Casey's General Stores, Inc. (CASY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Casey's Announcement Conference Call. [Operator Instructions] And I would now like to hand the conference over to your speaker today, Brian Johnson, SVP, Investor Relations and Business Development. Thank you, and please go ahead, sir.

Good morning, everyone, and welcome to Casey's conference call to discuss the announcement of our agreement to acquire Buchanan Energy, owner of Bucky's Convenience Stores. Joining me today to deliver prepared remarks are Casey's President and CEO, Darren Rebelez; and the company's Chief Financial Officer, Steve Bramlage. Darren and Steve will also be available for a brief question-and-answer session after their comments. For your convenience, in addition to this morning's news release, we have posted a presentation to the Investor Relations section of our website. We will make some references to this presentation during our opening remarks. Before we begin, I'll remind you that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements with respect to Casey's and the acquisition relating to the expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, supply chain, business and integration strategies, plans and synergies, growth opportunities, performance of our stores and the potential impacts of the COVID-19 pandemic. 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, integration of the acquisition, executing our strategic plan, the impact of duration of COVID-19 and related governmental actions as well as other risks, uncertainties and factors that are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the Securities and Exchange Commission and available on the Casey's website within the Investor Relations section at www.caseys.com. Before turning the discussion to Darren, we ask that you remember that any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise any forward-looking statements, whether a result of new information, future events or otherwise. And with that, I turn the call over to Darren to discuss the transaction and related details. Darren?

Thanks, Brian, and good morning, everyone. Thank you for setting aside some time to join us today. We're pleased to be with you to announce our agreement to acquire Buchanan Energy in its 94 Bucky's Convenience Stores. To say that this is a meaningful opportunity for Casey's is an understatement. This is the most significant single strategic transaction in our 52-year history. This acquisition expands Casey's presence in key Midwest markets, delivers near-term accretive earnings growth and creates value for our shareholders, team members and guests. And based on discussions with Steve Buchanan and his team, I'm confident this is an equally important time for Buchanan Energy and his Bucky's Convenience Stores. We thank Steve for what has proved to be very productive discussions. We're pleased to have reached this agreement and are excited about Casey's future. We expect to complete the transaction by the end of calendar year 2020. Before getting into details and outcomes associated with this transaction, I'll first remind you of Casey's 3-year strategic plan that we first shared in January of this year. At that time, we said we will work to reinvent the guest experience, create capacity through efficiencies, accelerate unit growth and invest in our talent. As we review this acquisition, related details and the value it creates, you'll see that this acquisition fits perfectly in line with our strategy, which is, without exception, sharply focused on delivering top-quintile EBITDA growth. This is an ideal and complementary fit for both organizations. Bucky's is a family-operated convenience store chain, founded in 1980 based in Omaha, Nebraska, with 94 retail stores and 79 dealer locations across the Midwest. It is a great strategic fit as we continue to grow in the Midwest and areas where we know the Casey's brand performs extremely well. As mentioned earlier, this is an important moment in the history of both companies as together we drive value and deepen relationships with guests, team members and communities. With special mention, this transaction will increase Casey's store count to over 2,300 stores. This expanded market presence is especially meaningful in Nebraska and Illinois, where both Casey's and Bucky's already have a proven record of performance. Our stores performed very well there. We've been actively growing our store base in these markets, both organically and via M&A. Three additional items make this acquisition appealing. First, the combination provides an opportunity to add Casey's signature prepared food offerings, including our famous Casey's Pizza, to Bucky's high-volume locations. Second, the transaction adds a new wholesale fuel business and dealer network capability that provides further flexibility in support of Casey's long-term strategic business plan. Casey's will manage fuel supply agreements to these stores. This new capability provides the company future flexibility with respect to mergers and acquisitions as well as a new income stream while further leveraging our existing scale for fuel procurement. And third, in addition to the 94 stores, included in the transaction are several well-located, undeveloped real estate sites for future new store construction projects. Before turning it over to Steve for a deeper discussion of the financial aspects of the transaction, I want to draw a straight line for you between this acquisition and our strategy. As we said at our Investor Day last January, our plan is to accelerate unit growth to add 345 additional units over the next 3 years. That growth is finally underway. We said our approach to owning Midwest locations was important to us, benefiting from our core strengths, including convenience, a differentiated guest experience, a passionate sense of community and a values-driven approach to serving the local market. We have now amplified our Midwest presence. Yes, we're growing and doing it thoughtfully. In doing so, our two-pronged formula for success remains unchanged. We continue to be positioned for a highly selective, fairly valued strategic acquisitions like this one. And our ability to grow organically remain solid, deepened by strong financial flexibility and expanded market reach as a result of today's news. Casey's will continue to be powered by strong brand recognition and quality guest experience, fuel and merchandise sales and crave-able pizza and other foods our guests love, all to create value for those who count on us. With that, I turn the call over to Steve.

