial results from the second quarter. Steve?

Thanks, Darren. Good morning. I'm very proud of the hard work of our team during the quarter. We're now halfway through our three-year strategic plan, and we are carrying tremendous momentum into the second half of it. Total revenue for the quarter was $3.9 billion, a decrease of $118 million, or 2.9% from the prior year. And that's due primarily to a 14.1% decline in the retail price of fuel, which was nearly offset by higher inside sales as well as higher fuel gallons sold. Results were also favorably impacted by operating approximately 4% more stores on a year-over-year basis. Total inside sales for the quarter were $1.47 billion, an increase of $121 million, or 9% from the prior year. For the quarter, prepared food and dispensed beverage sales rose by $35 million to $418 million, an increase of 9.2%, and grocery and general merchandise sales increased by $85 million to $1.05 billion, which is an increase of 8.8%. Retail fuel sales were down $232 million in the quarter driven primarily by a $0.51 decline in the retail price of fuel from $3.62 per gallon in the prior year to $3.11 per gallon in the second quarter. This was partially offset by a 6% increase in total fuel gallon sold as our newer units tend to sell more fuel than the chain average. We define gross profit as revenues, less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $959 million in the quarter. That's an increase of $73 million or 8.2% from the prior year. This is driven primarily by higher inside gross profit of $66.4 million or 12%, while fuel gross profit was higher by $3.4 million or 1.1%. Inside gross profit margin was 42.2%, and that's up 110 basis points from the prior year. Prepared food and dispensed beverage margin was 58.7%, down 30 basis points from prior year. The primary driver of the slight decrease was a modest headwind on cheese, which was $2.25 per pound in the quarter compared to $2.12 per pound in the prior year. It's an increase of 6% or approximately 35 basis points. The grocery and general merchandise margin was 35.6%, an increase of 160 basis points from prior year. The change was primarily due to favorable mix and good asset protection performance. Fuel margin for the quarter was 40.2 cents per gallon. That's down 2.1 cents from the prior year. Fuel gross profit includes almost $5 million from the sale of RENs, and that's down $3.5 million from the same quarter in the prior year. Total operating expenses were up 5.2% or $30 million. Approximately 4% of the total operating expense increase is due to unit growth as we operated 93 additional stores versus prior year. Same-store employee expense accounted for approximately 1% of the increase, as modest increases in wages were partially offset by the reduction in same-store hours. Depreciation in the quarter was $96.6 million. That's up $11 million versus the prior year, primarily due to more stores. The effective tax rate for the quarter was 24.5%, and that's compared to 23.6% in the prior year. That increase was driven by a one-time benefit in the prior year that did not repeat. Net income was up versus the prior year to $180.9 million, an increase of 13.9%. EBITDA for the quarter was $348.9 million compared to $305.9 million a year ago, an increase of 14.1%. Our balance sheet is in excellent condition, and on October 31st, we had total available liquidity of $1.25 billion. Please note the liquidity calculation excludes the impact of the restricted cash balance, which is included within long-term assets as of October 31st. The restricted cash relates to cash held in an escrow account for the acquisition of FITES, which closed the next day on November 1st, and that is subsequent to the quarter end. On October 31st, the leverage ratio of debt to EBITDA was 2.3 times per the covenants in the company's recently amended credit facilities. We still plan to delever to two times within the first year of closing, and we will reduce spending as originally planned on property, plant, and equipment. We likely will not repurchase shares until we achieve the targeted leverage ratio. For the quarter, Net cash generated by operating activities of $271 million, less purchases of property and equipment of $111 million, resulted in the company generating $160 million in free cash flow, compared to $145 million in the prior year. At the December meeting, the board of directors voted to maintain the quarterly dividend at 50 cents per share. Primarily, due to the closing of the Fikes transaction, we are updating our previously communicated fiscal year guidance. For the second half of fiscal 2025, specifically related to the FITES transaction, Casey's expects to incur an additional $15 to $20 million in one-time deal and integration costs, primarily in the third quarter. EBITDA contribution from FITES is expected, therefore, to be modestly dilutive in the third quarter, again, primarily due to the previously mentioned costs. EBITDA contribution from FIX is expected to be modestly accretive in the fourth quarter. Interest expense will be $35 million higher than the original outlook due to the financing of the transaction. For Casey's total fiscal year 2025 outlook, including the impact of the FIX acquisitions, EBITDA is now expected to increase at least 10%. Total operating expenses are expected to increase between 11% to 13% for the fiscal year, and that includes approximately $25 to $30 million in one-time deal and integration costs, while same-store operating expenses excluding credit card fees are expected to only increase approximately 2% for the year. Net interest expense is expected to be approximately $90 million for the year. Depreciation and amortization is expected to be approximately $410 million, and purchases of PP&E are expected to be approximately $550 million. The tax rate is expected to be approximately 23% to 25% for the fiscal year. Note that Casey's is not updating its outlook for the following metrics. We still expect to add approximately 270 stores for the fiscal year. We expect inside same-store sales to increase between 3% to 5%, and inside margins to be comparable to the prior year. The company expects same-store fuel gallons sold to be between negative 1% to positive 1%. Overall, Fikes is expected to contribute over $200 million of inside sales and approximately 200 million gallons of fuel for the second half of fiscal 25. Of the expected total operating expense increase of 11% to 13%, approximately 5% to 7% of the increase is due to the existing Casey's business, and that's a decrease from our previously communicated 6% to 8% expected increase. The FIKES acquisition is expected, therefore, to contribute approximately 6% of the total increase, over 1% of which is related to the one-time deal and integration costs. Our results for November were as follows. Inside same-store sales were near the midpoint of the annual outlook range. As we enter the seasonally lower time of year for both fuel margin and fuel volume, same-store fuel gallons are near the low end of the annual outlook range, and CPG is between the mid to high 30s. Current cheese costs have improved but are still modestly unfavorable versus the prior year by several hundred basis points. Our third quarter total operating expense expectation is an increase of approximately 20%, and that's primarily due to the FICES acquisition and the $15 to $20 million of one-time deal and integration costs. As a result of these closing costs and the incremental interest expense, FICES will be dilutive to our earnings in the third and fourth quarters, as we expected. I'll now turn the call back over to Darren.

