Q2 2022 Caseys General Stores Inc Earnings Call

December 8, 2021

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

[music].

Yeah.

Good day, ladies and gentlemen, and welcome to the Casey's General stores second quarter fiscal year 2022 earnings conference call. At this time all participant lines are in a listen only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

Can I ask a question you will need to press Star and then one on your telephone.

As a reminder, this call is being recorded.

If anyone should require operator assistance. Please press star and then zero.

I would now like to turn the call over to Brian Johnson Senior Vice President Investor Relations.

Please go ahead.

Good morning, and thank you for joining us to discuss the results from our second quarter ended October 31, 2021, I am Brian Johnson Senior Vice President Investor Relations and business development with me today is Dan Rebalanced, President and Chief Executive Officer, and Steve Bramlage, Chief Financial Officer.

Before we begin I'll remind you that certain statements made by us during this investor call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

These forward looking statements include any statements relating to expectations for future periods possible or assumed future results of operations financial conditions liquidity and related sources or needs. The company supply chain business and integration strategies plans and synergies growth opportunities performance at our store.

Wars.

The potential effects of COVID-19, there are a number of known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward looking statements, including but not limited to the integration of the recent and pending acquisitions, our ability to execute on our strategic.

Plan or realized benefits from the strategic plan, the impact and duration of COVID-19, 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.

This call reflect our current views as of today with respect to future events and quick cases claims 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 measures referenced in this call as well as a detailed breakdown of the operating expense increase for the second quarter can be found on our website at www Dot cases dot com under the Investor Relations link following this call.

With that said I would now like to turn the call over to Darren to discuss our second quarter results. Yeah. Thanks, Brian and good morning, everyone. We're looking forward to sharing our results in a moment, but I'd like to start by thanking our 43000 cases team members for their tireless efforts as we look to overcome the ongoing challenges with COVID-19, and our results.

Supply chain issues.

Our team members who've done an outstanding job navigating this new in difficult situations and the team's ability to perform under the circumstances is something I'm, especially proud of and grateful for.

The Casey's our purpose is to make life better for our communities and guests every day I'm proud to report that we continued to make excellent progress in this regard during the second quarter. This.

This quarter Casey's cash for classrooms, giving campaign raised nearly $1 million to support local schools in our communities through brands same store generous guests and passionate team members.

These grants will provide much needed funds to local schools and communities, where we operate.

Then in November Casey told of veterans focus, giving campaign in partnership with Pepsico to raise funds for organizations, providing assistance to veterans and their families.

As a veteran myself I know the great sacrifices these families have made and the challenges they face.

This year's campaign raised nearly $1 million that will help to outstanding organizations children fallen Patriots and hope for the warriors.

These funds will allow the charities to have an even greater impact on the lives of veterans and their loved ones.

Thank you to our vendor partners each casey's team members, who made a donation asking our stores and especially to our guests who truly do good when they shop in cases.

Now, let's discuss the quarter's results.

As you've seen in the press release, we delivered yet another strong quarter diluted earnings per share were $2 59 per share and while down from the prior year were still impressive in the wake of the extremely challenging retail operating environment that we're currently facing.

Total gross profit dollars of $718 million was an all time high for the second quarter net.

Net income was $96 8 million EBITDA was $217 million down 2% from the prior year, primarily due to higher operating expenses.

Inside the store sales volumes were positive and grew stronger throughout the quarter, partially aided by our new breakfast menu launch in October which is proving to be a big hit with our guests and exceeding our early expectations.

We experienced increased guest counts and positive same store fuel volumes, we maintained our brewer margins inside the store, while dealing with a myriad of products and inflationary challenges and <unk>.

Fuel, we nearly matched the prior year's margin of 35 cents per gallon. Despite the retail price of fuel increasing nearly $1 per gallon.

The second quarter was also the first full quarter operating the buggies and circle K acquisitions, which are on track to realize expected synergies.

We announced our third strategic acquisition this year with an announced with an agreement to acquire 40 stores from pilot Corporation in the Knoxville, Tennessee area is expected to close in the third quarter.

Overall, we remain very confident in our ability to deliver on our strategic commitments and manage through the near term challenges presented by the current environment.

I would now like to go over our results and share some of the details in each of the categories.

Inside same store sales were up 6% from the second quarter with an average margin of 47%.

Same store grocery and general merchandise sales were up six 8% and the average margin was 33, 3% in line with the same period a year ago.

We believe we're taking share in this category in our geography based on industry data and peer performance.

Packaged beverages and salty snacks continued to perform well due largely to the successful store resets and assortment optimization efforts completed last fiscal year.

Non alcoholic beverages were up over 24% on a two year stack basis Alka.

Alcohol same store sales were up low single digits, despite challenging comparisons and remain up over 22% on a two year stack basis.

The merchandising team did an excellent job maintaining margin, while overcoming inflationary headwinds.

Rival label program and procurement initiatives contributed favorably to gross profit margin this quarter.

Same store prepared food and dispense beverages were up four 1%.

The average margin for the quarter was <unk>.

66% up 50 basis points from a year ago.

Pizza slices continued to perform exceptionally well up 21% in the quarter.

While our self distribution model will help mitigate some supply chain challenges, we most acutely felt product availability challenges into prepared foods category during the quarter.

At various times during the quarter and sometimes for nearly the entire quarter, we were out of stock with key items, such as Donuts fountain beverage cups in chicken.

During the second quarter same store fuel gallons sold were up two 5% with a fuel margin of $34.07 per gallon down slightly but still largely comparable to the same period last year.

The field team continues to do a tremendous job balancing fuel margin and volume to optimize the profitability of the category.

The higher fuel profitability levels are clearly being impacted by the rising operating costs. The entire industry is occurring both in terms of labor as well as higher credit card and <unk> compliance.

I would now like to turn the call over to Steve to go into some detail on the financial statements Steve.

Thank you Darren and good morning, total revenue for the quarter was approximately $3 $3 billion, an increase of $1 billion or 47% from the prior year. This was primarily due to an increase of retail sales of fuel of $855 million, which was driven by a 15, 8% incur.

Total gallons sold to 669 million gallons as well as a 48% increase in the average retail price per gallon.

The average price of fuel during the period was $3.06 per gallon compared to $2.07 a year ago.

Reported fuel revenue results do not include the recently acquired Buchanan energy wholesale fuel business, which is included in the other revenue category and is responsible for the vast majority of the $60 million increase that we saw in this quarter on that line item.

Total inside sales rose 13, 1% to $1 $1 billion grocery and general merchandise sales increased by $111 million to $829 million, an increase of 15.5% prepay.

Prepared food and dispense beverage sales rose by $21 million to $309 5 million an increase of seven 2%.

Please note that the reported figures are favorably impacted by seven 3% more stores that were operated on a year over year basis, though the prepared food and dispense beverage was less favorably impacted due to the timing of kitchen installations in construction and our recent acquisitions.

As a reminder, we define gross profit as revenue less cost of goods sold but excluding depreciation and amortization.

Casey's had gross profit of $718 million in the second quarter, which is an increase of $86 million from the prior year.

This was driven by higher insight gross profit of $58 million or 12% as well as an increase of $27 $7 million or 13, 6% in fuel gross profit.

Fuel gross profit benefited by over $6 million from the sale of rentals. All rens generated were sold in the quarter and there was no carryover from previous quarters, our grocery and general merchandise gross profit increased $36 $9 million, while prepared food and dispensed beverage gross profit increased 30.

$8 million.

We also saw a $7 $3 million lift in other gross profit and this is benefiting from the dealer network activities and car washes that we acquired from the Buchanan energy acquisition that we record in the other category.

While inside margin remained relatively flat compared to the prior year, our merchandising and logistics teams are performing exceptionally well in the face of the challenging inflationary and supply chain environment inside gross.

Profit margin was 47% and while this is a decrease of 30 basis points from the prior year quarter, it's completely driven by the mix change between our two categories. The grocery and general merchandise margin was flat at 33, 3% prepared food and dispense beverage margin was 66% up.

50 basis points from prior year.

Higher volumes mix enhancement procurement actions and selective price increases all combined to partially offset the inflationary pressures that we're facing.

Specific to prepared food and dispense beverages. The company also benefited from a 22 cents per pound favorable cheese cost comparison cheese costs were $1 96 per pound this quarter compared to $2 18 for the same quarter, a year ago, and that's an approximately 75 basis points.

Benefit.

However, this cheese cost benefit was largely offset by commodity cost increases in our other prepared food ingredients.

Total operating expenses were up 22% or $90 million in the second quarter, which is consistent with our expert expectations and a reduction from the first quarter growth rate by a couple of hundred basis points.

Approximately 9% of the operating expense increase is due to unit growth as we operated 161 more stores than the prior year as well as approximately $3 million in one time integration expenses associated with the Buchanan and circle K acquisitions approximately.

Approximately 7% of the increase is due to same store employee and store operating expenses, increasing and this is primarily due to a 14% increase in store level wage rates, while the number of hours worked were not significantly different in the quarter versus prior year on a two year stack basis see.

AME store labor hours remain down approximately three 5%.

Thus, we were able to grow inside sales nine 7%.

On a two year stack basis, while reducing store labor hours, which is a tremendous accomplishment by our store operations team.

Finally, due to the higher retail fuel prices mentioned earlier same store credit card fees also rose and that's accounted for another 2% of the operating expense increase in the quarter.

Depreciation in the quarter was up 15, 5% driven primarily by the store growth along with the placing of our third distribution center into service earlier this year.

Net interest expense was 13 and a half million dollars in the quarter and that compares to $10 6 million in the prior year. The increase is primarily related to the additional debt. We took on to fund the Buchanan acquisition.

The effective tax rate for the quarter was 25% that compares to 23, 6% in the prior year driven by earnings mix differences and timing.

Net income was down versus the prior year to $96 8 million EBITDA for the quarter was $216 $9 million.

<unk> to $221 4 million a year ago, a decrease of 2%.

Notably both the Buchanan and circle K acquisitions were accretive to EBITDA in the second quarter as we had expected.

Our balance sheet remains really strong and October 31, cash and cash equivalents were $312 million and we have the full capacity undrawn of our $475 million in lines of credit, giving us ample available liquidity of 787 million our leverage ratio remained at two four times post.

Closing of the acquisitions, which is consistent with the first quarter.

Fourth quarter net cash provided by operating activities of $213 million less purchases of property and equipment of $78 million resulted in the company generating $135 million in free cash flow. This.

