Caseys General Stores, Inc.

Good day and thank you for standing by. Welcome to the Q3 fiscal year 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 11 on your telephone. You will then hear an automated message advising that 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 third quarter-ended January 31, 2025. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Dan Rebellas, Chairman, President, and Chief Executive Officer, as well as Steve Bramlich, Chief Financial Officer. Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. These forward-looking statements include any statements relating to the potential impact of a 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 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 third quarter, can be found at 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 third quarter results. Darren?

Thanks, Brian, and good morning, everyone. We're excited to discuss the excellent third quarter results in a moment. Before I do, I want to thank the entire CACES team for delivering another outstanding quarter. I'd also like to highlight our Feeding America campaign that kicked off in late February in partnership with Celsius. Through April 1st, we're excited to be able to help communities in need, including rural areas in CACES country, combat hunger and food insecurity. Now let's get into the results from the quarter. finished at $2.33 per share, and net income was $87 million, both flat with the prior year. EBITDA was $242 million, up 11% from the prior year. Inside sales were up over 15%, and fuel gallons sold were up over 20%, while our store count growth was up 10% versus the prior year, an encouraging sign that the economic impact of the stores we were building and buying is greater than the company average. Inside the store, prepared food innovation was also a key driver of strong performance. With regards to fuel, the team managed to outperform the geographic market and grow same-store gallons with fuel margins over $0.36 per gallon. The business continues to execute on our three-year strategic plan as we are growing the food business, accelerating unit growth, all while operating the stores more efficiently. 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 3.7% for the quarter, or 8% on a two-year stack basis, with an average margin of 40.9%. Same-store prepared food and dispensed beverage led the way, as sales were up 4.7%, or 12.6% on a two-year stack basis, with an average margin of 57.8%. Hot sandwiches continued their strong performance up over 50%, and bakery also performed well, up nearly 10%. Margin was down approximately 180 basis points from the prior year, due primarily to the addition of the Sefco stores that have a lower margin profile, as well as the coffee promotion that featured our new flavor profiles. Same-store grocery and general merchandise sales were up 3.3%, or 6.2% on a two-year stack basis. with an average margin of 34.2%. Non-alcoholic beverages performed well in the quarter, with energy drinks continuing a strong momentum up approximately 18%. Margin increased approximately 40 basis points for the prior year, primarily due to a favorable product mix shift. For fuel, same-store gallons sold were up 1.8%, with a fuel margin of 36.4 cents per gallon. Opus Fuel Gallon sold data shows the mid-continent region down approximately 4% in the quarter, indicating that we're taking market share. We believe our high-quality in-store experience drives traffic to our sites and is a significant competitive advantage. Operating expense management remains top of mind, and the third quarter saw an increase of just 3.2% on a same-store, excluding credit card fee basis. Our continuous improvement team has identified processes that can be simplified while still serving the guests at a high level. The results are there, as same-store labor hours were down 2%. I'd now like to turn the call back over to Steve to discuss the financial results from the third quarter.

