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Edited Transcript of CASY earnings conference call or presentation 10-Dec-19 3:30pm GMT

Q2 2020 Caseys General Stores Inc Earnings Call ANKENY Dec 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Caseys General Stores Inc earnings conference call or presentation Tuesday, December 10, 2019 at 3:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Darren M. Rebelez Casey's General Stores, Inc. - President, CEO & Director * William J. Walljasper Casey's General Stores, Inc. - Senior VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Alessandra Jimenez Raymond James & Associates, Inc., Research Division - Research Analyst * Benjamin Shelton Bienvenu Stephens Inc., Research Division - MD * Charles Edward Cerankosky Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal * Christopher Mandeville Jefferies LLC, Research Division - Equity Analyst * John Macalister Royall JP Morgan Chase & Co, Research Division - Analyst * Karen Fiona Short Barclays Bank PLC, Research Division - Research Analyst * Kelly Ann Bania BMO Capital Markets Equity Research - Director & Equity Analyst * Paul Trussell Deutsche Bank AG, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Q2 Fiscal 2020 Casey's General Stores Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Bill Walljasper, Chief Financial Officer. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [2] -------------------------------------------------------------------------------- Good morning, and thank you for joining us to discuss Casey's results for the quarter ended October 31. I'm Bill Walljasper, Chief Financial Officer. Darren Rebelez, Chief Executive Officer, is also here. 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 related to our possible or assumed future results of operations, business strategies, growth opportunities and performance improvements 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 our ability to execute on the value creation plan or to realize benefits from the value creation plan 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. This morning, we'll take a few minutes to summarize the results of the second quarter and then open for questions about those results. I would now like to turn the call over to Darren to discuss the results of the quarter. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Bill, and good morning, everyone. As you've seen in the press release, diluted earnings per share for the second quarter were up 23% to $2.21 compared to $1.80 a year ago. The results were driven primarily by a stronger fuel margin versus second quarter last year, continued operating expense control and sales gains inside the store. Year-to-date, diluted earnings per share of $4.52, up over 22% from the same period a year ago. Excluding the onetime impact from tax reform, this quarter marks the sixth consecutive quarter of double-digit earnings growth per share compared to prior year quarters. We continued to execute on key elements of our long-term plan this past quarter, positioning us well for future growth. I would now like to go over our results and some of the details in each of the categories. During the quarter in the Fuel category, we experienced a favorable fuel margin environment, combined with our ability to leverage the implementation of PriceAdvantage, which is our fuel price optimization tool. These factors enable us to achieve an average fuel margin of $0.229 per gallon, up nearly $0.03 per gallon from the same period last year. As a result, gross profit dollars increased nearly 19% in the quarter in the Fuel category. Same-store gallons sold were down 1.8% in the quarter. This was primarily due to our efforts to optimize gross profit dollars in the category by striking the appropriate balance between gallon growth and fuel margin. The average retail price of fuel during this period was $2.47 a gallon compared to $2.73 a year ago. Despite the decline in same-store gallons, total gallons sold for the quarter were up 3.4% to 614 million gallons due to the strong contribution from new stores opened in the last 12 months. Same-store gallons sold year-to-date were down 2%, with an average fuel margin of $0.237 per gallon. Through the first 6 months, gross profit dollars in the Fuel category are up 20.5% compared to the same period a year ago. Our effort in price optimization continues to have a positive effect on our fuel margin gains. By the end of this quarter, we anticipate to have all of our stores fully integrated at the point-of-sale with the PriceAdvantage tool. We also currently have approximately 400 stores without a digital price sign. We are on schedule to have these converted to a digital format by the end of the fiscal year. This integration and sign conversion will allow us to increase flexibility in adjusting retail prices to react more quickly to the changing fuel environment. We are also pleased with the progress we've been able to make in fuel procurement in second quarter. Currently, our contracted fuel volume represents about 37% of our total fuel volume. As we continue to build out this team, we expect to have approximately half of our overall fuel volume under contract by the end of the fiscal year. Lastly, in the Fuel category, we continue to gain traction in our fleet card program. Over the course of the second quarter, we added over 3,000 new cardholders. To date, we now have 2,500 accounts and 15,500 cardholders. This combined with our additional efforts in other types of fleet cards have driven the universal fleet program [8%] in the second quarter. We remain optimistic about the potential of all these initiatives going forward. As a result of our efforts with price optimization and the expected opportunities of fuel procurement, we adjusted our fiscal year same-store gallon guidance range downward to minus 1% to a positive 0.5% and moved our annual fuel margin guidance range up to $0.21 to $0.23 per gallon. Same-store gallons are currently trending below our current annual guidance, while the average fuel margin is trending toward the upper end of our current annual guidance range. Moving to inside the store. Total sales in the Grocery and Other Merchandise category were up 6.8% to $660.6 million in the second quarter. Same-store sales were up 3.2% during the quarter, in line with our annual guidance. Excluding cigarettes, same-store sales were up 5.8%. The average margin in the quarter was 33.3%, up 90 basis points due primarily to a favorable product mix shift to higher margin items. Gross profit dollars for the quarter in the category were up nearly 10% to $220.1 million. For the first 6 months, same-store sales were up 3.1% with an average margin of 32.3%. As you may recall, the year-to-date margin was adversely impacted by a $6.6 million one-time adjustment that occurred in the first quarter. Without that adjustment, the margin would have been 32.8% and gross profit dollars for the first 6 months would have been up over 8% to $442 million. Same-store sales are currently trending ahead of our annual guidance. During the second quarter, we continued to integrate our price optimization platform inside our store. We completed the rollout of the center store products