Thanks, Steve. like to thank the entire cases team for another outstanding quarter and again want to welcome the fikes team to the casey's family we're excited to have you on board and are looking forward to integrating these stores into our network our team has done an incredible job executing on the first half of this three-year strategic plan and is looking forward to finishing out the second half strong growth is a key pillar of the strategic plan and we're executing on it Announcing the closing of the largest transaction in the company's history is extremely exciting and right in line with the plan we laid out in June of 2023. We're also committed to maintaining a strong balance sheet and we'll work to deliver toward targeted two times leverage ratio quickly. We believe our ability to execute and integrate acquisitions like these will continue to build shareholder value. Inside the store, we continue to produce excellent results. On the prepared food and dispensed beverage side of the business, guests are flocking to our refreshed sandwich lineup as we offer high-quality products at a great value. With respect to grocery and general merchandise, our merchandising team is doing an excellent job identifying the right products and working with our supplier partners to develop effective promotions for our guests. One shining star within the non-alcoholic beverage category remains energy drinks. where we had another quarter of over double-digit same-store growth. Overall, we believe our inside offering is a meaningful differentiator in the industry. Enhancing operational efficiencies is the third pillar of the strategic plan. Our continuous improvement team is doing a great job collaborating with store operations to make the organization more efficient. The results are compelling, as the second quarter marked the tenth consecutive quarter with a reduction in same-store labor hours. The team has done this with a rigorous process to simplify store operations and get rid of non-value-added work. Some things up. We've never felt more confident in our team's ability to execute our plan and deliver differentiated results to our shareholders. We'll now take your questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. And our first question comes from Bobby Griffin of Raymond James. Your line is open.

Good morning, everybody. Thanks for taking my questions, and congrats on getting the fight steel over the finish line. So I guess first for me, I just wanted to kind of dive in a little bit to the grocery and general merchandise margin. Another great quarter, second quarter in a row over 35%. So can you maybe talk a little bit more about the puts and takes there? And is this a more structural step up in your view of where the margins in this business, this side of the business could be at, especially with some of the opportunities like we saw out there with the back bar changes coming and some things like that?