Thank you. To reaffirm what Darren said earlier, this transaction is an exciting strategic and financially compelling opportunity for Casey's. Bringing these 2 companies together is a win for the organizations and our stakeholders. Beyond the strategic rationale for the deal Darren discussed, this transaction is expected to provide substantial, incremental and accretive EBITDA and earnings per share for Casey's and is expected to generate returns on our investment well in excess of our cost of capital. Furthermore, we will be able to maintain our financial flexibility and strong balance sheet from day 1 post closing. With Bucky's, we are requiring, first and foremost, an excellent team of store operators with strategically located sites, strong brand recognition in their local markets, a wholesale fuel business that we can build upon within Casey's existing footprint and several attractive and well situated but undeveloped parcels of real estate. In review of the transaction, Casey's is acquiring Buchanan Energy for $580 million in an all-cash transaction, which includes an expected $80 million in tax benefits primarily from a step-up in the tax basis for the assets that we are acquiring. Therefore, our purchase price, net of these tax benefits, is $500 million. The LTM EBITDA of Bucky's as of July is $47 million and includes stores and operations for a complete year. Therefore, our net purchase price is a multiple of 10.6x LTM EBITDA. Pro forma EBITDA from stores opened less than 12 months will add another $3 million in EBITDA. We expect to realize approximately $23 million in synergies from the transaction by the third year. The net purchase price is a multiple of 6.8x LTM EBITDA with fully realized run rate synergies and the EBITDA from newly opened stores. These synergies will come primarily from 4 areas: first, improved Casey's retail fuel margins and gross profits based on the addition of the Buchanan Energy network. Bucky's is expected to increase our existing gallons sold by over 10% and bring a new wholesale fuel distribution capability we can apply across our existing footprint and self-distribution assets; second, increased merchandise profit margins with expected gross margin uplift on select merchandise categories as a result of implementing Casey's product and in-store offerings, increased procurement leverage and distribution of Casey's growing private brand portfolio; third, reductions in operations and SG&A-related costs through the combination of operations and distribution synergies from utilizing our existing self-distribution assets; and fourth, upgrades to Bucky's stores, which will allow us to introduce Casey's prepared food menu, including pizza, into those units. The acquisition is expected to be accretive to Casey's EBITDA by the fourth quarter of fiscal 2021 and earnings per share in fiscal 2022 once we cycle through $16 million to $20 million of deal-related closing and integration investments in the first several quarters. We plan on financing the acquisition through a combination of cash on hand, a new term loan A bank facility and a small temporary revolver draw. Assuming close by the end of the calendar year, we anticipate Casey's pro forma debt to LTM EBITDA will -- at the close will be approximately 2.3x. This is well within our historical range of 2x to 2.5x. A few other specifics on the transaction. The transaction does require regulatory approval, and we will file in the very near future. We anticipate booking approximately $6 million to $7 million in a noncash, onetime tax expense at closing associated with the revaluation of our existing deferred tax liabilities as the apportionment of our state tax profitability will change from this transaction. After the transaction is complete, we expect to have a strong operational and financial profile, including: over 2,300 stores, which is an increase of over 4% to our existing base; a new Casey's wholesale fuel capability; an increase in fuel gallons of over 10% versus Casey's FY 2020 volumes; an increase in inside sales of 4% compared to Casey's FY 2020 volumes; a 7% increase and an 11% increase in the prior year's $647 million of EBITDA on a pro forma and fully synergized basis; a low double-digit increase over our FY 2020 EPS once we have realized most of the synergies; returns on invested capital from this investment will be more than double our current cost of capital; and post-closing debt-to-EBITDA of approximately 2.3x and with an even stronger cash flow profile and with our financial flexibility unchanged from today. This is a very good on-strategy acquisition for Casey's at a fair price that will enable us to deliver accretive and return-on-capital enhancing EBITDA and earnings per share growth. Importantly, in completing this transaction, we are confident that it will create near- and long-term value for our team members, our guests and our shareholders. Darren, back to you.

All right. Thanks, Steve. In summary and before going to your questions, I'll offer a few key takeaways. Our strategic rationale behind this acquisition is clear, including an opportunity to expand our presence in the Midwest markets where we already perform well and have a strong brand recognition and add a highly regarded dealer network capability. And as mentioned, we will create value with accretion expected in year 1 and with significant synergies that we expect to realize. Because of this transaction, Casey's will unlock additional growth and further expansion opportunities at a compelling value. Again, thank you for joining us today. It's really an exciting time here at Casey's. And with that, we're happy to take a few questions. So operator, I'll turn it over to you to facilitate our Q&A.