Steve? Thank you, Darren, and good morning. I'm very proud of the hard work of our team during the quarter as we integrated the largest transaction in the company's history while also producing outstanding results. Total revenue for the quarter was $3.9 billion, an increase of $574 million, or 17.3% from the prior year, due to outstanding results in both inside sales and fuel gallons sold, partially offset by a 4.2% decline in the retail fuel price. Results were also favorably impacted by operating approximately 10% more stores on a year-over-year basis. Total inside sales for the quarter were $1.4 billion, an increase of $185 million, or 15.3% from the prior year. For the quarter, over $100 million of the increase was attributable to the Sefco stores. Prepared food and dispensed beverage sales rose by $48 million to $397 million, or an increase of 13.7%. and grocery and general merchandise sales increased by $138 million to $1 billion, an increase of 15.9%. Retail fuel sales were up $315 million in the quarter, driven primarily by a 20.4% increase in fuel gallons sold. The Sefco stores contributed just over 100 million gallons a quarter. This is partially offset by a $0.12 decline in the retail price of fuel from $2.98 per gallon in the prior year to $2.85 per gallon in the third quarter. We define gross profit as revenue less cost of goods sold but excluding depreciation and amortization. Casey's had gross profit of $913 million in the quarter That's an increase of $126 million, or 16% from the prior year. This is driven by both higher inside gross profit of $71.6 million, or 14.3%, and higher fuel gross profit of $44.8 million, or 17.4%. Inside gross profit margin was 40.9%. That's down 40 basis points from a year ago. Prepared food. dispensed beverage margin was 57.8 percent that's down 180 basis points from the prior year 150 basis points of the decrease was due to the consolidation of lower margin sephco stores the coffee promotion darren previously mentioned had an impact of approximately 20 basis points finally we also had a very modest headwind on cheese which was $2.12 per pound for the quarter, and that compares to $2.06 per pound last year, an increase of 3%. The grocery and general merchandise margin was 34.2%. That's an increase of 40 basis points from the prior year. The increase in margin is due to a favorable product mix shift of approximately 50 basis points, and that was partially offset due to the addition of the SEFCO source. Fuel margin for the quarter was 36.4 cents per gallon. That's down 0.9 cents per gallon from the prior year. And that's primarily due to the impact of the SEFCO stores, which was nearly 2 cents per gallon. Fuel gross profit includes $2.6 million from the sale of RENs, down 0.8 million from the same quarter in the prior year. Total operating expenses were up 17.8%. or $101.3 million in the quarter. Approximately 14% of the total operating expense increase is due to unit growth, as we operated 254 more stores than in the prior year. Included in this increase was approximately $13 million in one-time deal and integration costs associated with the FICO transaction. Same store employee expense accounted for approximately 1% of the increase, as modest increases in wage rates were partially offset by the reduction in same-store hours. Depreciation in the quarter was $105.2 million. That's up $16.3 million versus the prior year, and that's primarily due to operating more stores. Net interest expense in the quarter was $29.4 million. That's up $15.3 million from the prior year. And this is more reflective of our new quarterly run rate for interest expense in light of the financing associated with the FICES transaction. The effective tax rate for the quarter was 19.2%, and that compares to 24.1% in the prior year. The decrease was driven by a one-time benefit to state deferred tax liabilities following the FICES transaction. Net income was flat versus the prior year at $87 million. EBITDA for the quarter was $242.4 million compared to $217.6 million a year ago, an increase of 11.4%. Our balance sheet is in excellent condition, and on January 31st, we had total available liquidity of $1.3 billion. The quarter-end leverage ratio of debt to EBITDA was approximately 2.1 times per the covenants and the company's recent recently amended credit facilities, and we now expect to achieve our target leverage ratio of approximately two times by the end of the fiscal year, and that's a bit earlier than we had originally anticipated. For the quarter, net cash generated by operating activities of $205 million, less purchases of property and equipment of $114 million resulted in the company generating $91 million of free cash flow. This compares to using $27 million in the prior year. At the March meeting, the Board of Directors voted to maintain the quarterly dividend at 50 cents per share. We are updating our previously communicated fiscal year 2025 guidance as follows. Casey's now expects EBITDA to increase approximately 11%, and we now expect the purchase of property and equipment to be approximately $500 million. We're not updating any other metrics, but we have some further clarification as follows. But first, while we know there's some modeling noise related to the FIKES acquisition in the quarter, the outstanding financial results that we posted demonstrate the team's ability to integrate a large acquisition while still running the business at a very high level. Also as a reminder, the fourth quarter will obviously be impacted by the FIKES transaction on our total results, notably on our inside and fuel margins, as well as total operating expenses. They will not impact same-store sales. Additionally, February 2024 included a leap day, which is not repeating this year. The impact of the leap day to the fiscal 2024 fourth quarter was a positive approximately 100 basis points. We believe that February has not been reflected of the expected same-store fourth quarter results due to unfavorable weather conditions and a lapping of leap day. But the company does expect to finish the year at the bottom of the inside same-store sales range. This does imply that the fourth quarter will be below the annual range. Same-store gallons are still expected to be near the middle of the range for the fiscal year. Fuel margin in February was in the mid-30s on a cents-per-gallon basis, and that includes FICS. And cheese costs are very modestly favorable versus the prior year. Our total fourth-quarter operating expense expectation is an increase, again, primarily due to the FICS acquisition. In total, as expected, FICS will be dilutive to our earnings per share in the fourth quarter, primarily due to incremental interest expense higher depreciation and amortization, and several million additional dollars of anticipated integration costs. And I'll turn the call back over to Darren.