This compares to $86 million generated in the prior year. The primary difference versus prior year was due to a reduction in capital expenditures as well as higher cash provided by operating activities.

At the December meeting the board of directors voted to maintain the dividend at <unk> 35 per share unchanged from the first quarter.

We will continue to remain balanced in our capital allocation going forward leaning into the many growth related investment opportunities that we have but continuing to repay debt gradually and tending to the dividend as well.

Our share repurchase authorization is untapped $300 million and we will remain opportunistic in this regard.

So far this year. The company has opened seven new stores and has acquired a 144 stores, including the 89 buggies in 48 circle K stores.

The pending pilot acquisition consists of 40 stores in the Knoxville, Tennessee Metro area.

38 of these stores are traditional convenience stores and to our truck stops.

<unk> price is $220 million and that represents a multiple of nine three times pre synergy trailing 12 month EBITDA.

Fuel gallons sold per store is approximately one 5 million gallons.

The average merchandise sales per store was approximately $2 $2 million and they have quite low existing prepared food penetration in those stores.

The acquisition is expected to close December 16th and it will be financed with a combination of cash on hand, and a $150 million term loan.

And that's expected to be accretive to EBITDA in the current fiscal year.

Now the pending pilot acquisition provides the opportunity for us to update our 2022 outlook Casey's now expects to add approximately 225 units by the end of the fiscal year and that's up from the 200 units. We previously disclosed total operating expenses are now expected to increase in the high teens.

<unk> percentages versus the mid teen percentages previously disclosed due in part to the aforementioned pilot acquisition.

Additionally, credit card fees continued to remain elevated along with the retail price of fuel.

Now despite these changes we have cycled past the worst of the year over year increases in operating expenses for this fiscal year.

To assist with modeling, we expect that the third quarter operating expenses will be up 18% to 20% versus the prior year and the fourth quarter will be up 11% to 13% versus the prior year, the fourth quarter, notably has a more favorable opex comparison given some.

Prior year, one time items, such as asset impairment charges, and ENV retrofit compliance costs as well as elevated incentive compensation costs.

Interest expense is now expected to finish the year at approximately $55 million with depreciation and amortization planned for approximately $310 million at the end of the year. Both are driven by the increase in new units and the associated financing costs, the purchase of property plant and equipment should be approximately.

<unk> $400 million.

Versus the 500 million previously disclosed as the company will reduce new store construction due to the increase in acquisition activity and this will positively impact our free cash flow.

The company still expects the tax rate to be approximately 24% to 26%.

The company is maintaining the same store sales outlook for fuel and inside sales to increase mid single digit percentages.

Casey as expected the third quarter same store sales to be mid single digits for both fuel and inside sales fuel margins continue to trend in the low to mid 30 per gallon range and we expect net earnings in both the third and fourth quarters to be.

The higher than the prior year.

Now I'd like to turn the call back over to Dan.

Thanks, Steve.

First I'd like to congratulate the entire team for delivering impressive results in the second quarter, we couldnt have done it without their hard work and dedication and.

Given the challenges concerning COVID-19, labor shortages and supply chain issues, we will continue to need their perseverance to perform at a high level.

If you recall the pillars of our strategic plan to deliver top quintile EBITDA growth are reinventing the guest experience create capacity through efficiencies and be where the guest is via disciplined unit growth.

All of this is going to be driven by an investment in talent strengthen the team and add capabilities to the business.

With the recent large acquisitions completed in another deal pending let's start with being where the guest is.

We made a commitment to add 345 units over a three year period by the end of fiscal 2023, which is a 5% CAGR versus starting point.

We are now 18 months into the initiative and have added 195 units, thus far including 150 in fiscal 2022.

On the horizon is the pending pilot acquisition.

We've seen the Knoxville, Tennessee market is a strategic fit within our existing distribution network and it is an attractive midsize market, we expect our prepared foods to do well.

It also gives us immediate scale in Knoxville, and expands our footprint in Tennessee.

Overall, we are extremely excited about the potential for these stores. We are also highly confident we will achieve the 345 unit expansion we committed to.

Our team has also done a great job integrating the Bucky's acquisition. We have now completed 28, Remodels with 10 Remodels in progress.

We plan to have all of the stores moved our supply chain network by the end of the calendar year, which is ahead of schedule.

With respect to efficiency our field team continues to drive profitability, so retail price optimization and procurement efforts in the current quarter, we stood up a new fuel technology solution, we continue to optimize fuel procurement efforts.

Merchandising team has proven they are capable of navigating through this inflationary environment inside the store by effectively managing cost of goods negotiations and making retail price point adjustments as needed.

<unk> also successfully driven sales to more profitable categories from the store resets completed last fiscal year.

And finally private label products continue to grow market share inside our stores and we remain on track to reach our 5% goal by the end of the fiscal year.

Not only is this a better value option for our guests, but it also improves gross profit margin for the category.

Our initiative to reinvent the guest experience at Casey's has performed better than expected.

During the quarter, we had a successful launch of our new breakfast lineup highlighted by cases signature handheld and the rollout of the fresh brewed Bina Cup coffee program.

Our digital guest engagement remains a high priority as digital sales were up 10% in the second quarter on top of a 120% increase in the same quarter last year.

Our partnerships with third party aggregators, such as door Dash, New breeds are now at 1081 stores.

We also utilized door dash White label delivery third party service that takes orders through our systems at 826 stores.

This enables our casey's rewards members to fully participate with their member benefits on our own app and receive delivery services.

We still utilize our own delivery drivers at 435 stores and still offer in store pickup and curbside pickup at over 2200 stores.

Our Casey's rewards enrollment continues to grow and eclipsed $4 2 million members in October.

Our app now generates more order revenue than any other media, including phone in orders.

We're continuing to grow segmented marketing campaigns, where we offer personalized promotions to our members.

We've also begun to segment our content by day part on both the web and App to improve our relevance. We believe these shifts will result in a more engaged guests.

With respect to investing in our talent.

Despite the difficult labor environment. The company has been able to make progress staffing the stores and the special federal unemployment benefits expired, we will remain competitive in the market with respect to pay to adequately staff. Our stores. So we can deliver the exceptional experience our guests have come to expect from cases.

We're continuing to incentivize our team members with vaccination bonus.

And safety of our team members and guests is our top priority.

We will now take your questions.

Thank you.

I'll ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key we ask that you. Please limit yourself to one question and one follow up.

Our first question comes from the line of Karen short with Barclays. Your line is now open.

Hi, Thank you very much.

The question that I'm asking.

When you look at your Opex growth.

Profit dollar growth and I'm actually giving us on relative to the 19.

Last year I mean.

You definitely contained.

Great.

Alright widening of that gap.

It's growing much faster than gross profit dollars in the door.

Can you just talk a little bit.

Think that trajectory.

The second half and then I had one.

Okay.

Yes, Karen. Thanks. This is Darren and I'll go ahead, and start and let Steve kind of fill in some details here, yes, we still believe that we'll be able to generate.

Gross profit dollar growth in excess of our Opex growth I think the reality of it is we've got we've got some timing issues as we continue to.

Accelerate our store growth in that acquisition those acquisitions come with.

With opex to them until that growth starts to look outsized relative to the GP generation of short term and part of that is because when we acquire stores one of the main synergies that we expect to achieve is layering in our prepared foods business, which is the most significant driver of our gross.

And so in the short term as we bring those stores on we don't have the prepared foods momentum yet as we have to remodel those stores, bringing the kitchens and train the people and then we start to generate that gross profit. So ultimately you start to normalize the opex affect those acquisitions, but you accelerate the gross profit.

<unk> of those vis vis the prepared foods business. So that's really how that equation will work its just in the in a short period in the short term when you first bring those on you have a little bit of a mismatch there I'll, let Steve talk about what our outlook is for.

Hi.

I would just add Karen that certainly for the in the very near term in the second half.

Baidu expect gross profit dollar growth is going to outpace operating expense dollar growth right. It did not in the second quarter for the reasons that we talked about and some of that is just the comps around opex growth or are going to get a little easier for us here in the in the second year. So we're lapping.

Hard closures of operating hours in the prior year, and then reopening and we had special coven pay coming on and off in the prior year, which makes it very lumpy in terms of what's happening with opex, but in the second half of the year as we sit here now I think we've got a pretty good line of sight to gross profit dollars.

Put simply outperform from a growth standpoint, the operating expense growth.

Okay. That's helpful and then just on pilot.

Wondering if you could give a little color on what you actually think that synergies will be.

You just commented on some tremendous synergies will be coming from prepared food, but any more granularity on that would be great.

Yeah.

I think that is the true synergy we do believe that making some investment in those remodels are those stores will help our merchandising team will re merchandise our stores and that always helps.

And we have that experience from the other acquisitions, but clearly the the largest synergy we expect to capture with with the pilot acquisition as well as virtually any acquisition, we we bring as our prepared foods and and so as Steve mentioned in.

In the opening remarks, because they have very low penetration of prepared foods in there and based on our experience. We know we can go in and and.

Significantly elevate that prepared foods experience.

May add I think.

I think we will find that our ability to merchandise on the grocery side within those stores is going to accrue to our benefit certainly over time and then from a distribution standpoint, we will definitely get some further absorption of fixed cost within our system right. We'll we'll continue to load the warehouse that's closest to them.

That part of the country and that will make the rest of our distribution network that much more efficient as well.

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.

Great. Thank you good morning, everyone.

Good morning.

I also had a question on your Opex maybe.

A little bit of a different question I'm good.

Thinking about it.

The opex per Starwood quite high in the quarter.

More than 20%.

The bulk of it.

By new stores, and then the higher credit card.

But I guess I'm trying to understand the component coming from new doors and really.

Right.

Especially since you've been opening of new stores in the quarter I guess.

You know Darren based on what you said.

Just a function of learning.

The new stores you opened earlier this year and now costing more to operate.

If so how should we think about the new pilot stores that youre going to be opening.

Are those also going to have elevated.

Right.

Well Bonnie nothing nothing has really changed I mean, what we said in the first quarter, we had a 24% increase in opex versus the prior year and what we said in that call was that we would see a slight improvement in that opex in the second quarter and then it will continue to get better.

More substantially better in the third and fourth quarter.

Is in fact exactly what has happened.

We were up 22% this quarter, which is slightly better than the 24% last quarter. So nothing's really changed now.

In the current environment, certainly with the labor shortages wages have gone up and we said, our our average wages up 14% roughly.

Roughly and when we look at industry data in the hospitality and leisure and restaurant industries retail industries that average wage and the industry has got about 13, 7%. So we're we're right in line with with where wages have gone and so that is certainly.