Yeah, Bobby, this is Darren. Yeah, what I'd tell you is I think there's a few things going on in grocery and general merchandise. Obviously, we've done a great job in just working with supplier partners on joint business planning, and that ultimately translates into some impact there. But really, I think the biggest driver is in mix. And what we're seeing kind of across the board is a mix shift to some of the higher margin items that we have. in the categories. I'll give you a couple examples. If you take a look at alcohol as an example, the lowest margin subcategory within alcohol is premium beer, and that's been probably the softest of the subcategories within alcohol. Inside of beer, though, the fastest growing part of that is imports and super premiums, which tend to come with higher margins. If you go to the other subcategories, liquor and wine, those are both growing at about a 10% clip, and those have higher margin as well. So as we continue to accelerate growth in the higher margin areas and the lower margins are kind of hanging in there, you're just seeing that margin shift. And so that was a 200 basis point improvement year over year, primarily driven on mix. You go to the other example would be tobacco, and again, you have a similar dynamic where cigarettes combustible cigarettes are the lowest margin subcategory within within that category and they're declining and have been declining for a number of years um on the flip side you have nicotine alter alternatives and vapor which are growing at the fastest pace in fact nicotine alternatives are almost triple digit increases and those tend to come with a much higher margin rate so we're actually seeing margin rate expansion in tobacco overall, even though you're seeing that decline on combustible cigarettes. And then lastly, our asset protection team has done a really nice job on shrink, and we've done a lot of work over the last year or so with exception-based reporting and some other technology to really identify sources of shrink and root those out. So when you put all that together, that's where you end up with 160 basis point improvement in margin. And so I would say to your other

question on is this structural I say to a large extent it is because that mix shift is continuing to to go thank you that's very helpful and I guess this my final one for me is just on the Fikes deal itself is there a seasonality aspect to their EBITDA that we should be aware of I think just some of the investors that we're doing some quick math on the 89 million that was given when you announced the deal and then kind of back it into what's implied for the guidance change. So I just want to make sure, is there any seasonality aspect we should be aware of? And is that business still trending around $90-ish million, which in EBITDA as it was when you guys announced the deal?

Yeah. Hey, Bobby, this is Steve. There is some seasonality with Mike's. Yes, it's probably not quite as significant as what we would call the Casey's mothership just because they're not as far They're not as far north as we are, but there's still some seasonality. So the second half of the year for them is not going to be quite as big as the first half of the year, and that would be consistent with our business on a general rule. And yeah, the LTM $89 million that we had talked about previously, which included some contributions from ramping stores that had not been open, they had about 20 stores or so that were either under construction or had not been open a full year. That's a good number to start with. That's the number we're basing all of our plans, et cetera, on. But just remember that there's some ramping store dynamics in that number.

Absolutely. I appreciate the details, and congrats again on a great quarter.

Thanks.

Thank you.

Our next question comes from Bonnie Herzog of Goldman Sachs. Your line is open. All right. Thank you. Good morning, everyone.

Good morning. Our same store inside sales guidance of 3% to 5% for the year, which you maintained. I guess at the midpoint, this does imply a bit of an acceleration in the second half versus the first half. Okay. You know, just curious what will be the drivers of this. And then along those lines, could you maybe touch on how your traffic levels trended in the quarter versus last quarter? And then maybe any color on November and so far in December. And, again, outlook for traffic for the heading into next year or the rest of your fiscal year. Thanks.

Yeah. Hey, good morning, Bonnie and Steve. I'll start with that. Traffic was positive in the quarter for us. Our November experience, we were right at, literally right at 4% inside same store sales for November. So right in the middle of the range. And so, you know, certainly we were obviously below the low end of the range in the first quarter on inside same store sales. So we're aware of that, obviously. But our current thought is, you know, the second quarter was kind of right on the nose in the middle of the range. November, which is the biggest month of the third quarter, is right on the nose in the middle of the range. We feel pretty good about comparability for some of the exogenous stuff on weather and a lot of the initiatives that the team has to launch various programs, et cetera, as we kind of get into the new part of the calendar year. So it just felt like that range still felt good to us within the range. you know, we are certainly aware of in the fourth quarter that there's the dynamic, obviously, of lapping the prior year's leap day, but we know that that's in there already. So, it felt like there was no need really to change that range. It feels pretty safe based on what we know kind of year-to-date through November and what we have going forward.

Okay. Can I just clarify something, then I'll pass it on? Just you know, in the context of what you just, you know, talked about, then are you seeing any, you know, change behavior, consumer behavior? Are you seeing any strengthening with the consumer in the context of all of this?