[Operator Instructions] And our first question comes from the line of Karen Short.

This is Cait Howard, on for Karen. So congratulations on the deal. First, you highlight the buckets for synergies within the presentation and also here on the call, but I was wondering what bucket do you think have the biggest potential or if you could give an order of magnitude. And also, if you could parse out the more near-term versus more intermediate-term synergies that you see?

Yes. I'll touch on that, this is Darren, and let Steve add some color as well. I think there's certainly synergies across the board. I would say probably the biggest opportunity that we see is with our prepared foods. In that mix, if you look in the deck that we set out, the mix of prepared foods for the Bucky's business is about 7% versus our 31%. And so there's significant opportunity to add that capability. And these are already high-volume stores on the grocery and other merchandise side of the ledger. So the prepared foods business would truly be an incremental add. So we think there is a, definitely, benefit there. And then certainly, from a scale and procurement standpoint, we believe when we migrate this business over to our platform, we'll be able to capture some more synergies, both on the fuel side and on the margin side. And then we also outlined SG&A opportunities. Steve, I'll let you.

Yes, I would. If I draw your attention to the synergy detail visual that we had posted, I mean, it's roughly 1/3 of our expected benefit would come from the left-hand side of the page, which would be fuel and merchandise profitability in the store, and probably 2/3 of our expected number would come from the right-hand side around the operational and store upgrade opportunities we have and from a sequencing standpoint. To some extent, it will go left to write on the page and to Darren's comment around pizza, it will take us a little time to physically be able to put kitchens into some of these locations because of the permitting time lines required at all this.

Great. And I guess just on that last point with adding the kitchens, so it seems like the stores are similar square footage. So I was wondering what you have to reconfigure within those stores to put up the pizza kitchens and what space gets redeployed? Or do you actually have to expand those stores?

That's a little bit all over the board. They have some stores that are larger, they actually have kitchens in them today. We may have to make some tweaks to equipment. And then there are some smaller stores that we may have to bump out or we may have to do some more significant work on and everything up to some scrape and rebuilds. And we do have capital set aside as part of this to be able to make all of those things happen.

Our next question comes from the line of Ben Bienvenu.

Congratulations. I want to ask first, it's been an unusual last 12 months of EBITDA, I'm sure, when you looked at this deal. So I'd be curious to hear about how you thought about the appropriate valuation to pay for the transaction. And within that, I noticed in the sales mix, it looks like the mix pies are based on 2 different time frames, yours on April end and theirs on July end. And that kind of April to July bridge, I guess, created a pretty different operating environment. So curious if that's still -- I assume because you showed it's indicative of the mix opportunity. But how representative is the baseline EBITDA of what this business has transacted at? We should -- how we should be thinking about it moving forward past COVID?

Yes, Ben, this is Steve. I'll start with that and maybe let Darren address the mix question. The LTM we're using from them, their family of businesses as of July, so it's a July LTM, and we were certainly sensitive to the kind of COVID dynamic around reported numbers. And so there's 4 months or so of COVID impact in this LTM number if you think of kind of the March marks through July impact. And so they would have certainly seen as much of the industry ride much lower volumes in terms of traffic and better fuel profitability. But when we went back and looked at LTM over some historical periods of time, we felt like the numbers were not significantly different with that 4 months of COVID in there, especially given we're excluding any EBITDA from stores that have been open less than a year, which is only going to flatter that number going forward. And so all things considered, we felt like it was a pretty fair reflection of historical performance and reflective of the fact it got more coming online. Darren, you want to comment on the mix?

Yes. And with respect to the mix, when we look over the last several months, their prepared foods business is such a small part of their overall business that it really didn't change much materially from pre-COVID to post. It just wasn't a big part of their business. So if we look at our business in comparison to theirs, we still believe we've had significant upside on the prepared side of the business.

Great. And then one quick follow-up on that point and to kind of extend the line of questioning earlier in the call. On the putting kitchens in some of these stores, how CapEx-intensive do you expect that to be, helping us think about kind of what capital is -- incremental capital is needed to be deployed to get the return profile that you described?

Yes. Over the 3-year period of time to get the synergy number fully realized, but we'll spend something on a net basis less than $50 million of incremental capital. There are some assets within that family will monetize more than likely as well. So I would expect a net of somewhere south of $50 million over the next 3 years to get kind of fully prepped on the Casey's model.

And our next question comes from the line of Bobby Griffin.

Congrats again on this deal. The first thing I wanted to ask about is, maybe can we just -- can you expand a little bit more on the wholesale opportunity and the dealer network that you're acquiring? And kind of as part of that, how does that position the company, Casey's, for future M&A? And what are those additional capabilities?