Certainly put a damper on our opex, but again with respect to the acquisitions I think.

This played out exactly like we thought now when we bring on pilot.

That's another 40 stores that will come with 40 stores with a operating expense with them. So that's going to go up we will have more fuel volume. There. So credit card fees will continue to go up and that's going to be a function of.

The retail price of fuel as well so.

But because of some of what we're cycling over from the prior year.

We are confident that those numbers are going to come down on a percentage increase basis versus the prior year, Steve do you want to yes.

Just to drill.

Drill down on.

The cost of running the new and the acquired stores in the first quarter. When we did that bridge and we have it on our website and our growth in M&A units were contributed about 8%.

Year over year increase in total and you may remember we didn't close the.

The actual acquisition of these stores on the very first day of the quarter. It was a couple of weeks after the quarter had started and so now in the second quarter. We have obviously those units for the entire quarter, which is a couple of extra weeks.

And we've got a 9% contribution to the operating.

<unk> expense increased so from my perspective other than Theres, a couple of weeks of extra new unit cost in the second quarter. The cost of running them was largely the same and the other piece I would which is called outage now we still in the Butte case of Buchanan.

We still have some synergies to pull out of the system better and operating expense rates at that headquarters location wallets.

Lower staffing level than it was before that's not completely closed down the warehouse that we have acquired from them will not close until the end of the calendar year and so you've got some redundant costs that will be coming out of the system here quite quite soon.

Okay that was helpful and just maybe to clarify so on the first half.

The opex sort of in line with your expectation, but then you're taking up your guidance for the full year.

Primarily because as you know.

Maybe the pilot acquisition.

And do you think is the more expensive more inflationary environment.

To think about it because it's all year.

Largely yes from my perspective to two things are changing so pilot. If we close next week is we're hoping to close is probably going to bring somewhere in the neighborhood of $15 million of incremental operating expense into the last five five months.

Or so five months of the year. So that's an incremental change and then the other one is for sure.

Credit card fees are higher than we thought they were when we set this guidance out at the beginning and that's a function of of higher retail and so we continue to believe and I think it's worth stating that part of the reason C. P. G for the industry is hanging around the level. It is.

Because operating expenses are higher there is a correlation between those two things. They just start on the same line item and so for US Theres definitely more credit card fees that were gonna see while retails hanging out in a $3 level than we had guided previously.

Thank you.

Our next question comes from the line of Kelly Bania with BMO capital. Your line is now open.

Hi, good morning, Thanks for taking my question.

I'm going to try to ask.

Similar question kind of in a different way here.

I guess in terms of in terms of the operating expense outlet, so higher credit card fees the pilot stores rolling in.

I guess just wanted to understand underlying kind of core operating expense and that that wage rates.

Increase of around 14% how is that tracking to your plan for the year.

Underlying expectations because to your point I guess on the.

Opex and any impact this is having on on CPG is kind of just kind of understand how you feel about your total outlook for earnings or EBITDA. This year and how that has changed.

Given these developments.

Yes, Kelly Hey, good morning, I'm, Steve I'll start with that so relative to kind of how the cadence is going to work going forward with what I would call kind of same store wage rate is how I'll answer that.

Our expectation that that has not changed I think we had a pretty good view certainly that three three months ago.

Wage pressure was in the market I think we were saying similar wage pressures to what we are today.

The biggest driver of the headline number for US is just the comps from last year. So if you think of what was happening in the prior year at various points in time, we had special Covid pay that was happening in the first quarter, we took that COVID-19.

In the second quarter.

And so when we have a wage rate that we're paying today. It actually was a smaller delta in the first quarter because the prior year number was inflated because of that special pay and even though the headline number we are paying this year has not changed.

The lower number from prior years, giving us a higher percentage than that we started to implement.

Extra COVID-19 related pay in.

In the second half.

Last year, and so again, we're not going to pay a higher wage rate necessarily in the second half of this year, but the comp will get easier and so that.

14% wage rates that we referenced earlier the dollars won't change, but that percentage will go down because we had a higher base in the second half.

The prior year.

And so as a result of the second part of your question.

We haven't guided for EBITDA for the year, and we're not going to do that but our expectations haven't changed I will go back to the end of the question.

Bonnie pose is to the extent operating expenses are higher as an industry because of either wages or.

Credit card fees, we believe that's contributing to more sustained higher.

Fuel profitability for the industry and to a large extent thus far those those two are kind of washed out by the time you get to the bottom line and I don't have any evidence right now that that relationship is going to change in the near term.

Okay that makes a lot of thats very helpful.

And then can you also maybe elaborate on the price increases that you took when were those which categories are you seeing competitors also move in that direction and do you have any plans for more.

Yes.

Kelly This is Darren Pri.

Primarily in the on the grocery side of the business the price price changes have been taken in tobacco as we've had cost increases there. We've had some modest cost increases passed on in some other categories, where we've done some fine tuning from a pricing standpoint.

In large part because we had already negotiated cost of goods through the balance of this calendar year.

So we're in the process now finalizing cost of goods negotiations for the next calendar year.

That's on the grocery and general merchandise.

As you've seen with our same store sales results relative to peers and others in the industry.

We believe we are taking share and we've kind of confirm that through some.

Independent industry data that we've been able to look at so we like our pricing position now and we certainly have the ability to take more price.

As needed on the prepared foods side, we did take some pricing in the second quarter as late in the second quarter and that was across a number of categories. Because we were facing some more inflationary pressures there primarily on ingredient cost and.

As Steve highlighted with cheese costs, we had some we had a little bit of favorability on the cheese cost side, which offset the margin impact.

In the second quarter, but we went ahead and.

It took the pricing anyway, because we had the opportunity to do it from.

From a competitive standpoint, and we've not seen any erosion in volume as a result of that.

Thank you.

Our next question comes from the line of Ben <unk> with Stephens. Your line is now open.

Hey, Thanks, good morning.

Good morning, Good morning, Ben So I wanted to ask about.

Prepared food per store volumes across the entire business kind of having moved lower as a result of these newly acquired stores that was one piece of variance from our model.

Darren I think you were talking about kind of the remodel pipeline on the Buchanan stores I assume you'll pursue remodels and put the casey's prepared food offer in the pilot stores as well.

But can you give us a sense of the timeline over which you expect to make those investments in those remodels and how long before you think you can get that per store sales and margin from the prepared food category back to parity with kind of the core legacy Chang.

Yes sure Ben.

With respect to the Buchanan energy.

Transaction, we've got 28 stores already remodeled at this point and we have 10 more being remodel as we speak so really.

Our goal is to get those things remodeled as fast as we can and get our kitchens put in there in teams trained up and get that synergy is largely dependent on a permitting timeline.

And how quickly we're able to move from that standpoint, but our our construction team has really developed a nice cadence around that so by the end of this calendar year remember, we just closed on Buchanan in May.

It will have 40 stores roughly remodeled by the end of the calendar year. So pretty quick work. So far what we've seen in Buchanan had a little bit of a prepared foods offering developed.

More so than the pilot stores and I'll tell you what we've seen early on is anywhere from a 70% to 80% lift in prepared food sales in those stores.

In the first month to two months post remodel so we're well on our way.

So I don't have any concerns about the ramps there and getting to more.

System wide average now with respect to pilot.

That's in Knoxville, Tennessee, and that's much newer territory for us. So we tend to find that in new geographies, where our brand is not as well known but that prepared foods ramp it takes a little bit longer than in our core markets, where once we hang a sign people know, who we are and they and they come.

That being said one of the things we found attractive about this deal was as <unk> 40 stores all concentrated in the Knoxville area, which allows us to get immediate scale. We can do some advertising there we can really accelerate the ramp period in that market because of the scale is something that we can't normally do.

When we do once one store in a small town at the time it takes a little bit longer to do so we feel really good about our prospects on the pilot acquisition as well.

Okay, Great I'm going to ask another question about Opex. It's a two parter one is more housekeeping and then the other is kind of longer term trajectory on the housekeeping.

Steve I think we've got year to date about $11 million of deal related kind of nonrecurring non-GAAP cost in the Opex line. So call. It one 5% incremental opex year to date from deal costs.

So the first part of the question.

Will there be residual deal costs from Buchanan going into the back half of the year will there be incremental non-GAAP deal costs from pilot in the back half of the year that's incorporated in the guidance.

Part one and then question two is as you look out to fiscal 'twenty. Three I think you guys have historically talked about our.

The belief that you can settle into a high single digit operating expense growth range do you still believe that to be true as you start to think out beyond some of the noise. That's in the numbers right now.

Yeah, Hey, thanks for the question.

Do the first one.

I think we will have we don't have any more deal related costs in terms of like.

Legal fees are banking fees per se I think we will spend we also have several million dollars of integration related costs right. We were extra training.

Et cetera.

It was all part of.

When we gave the expectation earlier this year that I think it's about $45 million of EBITDA contribution from Buchanan that would've been inclusive of.

All of those costs. So I do think we will spend several million dollars more for frankly, all three acquisitions circle K. If you cannot in pilot in the second half of the year and they will be integration and consistent with kind of the overall accretion expectation of of EBITDA.

And transitioning to the second question, but are as we enter into next year. It's a little early for us to be specific on it but nothing has changed in our expectation that.

Medium term right our algorithm is that we need to.

Manage operating expense growth at a slower clip than what we're getting right EBITDA related growth and I don't see any reason that we can't do that.

The lumpiness of the prior year will be much better next year, because this year will be much much flatter I think we're not going to be out of the woods nor is anybody in retail around just theres definitely more wage pressure.

As a general matter in the system.

I don't see any reason to think that's going to change in the near term, but our ability to manage same store opex to a lower rate in the medium term than what we're growing EBITDA, we feel very good about our ability to do that.

Yes.

Ben the only thing I'd add to that is.

The largest element of our operating expenses as stores and the labor and team members in those stores and what we highlighted a little bit earlier today was that in spite of growing our two year same store comps.

The 10% we had a three 5% reduction in hours. So I think our operations team is acutely aware of the need to operate our stores efficiently and we've been able to take labor hours out of the stores, while still accelerating the store growth on a more comparable basis, so to Steve's point I think.

As we go into next year, the Lumpiness of cycling shutdowns and restarts and everything else kind of goes away it will be a little more normalized.

We're not prepared to give that guidance now, but as we get towards the end of the fiscal year, we will have much.

Clear line of sight on how that should play out for the next fiscal year.

Thank you. Our next question comes from the line of Irene <unk> with RBC. Your line is now open.