Hey, Bonnie, it's Darren. With respect to the consumer, you know, we're directionally the consumers hanging in there about the same as what we would have talked about last quarter. We're still seeing a little bit of softness on that lower income consumer. But again, we don't have disproportionate exposure to that consumer. For the balance of the consumers, which are about three quarters of them, they're continuing to shop, they're continuing to visit the store at the same frequency, continuing to buy as normal. So I think getting back to Steve's point, we've This quarter, we're at the midpoint of the guidance this past month. In November, we were at the midpoint. We think that three to five is the appropriate range that ultimately we will land on for the year.

Thank you.

Our next question comes from Jacob Aiken Phillips of Milius Research. Your line is open.

Hi, thanks for the question. I just wanted to go a bit into prepared food and the competitive dynamic there. I'm just wondering what you're seeing in terms of competition with PETA, other QSRs, and if you may feel the need to increase the promotional or investment gross margin there.

Yeah, Jacob, this is Darren. We're keeping an eye on the competition pretty closely, and I guess I'd break it into two segments. There's the pizza segment and then there's the rest of the QSRs. With the rest of the QSR, obviously it's become a much more value-oriented environment. But as we discussed previously, our value proposition just on a line pricing basis is pretty compelling relative to what a lot of the others are doing. And so if you think of the the sandwich QSR players that have, you know, really invested heavily in, in extreme value. I mean, those are typically sandwiches and that sort of thing. And that's where we're seeing the most strength. And, and so that's more, um, the more reflective of the innovation and our, our line pricing value proposition. So we don't feel a need to have to get any more aggressive. than we already are, and those products carry a pretty healthy margin. On the pizza side, I wouldn't say that it's gotten any more competitive than it always is. And we look at our pricing across our geography, and I'd probably remind you that in about half of our stores, we don't even have one of the major pizza competitors. So we're not under any real pressure at all. from a pricing perspective in about half of our stores. And the other half, we tend to be $1 to $2 below their standard menu pricing just every day. And then, of course, we layer in a variety of promotional offers via our rewards platform. And so what you see right now in terms of margin and value proposition is pretty reflective of our normal operating mode. And as long as our sales volume continues to perform like it has been, we don't see the need to get any more aggressive from a value standpoint.

I appreciate that. And then just wondering if you had any updates on the timeline for rebannering the FIKE stores or for incorporating some of their fuel assets into your upstream capabilities?

Yeah.

With respect to the remodeling of stores, that's probably the longest pull in the tent in terms of the overall integration. That'll take a few years. And first, as we discussed before, they had a pretty successful food program, and obviously we have one as well. And so we're going to quickly remodel a few stores, integrating those two platforms and really understand how they perform together so we can really have an informed scope of work to apply to the rest of the chain. And so there'll be a little bit of work to do there. And then permitting process can take anywhere from 12 to 24 months, depending on the jurisdiction. So there's a pretty long timeline there. On the fuel side, that integration will happen a little more quickly as we take over pricing and procurement activities and that sort of thing. So I'd anticipate a little more benefit sooner in the timeline than on the remodel side. But really, you should be thinking three to four years from where we sit here today to the end of that integration process.

Thank you.

Our next question comes from Anthony Bonadio of Wells Fargo. Your line is open.

Hey guys, nice quarter. So just wanted to talk a little bit more about guidance. It looks like the back half now implies 8% EBITDA growth, which includes call it a 4% headwind from one-time costs and that 15 to 20 million. So as you guys work through your revision to guidance, I guess, has anything fundamentally changed about how you're thinking about the existing Casey's business in the back half? And then any initial thoughts on the fiscal 25 contribution? from SynergyCapture, from Fikes, just trying to better bridge the back half of the year.

Hey, Anthony. Good morning. This is Steve. I'll start on that. You know, related to kind of mothership assumptions for the second half of the year, I think, no, nothing has fundamentally changed. I mean, we tried to acknowledge our OPEX performance is better than we originally got it to, so the The OPEX growth and the Casey's legacy operations is going to be lower than we had originally guided to by 100 basis points or so. And that's even with some incremental incentive compensation. So I think we feel really good about that. We certainly, to Darren's earlier comment, have seen really good margin performance in the legacy business inside the stores. And so, we would have no reason to think that that's not going to continue as a general rule. And so, I would say it's largely steady as she goes in the mothership from an income statement perspective. We are, you know, we're making some consciously different decisions on some items that will impact cash flow just to contribute to the speed of deleveraging. And so, we're resequencing some capital spending on new units that we otherwise would have been building. We'll have a little bit lower set of tax payments because of some of the benefits of the deal. So cash flow, I think, could be a little higher than we had initially thought it was going to be, and that'll directly get applied to paying off debt associated with the transaction. And as it relates to FITES, you know, we don't have any specific commentary out on the next fiscal year yet at this point in time, but generally on synergies from the transaction, if I bucket them, kind of what comes first, et cetera. We would expect to get some fuel synergies very quickly in the game. That's really a function of us taking a consolidated you know as and then procurement synergies will come kind of in line with the GNA as we get the advantage of a greater scale on a lot of the sourcing side of the business you know ultimately the real most significant savings will be on the inside of the store as we introduce the pizza into the stores that is more dependent on the remodel schedule So that will certainly not be in the next 12 months, realistically. But, you know, in the second half of this fiscal year, it's not going to be a significant number. And it is reflected in the guidance that we've given. But just, you know, in the next six months, other than a little bit of fuel, I don't think there'll be synergies per se that would move any of the numbers we've given.