All right, thanks, Steve. I'd like to again thank the entire CACES team, including our new team members from FIFES, for another excellent quarter. I'm also very proud of the team's ability to integrate the largest transaction in the company's history while also producing outstanding financial results. The first pillar of our three-year strategic plan is to accelerate the food business. Our prepared food and dispensed beverage team continues to do an excellent job innovating and finding the right quality products to serve to our guests. The hot sandwiches launched last year have continued to perform very well. We also had a limited release of new chicken wings and fries in our Des Moines market, with encouraging results so far. On the grocery and general merchandise side, we continue to see strength in the energy drink category as we mentioned earlier, with 18% growth in the quarter. Our store growth pillar was on full display this quarter, integrating the FIQS transaction. Our dedicated integration team has done an excellent job getting our newest team members comfortable operating in the KC system. We're able to do this while maintaining a strong balance sheet. As of January 31st, we set a 2.1 times leverage ratio and are quickly on our way to the targeted two times leverage ratio. Given our track record of executing and integrating meaningful acquisitions, we are well positioned to continue this strategy and enhance shareholder value. Enhancing operational efficiency is the third pillar of the strategic plan. With strong work from our continuous improvement and operations teams, the organization achieved its 11th consecutive quarter of reduced same-store labor hours. This work has been done without compromising the Casey's experience, and we continue to see guest and team member satisfaction scores. Overall, this quarter was another great example of how our differentiated business model, coupled with a great team, leads to outstanding results. With a high level of execution on our strategic plan, we are able to guide to EBITDA growth of approximately 11%, outpacing our standard growth algorithm. We'll now take your questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question and one follow-up. One moment for our first question. Our first question will be coming from Jacob Akin-Phillips of Mellius Research. Your line is open, Jacob.

Hi, everyone. First, I want to ask something, I guess, more broad, strategic. Both of you joined in like 2019, 2020, and you've overseen the company through like some volatile times, pandemic, inflation. But now we're up against kind of a volatile policy backdrop, tariffs, maybe some accelerating inflation. So just wondering if you could talk about like how Casey has set up things that have changed over the past four or five years and why you're confident that Casey can operate in this potentially volatile environment.

Hey, Jacob, this is Darren. Yeah, you're right. I started in the middle of 2019, and then Steve started a year later. And so, yeah, we've got to see quite a bit over the last few years. And I guess what I would tell you is that the company we started in five or six years ago is very different than the company we have today. We've added a lot of different capabilities, whether it's in our procurement function, data and analytics, guest insights, our culinary team, continuous improvement. We just have a whole suite of capabilities that we simply didn't have several years ago. And so as I look at this particular environment, with some uncertainty and a bit of volatility. I feel far more confident now than I ever was before in our ability to deal with those things, just because we have a more tenured team. We have more sophisticated capabilities. We have better technology. And so I just feel like we're better equipped to deal with whatever comes our way. And so far, what we're seeing is a lot of uncertainty, but we haven't seen a lot of concrete impacts to the business either based on all the noise out there in the world. So I feel like we're in a much better position to deal with whatever comes.

I would probably add to that, Jacob. You put all of that on top of just the resiliency of our core business model. Casey's was successful for a long time before any of the current members of the leadership team got here through all kinds of external environments. And the beauty of our business model is we're not dependent on a particular set of exogenous factors going our way, whether it's in petroleum or health of consumer. We've got a differentiated value proposition inside the store when times are tough for a consumer. We've got outstanding fuel capabilities, much more sophisticated than most of the people that we compete against with on a day-to-day basis. And the merchandising offering that we have inside the store, we feel was second to none. And so almost irrespective of what's happening outside of our four walls, we feel like we have something that differentiates us from anybody else in the space.

And then I guess just as a follow-up, on Fikes, it was known that it was going to be diluted to margins. So I guess mainly from prepared food, what are the

like easy things to fix is it just a factor of different product mix and what are the timelines to like kind of helping those stores improve on their margins yeah um well well nothing's easy to fix i i guess what i would say is you know what if you look at the prepared food side of their business that that's probably where the the most glaring difference in the margin profile between where they are today and where we are. Some of that is due simply to product mix and what they sell. What they sell in their food business is a little more protein heavy, which tends to come with a little bit lower margin profile, where we sell a lot of pizza, which has a much higher margin profile. So some of the fix, so to speak, will be when we ultimately get kitchens in those stores and we can get our assortment of products in to complement theirs. So we'll add pizza to their assortment. And what's really encouraging right now is we've converted three stores pretty quickly that already had kitchens in them. And we've kind of taken a best of both approach to the assortment where we've kept some of the things that really made them successful. We added some of the things that make us who we are, primarily pizza. And we have the best of both. And then we've eliminated some of the things that weren't as profitable for them. And so what we're seeing is really good results so far. Granted, it's only three stores. It's early days. But we really think that as we get further into it and we're able to optimize that menu between what they did really well and what we do really well, we'll see not only increased margins, but we'll see increased velocities as well. And then, of course, over time, as their existing