Thanks, and good morning, everyone just to change topics a little bit.

How would you describe your your traffic.

Prepared food sales during the morning day part.

Relative to pre Covid level.

Yes, Thanks, Larry.

Traffic has started to improve in the morning day part.

I think it.

It was hampered a little bit by the fact that a lot of.

Business reopening that were scheduled to take place after labor day kind of got pushed back after the first of the year given the delta variant resurgence, but in spite of that.

Definitely saw our best traffic growth during the quarter in the morning day part and.

And then with respect to the breakfast launch.

We've really been pleased with how that's gone so far.

Most of the new products, we introduced we're in the breakfast sandwich category and that that category is up somewhere between 40 and 50% on any given day that our guests have really responded well to.

To the new breakfast program and so we feel good about.

That category has rebounded versus where we were just a couple of months ago.

That's great. Thank you and what are you seeing in terms of the balance of the day.

Where do you think you are relative to pre COVID-19 levels.

With respect to the rest of the day, we still see some momentum in the lunch day part Thats still growing the evening day part as pulled back a little bit if you will.

Recall last year when people were more locked down our whole pie business really took off and we were up 25%, 30% in whole pies.

Certainly given a little bit of that back but on a two year stack basis.

We're up double digits in the whole pie. So we feel really good that.

Well, we certainly pulled back from a from a lockdown type scenario.

Certainly growing that business on a two year stack basis very favorably.

So.

So overall, we feel pretty good about the prepared foods I think the other thing that I would comment while we're talking about prepared foods.

<unk>.

We posted a four 1% increase in comps over the quarter, but I think.

As I alluded to in my narrative that we were impacted by some supply chain issues and so you get a little more specific when we look at our prepared foods, we have three categories subcategories, its hot and cold food, which is what I think you would normally associate with our business Thats, where all the pizza goes in our our hot food our sandwiches RAF salaries.

All the main core of the menu.

And then there's the bakery category and then Theres the beverage category.

And the hot and Cold food, which is three quarters of the business were up eight 3% in the quarter. So really strong results over the quarter in that category.

That was offset by bakery and dispense beverages and that was strictly due to supply chain issues. We had some suppliers with with doughnuts in particular and Werent able to.

To meet our needs and so we were out of stock on some key top sellers and that certainly impacted that category.

And then in dispense beverages, we had challenges getting cups.

We have since mostly resolve that through some alternate sources of supply but.

Those categories were impacted now I'll, just make one more point on those two specifically.

With dispense beverages and found cuts when the cut is not there. We don't believe that we're losing the guests. We believe that the guests will take a look at that Steve. They don't have a covenant will work two or three steps over to the cooler and pull out the beverage that they would've bought on the phone out of the vault and so when we look at our non carb business.

And that and the fact that that increased 14% during the quarter.

I would probably attribute some of that increase to some shifting among categories from dispensed over into the cold vaults and then likewise with bakery.

When when we lost some of those bakery sales in this category. If we look at our private label packaged bakery category, our packaged bakery is up 35% to 40% versus prior year in our private brand inside of that it's taken 41% share within that category. So we definitely bill.

Pleased that there are some bakery guests who come in maybe not found exactly what they were looking for in that in the prepared foods case and moved over to the center of the store and made another purchase and so I think that's why our overall comps are very strong even though we had some.

Some challenges and some subcategories due to supply chain.

Thank you.

Question comes from the line of Bobby Griffin with Raymond James Your line is now open.

Morning, everybody. Thanks for taking my question good morning, Bobby.

First I wanted to switch back to M&A you guys are off to a great start on trying to hit your multiyear store targets given the number of stores.

Kind of a quieter announced acquired with pilot here recently or are we more in a digestion phase going forward or is there still a good appetite for any incremental M&A. If it was to come available in the next couple of quarters.

Yes, Bobby.

We certainly are.

Are going to be opportunistic with respect to the M&A.

As you can probably appreciate.

M&A isn't just a ratable thing where you just decide you're going to do it or you decide you're not going to do it.

Lot of that depends on the sellers in the world and who is for sale and where they are for sale and what looks attractive. So we have to be opportunistic from a balance sheet perspective, we're in great shape.

Two four times leverage we have plenty of liquidity.

So.

Plenty of capability to add more so the way I would characterize it is we're certainly digesting everything we have now and we're focused on that but we also have our M&A team actively talking to other prospective sellers and.

When we find the right deal and we still have the capacity to do it we will take advantage of those opportunities.

I'd just follow up on that Bob you're right.

<unk> of our model is our ability to kind of go back and forth between building new units and buying units and so to the extent there is.

I, just and I guess, you saw it a little bit and the decisions we've made so.

We've reduced our capital spending expectation this year, because we're going to build.

A little few.

Fewer number of units than we had thought at the start of the year in that.

Some of that supply chain related but primarily its a function of we're able to buy more than we would have expected.

At the beginning of the year and so we will kind of titrate, both of those numbers and balance them to make sure.

Operations can absorb all of the new units that are coming in and those new units happened to be acquired units at the moment more more than historically they would have been units that we were standing up de novo.

Okay. That's helpful. I appreciate it and then I guess lastly, just kind of a <unk>.

Two part question on Opex go back two years. It seems like wages of course are the biggest driver of the growth versus two years. The quote unquote normal period, and I guess part one is is that true or is there something out in the opex that we're not aware of that we should be aware of that causes inflation and then the second part.

Do you see opportunity elsewhere in the P&L, whether Roche here prepared food to pass through price or fuel margins really going to be the sole.

No.

Area that you can try to offset this opex growth that the industry is facing.

I'll take I'll take the first one of those Bobby I mean listen wages clearly is driving if youre looking back on a two year basis right. I mean, we referenced before ours are down so.

On a same store basis.

It's not ours, because we're more efficient to the credit of the operations than we were before.

If youre looking.

Including or excluding credit card fees credit card fees were higher for sure, but I'll exclude that for a second so same store opex, excluding the credit card. It is primarily a wage story right and so there is no doubt last year, there were quite a bit of a minimum wage.

Increases across our footprint and then has COVID-19 rate continued to be more of a significant issue. We obviously then started to deal with broad based industry wage pressure and so it's much more of a wage.

Pressure dynamic in terms of what's driving the two year same store opex number for us.

Yes, Bobby.

Your second one on pricing so to answer your question no. We don't think prepared foods is the only category two.

We have the opportunity to take price in and so our merchandising team is certainly evaluating all of those opportunities as we see it.

Like I said before because we had AD cost of goods and largely locked in across categories through the balance of the calendar year, we saw it as an opportunity to to maintain margins and take some share and like I said before we have done that and now as we move into the new calendar year, we think theres going to be a lot of folks under increasing cost pressure and thats.

Going to drive retails up, but we will be able to take retail price along with them and at the same time maintain a competitive delta and still be able to grow share.

Thank you.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is now open.

Good morning, everyone.

Go on.

Going back to the.

Out of stocks.

You talked about how customers are ready to substitute.

Purchase other products, how did that impact the in store margins.

Well Chuck.

Yes, I think it certainly impacted a little bit.

Those categories that I referenced.

Bakery, and and dispense beverages run it.

10% to 20% higher margin than the comparable categories in the grocery.

<unk>.

Would have impacted that margin. So now the balance there in terms of mix is it.

Create a higher mix of that hot food category, which is the highest margin sub category within prepared foods. So.

It ultimately netted out that some of the prepared foods margin ultimately moved up a little bit, but we're able to maintain the margin on the on the grocery side. So overall, we had some margin.

Benefits through the quarter.

Out of those out of stock situations look to you is as we start the second half of the year.

You know as we sit here today, we still.

From a supply chain standpoint, the Cubs are still an issue from our primary supplier, but like I said, we've been able to get creative and <unk>.

Come up with some alternatives so I think.

On the Cup side I think we're in decent shape, the bakery side, there's a little bit hit and Miss its more difficult on the alternate supplier side with spec products that.

We get from.

From a supplier so.

That part is not as easily replicable, so I would expect that.

We would still see some of that challenge in that and that's been on and off again and a lot of that's dependent on our supplier and their labor situation at the time, we have had periods, where we've been back in stock and they've been able to satisfy orders and then they run into a labor challenge again, and then they can't fulfill them. So.

It's a little bit variable in that category, but like I said I think on the beverage side. We've got it largely contained there there'll be more in the bakery category as we move forward.

Thank you. Our next question comes from the line of Cristina <unk> with Deutsche Bank. Your line is now open.

Hey, guys good morning.

Just wanted to touch base on you said that the breakfast day part has improved the most in part driven by good performance obviously in the news.

Breakfast handheld so.

How should we think about some of the next catalyst when it comes to your menu innovation journey, you know how is the supply chain impacting that potentially and then overall just thinking about the timeline I believe you guys have said roughly 18 months from idea generation to launching in stores.

The process be shorten given how dynamic the landscape is changing consumer taste and behaviors.

Yes, Kristina I think let me just talk about some of the innovation and other.

Parts of the menu.

We'll say the supply chain is having an impact on some of that in.

I don't want to get into a lot of detail, but I would say we we.

Spend some time developing a new product platform that we are prepared to launch and then.

Our primary supplier for that product.

Was unable to meet to meet our needs because of their own labor challenges in their manufacturing facilities. So we've had to postpone that launch now.

Yes.

If there is any good news inside of that is that we have that sitting on the shelf in the pantry ready to go.

Ever.

Can resolve the supply chain issue so.

So we have that.

In terms of innovation and we continue to innovate in our culinary team is starting to focus more on the areas, where we are not experiencing supply chain challenges. So.

We're working towards that as well in terms of shortening the timeline.

Sure.

We're always looking at ways of being more efficient and effective with any of our processes.

With the product development.

It is very important to stay disciplined in that and be very guest centric and very <unk> focused.

When I think about how our breakfast products are performing with a 40% 40% to 50% increase.

In units and that was on top of a 10% increase already in that trend.

It goes to show you that when you follow the process and do it right that you get the results that you hope to expect so.

Well again, I think we look at being efficient and effective in it.

I'm reticent to deviate too far from that process because that process works.

Alps us ultimately to avoid.

Big and expensive mistakes as we launch new products and platforms.

Got it that's helpful and.

Just my follow up would be on the private label I don't know if you said, where you ended the quarter in terms of penetration, but you said that you're on track for 5% I'm just curious how it's performing relative to your internal expectations and are you finding more success with the private label.

Program in the current environment as you know inflation is hitting consumers and a lot of ways.