Got it. That's super helpful. And then just to follow up on fuel, I guess just any additional thoughts on how you're thinking about fuel margins in the context of that 10% EBITDA growth? And just to clarify that, I believe mid to high 30s, you said Q2 includes the new SEFCO stores. And just any thoughts on how those margins blend in?

Yeah, listen, we consciously, you know, we don't guide the fuel margins. Our crystal ball is not any better than than anybody else's necessarily. And so our obviously experience in the quarter is kind of that between the mid and the high 30s. I would expect just the mixing in of the Fikes business, those geographies tend to be a little bit lower margin fuel geographies than what we have. There's probably about a penny or maybe a little bit more than a penny per gallon headwind just on the math of mixing in that fuel profitability from FIQS. That would be reflected, obviously, in our EBITDA expectations for the second half of the year. But, you know, we don't have a specific number we're going to guide to for CPG in the second half of the year, just consistent with how we manage the full year expectations.

Thank you.

Our next question comes from Michael Montani of Evercore ISI. Your line is open.

Yes. Hey, guys. Congrats on the quarter and getting the Fikes deal completed. Thanks. I just wanted to ask on the inside margins, first off, if there's anything to be aware of, you know, in terms of timing or headwinds, et cetera, that could... kind of impact this improvement that we've seen in grocery and gen merch into the back half of the year? And then secondly, you know, other than cheese spot, any headwinds you'd call out to the prepared food side of the gross margins as well?

Yeah, Michael, this is Darren. Yeah, on the grocery and general merch side, I wouldn't anticipate any real headwinds. We're not seeing any of that. As we roll over the calendar year, there'll be some cost increases in some categories, and we should be able to offset that largely through pricing action. So I wouldn't anticipate any big shifts there. The mixed evolution is something that I do think will stick. And so I think that's probably to our benefit. On the cheese side, Steve, maybe you can comment on this.

Yeah, let's not. I just – one thing to buttress Darren's comment. You know, there's a little bit of seasonality in our normal course product mix on the grocery side, right? You know, in the coldest part of the year, we don't sell as much ice and things that are kind of higher margin products for us. So I think the third quarter natural mix is probably going to be a little bit – And, you know, outside of cheese and prepared food, no, I don't think there's anything significant to note. Again, cheese at the moment is a little bit more – it's less of a headwind as we sit here today than it was in the second quarter.

Thank you. Thank you.

Our next question comes from Christina Katai of Deutsche Bank. Your line is open.

Hi, good morning, Darren and Stephen, and congrats on nice results. So I wanted to ask on OpEx, but as it relates to the Fike stores, and now that you've owned them for almost a month and a half, I was wondering if you could just discuss your initial assessment on some of the opportunities at these acquired stores. Just how do you see opportunity to implement many of the same labor hours saving initiatives that were so successful at Casey's? And then what could that general timeline look like over the next 18 to 24 months?

Yeah, Christina, this is Darren. Yeah, we feel pretty good about that. You know, Fikes, you know, has done a great job operating their store. So I would say they have a good operation generally, but You know, we've learned a lot ourselves over the last couple of years employing a lot of these different techniques and tactics and technologies to impact our OPEX. So we feel we still have that opportunity to do that in the Fife stores. You know, that's going to take some time. I wouldn't anticipate a lot of that for the balance of this fiscal year. We're still, you know, pulling together that operation overall. But we'll have some more detailed plans. as we go into the next fiscal year in terms of how we might approach that and when we might expect to see some of those benefits. But we definitely have the opportunity there, so we feel really good about that.