supplier contracts come to an end we'll be able to migrate them over onto our contracts with far more scale and so we'll be able to blend that margin up as well one moment for our next question our next question will be coming from anthony bonadio of wells fargo your line is open anthony yeah hey good morning guys uh thanks for taking our questions um

so just digging in on folks a little bit more, um, can you just maybe talk a little bit more about, uh, early performance from that asset, uh, how the integration is going, um, and then any change to how you're thinking about, uh, the cadence and magnitude of synergies.

Um, yeah, I'll talk a little bit about performance, uh, thus far.

I'll let, let Steve talk about cadence of synergies, but, uh, performance overall, I mean, we're, we're pretty happy. We're only one quarter into it. Right. And, uh, And, you know, unfortunately, that first quarter was in the wintertime, and they got a lot of snow in Texas and in the panhandle of Florida, which then happened a whole heck of a lot. So probably not as representative of what the normal business performs like. But aside from that, I think it's exactly what we thought we bought. We've got some really high-quality, high-volume stores in attractive geographies. And like I mentioned before, you know, early indications are that when we combine our assortment and doing the things that we each do well, we get some pretty good results. So we feel really good about the deal so far. The team seems to be integrating very nicely. And we got a lot of work to do still, but feel good about that so far. you know, the real synergies for us start to happen as we convert sources. Steve, I'll let you.

Yeah, just to reiterate, our expectations on synergy capture have not changed. So, you know, over three to four years, we think we can achieve $45 million of synergies. You know, 40% of that or so would be the food synergy capture that Darren referenced. And so, that'll be on the back end of that three to four-year time period just because that's associated with with some construction and remodeling their lead times to get that to work. And so certainly in the first 12 months, you would expect us to capture some fuel pricing synergy where we've taken over the pricing of fuel already and starting to In the middle of that, we'll get some merchandise synergies for our center of store mix. But again, most of what will happen in the next 12 months would be on the fuel and the overhead side.

Got it. That's really helpful. And then just on the gallon side, you guys put up a really strong fuel gallon quarter. Well, we've generally seen pretty choppy industry data and results from others. So can you just talk a little bit more about what you think is driving that outperformance And then just maybe your latest thinking on the right balance between gallon growth and margin as you look to optimize gross profit dollars.

Yeah, Anthony, I would say that there are two factors that really drove the gallon performance in this quarter. Some of it is some of the acquisition stores that we did in prior years, they're starting to ramp. And so as we cycle over some softer numbers, When we bought those stores, now we're starting to see our fuel capabilities come to bear on those stores, and we're seeing some strong gallon growth in those areas. The other area that we started to see some traction in is on diesel, and that's been a subcategory that's been under some pressure for the last several quarters, but started to gain some traction in the most recent quarter, both on the commercial side and through some of the the programs that we have to offer incremental value to that over-the-road diesel consumer. So we saw strength in both of those areas, and that really contributed to the overall gallon performance.

And one moment for our next question. Our next question comes from Bonnie Herzog of Goldman Sachs. Your line's open, Bonnie.

All right, thank you. Good morning. Good morning. I wanted to ask, about you know just the fears of recession right now seem to be gaining some momentum recently so just hoping you could touch on how your business model and value proposition might you know position you hopefully well in the case of a recessionary environment and along those lines you know have have you become more aggressive on your food and beverage promotions recently given you know the increased promotional intensity we're seeing at some of the qsrs you know any you know, broader commentary on the consumer, your recessionary playbook and promotional levels would be helpful.

Thanks. Okay, sure, Bonnie. I think that was five questions, but I'll try to tackle them. Yeah, you know, going into recessions, you know, if we end up in one, you know, Casey's for a long time has performed very well during recessionary times. And I think that's for a couple of reasons. One is that We sell basic daily needs that people need. They're low dollar denominations. So in the grand scheme of things, when people have to pull back on discretionary spending, a lot of what we sell would be considered by our guests to be non-discretionary. And because there tends to be a lower price point, it isn't the first thing to cut on the list because these are daily needs. That being point number one. Point number two is on our food proposition. We are, generally speaking, lower priced than an equivalent QSR alternative. And so as consumers start to look for value, we're a great trade down opportunity from a price perspective, but not a trade down in quality. So I think consumers feel really good about being able to stretch their dollars with us on the food side. With respect to being more promotional, we have not increased our promotional activity. We have been more targeted with that. We've got some new capabilities now where we're able to more efficiently look at different consumers and what their purchasing habits have been, and where we see that they may be lapsed, we can target them with more specific offers. We're not spending more from a promotional standpoint, but we're being far more targeted in how we do that.