So if you could just talk about how you can capitalize on that and just remind us of the margin implication.

Yes.

Private label program is still trending right on track we ended the quarter at about four 2% penetration.

Have a little over 200 items, we rolled out 28 during the quarter. We have another 35 items that will be rolling out in the third quarter and so we have clear line of sight to that 5% now the thing I would I would tell you about it is 5% is 5% of the sales penetration today.

Today, we're already at seven at about seven 5% of gross profit dollars penetration so the.

The items are running at a much higher margin radar, our average margin rate for private labels in the high Fifty's.

Versus what you're seeing in the rest of the business in the low 30. So it's certainly accretive from a margin standpoint, and that's why we're so focused on growing that part of the business.

Thank you. Our last question comes from the line of Brian Mcnamara with Bamberg Capital. Your line is now open.

Hey, good morning, Thanks for taking the question.

Kristina I got my question on private label, but on just on Opex I know, we're beating a dead horse here, but I remember when you gave the mid teens guidance preliminarily or are the initial guidance you kind of mentioned it was a 50 50 split in terms of same store.

Kind of.

Acquired.

Opex can you can you kind of give us an idea of where that fits given your revised expectation.

Yeah.

Yes.

This is Steve it it's not going to be significantly different because the.

The credit card, but the two things that are driving if theres more units.

For sure coming in with pilot credit card fees are higher both with the acquired stores frankly, but theres a lot more stores and the mother ship. So I think by the time, we get to the end of the year, it's not going to be significantly different than <unk>.

Been a 50 50 split probably a little more weighted to same store just as you think about just the overall number of units and the fact that again most of our most of our integration related spending.

<unk> has already been completed and so that is going to drop out.

The reconciliation to large extent for new units, so modestly overweighted to same stores by the time, we get to the end of the year.

And then just a follow up on M&A just curious how the current environment is relative to when we spoke last three months ago in terms of.

These smaller operators willingness to sell in the current environment, just given where fuel margins continue to be pretty high.

Yes, Brian.

We still see a really strong environment out there right now and remember like Steve was saying.

There's a there's definitely a correlation between the fuel.

Margin resilience and the rising opex environment, and so I think with the smaller operators, it's getting more and more challenging just to keep store staff and keep people on an end to operate in this environment. So we see more deal flow coming through.

Because of that we have the ability to be selective and pick our spots but.

We like the environment right now.

Like I mentioned before we will continue to stay opportunistic with respect to that.

Thank you there are no further questions I will now turn the call back to Darren Rubella CEO for closing remarks.

Okay. Thank you and thanks for taking the time today to join US on the call I'd also like to thank our team members. Once again for their efforts. This quarter. We've had a great first half of fiscal 'twenty two despite the challenges related to COVID-19 labor shortages in the supply chain.

Fortunately, we've demonstrated our ability to deliver results on our long term strategic plan in fiscal year outlook and both normal times and during a global pandemic and I'm confident we will continue to drive shareholder value.

Our second quarter was our most challenging comparisons for the fiscal year and we're looking forward to delivering great results for the back half of the year.

Our team here at Casey's wishes, everybody happy holiday season.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Good day, ladies and gentlemen, and welcome to the Casey's General stores second quarter fiscal year 2022 earnings conference call. At this time all participant lines are in a listen only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

Can I ask a question you will need to press star one on your telephone.

Reminder, this call is being recorded.

No one should require operator.

Press Star and then zero.

I would now like to turn the call over to Brian Johnson Senior Vice President Investor Relations.

Please go ahead.

And the potential effects of COVID-19.

There are a number of known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward looking statements, including but not limited to the integration of the recent and pending acquisitions, our ability to execute on our strategic plan our realized benefits from the strategic plan.

The impact and duration of COVID-19, 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 <unk>.

Future events, and Casey's claims any intention or obligation to update or revise forward looking statements, whether as a result of new information future events or otherwise are.

A reconciliation of non-GAAP to GAAP financial measures measures referenced on this call as well as a detailed breakdown of the operating expense increase for the second quarter can be found on our website at www Dot cases dot com under the Investor Relations link following this call.

Supply chain issues.

Our team members have done an outstanding job navigating this new in difficult situations and the team's ability to perform under the circumstances, if something I'm, especially proud of and grateful for.

The cases, our purpose is to make life better for our communities and guests every day.

Proud to report that we continued to make excellent progress in this regard during the second quarter.

This quarter Casey's cash for classrooms, giving campaign raised nearly $1 million to support local schools in our communities through grants same store generous guests and passionate team members.

These grants will provide much needed funds to local schools in the communities, where we operate.

Then in November changes, all the veterans focus giving campaign in partnership with Pepsico to raise funds for organizations, providing assistance to veterans and their families.

As a veteran myself I know the great sacrifices these families have made and the challenges they face.

This year's campaign raised nearly $1 million that will help to outstanding organizations children fallen Patriots and hope for the warriors.

These funds will allow the charities have an even greater impact on the lives of veterans and their loved ones.

Thank you to our vendor partners each casey's team member they made a donation to asking our stores and especially to our guests who truly do good when they shop in cases.

Now, let's discuss the quarter's results.

Total gross profit dollars are $718 million was an all time high for the second quarter net.

Net income was $96 8 million EBITDA.

EBITDA was $217 million down 2% from the prior year, primarily due to higher operating expenses.

<unk> sales volumes were positive and grew stronger throughout the quarter, partially aided by our new breakfast menu launch in October which is proving to be a big hit with our guests and exceeding our early expectations.

We experienced increased guest counts and positive same store fuel volumes, we maintained our brewer margins inside the store, while dealing with a myriad of products and inflationary challenges.

And fuel we nearly matched the prior year's margin of 35 per gallon. Despite the retail price of fuel increasing nearly $1 per gallon.

The second quarter was also the first full quarter operating the buggies and circle K acquisitions, which are on track to realize expected synergies.

We announced our third strategic acquisition this year with an announced an agreement to acquire 40 stores from pilot Corporation and in Knoxville, Tennessee area is expected to close in the third quarter.

Overall, we remain very confident in our ability to deliver on our strategic amendments and manage through the near term challenges presented by the current environment.

I would now like to go over our results and share some of the details in each of the categories.

Inside same store sales were up 6% from the second quarter with an average margin of 47%.

Same store grocery and general merchandise sales were up six 8% and the average margin was 33, 3% in line with the same period a year ago.

We believe we're taking share in this category in our geography based on industry data and peer performance.

Packaged beverages and salty snacks continued to perform well due largely to the successful store resets and assortment optimization efforts completed last fiscal year.

Non alcoholic beverages were up over 24% on a two year stack basis.

Alcohol same store sales were up low single digits, despite challenging comparisons remain up over 22% on a two year stack basis.

The merchandising team did an excellent job maintaining margin, while overcoming inflationary headwinds our private label program and procurement initiatives contributed favorably to gross profit margin this quarter.

Same store prepared food and dispense beverages were up four 1%.

The average margin for the quarter was <unk>.

66% up 50 basis points from a year ago.

Pizza slices continued to perform exceptionally well up 21% in the quarter.

While our self distribution model will help mitigate some supply chain challenges, we most acutely felt product availability challenges into prepared foods category during the quarter.

At various times during the quarter and sometimes for nearly the entire quarter, we were out of stock with key items, such as Donuts fountain beverage cups in chicken.

During the second quarter same store fuel gallons sold were up two 5% with a fuel margin of $34 seven per gallon down slightly but still largely comparable to the same period last year.

The field team continues to do a tremendous job balancing fuel margin and volume to optimize the profitability of the category.

I would now like to turn the call over to Steve to go into some detail on the financial statements Steve.

Thank you Darren and good morning, total revenue for the quarter was approximately $3 3 billion, an increase of $1 billion or 47% from the prior year. This was primarily due to an increase in retail sales of $855 million, which was driven by a 15, 8% incur.

Greece of total gallons sold to 669 million gallons as well as a 48% increase in the average retail price per gallon.

The average price of fuel during the period was $3.06 per gallon compared to $2 seven a year ago.

Total inside sales rose 13, 1% to $1 $1 billion grocery and general merchandise sales increased by $111 million to $829 million, an increase of 15, 5%.

Prepared food and dispensed beverage sales rose by $21 million to $309 5 million an increase of seven 2%.

As a reminder, we define gross profit as revenue less cost of goods sold but excluding depreciation and amortization.

Casey's had gross profit of $718 million in the second quarter, which is an increase of $86 million from the prior year.

This is driven by higher inside gross profit of $50 8 million or 12% as well as an increase of $27 7 million or 13, 6% in fuel gross profit <unk>.

Fuel gross profit benefited by over $6 million from the sale of brands.

All rens generated were sold in the quarter and there was no carryover from previous quarters, our grocery and general merchandise gross profit increased $36 $9 million, while prepared food and dispensed beverage gross profit increased $13 $8 million. We also saw a $7 $3 million lift in other.

Gross profit and this is benefiting from the dealer network activities and car washes that we acquired from the Buchanan energy acquisition that we record in the other category.

While inside margin.

<unk> relatively flat compared to the prior year, our merchandising and logistics teams are performing exceptionally well in the face of the challenging inflationary and supply chain environment.

In fact gross profit margin was 47% and while this is a decrease of 30 basis points from the prior year quarter is completely driven by the mix change between our two categories. The grocery and general merchandise margin was flat at 33, 3% prepared food and dispense beverage margin was 66%.

Up 50 basis points from prior year.

Volumes mix enhancement procurement actions and selective price increases all combined to partially offset the inflationary pressures that we're facing.

Specific to prepared food and dispense beverage. The company also benefited from a 22 cents per pound favorable cheese cost comparison cheese.

Cheese costs were $1 96 per pound this quarter compared to $2 18 for the same quarter a year ago, and that's an approximately 75 basis point benefit.

However, this cheese cost benefit was largely offset by commodity cost increases in our other prepared food ingredients.

<unk>, 7% of the increase is due to same store employee and store operating expenses, increasing and this is primarily due to a 14% increase in store level wage rates, while the number of hours worked were not significantly different in the quarter versus prior year on a two year stack basis same.

More labor hours remain down approximately three 5%.

Thus, we were able to grow inside sales nine 7%.

On a two year stack basis, while reducing store labor hours, which is a tremendous accomplishment by our store operations team.

Finally, due to the higher retail fuel prices mentioned earlier same store credit card fees also rose and Thats accounted for another 2% of the operating expense increase in the quarter.

Depreciation in the quarter was up 15, 5% driven primarily by the store growth along with the placing of our third distribution center into service earlier this year.