and are currently in the final stages of adding the beer and alcohol categories. As we move into the back half of the fiscal year, we will look to integrate cigarettes and prepared foods onto this platform as well as promotion analytics. With a limited amount of data at this point from the early rollout, we do not have any results to share. We should be in a position to update you at our next earnings call. In the Prepared Food and Fountain category, total sales were up 5.2% to $297.8 million for the quarter. Same-store sales were up 1.9%. Even though this was below our annual guidance, we were pleased with the acceleration in our comps towards the back half of the quarter, resulting in a strong sequential increase in our 2-year stack comps for the month of October and for the quarter. We continue to gain traction in our digital engagement with our guests. As part of this digital engagement, we completed an employee pilot and recently rolled out a soft launch of our loyalty program at the beginning of this month. We currently have a planned global launch of the program at the start of the new calendar year. We believe that Casey's is at the heart of every community we serve, with our purpose being to make life better for communities and guests every day. With that spirit in mind, we wanted to create a partnership opportunity with our guests through the loyalty program. The program will allow members to accumulate points for their purchases at Casey's that can be redeemed for in-store purchases or fuel discounts. Unique to Casey's, our rewards program also allows our guests to convert their points into cash that they can donate to their local schools. This concept tested extremely well with our guests, and we believe this will differentiate our rewards program from our competitors. We're excited about the opportunity to learn more about our guest preferences, which will allow us to serve them even better. We believe that the combination of the new suite of digital platforms will increase our basket size and drive additional traffic. The average margin for prepared food in the quarter was down 150 basis points to 60.9% versus the second quarter a year ago, primarily due to the rise in cheese costs. The average cost of cheese for the second quarter was $2.18 per pound compared to $1.86 in the same quarter last year. Cheese cost is currently trending up. We are currently purchasing on the spot market and monitor this closely for buying opportunities. In the quarter, prepared food gross profit dollars rose 2.7% to $181.5 million. As you've seen in the press release, we adjusted our annual same-store sales guidance range for prepared foods downwards to 1.5% to 4%. Same-store sales are currently trending within our annual guidance. As many of you have seen already, we recently onboarded Tom Brennan as our new Chief Merchandising Officer, who brings to Casey's a wealth of experience in the convenience store and restaurant industries. He's held leadership roles in merchandising, category management, store development and operations. And I know that with his broad background and track record of success, he will help us accelerate our prepared food program and overall merchandising strategy. We're also currently searching for a new Head of Food Service to help with that acceleration. With the addition of these new leaders, the continued traction in our digital platform, including the upcoming launch of our loyalty program, we're optimistic about this category moving forward. I would now like to turn the call over to Bill to discuss operating expenses and the financial statements. Bill? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [4] -------------------------------------------------------------------------------- Yes. Thanks, Darren. We continue to stay focused on controlling operating expenses. For the quarter, total operating expenses increased 8.5% to $373.4 million. The increase was mainly driven by operating 84 more stores this quarter than a year ago. Same-store operating expenses were up 2.6%. Year-to-date, our operating expenses were up 7.1% which includes the impact of senior leadership transition costs as we bring on new talent. For the fiscal year, we anticipate these costs to have an adverse impact of approximately $6 million or $0.12 on earnings per share. On the income statement, total revenue in the quarter was down slightly to $2.5 billion, primarily due to lower retail fuel prices from a year ago, offset by operating more stores compared to the same period a year ago and sales gains inside the store. Depreciation in the quarter was up 2.5%. The change in the annual guidance range is primarily due to the positive impact of depreciation from the onetime adjustment related to the useful lives of the underground storage tanks and the deferral of some store replacement activity. The effective tax rate for the quarter was 24.2%, down from a year ago, primarily due to a reduction in unfavorable permanent differences. We expect our effective tax rate for the fiscal 2020 year to be between 23.5% and 24.5%. Our balance sheet continues to be strong. At October 31, cash and cash equivalents were $44 million. Long-term debt, net of current maturities, was down to $715 million, as our $569 million bullet payment due next August moved to a current liability. As interest rates move down, we'll be looking to refinance all or a portion of this debt. We do not anticipate a risk in our ability to refinance this debt. Our trailing 12-month net debt-to-EBITDA ratio was 2.1x. We anticipate this moving downwards as we continue to execute on our fiscal 2020 operating plan. For the 6 months, we generated $312 million in cash flow from operations, and capital expenditures were $248.7 million compared to $201 million a year ago in the same period. Adjusted EBITDA grew 10.5% in the quarter compared to the same period a year ago. Our capital expenditure estimate for fiscal 2020 remains at $516 million. I would now like to turn the call back to Darren to update you on our unit growth. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Bill. Our target this fiscal year is to build 60 stores and acquire approximately 25 additional stores. Through the second quarter, we have opened 36 new stores, acquired 5 stores and have 12 additional stores under agreement to purchase. Currently, we have 97 sites in our pipeline, including 31 under construction, which positions us well for future growth. As mentioned in an earlier press release, we're excited to announce our third distribution center to be located in Joplin, Missouri. We plan on breaking ground later this month with an estimated completion date in the spring of 2021. Upon completion, we plan to immediately serve approximately 500 stores from this center, which will allow our network to operate more efficiently and alleviate pressure off of our current distribution centers. It will also give us the ability to efficiently expand into new markets. In closing, we've recently completed a comprehensive strategic planning process to more clearly define the direction of the business over the next 3 years. We will continue to execute on our current initiatives we have underway. At the same time, we believe we have a tremendous opportunity to enhance current capabilities and stand up new capabilities that will accelerate business performance. We'll be hosting an Investor Day in January to announce and discuss this strategic plan in more detail. We continue to take transformational steps to enhance store performance and deliver long-term profitable growth. We'll continue to review and add skill sets to successfully execute on driving significant long-term shareholder value. With that, we will now take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question is from Casey Short from Barclays. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Karen Short. Just wanted to talk about prepared food for a second. So I mean I appreciate, on the last call, you talked about the fact that the trends had accelerated, kind of, sequentially to end August pretty strong, and you didn't quantify that. But I guess I would characterize prepared food to be lower than expected. So maybe a little color there in terms of what you think the real pain points are right now. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes, Karen, this is Darren. I think if you look through the quarter, we had a couple of good months and one bad one, I guess, is how I'd characterize second quarter. We did end the quarter strong with some nice momentum. And then moving into this quarter, we're seeing that momentum carry forward. So again, I think the sequence of -- or the cadence of the months through second quarter didn't quite work out as well as we had hoped, although we did accelerate. And then as we move forward, we're expecting the launch of the rewards program to have an impact on prepared foods. And if you recall, we had originally planned to launch that program earlier in the year, and then we ended up pushing that out. So we expected that to somewhat soften the prepared food comps as we move through the year. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- But any color specifically also the impact of the app, because I think you thought that the app would also help accelerate the prepared food comp? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. The app is having an impact. And actually, about 27% of our whole pizza orders are coming in through the app at this point. And so that is having a positive impact. We are seeing a little bit of softness inside the store that's somewhat offsetting that. So we're still optimistic that the app, along with the loyalty program, will continue to help build that momentum. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Okay. And then in terms of the price zones, in general, I think on the last call you said it was more of a margin lift versus a sales lift. But I guess maybe clarify that a little bit. Is that just a function of the fact that you have for every item or SKU you have that you could think you can raise prices, you have similar number that can lower, so it's less of a lift to sales. But maybe a little clarification on that? And how that impacted the quarter, this quarter? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes. When we think about price optimization, it's not about price increases necessarily. It's about optimizing the right retail price to strike the right balance between volume and margin. So depending on the category and depending on the geography, that may cause us to move up or down on those prices. But we're trying to strike that right balance. And so price optimization won't always translate into increased retail prices. It will just -- it'll be more of a rightsizing of the prices to optimize gross profit dollars. -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [8] -------------------------------------------------------------------------------- Yes, Karen, this is Bill. Just maybe just to add a couple of pits of color on a couple of those questions here. First of all, your first question, I just understand, make sure we understand the cadence of the digital transformation that we're undergoing. So there's 2 pieces to the platform that we have currently underway, with the third being the loyalty program that Darren spoke about. But the e-commerce platform just kicked off at the beginning of the fiscal year. The mobile app that you referenced, we actually integrated roughly towards the end of the first quarter. So we really only have that up and operational for 1 quarter at this point. And so what we have seen thus far is certainly continued traction on a number of fronts, which we're encouraged by. And I think that's reflected in Darren's comments relative to the sequential movement of comps in prepared food. We continue to see our basket rings move forward, conversion rates to move forward, inside customer traffic continuing to get better and better over each month. And then as Darren mentioned, into this -- so far, at least quarter-to-date, we're seeing that continued improvement. So I think we're encouraged by that traction. So I hope that adds a little more color. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Okay. Yes. And then just last -- thanks, that's helpful. And then just last question, ex tobacco, so you gave the growth rate comp ex tobacco. But I just feel like I've gotten a lot of questions on JUUL specifically. Can you maybe just parse out what exactly the impact would be on -- or is from JUUL? And if there was a more broad-based removal, what that would do to the comp? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Well, we haven't seen a lot of erosion in JUUL with the recent changes. It's -- and what I'd have everybody keep in mind is that JUUL, while it has been a growth category for us, it's a relatively small part of our overall mix. It's about 1.8% of our grocery and other merchandise sales and about 1.2% of our overall merchandise sales. So while it has shown positive growth, it's really not as large a category or large an impact as one might expect. Bill, I don't know if you wanted to add any color there? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [11] -------------------------------------------------------------------------------- Yes. The only other color I'd add to that is to maybe more direct to your question. If you look at our comps that we've been able to put up here in the second quarter and first quarter, roughly between 100 and 150 basis points of that is due to the acceleration of the JUUL product. We have cycled over the rollout of that product, and it continues to be a very popular product. But to Darren's comment, I want to reiterate that it's a very small overall piece to the equation with respect to grocery and general merchandise. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question is from Chris Mandeville from Jefferies. -------------------------------------------------------------------------------- Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [13] -------------------------------------------------------------------------------- Bill, could you unpack that 150 basis points of prep food margin erosion a little bit more just based on that $2.18 in pricing for cheese? I'm not quite getting to that magnitude of compression. So is there anything else that we should be aware of? Whether it be increased shrink or greater promos or something you can provide some color thereon? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [14] -------------------------------------------------------------------------------- Yes. So there's really 2 major components that would make up that differential. Obviously, the biggest one is the cheese cost differential. And so if you just by way of reminder, about every $0.10 per pound swing in the cost of cheese is roughly about 35 basis point adverse impact to the overall Prepared Food and Fountain margin. The remaining piece of that, to get to your question, is going to be from additional promotion activity that we are doing with our digital team. So obviously, as you know, it's been a competitive landscape over the last 12 to 18 months, albeit we haven't seen any increased acceleration in that competitive landscape here in the quarter. We continue to be more promotional and trying to obviously provide value opportunities for our guests, and the rest of that would be centered around that. -------------------------------------------------------------------------------- Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [15] -------------------------------------------------------------------------------- Okay. Is there anything on the coffee front, I suppose? And I guess it's a much more moderated input, but nonetheless, pricing has risen to some extent recently. So I was just trying to think if that has an influence as well? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [16] -------------------------------------------------------------------------------- Yes. Not in the second quarter. But as we had in the first quarter, we did launch a new coffee program. Obviously, new flavor profiles, new packaging. And we did have some special pricing promotions in the month of November to introduce that new product to our guests. And so that will be playing in, and we'll talk more about that in the Q3 results. -------------------------------------------------------------------------------- Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [17] -------------------------------------------------------------------------------- Okay. And then maybe turning to the OpEx. Could you just reference what credit card fees were in the quarter? And just based on the year-to-date performance, I mean, is there any reason to believe that you can't necessarily manage to be at the low end of your guidance? Or is there anything that we should be thinking about? And can you provide any real update on just that time and motion study? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [18] -------------------------------------------------------------------------------- Yes. So to answer your first part, $39 million was the credit card fee cost in the end of second quarter. With respect to the second quarter, up 8.5%. You notice we did not change, obviously, the range for operating expenses. So we anticipate an acceleration -- we are slightly behind in Q1 with respect to new store openings. And so we are catching up on that. So intuitively, we will have more operating expenses in the back half of the year relative to that activity. So there's a couple of other call outs, I would say, from the Q2 OpEx. We mentioned a little bit on the senior leadership transition costs for the year. This is spread out throughout the course of the year. So roughly about $1 million came in, into the second quarter for that. We did have a store manager bonus that was a little higher than we had in previous quarters. That's due to the performance of the company and the new bonus program. Just a couple of call-outs there. So we continue to move forward on the time and motion study that you mentioned. Right now, we're looking at Q3, Q4 to have that completed and rolling out. So I would not necessarily see a tremendous impact from that in this next quarter, you might see some tailwind impact in the fourth quarter of this fiscal year, though probably more so of a next fiscal year impact. But we're right on track with that, Chris. -------------------------------------------------------------------------------- Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [19] -------------------------------------------------------------------------------- Okay. And then just the last one for me, since cost control have really become a greater focus over the last year or so. When you look at some of the newer stores that have been opened with the greater emphasis on that line item, how are those returns looking relative to older vintages? And maybe if there's any update with respect to how the returns profile is trended on the stores that eliminated the likes of delivery and/or 24-hour model? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [20] -------------------------------------------------------------------------------- All right. I may not get all of it. You had a lot of sub-questions in there, so I'll try to gather all of those. But I think your ultimate question is new stores, how they might be ramping up relative to some of the previous stores that we've built in general? And if that's the question, I would say that -- and Darren kind of alluded to it, obviously, the new store contribution continues to perform in line or above our expectations. And so certainly, that's helping us, the results that we currently have. Now I would say this, as we get further down the path with the digital transformation, further down the path of price optimization and fuel procurement, I think we have an opportunity to shrink the maturation cycle of the new stores that we open, and then increase the returns ultimately of those stores. So we're excited about all those opportunities going forward. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question is from Bobby Griffin from Raymond James. -------------------------------------------------------------------------------- Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [22] -------------------------------------------------------------------------------- This is Alessandra Jimenez on for Bobby Griffin. First, did the fuel procurement strategy of moving towards more contract purchasing have a noticeable impact on fuel margins during the quarter? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [23] -------------------------------------------------------------------------------- Yes. So it would have -- I would say -- when you roll up the fuel margin for the quarter, the predominant -- when it comes to the initiatives that we're undertaking, the predominant impact came from price optimization as opposed to fuel procurement. So we have been successful during the course of the second quarter in increasing the number of our fuel gallons under contract. But just by the nature of the timing of when those were executed, those will be more a balance to the back half of the year. -------------------------------------------------------------------------------- Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Okay, that's helpful. And then at the midpoint of guidance, the guidance implies the second half fuel margins are relatively flat to modestly higher year-over-year. Is the industry pricing environment starting to slow down? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [25] -------------------------------------------------------------------------------- Well, I would -- the way I would characterize that. If you go back and look at our historical Q3 and Q4 fuel margin, you will typically see a drop in our fuel margins in every fiscal year that we've had probably in the last 10 years. It's a function of the structural dynamics of that particular category. So it's not necessarily we have now. To that degree, I think we have opportunity to offset some of that with some of the initiatives we have going on with price optimization and procurement. -------------------------------------------------------------------------------- Alessandra Jimenez, Raymond James & Associates, Inc., Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Okay. And then lastly for me. Can you expand on some of the labor initiatives you're working on? And how much more of an opportunity do you see from labor allocation? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [27] -------------------------------------------------------------------------------- Great question. This is -- I kind of touched on it a little bit in the last answer with this time and motion study. And just to reflect what -- as a reminder, what that is, it's really -- we have many -- all of our [cash] are replicable across our 16-state area. And so with that, we can certainly provide an opportunity to have the time it takes to, say, make a pizza to take out the garbage or whatever it is. That should be the same in every store. And so then we layer that on top of the scheduling tool that we have, which will be able to assist the store operations individuals to better move their schedule with the movement of their stores. So as traffic increases, we have the ability to increase the scheduling and vice versa. So I think we're excited about that opportunity as we head primarily into next fiscal year. But along those same lines, we continue to always have an emphasis on looking at our labor hours in the store. Our labor hours in the store continue to be down. We are cycling over here in Q2, Q3 and Q4, some significant labor hour reductions that we took last year. So just -- it will continue to be an area of focus. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question is from Paul Trussell from Deutsche Bank. -------------------------------------------------------------------------------- Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Maybe let's just touch on the grocery category. You had nearly a 6% comp, I think, ex cigs -- cigarettes. Maybe just talk a little bit about the puts and takes there, along with the margin performance of that category? And what kind of mix shifts you're seeing to drive that year-over-year gain? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [30] -------------------------------------------------------------------------------- Yes. Well, there's a couple of call outs from a same-store sales perspective in the grocery and general merchandise. We touched on one of those early with the vapor products, specifically JUUL being very popular and continues to be very popular. And so that's part of the lift. But also there are several other categories that continue to gain some pretty significant traction. That would be like in the packaged beverage category; the energy drink, for instance, with the advent of BANG and REIGN. So those 2 categories are doing very well. Then the alcohol and beer category continues to make great strides as well. And there's a couple of things to call out there. We had a few state law changes that allowed us to sell a stronger alcohol content beer, which those intuitively are moving forward. But we're also looking at additional store resets of wine as well as additional resets of alcohol. That seems to be doing very well and resonating with our consumer. Now on the margin side, about all those products I just mentioned, are higher margin items. And certainly, as we make a product mix shift, that's the predominant reason you see that margin. But also, as you may recall, Paul, the state of Illinois had a cigarette tax increase back in the first quarter. And with that, they did not tax the inventory on hand. And so the inventory that we have currently in our warehouse is now funneling through, through a sales aspect in the second quarter. And so there is a benefit to the margin that's running through there of roughly about 30 basis points. -------------------------------------------------------------------------------- Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Got it. That's helpful. Then maybe just touch on the fleet program. You remain optimistic about the potential there, adding a lot of cardholders. Maybe just give an update on what you're seeing? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [32] -------------------------------------------------------------------------------- Yes. Yes, we have -- made some great traction this last quarter. We've had a couple of larger accounts come on and continue to be very diligent in bringing on new accounts to our specific fleet card. But probably more -- probably the bigger story here, Paul, is looking at our universal fleet program, of which a component is that fleet card that I think you're referring to. So we'll continue to -- I'm confident we'll continue to gain traction on the fleet card program. But starting about the beginning of the fiscal year, roughly -- maybe even back in the fourth quarter, we made some changes to the overall universal fleet program that allowed us to be a little bit more competitive in some of the discounts that we're offering. And as a consequence, over the last 3 quarters, we're averaging roughly about an 8% to 9% increase in universal fleet gallons quarter-over-quarter in those respective periods. So we continue to gain traction. That brings more customers into the store and allows us more intersection points as we've launched a loyalty program to get to those customers as well on that -- on our loyalty program. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from Ben Bienvenu from Stephens. -------------------------------------------------------------------------------- Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [34] -------------------------------------------------------------------------------- I want to ask first about fuel, and you touched on it earlier with some of the progress that's been made on procurement, and that should be more impactful in the back half of the year. I wanted to get a sense of, based on those changes, what percentage of your fuel mix is procured via contract? And I think you had previously referenced that 30% of the mix would ultimately be procured under contract by the end of the fiscal year. Is that still a reasonable watermark for us to think about in terms of the mix of procurement? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Yes, Ben, this is Darren. If you look through second quarter, we're actually at 37% of our overall volume is under contract at this point, and that was building throughout the second quarter. So as we look to the balance of the year, we're expecting to get roughly 50% of our overall volume under contract by the end of the fiscal year. -------------------------------------------------------------------------------- Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [36] -------------------------------------------------------------------------------- Okay, great. And then following up on cheese. Obviously, the commodity price inflation is causing some margin pressure in prepared food. It looks like you've, to this point, chosen to absorb the majority of that, if not all of that, versus passing along pricing increases. Is that how you'd expect to continue to handle it? Are you waiting to see what the competitive response is among your peers before you make a decision around passing along higher prices? How should we be thinking about how you navigate this environment? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Yes. This is Darren, again. We're kind of taking that day by day, to be frank, looking at the commodity market and looking at the competitive environment as well and trying to strike that right balance. We expect that the cheese costs will start to come down at some point. And so we don't want to put ourselves in a competitive disadvantage from a value proposition standpoint. So we're continuing to monitor that, and we'll see how we go. But at this point, we've elected to not pass that on to the consumer. And we're looking for opportunities to opportunistically procure the cheese at more advantageous price. -------------------------------------------------------------------------------- Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [38] -------------------------------------------------------------------------------- Okay, great. And then one last one for me. Congratulations on the distribution center announcement. I know when you guys built the Terre Haute facility, there was a significant reduction in stem miles in addition to opening up some contiguous geographies that you could build into. When you think about the benefits that this Joplin facility provides, if you could give us a sense of how much of it is continued stem mile reduction and efficiencies in transportation versus opening up new geographies, kind of, more southwesterly? That would be helpful. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Yes, sure. I would say that the bulk of it is really from improved efficiency within our distribution network. Right now, that southern -- Southwestern part of our geography is being serviced out of Ankeny, Iowa and Terre Haute, Indiana. So that's a pretty long haul. When we open up that facility in the spring of '21, we'll immediately be able to service about 500 stores out of that facility, which will really start to rightsize our distribution infrastructure and reduce the overall cost to serve those stores. That being said, it does expand our ability to reach into some new geographies that we're not currently in. So the immediate impact would be on the efficiency side and perhaps a little bit longer term would be on the development side. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question comes from the line of Kelly Bania from BMO Capital. -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [41] -------------------------------------------------------------------------------- I just wanted to ask about traffic. I think, Bill, may -- you may have mentioned that it was sequentially improving, but just can you help us understand where that lies and what you're seeing? And then on the loyalty program, can you help us understand kind of what you experienced in the test? It sounds like the acceleration that you're hoping for here in prepared foods rests largely on the loyalty program. So maybe just help us understand what you've seen so far with the test there? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [42] -------------------------------------------------------------------------------- Yes, I'll try to get all those questions answered, but Darren and I will make sure that we gather that. So on the loyalty -- I'll start on the loyalty side. With respect to that, we certainly see that we are in a position now that we believe that we, in some cases, have the -- well, take a step back. I think we've seen that the Fuel Saver program that's been out for probably 6, 7 years now, how that resonated with our consumers. And so that's a form of a loyalty program. We see many of our larger regional players have loyalty programs coming on board since the success that they have, obviously. And so we believe, certainly, this is going to be a positive impact for us. But I don't want to miss -- have you come away from this call thinking that, that's the only thing that's going to be driving prepared foods going forward. So as Darren mentioned, we'll be having an Investor Day here in January. And there are a number of other opportunities that we think outside of loyalty that we have in play coming up in the next fiscal years to drive that program forward. So more to come on that. The first part of your question, Kelly, can you repeat that for me? -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [43] -------------------------------------------------------------------------------- I was just curious about the traffic. -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [44] -------------------------------------------------------------------------------- Traffic count. Yes, traffic count. So right now, traffic count inside the store is roughly flat. And we have actually -- that's an improvement, as we've been actually slightly negative here for the prior quarters. And we have been seeing a gradual increase over probably the last 3 to 4 quarters. So we're encouraged by that. We believe some of the things that we are doing with respect to the digital transformation are helping that. I miss anything there? -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [45] -------------------------------------------------------------------------------- No, that was helpful. And I guess just another one. As I think about what you're talking about in grocery, some real favorable mix shift, some higher-margin categories, I guess there was some impact from the cigarette tax, but still some -- it sounds like favorable mix shift and just seems to be very different from what's happening in the prepared food side, where you're doing more promotions. And it just seems to be characterized as a tougher environment. So just curious if you had any thoughts on kind of the differences in the 2 categories? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [46] -------------------------------------------------------------------------------- Yes, Kelly, this is Darren. I think if you look at those 2 categories, I mean, obviously, in our prepared foods category, we've got a big reliance on our pizza product, and we have a high mix of that, and cheese being the single biggest component of that cost of goods. And so when you see the commodity markets get out of whack, like they are right now, so that's obviously going to put a direct pressure on margins. But that doesn't impact the fact that the guests still wants our pizza and they continue to buy it. If you look at the grocery category by comparison, you see people shifting among products. So carbonated soft drinks tend to be declining. And that's been a trend that's been going on for a while now, and they're shifting over to energy drinks. So the energy drinks have a higher margin than the carbonated soft drinks. If you look at the cigarette category, people are smoking less combustible cigarettes and moving over to the electronic cigarettes, which have higher margins. So you're seeing those behaviors with the consumer where they're shifting away not because of pricing pressures, but they're shifting away out of preference to the products that are naturally higher margin. Bill mentioned earlier, the development of our liquor and wine categories. Again, premium beers are starting to decline, craft beers are growing, liquor and wine is growing. All of those are favorable shifts from a margin standpoint. So there's some natural margin accretion there. -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [47] -------------------------------------------------------------------------------- That's helpful. And I guess, just maybe one more. Just on retention levels and turnover, both in the store and at the DCs, just a general update on what you're seeing there? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [48] -------------------------------------------------------------------------------- Well, it's -- well, at the store level, I mean it continues to be. Any time you're an entry-level retail, it's always going to be a competitive landscape. Rate pressure. Obviously, we have seen that in the second quarter. And that's part of the operating expense question that was asked earlier. So we continue to evaluate our markets to make sure that we're competitive on our rates. But it's still very challenging, especially with the low unemployment that we have experienced throughout the Midwest here. With respect to the corporate offices here or the distribution, we generally tend to have low -- very low turnover rate there. So there's nothing really to call out at this point. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Our next question is from Chuck Cerankosky from Northcoast Research. -------------------------------------------------------------------------------- Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [50] -------------------------------------------------------------------------------- A couple of questions. Looking at the Joplin, Missouri, distribution center, what kind of operating radius will that have? And what's the total number of stores you expect to be able to support after the initial 500 start-up? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [51] -------------------------------------------------------------------------------- Yes, Chuck, this is Darren. We typically operate our distribution centers with a 500-mile radius. So that gives us a pretty broad swath of stores that we can service. Our optimal efficiency range is a little bit south of that, but we currently support stores within a 500-mile radius there. -------------------------------------------------------------------------------- Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [52] -------------------------------------------------------------------------------- And how many could it support over time? Is it 1,000 or more than that? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- Yes. I mean, our initial push on store count will be 500, but we could service upwards of 1,000 stores out of that distribution center. So we have plenty of room to grow. I guess the other thing that I'd point out is that, in addition to the existing facility that we're designing, and we're designing this to be more automated and more efficient than perhaps our other 2 distribution centers, we also have additional land adjacent to the site that we could expand if we need to. So we've got a couple of levers there. -------------------------------------------------------------------------------- Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [54] -------------------------------------------------------------------------------- And great, yes, I think I remember in the press release, the acreage purchased sounded a little high. So that's what -- that covers that. On the -- I think, Bill, you've mentioned some store projects that were deferred that led to the D&A reduction. Can you talk about that a little bit? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [55] -------------------------------------------------------------------------------- Yes, absolutely. So coming into a fiscal year, we certainly have an idea of how many stores that we feel are candidates to replace over the course of the year. And so once we make that decision to replace a store, changes the useful life of that, we have to accelerate the depreciation very quickly. And so as we were looking at our plan, about halfway through the fiscal year, we made a decision to defer roughly about 4 of those sites into next fiscal year. And consequently, accelerated appreciation that we had planned for was not coming through, and that's part of that appreciation testing. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Our next question is from John Royall from JPMorgan. -------------------------------------------------------------------------------- John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [57] -------------------------------------------------------------------------------- First one is on uses of cash. You guys have had enough free cash flow to pay down some debt in the first half, and you're sitting in the low 2s on leverage right now. So any thought at this point to utilizing the buyback in the near future? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [58] -------------------------------------------------------------------------------- John, we always keep that option available to us. I think you know we have a $300 million authorization for those share buybacks. So we'll always take a look at our cash balance and opportunistically when there's an opportunity we see that made some sense, we can deploy that extra cash. So we'll continue to look for those opportunities. And you'll see it if we do it. -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [59] -------------------------------------------------------------------------------- Yes. Also, John, on our debt right now, we have make-whole provisions, so there would be prepayment penalties to accelerate any payments on the current debt that we have. But as we look to refinance, that certainly is -- certainly an opportunity for us to -- and that's -- therein lies the comment that we made that we will look to refinance all or a portion of the upcoming debt. I hope that helps. -------------------------------------------------------------------------------- John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [60] -------------------------------------------------------------------------------- Yes, it does. And then on the distribution center, is there a total cost number you guys can share with us at all? Or maybe how much is in this year's budget for it, if not? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [61] -------------------------------------------------------------------------------- Yes, we're -- we budgeted about $63 million for the construction of that facility. -------------------------------------------------------------------------------- John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [62] -------------------------------------------------------------------------------- Okay. And then maybe the sequencing, you said you're starting in '21. So how much maybe should we expect next year? -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [63] -------------------------------------------------------------------------------- Yes. Just to clarify, we'll be breaking ground later this month on that facility. And it'll take -- give or take about 18 months to build. So we'll -- we're targeting somewhere late spring of 2021 to have that facility fully operational. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- Our next question is from Karen Short from Barclays. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [65] -------------------------------------------------------------------------------- Sorry, I just had a couple of follow-ups. With respect to the loyalty program, how many employees did you have on the test? If you gave that, I missed it. -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [66] -------------------------------------------------------------------------------- Yes. So when we did -- tested the loyalty program, it was really centered around here at the corporate facility. And then we just, as Darren mentioned, we put out a soft launch here beginning of -- roughly the beginning of this month. And then the cadence and will go to a global launch, and we'll give more details on that at the Analyst Day. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [67] -------------------------------------------------------------------------------- Yes, Karen, it was about 2,000 employees ultimately that were on the program in our beta test, and now it's open to the entire system. -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [68] -------------------------------------------------------------------------------- And just to clarify, the test for the employees was really intended to be making sure that the mechanics behind the loyalty program were working properly, the discounts were being done. And so that's what we wanted to make sure. Did not want to make a global launch and have a nuance occur, only to have maybe a poor experience with our guests. So -- and then part of the also push is certainly to put media around a loyalty launch, I'm not sure you get the value out of that media here around the holiday season. And so we wanted get past the holiday season before a global launch. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [69] -------------------------------------------------------------------------------- Great. But the initial test was more of the functionality and mechanics, not the substance necessarily? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [70] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [71] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [72] -------------------------------------------------------------------------------- Okay. And then in terms of the second half implied range, it's a pretty wide range in terms of grocery comps and prepared food comps. Maybe a little color on how to think about that? And then the second part would be, we haven't really necessarily talked about in-store gross profit dollar growth versus SG&A growth. But can you maybe give some context on how you think about that more generally? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [73] -------------------------------------------------------------------------------- Yes, yes. I'll start and Darren. So as far as the guidance ranges, we -- in the past, we have narrowed the guidance range as we get further into the fiscal year. We've made a decision to keep those ranges intact unless there were something like from the prepared food category, where we did not think the upper end of the range was attainable in the back half of the year, given what the results were at the 6-month mark. And so I'm not sure there's anything to read necessarily into that other than that. And as far as gross profit inside the store, for us it's -- we always are trying to drive gross profit. We stop short of giving any targets relative to gross profit increase. But we are seeing gross profit dollar increases, either high single digits or low double digits inside the store depending on the category you're looking at. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [74] -------------------------------------------------------------------------------- Right. But gross profit does -- or SG&A growth seems to be exceeding gross profit dollar growth. So I'm wondering -- and depending on how you're including D&A and credit card fees and things like that? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [75] -------------------------------------------------------------------------------- Yes, I'm not sure -- yes, so when we look at our total gross profit, we show it exceeding the total operating expense growth. And you might be getting confused with or maybe with the same-store operating expense -- same-store operating expenses were up 2.6%. We happen to reference excluding credit card fees up a little over 3%. So our inside growth would be right comparable with that. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [76] -------------------------------------------------------------------------------- Yes, maybe I'll take it offline, because I think we're -- yes, I think we're looking at different... -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [77] -------------------------------------------------------------------------------- And we do expect acceleration in both of those. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [78] -------------------------------------------------------------------------------- Like a widening of the gap, you're saying, between gross profit dollar growth and SG&A growth? -------------------------------------------------------------------------------- William J. Walljasper, Casey's General Stores, Inc. - Senior VP & CFO [79] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- At this time, I'm showing no further questions. I would like to turn the call back over to Darren Rebelez, President and CEO, for closing remarks. -------------------------------------------------------------------------------- Darren M. Rebelez, Casey's General Stores, Inc. - President, CEO & Director [81] -------------------------------------------------------------------------------- Okay. I would like to thank everyone for joining us this morning and close the call by reiterating our key initiatives are designed to position Casey's for accelerated revenue growth and improve long-term profitability. We're looking forward to sharing with you our plan to build upon what is currently underway and outline our new initiatives that we believe will continue our long-term track record of driving shareholder value. Thank you, everyone. -------------------------------------------------------------------------------- Operator [82] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.