All right. Thank you.

And one moment for our next question. Our next question will be coming from Mike Montani of Evercore ISI. Your line is open, Mike.

Hey. Good morning, guys. Thanks for taking the question. Congrats on the quarter.

All right. Thanks.

Thanks. So you said a two parter here. The first one was just in terms of a high level, you know, maybe if you could talk a little bit about, you know, the state of the consumer through your eyes and, and secondly, like the value gap positioning that you see versus peers, given some of the promotional activity from some of the other dining options that may exist out there.

Yeah, sure. Mike, from a consumer standpoint, I think similar to others, we've seen a little bit of pressure on the lower-income consumer, but what I would say is that consumer, and I'll remind you that we consider a low-income consumer someone who makes less than $50,000 a year. We only have about 25% of our guest space is in that category, so we're not overly exposed in the base case. They are still purchasing. We still see positive growth. from those consumers, it's just not at the same rate that we see in the other income cohorts. So they're still buying, just not as much as some of the other cohorts. You know, typically about 1 to 300 basis points softer, and it's more in some of those, I guess, maybe more discretionary items like tobacco and alcohol where we see a little bit of softness there. But that's really from the consumer side. With respect to value, like I said, I think we're still in a good spot from a value proposition standpoint when we look at our pizza business. On the one hand, only about half of our stores even have a national brand competitor in their trade area. So we don't really have to go head-to-head with with somebody that might be a little more promotional in about half of our stores. And the other half where we do have a national brand competitor, we typically are a dollar or more below on a typical menu price versus those competitors. So we already start off at a, at a competitive value relative to them. And then we do some promotional activity. They do some. So we feel like we're always competitive and, Like I said before, we're able to get more specific and targeted with our rewards members and really be more efficient with our promotional spend.

And one moment for our next question. Our next question will be coming from Bobby Griffin of Raymond James. Your line is open, Bobby.

Hey, guys. Good morning. Thanks for taking my questions and congrats on a good quarter. So I guess, Darren, I want to circle back on February and just kind of asking the sense of, you know, obviously there's a lot of anxiety on consumer spending from investors and different things like that. But when you kind of X out the weather or look in the regions of your business that might not have been impacted quite as much on a year-over-year basis, is there anything you can share to kind of give comfort that this really was a weather impact around February, any data or anything like that?

Yeah, Bobby, I don't have specific numbers to share with you on that other than to say, you know, February was a tough weather month. And I can tell you when the temperature difference is 50 or 60 degrees colder than the prior year, I mean, you see it in the numbers. And what gives me confidence about this, Bobby, is that when the weather starts to normalize. It even gets back to parity. It doesn't have to be good weather. It just has to be comparable weather. We see the business respond accordingly, and we see the growth again. So if I wasn't seeing that, I would have other concerns, but it has strictly been tied to those weather events where we have an unusual amount of snow where we've got to shut down some stores or just Like I mentioned before, those extreme temperature variations. So I don't have any concern that there's a more fundamental issue with the consumer because they bounce back as soon as the weather clears up.

Very helpful. And then maybe just on the coffee promotion as well as the wing test, is anything more you can share on that? In particular, you know, how they went and is something, you know, I know coffee's been a category you guys have talked about maybe being able to do a little better in and kind of pushing. Is that something that was successful and that might continue going forward?

Yeah, you know, on the coffee side, it's still a little bit early, but we did see some good results. We saw the, you know, a shift to having positive unit growth in that category for the first time in years. And, you know, really that was assortment driven. We've got a new supplier, a little more sophisticated on the quality of the product. We did a lot of development and testing on that one. So we think we've got the assortment right. Coffee is a tough habit to get people to change. And so we got probably a little more aggressive on the promotional side than we normally would. Gave away about 2 million cups of coffee in January. And that, you know, hence the impact, you know, to the margin a little bit on prepared foods. But overall, this is, we're playing the long game here with coffee. So we like the results so far, but it's going to be work over a pretty protracted period of time. to really gain traction in that business. On the wing side, again, early days, we just did a soft launch in the Des Moines market in January and then started to advertise in February. We're very pleased with the results so far. Really high satisfaction scores from the guests. So we feel confident that we've got the product right. We're still working through some operational kinks, as you would expect when you test things. but feel really good about this. And what we're seeing so far is that this isn't really cannibalizing the pizza business. This is actually contributing an incremental, you know, call it an incremental night per week or an incremental visit from our guests, which is exactly what the goal was. So, so far, so good. Again, more work to do, but feel good about it in the early stages.