Net interest expense was $13 $5 million in the quarter and that compares to $10 6 million in the prior year. The increase is primarily related to the additional debt that we took on to fund the Buchanan acquisition.

The effective tax rate for the quarter was 25% and that compares to 23, 6% in the prior year driven by earnings mix differences and timing.

Net income was down versus the prior year to $96 8 million EBITDA for the quarter was $216 9 million compared.

Compared to $221 4 million a year ago, a decrease of 2%.

Notably both the Buchanan and circle K acquisitions were accretive to EBITDA in the second quarter as we had expected.

Our balance sheet remains really strong on October 31, cash and cash equivalents were $312 million and we have the full capacity undrawn of our $475 million in lines of credit, giving us ample available liquidity of $787 million.

Leverage ratio remained at two four times post the closing of the acquisitions, which is consistent with the first quarter.

Fourth quarter net cash provided by operating activities of $213 million less purchases of property and equipment of 78 million resulted in a company generating $135 million in free cash flow.

At the December meeting the board of directors voted to maintain the dividend at <unk> 35 per share unchanged from the first quarter.

Our share repurchase authorization is untapped $300 million and we will remain opportunistic in this regard.

So far this year. The company has opened seven new stores and has acquired a 144 stores, including the 89 buggies in 48 circle K stores.

The pending pilot acquisition consists of 40 stores in the Knoxville, Tennessee Metro area.

38 of these stores are traditional convenience stores and to our truck stops the purchase price is $220 million and that represents a multiple of nine three times pre synergy trailing 12 month EBITDA.

Fuel gallons sold per store is approximately one 5 million gallons and the average merchandise sales per store was approximately $2 $2 million and they have quite low existing prepared food penetration in the stores.

The acquisition is expected to close December 16th and it will be financed with a combination of cash on hand, and a $150 million term loan.

And that is expected to be accretive to EBITDA in the current fiscal year.

Now the pending pilot acquisition provides the opportunity for us to update our 2022 outlook Casey's.

<unk> now expects to add approximately 225 units by the end of the fiscal year and that's up from the 200 units we previously disclosed.

Total operating expenses are now expected to increase in the high teen percentages versus the mid teen percentages previously disclosed due in part to the aforementioned pilot acquisition. Additionally, credit card fees continued to remain elevated along with the retail price of fuel.

Now despite these changes we have cycled past the worst of the year over year increases in operating expenses for this fiscal year.

Prior year, one time items, such as asset impairment charges, and AMV retrofit compliance costs as well as elevated incentive compensation costs.

Interest expense is now expected to finish the year at approximately $55 million with depreciation and amortization planned for approximately $310 million at the end of the year.

Both are driven by the increase in new units and the associated financing costs.

The purchase of property plant and equipment should be approximately $400 million.

Versus the $500 million previously disclosed as the company will reduce new store construction due to the increase in acquisition activity and this will positively impact our free cash flow.

The company still expects the tax rate to be approximately 24% to 26%.

The company is maintaining the same store sales outlook for fuel and inside sales to increase mid single digit percentages.

The higher than the prior year.

Now I'd like to turn the call back over to Darren.

Thanks, Steve.

First I would like to congratulate the entire casey's team for delivering impressive results in the second quarter.

Wouldn't have done it without their hard work and dedication and.

Given the challenges concerning COVID-19, labor shortages and supply chain issues, we will continue to need their perseverance to perform at a high level.

All of this is going to be driven by an investment in talent strengthen the team and add capabilities to the business.

With the recent large acquisitions completed in another deal pending let's start with being where the guest is.

We made a commitment to add 345 units over a three year period by the end of fiscal 2023, which is a 5% CAGR versus a starting point.

We are now 18 months into the initiative and have added 195 units, thus far including 150 in fiscal 2022.

On the horizon is the pending pilot acquisition.

We've seen the Knoxville, Tennessee market is a strategic fit within our existing distribution network and it is an attractive mid sized market, we expect our prepared foods to do well.

It also gives us immediate scale in Knoxville, and expands our footprint in Tennessee.

Overall, we are extremely excited about the potential for these stores. We are also highly confident we will achieve the 345 unit expansion we committed to.

Our team has also done a great job of integrating the <unk> acquisition. We have now completed 28 Remodels were 10 Remodels in progress.

We plan to have all of the stores moved our supply chain network by the end of the calendar year, which is ahead of schedule.

With respect to efficiency, our fuel team continues to drive profitability, so retail price optimization and procurement efforts in the current quarter, we stood up a new fuel technology solution, we continue to optimize fuel procurement efforts.

<unk> also successfully driven sales to more profitable categories from the store resets completed last fiscal year.

And finally private label products continue to grow market share inside our stores and we remain on track to reach our 5% goal by the end of the fiscal year.

Not only is this a better value option for our guests, but it also improves gross profit margin for the category.

Our initiative to reinvent the guest experience at Casey's has performed better than expected.

During the quarter, we had a successful launch of our new breakfast lineup highlighted by cases signature handheld and the rollout of the fresh brewed coffee program.

Our digital guest engagement remains a high priority as digital sales were up 10% in the second quarter on top of a 120% increase in the same quarter last year.

Our partnerships with third party aggregators, such as door Dash <unk> are now at 1081 stores.

We also utilized door dash White label delivery of third party service that takes orders through our systems at 826 stores.

This enables our casey's rewards members to fully participate with our member benefits on our own app and receive delivery services.

We still utilize our own delivery drivers at 435 stores and still offer in store pickup and curbside pickup at over 2200 stores.

Our Casey's rewards enrollment continues to grow and eclipsed $4 2 million members in October.

Our app now generates more order revenue than any other media, including phone in orders.

We're continuing to grow segmented marketing campaigns, where we offer personalized promotions to our members.

We've also begun to segment our content by day part on both the web and App to improve our relevance. We believe these shifts will result in a more engaged guests.

With respect to investing in our talent.

Despite the difficult labor environment. The company has been able to make progress staffing in the stores and the special federal unemployment benefits expire we will remain competitive in the market with respect to pay to adequately staff. Our stores. So we can deliver the exceptional experience our guests have come to expect from cases for.

We're continuing to incentivize our team members with a vaccination bonus is the health and safety of our team members and guests is our top priority.

We will now take your questions.

Thank you.

Ask a question you will need to press Star then one on your telephone to lift.

Your question. Please press the pound key we ask that you. Please limit yourself to one question and one follow up.

Our first question comes from the line of Karen short with Barclays. Your line is now open.

Hi, Thank you very much.

They go to the <unk>.

And I've asked in the past when you look at your Opex growth versus your gross profit dollar growth and I'm actually giving us on relative to the 19 number relative to last year.

We are definitely continuing to see a deterioration in or.

Or widening of that gap, meaning opex growing much faster than gross profit dollars in the store. So can you just talk a little bit about how you think that trajectory will look in the second half and then I had one quick follow up.

Yes, Karen. Thanks. This is Darren and I'll go ahead, and start and let Steve kind of fill in some details here, yes, we still believe that we'll be able to generate.

Gross profit dollar growth in excess of our Opex growth I think the reality of it is we've got we've got some timing issues as we continue to excel.

To accelerate our store growth and that acquisitions those acquisitions come with.

With opex to them and so that growth starts to look outsized relative to the GP generation of short term and part of that is because when we acquired stores. One of the main synergies that we expect to achieve is layering in our prepared foods business, which is the most significant driver of our gross.

And so in the short term as we bring those stores on we don't have the prepared foods momentum yet as we have to remodel those stores bring the kitchens and train the people and then we started to generate that gross profit. So ultimately you start to normalize the opex effect of those acquisitions that you accelerate the gross profit.

<unk> of those vis vis the prepared foods business. So thats really how that equation will work. It's just in a short period in the short term when you first bring those on you have a little bit of a mismatch there I'll, let Steve talk about what our outlook is for.

Hi.

I would just add Karen that certainly for the in the very near term in the second half Baidu.

Baidu expect gross profit dollar growth is going to outpace operating expense dollar growth rate. It did not in the second quarter for the reasons that we talked about.

Some of that has just begun.

Comps around opex growth or are going to get a little easier for us here in the in the second year. So we're lapping.

Outperform from a growth standpoint, the operating expense growth.

Okay. That's helpful and then just on pilot.

Wondering if you could give a little color on what you actually think that synergies will be obviously as you just commented on tremendous synergies will be coming from prepared food.

Is there any more granularity on that would be great.

Yes.

I think that is the true synergy we do believe that making some investment in those remodels are those stores will help our merchandising team will remerchandise their stores and that always helps.

And we have that experience from the other acquisitions, but clearly the largest synergy we expect to capture with with the pilot acquisition as well as virtually any acquisition, we bring as our prepared foods.

And so as Steve mentioned in.

In the opening remarks.

Very low penetration of prepared foods in there and based on our experience. We know we can go in and and.

Significantly elevate that prepared foods experience.

May add I think.

I think we will find that our ability to merchandise on the grocery side within those stores is going to accrue to our benefit certainly over time and then from a distribution standpoint, we will definitely get some further absorption of fixed cost within our system right well, we will continue to load the warehouse that's closest to them.

That part of the country and that will make the rest of our distribution network that much more efficient as well.

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.

Great. Thank you good morning, everyone.

Good morning.

I also had a question on your Opex maybe.

A little bit of a different question.

Thank you about it.

Opex for Starwood quite high in the queue.

Quarter Dan.

More than 20% with.

The bulk of it.

New stores and then the higher credit card.

But I guess I'm trying to understand the component coming from new doors and really.

What changed especially since you've been opening any stores in the quarter I guess.

Darren based on what you said.

Just a function of learning.

The new stores you opened earlier this year are now costing more to operate and then if so how should we think about the new pilot stores that youre going to be opening.

In Q3 are those also going to have elevated.

Okay.

Well nobody nothing nothing has really changed I mean, what we said in the first quarter.

We had a 24% increase in opex versus the prior year and what we said in that call was that we would see a slight improvement in that opex in the second quarter and then it will continue to get better more substantially better in the third and fourth quarter.

<unk> is in fact exactly what has happened.

We were up 22% this quarter, which is slightly better than the 24% last quarter. So nothing has really changed now in the current environment certainly with labor shortages wages have gone up and we said, our our average wages up 14%.

Roughly and when we look at industry data in the hospitality and leisure and restaurant industries retail industries that average wage and the industry has gone up about 13, 7%. So we're right in line with with where wages are gone and so that is certainly.