Got it. That's helpful. And then just to follow up, I was hoping you could talk a little bit more about your joint planning process on the prepared food side of things, which I think is a relatively newer development for you. And then just, you know, if you could discuss on the type of benefits you and your vendors look to achieve in the upcoming calendar year. Thank you.

Yeah, you know, you're right. The joint planning process on prepared foods is a little bit newer than it is on the grocery and general merchandise side. But I think what we're seeing, you know, more broadly is that the suppliers that we've used historically are pretty large companies that have a lot of capabilities. And I don't think we were truly tapping into all the capabilities that they could bring to bear to help us improve our business. And so we're doing a much better job of that. And I think that's starting to yield some results, I would say, primarily in the innovation side of the equation. So most of these ingredient suppliers have pretty sophisticated culinary teams in their own right. And when we partner them with our culinary team, we can really get some great innovation, get some great improvements in quality, and get some improvements in cost at the same time. And so I think the chicken sandwich platform and really the hot sandwich platform overall is a great example of that. All of the ingredients and components in those sandwiches are new. And those were jointly developed with our culinary team and the culinary team of the ingredient manufacturers to produce a higher quality product at a better cost that allowed us to get the kind of performance we're getting. So we're going to continue that process with all of our suppliers. And this will be year two of that process that we're wrapping up right now. And so we're pretty optimistic about what's lying ahead for us.

Thank you. And as a reminder, to ask a question, please press star 1-1. One moment.

Our next question comes from Corey Tarlow of Jefferies.

Your line is open.

Great. Thanks. Darren, two for you and then one for Steve. For Darren, I had... You mentioned, I think it was energy drinks where you had seen some nice momentum. I was just curious if you could talk a little bit about what's driving that momentum. And then I was also curious about the effectiveness of the promotions that you've been doing recently and how that's helped support inside sales. And then for Steve, could you just remind us about what the traditional ramp to maturity is for a new KC store, and maybe if you could contrast that with bikes as well. Thank you so much.

Yeah, Corey, this is Darren. Yeah, on the energy drinks, that category is up essentially 13% year over year, and I would say that that is a combination of assortment, assortment optimization, assortment management, and promotional activity. So we've got some new products in the assortment. Alani New, Ghost, and C4 are all performing very well, and those are newer entrants into the assortment. Red Bull and Monster, on the flip side, have been stalwarts in the category and continue to grow at an accelerated pace. So I'd say the growth has really being driven in part by the new items coming into the assortment. And then on the Red Bull and Monster side, less of that and more of some different promotional activities and really execution at the stores. And, you know, as a reminder, we self-distribute Monster, which is unique in the industry. And I feel like our execution at store level and our in-stock position as a result of that is a differentiator versus others in the industry, and so I think that really accrues our benefit, and that's part of the equation behind the growth in energy drinks.

On the question on ramping, so we really don't have a significantly different expectation for ramping a new-to-industry build versus an acquisition model, but in terms of returns and how quickly they generate returns, an nti you know we would expect that to be certainly a positive return in the very first year right out of the gate it should be a double digit after tax returns by the second year and it should be mature in terms of kind of mid-teens after tax returns on invested capital by the third or fourth year um are literally decades of history with ntis would be very supportive of that as a consistent pattern in a newer geography you know, where the brand is a little bit less recognized and people aren't as familiar with the quality of the pizza specifically, you probably add an extra year to that ramp as a general rule. And that's all about just adoption of prepared foods. For Fikes stores specifically, you know, they're a little bit different in that we're obviously buying an existing business. They've got some very, very busy high returning stores already. The returns there you know, they're not going to be starting at zero because you're buying that existing business. So you'll get more of a step change as we remodel those stores because you're putting in the pizza business kind of all at once and you're introducing a prepared food business that, you know, they just don't have something comparable. So that'll be a little bit different pattern. But back to the return expectations on those stores, right? We'll finish the remodeling of those stores over a three to four month year period of time based on permitting timelines. But in the meantime, above unit of the stores, right, the fuel benefits, the procurement benefits, the SG&A benefits, those are going to accrue to kind of cases consolidated, even if they don't show up on an individual store's P&L necessarily.

Great. Thank you so much.

Thank you. I'm not showing any further questions at this time. I would like to turn it back to Darren Rebolez 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 once again thank our team members. I wish them and everyone on the call a happy holiday season.

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