Thank you. And one moment for the next question. Our next question comes from Christina Katai of Doce Bank. Christina, your line is open.

Hi, good morning. Congrats on the nice quarter. So I had a question. Good morning. Good morning. So question on prepared foods there, and you noted that innovation is driving the results there. So I was wondering if you can help contextualize for us how innovation is indeed driving that market share as it relates to bakery, hot sandwiches, etc., Where do you see the greatest untapped opportunity, whether that is a broader wings rollout? And we understand February has unique noise, but it sounds like March has bounced back. Is that a fair take? Thank you.

Yeah, you know, Christina, the innovation really has been the bigger driver of our growth versus the promotional activity. And, you know, we do both, but Whenever we get that innovation right, that's when we really see the outsized growth. And you mentioned it in the hot sandwiches. We launched that platform a year ago, and we're cycling over it with still double-digit increases in it. And so it really goes to show when you get the level of equality right and with some unique twists to it, we start to see some growth. In our specialty pizza business, This last quarter, we had the Italian deli pizza, and we saw really strong growth in that specialty pizza subcategory overall. So that's always been the case for us. When we innovate, we win. On the bakery side, we've had real strength in the dessert subcategory, primarily cookies. And the bakery team has done a great job in terms of innovating and coming up with limited-time, unique recipes. cookie skews that really resonate with our guests. And so that innovation has really taken hold. I'm sorry, you had asked another part of that question.

Yeah, just it sounds like you said that as the weather essentially turned, it started to bounce back. So is there a fair take to say that March is seeing sort of normalized level of inside crop growth?

I'd say March is seeing that level of growth when the weather cooperates.

Probably the first week of March didn't look a heck of a lot different than the last couple weeks or two of February, but we're starting to see that weather turn around. And again, like I mentioned, when the weather turns, the sales turn around with it. So we still have a little bit of room to go in the fourth quarter, but

If we can get back to normal weather cops, I'm confident that the sales performance will follow.

And one moment for our next question. Our next question will be coming from Kelly Bonilla of BMO Capital Markets. Kelly, you're on.

Good morning. Thanks for taking our questions. I wanted to just circle back on Fikes. You gave several of the figures. I'm just curious how much EBITDA the acquisition of Fikes added to the quarter and how much it's contributing to the 11% EBITDA growth forecast for the year. And if anything has changed on that front, whether it's the performance of the business or just timing of integration activities, just an update on that.

Hey, good morning. This is Steve. In the quarter, FIQS, it was EBITDA dilutive to us. It was a negative number, and that was primarily because of the $13 million of integration-related expenses. So prior to those costs, it was positive EBITDA, but it was net negative when you added in all of the integration and one-time costs. It will be modestly positive. EBITDA in the fourth quarter. Again, that's going to be influenced. We'll still have a couple million dollars of integration-related costs for sure. Some of it's sliding out from the third into the fourth. Some of it's just, you know, normal course spending. But so it'll become EBITDA positive as we expected it to be in the fourth quarter, but it'll still be a relatively small number. And so FICES per se is not a large contributor at all second half of the year to us increasing the total EBITDA expectation.

That's a mothership phenomenon.

Okay, that's very helpful. And on fuel, you talked a little bit about the factors driving the strong seeing store gallons, but I was just wondering if you can talk about how KC markets, kind of legacy markets, performed from a fuel margin standpoint because we were expecting maybe a little bit of dilution from the FICS CPG margins, just given their regions and where they operate. But just kind of curious what more of a same store KC fuel margin looks like and just what your take on the performance of fuel margins is today when we could maybe start to see those up year over year.

Yeah, maybe we'll maybe turn out tag team that one. I'll just start with clarifying on the on the margin standpoint. So the company produced 36, almost 36 and a half cents CPG. That's a consolidated number. And so mothership Casey's would have been almost two cents higher than that. So call it a little over 38 cents. And then the Fikes geography, as you mentioned,

Hinted at lends that number down by almost almost two cents two cents a share and all that dollar Darren talked about some of that volume stuff Yeah, you know on the volume side, you know the number that we gave the 1.8 percent That's the same store number so that would exclude bikes because they're obviously not in our same store panel yet so that that really is the performance of the base business and and again Yeah, the facts are driving that. We're cycling over some acquisition activity from the prior year in addition to seeing some recovery in the diesel business.