Certainly put a damper on our opex, but again with respect to the acquisitions.

<unk>.

This played out exactly like we thought now when we bring on pilot.

The retail price of fuel as well so.

But because of some of what we're cycling over from the prior year.

We're confident that those numbers are going to come down on a percentage increase basis versus the prior year, Steve you want to.

Just to drill down on kind of a cost of running the new and the acquired stores in the first quarter.

We did that bridge and we have it on our website and a growth in M&A units were contributed about 8%.

Year over year increase in total and you may remember we didn't close.

And we've got a 9% contribution to the operating.

Expense increase so from my perspective other than Theres, a couple of weeks of extra new unit cost the second quarter. The cost of running them was largely the same and the other piece I would just call out as you know we still in the case of Buchanan.

We still have some synergies to pull out of the system better and operating expense rates at that headquarters location wallets.

Lower staffing level than it was before thats not completely closed down but warehouse that we've acquired from them will not close until the end of the calendar year and so you've got some redundant costs that will be coming out of the system here quite quite soon.

Okay that was helpful and just maybe to clarify on the first half.

Opex was sort of in line with your expectation, but then you're taking up your guidance for the full year.

It's primarily because as.

Maybe the pilot acquisition, the new store openings and just the more expensive or inflationary environment is that how we should think about it for the full year.

Largely yes from my perspective to two things are changing so pilot.

We close next week is we're hoping to close is probably going to bring somewhere in the neighborhood of $15 million of incremental operating expense into the last five five months or so.

Five months of the year. So that's an incremental change and then the other one is for sure a credit.

Credit card fees are higher than we thought they were when we set this guidance out at the beginning and that's a function of a higher retail and so we continue to believe and I think it's worth stating that part of the reason CPG for the industry is hanging around the level. It is.

Because operating expenses are higher there is a correlation between those two things. They just start on the same line item and so for us Theres definitely more credit card fees that we're going to see while retails hanging out in a $3 level than we had guided previously.

Thank you.

Our next question comes from the line of Kelly Bania with BMO capital. Your line is now open.

Hi, good morning, Thanks for taking our questions.

I'm going to try to ask.

Similar question kind of in a different way here.

I guess in terms of in terms of the operating expense outlook, so higher credit card fees the pilot stores rolling in.

I guess just wanted to understand underlying kind of core operating expense and that that wage rates.

Increase of around 14% how is that tracking to your plan for the year.

And your underlying expectations because to your point I guess on the.

Opex in any impact this is having on on CPG is kind of just kind of understand how you feel about your total outlook for earnings or EBITDA. This year and how that has changed.

Given these developments.

Yes, Hey, good morning, guys, Steve I'll start with that so relative to kind of how the cadence is going to work going forward with what I would call kind of same store wage rate is how I'll answer that.

Our expectation of that has not changed I think we had a pretty good view certainly three three months ago of what the wage pressure was in the market I think we were seeing similar wage pressures to what we are today.

<unk> quarter.

A lower the lower number from prior years, giving us a higher percentage than that we started to implement.

Extra COVID-19 related pay in the second half of last year, and so again, we're not going to pay a higher wage rate necessarily in the second half of this year, but the comp will get easier and so that.

14% wage rates that we referenced earlier the dollars won't change, but that percentage will go down because we had a higher base in the second half.

Of the prior year.

And so as a result, so the second part of your question.

We haven't guided for EBITDA for the year, and we're not going to do that but our expectations haven't changed I will go back to the end of the question.

Bonnie pose is to the extent operating expenses are higher as an industry because of either wages or.

Credit card fees, we believe that's contributing to more sustained higher.

Fuel profitability for the industry and to a large extent thus far are those those two are kind of washed out by the time you get to the bottom line and I don't have any evidence right now that that relationship is going to change in the near term.

Okay.

A lot of Thats very helpful.

And then can you also maybe elaborate on the price increases that you took when were those which categories are you seeing competitors also move in that direction and do you have any plans for more.

Yes.

Kelly this is Darren.

In large part because we had already negotiated cost of goods through the balance of this calendar year.

So we're in the process now of finalizing cost of good negotiations for the next calendar year.

That's on the grocery and general merch side.

As you've seen with our same store sales results relative to peers and others in the industry.

We believe we are taking share and we've kind of confirm that through some.

Independent industry data that we've been able to look at so we like our pricing position now and we certainly have the ability to take more price.

As Steve highlighted with cheese costs, we had some we had a little bit of favorability on the cheese cost side, which offset the margin impact.

In the second quarter, but we went ahead and.

It took the pricing anyway, because we had the opportunity to do it from.

From a competitive standpoint, and we've not seen any erosion in volume as a result of that.

Thank you.

Our next question comes from the line of Ben <unk> with Stephens. Your line is now open.

Hey, Thanks, good morning.

Good morning, Good morning, Ben So I wanted to ask about.

Prepared food per store volumes across the entire business kind of having moved lower as a result of these newly acquired stores that was one piece of the variance from our model.

Darren I think you were talking about kind of the remodel pipeline on the Buchanan stores I assume you'll pursue remodels and put the casey's prepared food offer in the pilot stores as well.

Yes sure Ben.

With respect to the <unk> energy.

Transaction, we've got 28 stores already remodeled at this point and we have 10 more being remodel as we speak so really.

Our goal is to get those things remodel as fast as we can and get our kitchens put in there in teams trained up and get that synergy is largely dependent on the permitting timeline.

It will have 40 stores roughly remodeled by the end of the calendar year. So pretty quick work now so far what we've seen and Buchanan and add a little bit of a prepared foods offering developed.

More so than the pilot stores and I'll tell you what we've seen early on is anywhere from 70% to 80% lift in prepared food sales in those stores.

In the first month to two months post remodel so we're well on our way.

So I don't have any concerns about the ramps there and getting to more system wide average now with respect to pilot.

That's in Knoxville, Tennessee, and that's much newer territory for us. So we tend to find that in new geographies, where our brand is not as well known for that prepared foods ramp takes a little bit longer than in our core markets, where once we hang a sign people know who we are in and they come.

Yes.

Once one store in a small town at the time it takes a little bit longer to do so we feel really good about our prospects on the pilot acquisition as well.

Okay, Great I'm going to ask another question about Opex.

Two parter one is more housekeeping and then the other is kind of a longer term trajectory on the housekeeping.

Steve I think we've got year to date of about $11 million of deal related kind of nonrecurring non-GAAP costs in the Opex line. So call. It one 5% incremental opex year to date from deal costs.

So first part of the question.

Will there be residual deal costs from Buchanan going into the back half of the year will there be incremental and a non-GAAP deal costs from pilot in the back half of the year that's incorporated in the guidance.

Part one and then question two is as you look out to fiscal 'twenty. Three I think you guys have historically talked about.

Yeah, Hey, thanks for the question.

The first one.

I think we will have we don't have any more deal related costs in terms of like.

Legal fees are banking fees per se I think we will spend also have several million dollars of integration related costs right. We were extra training.

Et cetera.

It was all part of.

When we gave the expectation earlier this year that I think it's about $45 million of EBITDA contribution from Buchanan that would've been inclusive.

All of those costs. So I do think we will spend several million dollars more for frankly, all three acquisitions circle K Buchanan in pilot in the second half of the year and they will be integration and consistent with kind of the overall accretion expectation of of EBITDA.

And transitioning to the second question, but are as we enter into next year. It's a little early for us to be specific on it but nothing has changed in our expectation.

Medium term right our algorithm is that we need.

Manage operating expense growth at a slower clip than what we're getting right EBITDA related growth and I don't see any reason that we can't do that.

The lumpiness of the prior year will be much better next year, because this year will be much much flatter I think we're not going to be out of the woods.

Body in retail around just theres definitely more wage pressure.

As a general matter in the system and I don't see any reason to think that's going to change in the near term, but our ability to manage same store opex to a lower rate in the medium term than what we're growing EBITDA, we feel very good about our ability to do that.

Yes.

Ben the only thing I'd add to that is.

The largest element of our operating expenses as stores and.

The labor and team members in those stores.

And what we highlighted.

<unk> a little bit earlier today was that in spite of growing our two year same store comps roughly 10% we had a three 5% reduction in hours. So I think our operations team is acutely aware.

Of the need to operate our stores efficiently and we've been able to take labor hours out of the stores, while still accelerating the store growth on a more comparable basis. So to Steve's point I think as we go into next year, the lumpiness of cycling shutdowns and restarts and everything else kind of goes away.

And we will be a little more normalized.

We're not prepared to give that guidance now, but as we get towards the end of the fiscal year, we will have a much.

Clear line of sight on how that should play out for the next fiscal year.

Thank you. Our next question comes from the line of Irene Mattel with RBC. Your line is now open.

Thanks, and good morning, everyone just to change topics a little bit.

How would you describe your traffic and your prepared food sales during the morning day part.

Relative to pre Covid levels.

Yes, Thanks, Larry.

Traffic has started to improve in the morning day part.

I think it.

It was hampered a little bit by the fact that a lot of <unk>.

Business reopening that were scheduled to take place after labor day.

Got pushed back after the first of the year given the Delta variant resurgence, but in spite of that.

Definitely saw our best traffic growth during the quarter in the morning day part and.

And then with respect to the breakfast launch.

We've really been pleased with how that's gone so far.

Most of the new products that we introduced during the breakfast sandwich category and that that category is up somewhere between 40% and 50% on any given day that our guests have really responded well to <unk>.

The new breakfast program and so we feel good about that.

That category has rebounded versus where we were just a couple of months ago.

That's great. Thank you and what are you seeing in terms of the balance of the day.

And where do you think you are relative to pre COVID-19 levels.

With respect to the rest of the day, we still see some momentum in the lunch day part that's still growing.

The evening day part as pulled back a little bit and if you recall last year when people were more locked down our whole pie business really took off and we were up 25%, 30% in whole pies.

Certainly given a little bit of that back but on a two year stack basis.

We're we're up double digits in whole pie, so we feel really good that well.

Well, we certainly pulled back from a from a lockdown type scenario, where certainly growing that business on a two year stack basis very favorably.

So overall, we feel pretty good about the prepared foods I think the other thing that I would comment while we're talking about prepared foods.

<unk>.

We posted a four 1% increase in comps over the quarter, but I think as.

All the the main core of the menu.

And then Theres, a bakery category and then Theres the beverage category.

So in the hot and Cold food, which is three quarters of the business were up eight 3% in the quarter. So really strong results over the quarter in that category that was offset by bakery and dispense beverages and that was strictly due to supply chain issues, we had some suppliers with with doughnuts and.