Yes, sure. The -- this is something that we are hoping to find in a potential transaction. So they already have this wholesale dealer capability. And what that essentially means is they have relationships with owner operators of independent convenience stores and Bucky's supplies them with branded fuel from, say, a BP or an Exxon or Mobil or Shell, and they make a spread off of what they charge that dealer for the fuel versus what their cost is. And so what that gives us the capability of doing in future M&A is that, with any of these transactions we would look at, there's always a mix of assets and some of those are very attractive. They're the right size building. They're in the right neighborhood. They're on the right corner. They don't conflict with one of our existing stores, and we really like those stores a lot. And there's always a tail of some number of assets that just don't quite fit. And so having this wholesale capability allows us to take those assets that maybe don't quite fit, we can sell them to an independent owner operator, but then secure that fuel supply agreement over a longer period of time, which allows us to gain an additional revenue stream in -- with these assets that we would have to divest. And so that just helps us with the economics on any transaction we look at moving forward because we have a more accretive way of disposing of those assets that don't quite fit what we're looking for.

I think maybe what I would add is historically, without having that path to modify the mix of assets we were acquiring, Casey's has looked for kind of the complete population of an acquired asset set to fit our model. And I think there were asset acquisitions we probably passed on because not every single asset necessarily was fit for purpose with the way we tend to run stores. And so this probably, we believe, will widen the population of potential partners for us vis-à-vis the way we've looked at things in the past.

Okay. That's helpful. And then I guess, lastly for me, I just wanted to maybe circle back on the integration aspect. Just trying to get a sense, are these stores, when you bring in the Casey's piece and some of the merchandising, are you going to keep the Bucky's brand name or is it going to be a complete rebranded to Casey's? And then in the press release, you mentioned some fill-in opportunities in those markets. What brand or what banner would those fill in opportunities be under?

No, for anything that we would put pizza in where we're going to spend some capital, remodel the stores, we'll rebrand those stores to Casey's. And of course, that's by design. We have tremendous brand recognition in the Midwest, particularly in these 2 areas in Nebraska and Illinois. And so that's really the benefit that we bring as our brand recognition and then our prepared food capabilities. There are probably some stores that, when we're all done with the integration, just don't quite fit that we're not going to be able to do anything with. And then we'll make a decision about whether we want to sell those over to the dealer network or we want to continue to operate them as is under that existing brand. But we won't brand anything Casey's, unless it has the full complement of our assortment, including our prepared foods.

Our next question comes from the line of Irene Nattel.

Congratulations on what looks like a great deal. In addition to the first time you're getting a dealer network, you're also getting branded fuel. And so wondering what your intention is with respect to what brands you're going to fly as you convert the stores to the Casey's name.

Yes, Irene, we're going to continue to assess that and work through that process. We've not operated branded fuel before, and our preference is to go unbranded, but we haven't formally made that decision yet. There are certain brands, particularly in Northern Illinois, that have some pretty strong brand affinity. So we want to make sure that we're thoughtful about how we do that, but we haven't made that decision quite yet.

That's great. And just thinking this through from your last answer, it sounds as though your plan is maybe you kind of keep the Bucky’s name on the wholesale business. And do all those wholesale stores fly the Bucky’s brand or do they have other -- or are they just a bunch of other brands?

Yes. With the wholesale business, those stores are owned by dealers, so they can call that store whatever they choose to. It's really more -- the branding really comes on the fuel side, and we'll be supplying those stores with whatever brand of fuel that they have contracted for. And so that's really the distinction.

That's interesting. I'll just say because sometimes wholesale stores fly different brand anyways, but that's okay. And then just thinking through, it sounds as though, when I look at the store count versus the volume, the fuel volume or the inside sales volume, it sounds as though they over-index on fuel. And wondering if that's driven by the location, driven by the number of pumps and whether there is also a significant opportunity to just raise the total revenue inside the story even putting aside the prepared food piece.

Yes, this is one of the things we found really attractive is that these are high-volume sites, and I'll give Steve Buchanan and his team a lot of credit. They've picked some great real estate and have been able to drive some pretty significant fuel volumes. So that's something that I think they've done very well and we're going to be the beneficiary of. And we bring a lot of strengths to the table as well with our merchandising capability in our prepared foods business. So that's why we really like this transaction. We really get to leverage both of our strengths together on this one.

That's great. And then just one last one, if I might. How many parcels of real estate did you get? And how many do you think are developable, if that's a word, for you guys?

Yes. Listen, Irene. There's probably at least a half dozen of developable undeveloped sites we would anticipate actioning in the relatively near future. There are a variety of other parcels attached to operating sites that I think we will assess, but likely ultimately divest as well and some other pieces, offices, et cetera. And so it will be a little bit of a mix, but I would expect there's a solid half dozen plus that ultimately will end up with a Casey's store on them that are not sitting in any of those accounts today.