And one moment for our next question.

Next question comes from Chuck Sarankoski of North Coast Research. Your line's open, Chuck.

Good morning, all. Great quarter. Looking at the... the wings business. Is that at the stage, you talked about launching it in Des Moines, I think that was where you said, is it at the decision point where it will become an offering throughout the Casey's footprint?

Yeah, Chuck, we're still early stages there. The team is assessing it. We're still making some tweaks and adjustments. We feel We feel good about what we see so far, but we haven't made that final decision just yet on that platform.

Well, do you have any additional cities where it will be tested?

We don't have any more at this time. The test in the Des Moines area, it's the broader DMA, so it's about 225 stores, so it's a pretty fulsome test, both in the metro area and in some of the surrounding smaller towns. We're getting a a good look at how this performs both in an urban environment and in a very much a rural environment.

But more to come on that one, Chuck.

Thank you. Our next question will be coming from John Royal of JP Morgan. John, your line is open.

Hi, good morning. Thanks for taking my question. So my first question is a strategic question and appreciating that you're very early days in the Fikes acquisition and the integration will take some time. But as you think through your next legs of growth longer term, you do have this white space in Texas where you're essentially a new entrant. Is it safe to assume that that's your best opportunity to grow from here? And if so, how should we think about NTIs versus acquisitions as it pertains to that opportunity?

Yeah, John, certainly we have a lot of room to grow in Texas. We now have 170 stores there between the 150 that are in Fikes and then the 22 we bought last year from Lone Star. So we have tremendous space there. But if I take a step back with our 2,900 stores now, roughly, 2,000 of the stores are in only six states we operate in. We still have a lot of white space on the eastern edge of our footprint. So, Michigan, we have three stores open, Ohio, Kentucky, Tennessee. We're just barely getting started. So, yes, Texas certainly does present a great opportunity for much more growth, but we also have that same type of opportunity in the number of states we operate in because that'd be point number one number two um we don't you know we approach every fiscal year kind of going in with the assumption that our growth target is going to be half from nti and half from acquisition being the small deal m a type of stuff now over the last couple of years as deal flow has evolved it's skewed much heavier on the acquisition side versus the NTI side. But we continue to go out and find real estate and land bank those sites so that if the deal flow starts to slow a little bit on the M&A side, we have the pipeline to support it from an NTI standpoint and continue on our growth algorithm. So that's really how we approach it. We don't have a bias one way or the other. We just approach it as a balance. And then as things evolve, we shift and adjust to make sure we can keep that rateable growth that people are looking for.

Very helpful. Thank you. And then just a quick follow-up on labor hours. Can you talk about how much runway you think there is to continue to take out same-store labor hours and just what ending you think you're in in terms of getting those hours down to where you'd like to operate them?

Yeah, you know, when we started a couple years ago, almost when we started this current three-year plan, we committed to take 1% of same-store laborers out per year over the three-year period. So we're calling it two-thirds of the way, roughly, through that process. Now, frankly, we're a little bit ahead of schedule, too. We've taken out more than that. So we still have some runway for the next fiscal year. We haven't really guided to anything specific on that yet, and we'll do that in the next quarter. But, yeah, we still think there's some opportunity there, at least for the balance of this three-year strategic plan that we're in right now.

Thank you. And our next question will be coming from Chuck Grom of Gordon Haskett. Your line is open, Chuck.

Hey, good morning. Thanks very much. On the two-cent drag on the cents per gallon from Fikes, should we think about that wrapping over the next three quarters or – or was there something seasonal about this quarter that distorted it? And then on the, um, prepared foods, um, 150 basis points of a drag, I guess a similar question. How do we think about that wrapping over the next few quarters? In other words, I guess at what point do you think you can narrow it down to? So, so it's been, been, been menace.