They weren't able to to meet our needs and so we were out of stock on some key top sellers and that certainly impacted that category.

And then in dispense beverages, we had challenges getting cups.

We have since mostly resolve that through some alternative sources of supply but.

Those categories were impacted now I'll, just make one more point on those two specifically.

With dispense beverages and found cuts when the cupboard is not there we don't believe that we're losing the guests. We believe that the guests will take a look at that they don't have a covenant and they'll work two or three steps over to the cooler and pull out the beverage that they would've bought on the film out of evolve and so when we look at our non carb business.

And that and the fact that that increased 14% during the quarter.

I would probably attribute some of that increase to some shifting among categories from dispensed over into the cold vaults and then likewise with bakery.

When when we lost some of those bakery sales in this category. If we look at our private label packaged bakery category, our packaged bakery is up 35% to 40% versus prior year in our private brand inside of that is taken 41% share within that category. So we definitely bill.

Pleased that there are some bakery.

Guests, who come in maybe not found exactly what they were looking for in that in the prepared foods case and moved over to the center of the store and made another purchase and so I think that's why our overall comps are very strong even though we had some.

Some challenges in some sub categories due to supply chain.

Thank you.

Question comes from the line of Bobby Griffin with Raymond James Your line is now open.

Morning, everybody. Thanks for taking my question good morning.

First I wanted to switch back to M&A you guys are off to a great start on trying to hit your multiyear store targets given the number of floors.

Kind of a quieter announced the acquired with pilot here recently or are we more in a digestion phase going forward or is there still a good appetite for ink growth incremental M&A. If it was to come available in the next couple of quarters.

Yes, Bobby.

We certainly are.

Are going to be opportunistic with respect to the M&A.

As you can probably appreciate.

M&A isn't just a ratable thing where you just decide you are going to do it or you decide you're not going to do it.

Two four times leverage we have plenty of liquidity.

So.

Many of capability to add more so the way I would characterize it is we're certainly digesting everything we have now and we're focused on that but we also have our M&A team actively talking to other prospective sellers and when.

When we find the right deal and we still have the capacity to do it we will take advantage of those opportunities and I think I'd just follow up on that Bobby right.

<unk> of our model is our ability to kind of go back and forth between building new <unk>.

<unk>.

Buying units and so to the extent there is.

Digestion I guess, you saw it a little bit and the decisions we've made so.

We've reduced our capital spending expectation this year, because we're going to build.

A little fewer.

Fewer number of units than we had thought at the start of the year in that.

Some of that supply chain related but primarily its a function of we're able to buy more than we would have expected.

At the beginning of the year and so we will kind of titrate, both of those numbers and balance them to make sure.

Operations can absorb all of the new units that are coming in and those new units happen to be acquired units at the moment more more than historically they would've been units that we were standing up to novo.

Okay. That's helpful. I appreciate it and then I guess lastly.

Just kind of a two part question on Opex. If you go back two years. It seems like wages of course are the biggest driver of the growth versus two years in a quote unquote normal period, and I guess part one is that true or is there something else in the opex that we're not aware of that we should be aware of that causes inflation and then the second part.

Do you see opportunity elsewhere in the P&L, whether Roche in your prepared food to pass through price.

Fuel margins really going to be the sole.

Area that you can try to offset that opex growth that the industry is.

I'll take I'll take the first one of those Bobby I mean listen wages clearly is driving if youre looking back on a two year basis right. I mean, we referenced before ours are down so we on a same store basis.

Not ours, because we're more efficient.

To the credit of the operations than we were before.

If youre looking <unk>.

Pressure dynamic in terms of what's driving the two year same store opex number for us.

Yes, Bobby.

I'll take your second one on pricing so to answer your question No. We don't think prepared foods is the only category to that.

We have the opportunity to take price in and so our merchandising team is certainly evaluating all of those opportunities as we see.

Like I said before because we had a cost of goods and largely locked in.

Across categories through the balance of the calendar year, we saw it as an opportunity to to maintain margins and take some share and like.

I said before we have done that and now as we move into the new calendar year, we think theres going to be a lot of folks under increasing cost pressure and thats going to drive retails up and we'll be able to take retail price along with them and at the same time, maintaining a competitive delta and still be able to grow share.

Thank you.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is now open.

Good morning, everyone.

So.

Going back to the.

Out of stocks.

You talked about how customers are ready to substitute.

Purchase other products, how did that impact the in store margins.

Well Chuck.

Yes, I think it certainly impacted a little bit.

Those categories that I referenced.

Banchory and and dispense beverages run it.

10% to 20% higher margin than the comparable categories in the grocery so it would have impacted that margin now.

The balance there in terms of mix is that.

Create a higher mix of that hot food category, which is the highest margin subcategory within prepared foods. So.

It ultimately netted out that some of the prepared foods margin ultimately moved up a little bit, but we're able to maintain the margin on the on the grocery side. So overall, we had some margin.

Benefit through the quarter.

Out of those out of stock situations look to you as as we start the second half of the year.

You know as we sit here today, we still.

From a supply chain standpoint, the Cubs are still an issue from our primary supplier, but like I said, we've been able to create.

Creative and come up with some alternatives so I think.

On the Cup side I think we're in decent shape. The bakery side is a little bit hit and Miss its more difficult on the alternate supplier side was spec products that we.

We get from.

From a supplier so.

That part is not as easily replicable, so I would expect that.

It's a little bit variable in that category, but like I said I think on the beverage side. We've got it largely contained there there'll be more in the bakery category as we move forward.

Thank you. Our next question comes from the line of Cristina <unk> with Deutsche Bank. Your line is now open.

Hey, guys good morning.

Just wanted to touch base.

You said that the breakfast day part has improved the most in part driven by good performance of eastern in new breakfast handheld so.

Just how should we think about some of the next catalyst when it comes to your menu innovation journey, how does the supply chain impacting that potentially and then overall just thinking about the timeline I believe you guys have said roughly 18 months from idea generation to launching its story.

How can the process be shorten given how dynamic the landscape.

Changing consumer taste and behaviors.

Yes, Kristina I think let me just talk about some of the innovation and other.

Parts of the menu I will say the supply chain is having an impact on some of that in.

I don't want to get into a lot of detail, but I would say we.

Spent some time developing a new product platform that we are prepared to launch and then.

Our primary supplier for that product.

Was unable to meet to meet our needs because of their own labor challenges in their manufacturing facilities. So we have had to postpone that launch now.

Yes.

If there is any good news inside of that is that we have that sitting on the shelf in the pantry ready to go.

Ever.

Can resolve the supply chain issue so.

Yes, so we have that.

In terms of innovation and we continue to innovate in our culinary team is starting to focus more on the areas, where we are not experiencing supply chain challenges. So.

We're working towards that as well in terms of shortening the timeline.

We're always looking at ways of being more efficient and effective with any of our processes.

With the product development I think it is very important to stay disciplined in that and be very guest centric and very <unk> focused.

I think about how our breakfast products are performing with a 40% 40% to 50% increase.

And units and that was on top of a 10% increase already in that trend.

Goes to show you that when you follow the process and do it right that you get the results that you hope to expect so.

Well again, I think we look at being efficient and effective in it.

<unk> to deviate too far from that process, because that process works and it helps us ultimately to avoid.

Big and expensive mistakes as we launched new products and platforms.

Got it that's helpful and just my follow up will be on the private label I don't know if you said, where you ended the quarter in terms of penetration, but you said that you're on track for 5%.

Curious, how it's performing relative to your internal expectations and are you finding more success with the private label program in the current environment. As you know inflation is hitting consumers and a lot of ways. So.

So if you could just talk about how you can capitalize on that and just remind us of the margin implication.

Yes.

Private label program is still trending right on track we ended the quarter at about four 2% penetration.

We have a little over 200 items, we rolled out 28 during the quarter. We have another 35 items that will be rolling out in the third quarter and so we have clear line of sight to that 5%. Another thing I would tell you about it is 5% is 5% of the sales penetration.

Today, we're already at seven at about seven 5% of gross profit dollar penetration so the.

The items are running at a much higher margin radar, our average margin rate for private labels in the high Fifty's.

Versus what you're seeing in the rest of the business in the low 30. So it's certainly accretive from a margin standpoint, and that's why we're so focused on growing that part of the business.

Yes.

Thank you. Our last question comes from the line of Brian Mcnamara with Bamberg Capital. Your line is now open.

Hey, good morning, Thanks for taking the question.

Kristina I got my question on private label, but on just on Opex I know, we're beating a dead horse here, but I remember when you gave the mid teens guidance preliminarily are the initial guidance you kind of mentioned there was a 50 50 split in terms of same store and kind of kind of.

Acquired.

Opex can you can you guys give us an idea of where that fits given your revised expectation.

Yes.

This is Steve it it's not going to be significantly different because the credit card for two weeks to two things that are driving it theres more units.

For sure coming in with pilot credit card fees are higher both of the acquired stores frankly, but theres a lot more stores and the mother ship. So I think by the time, we get to the end of the year, it's not going to be significantly different than been a 50 50 split probably a little more weighted to <unk>.

Same store just as you think about just the overall number of units and the fact that again most of our most of our integration related spending.

<unk> has already been completed and so that is going to drop out of.

A reconciliation to a large extent for new units, so modestly overweight into same stores by the time, we get to the end of the year.

And then just a follow up on M&A just curious how the current environment is relative to when we spoke last three months ago in terms of.

These smaller operators willingness to sell in the current environment just given work.

Fuel margins continue to be pretty high.

Yes, Brian.

We still see a really strong environment out there right now and remember like Steve was saying.

There is no there is definitely a correlation between the fuel.

Margin resilience and the rising opex environment, and so I think with the smaller operators. It is getting more and more challenging just to keep store staff and keep people on an end to operate in this environment. So we see more deal flow coming through.

Because of that we have the ability to be selective and pick our spots but.

We like the environment right now.

Like I mentioned before we will continue to stay opportunistic with respect to that.

Thank you there are no further questions I will now turn the call back to Darrin Rubella CEO for closing remarks.

Ultimately, we've demonstrated our ability to deliver results on our long term strategic plan in fiscal year outlook and both normal times and during a global pandemic I am confident we will continue to drive shareholder value.

Our second quarter was our most challenging comparisons for the fiscal year and we're looking forward to delivering great results for the back half of the year.

And our team here at Casey's wishes, everybody happy holiday season.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Yeah.

Q2 2022 Caseys General Stores Inc Earnings Call

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