Yeah. Um, Hey, uh, good morning, Chuck. This is Steve. I'll, I'll start with that. So, um, on the CPG, um, Somewhere around two cents is probably a good number for the assumption in terms of whatever you had modeled for a traditional Casey's geography. The states that Fikes is active in generally blends in at about two cents down. We've only owned it for one quarter, so I want to be a little careful on the seasonality aspect of it. I mean, generally speaking, the Fikes units are larger volume units than an average kind of case season and the mothership they pump more gallons literally but um i don't have any reason not to tell you two cents is a pretty good number um on a prospective basis um you know some of our synergies that we expect to capture in that 45 million dollar number will be fuel related synergies and so you know can we can we chip away at that delta over time? Yeah, I think we can, but we're not going to gain enough synergies to, you know, somehow right-size those geographies back to what our average is. That's not what we're trying to do. On the prepared food side, that's going to be – we do over time expect to bring the Fikes stores, the major – 85% of the Fikes stores that will be converted to a Casey's, to a Casey's-like prepared food margin profile. That will be dependent on the – construction timeline where we get new kitchens in. And so back to an earlier question, it's not going to happen in the next 12 months because of the permitting timeline required. So that will be on more in kind of year three and year four. But ultimately, there's no reason for us not to assume that the Fikes stores will come in line with the prepared food margins of the existing Casey's business.

Okay, great. Thanks, Steve. And then my follow-up, just on the macro question that everybody seems to be focused on, I guess a different angle would be, you know, when you dissect your basket, are you seeing, you know, trade down, more people buying fountain drinks? Is there anything to unpack over the past four to six weeks, given the environment? Thanks.

Yeah. You know, we have seen some strikes in fountain drinks. I will say that. but you know it's across the spectrum of income cohorts, so I can't necessarily tell you that it's a lower income consumer indexing higher on that. Actually, it's the higher income consumers are actually growing the fastest on our dispensed beverages, so I'm not sure if I can draw any conclusions from that other than they're liking our fountain business. We have seen and continue to see some shifting around the store with candy prices being very high and our bakery program being really robust and some good innovation there. We are seeing people switch over from the candy category into the bakery category, which is a little more affordable and still allows people to get that sweet indulgence that they're looking for. And we like that trade from a margin standpoint, so we'll take that all day long. That's a good one for us. But generally speaking, that's kind of what we're seeing. You know, there's a lot of other mixed shifts going on that I don't think have really anything to do with the consumer from a pressure standpoint. And you see this in our grocery and general merchandise margin and how that's been able to grow. You know, the cigarette category, combustible cigarettes, is under a lot of pressure, and subcategory has been declining. At the same time, nicotine alternatives have been growing at a really fast rate. In the last quarter, our nicotine alternatives were up 74%, while the combustible cigarettes were down right around four. So that margin trade is a much better trade for us. So that blends that margin up. And at the same time, the overall category is less of the overall Grocery General Merchandise Mix, and more of that is going to non-alcoholic beverages and grocery, which carries about double the margin rate that the tobacco category does. So you see those shifts going on, and so that's what's allowing us to blend that margin rate up overall in Grocery General Merchandise.

And we do have a follow-up question from Mike Montani of Evercore ISI. Mike, your line is open.

Hey, thanks for letting me squeeze this in. Just wanted to ask, on the private label front, if you could talk about any of the tiering initiatives, how that's going. And then secondly, there's got to be a lot of pressure out there on the independents. So is there additional opportunities for acquisitions, especially in light of the ability to deleverage you've shown so far?

Yeah, Mike, we are starting to make progress on that tiering. We're literally, as we speak, just getting some of those new products into the stores, and we'll see that gradually bleed into the assortment over the next, call it, 9 to 12 months as we wind down some inventories on existing products and ramp up some of the production on the new products. So, We like what we've seen so far, but it's only a handful of skews, to be honest, and we have a lot more coming over the next several quarters. And then, I'm sorry. Yeah, the M&A environment. Yeah, look, I think you see the same industry data that we do. I think the smaller independent operators are under a lot of pressure right now, and those are the conversations that we continue to have. Um, that is impacting also some of the larger scale players. So we're optimistic that the environment will continue to be, uh, favorable to, to buyers like us. And, um, and, and we're seeing some, some pretty good deal flow, especially on the, on the smaller stuff. You know, the, the bigger, the bigger opportunities are a little more lumpy, but, um, we're, whenever something comes to market, we're actively engaged in it. And, um, so we, um, We like the hand we're holding right now. The balance sheet is in great shape. The team is very experienced at integrating these things.

So it's really about finding the right opportunities and at the right price for us.

I would now like to turn the call back to Darren Rebellus for closing remarks.

All right. Thank you for taking the time to join us on the call today and hope everyone has a great day. And this concludes today's conference call.

Thank you for participating. You may now disconnect.