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

Yes. We feel like there's a couple of things influencing the prepared food traffic. I mean, I think, I would start with -- but we make no apologies for and we're very glad we have the mix of prepared food that we do, I think, in a long time. We all firmly believe we would rather be holding that hand of cards with such a heavy mix of prepared food versus others who may be a little more depending on tobacco, et cetera, in the mix. So it's a good problem for us to have in a short term because it bodes certainly well on a longer-term basis. A vaccine is a vaccine, fully-distributed and taken by the people who can or should be taken, is that going to help traffic for all of us? Yes, of course, and higher traffic, for sure, is going to help our prepared food side of that business. Your guess as to when that actually happens is as good as mine, right? And so we're not banking on that in the very near term. We've done a lot of research around our customer base, around what is the reticence or lack thereof around self-service when they're allowed in the store and when they come into the store. Are they somehow adverse to self-service because they're just concerned around the hygiene aspects and et cetera, with COVID? It seems like most of our customers still want to do self-serve. We need to provide a safe environment for them where they feel like we've handled the food safety aspect of that appropriately and the hygiene aspect appropriately. But we haven't sensed a change in our consumers around their propensity to want to self-serve. They just want to do it the right way. And I think that the challenge we are still wrestling with, what you see in a lot of food businesses that have breakfast daypart, is just that while there's no doubt there's -- there remains a change in commuting, right, whether it's preference to stay home or requirements to stay home and then the knock-on effects of kids in school. We continue to have fewer people coming into the stores. And that is more weighted to the morning time than it is any other part of the day. And so I do believe we are somewhat skeptical with that fully comes back until you have something in society that allows people to return, right, to those previous patterns. The morning routine is tough to break. And so when people form new routines, those are also tough to break. And so I do -- we think that there's going to need -- we need some outside help around people feeling more comfortable or being able to get back into the traditional route in the morning for that to fully come back. The flip side, though, is the whole pie business for us has been a beneficiary of this, right, there's just no doubt. If you look at the other players in this space,, our whole pies volumes have been very consistent with those. We're very happy with that. That's actually not a bad trade for us on a one-for-one basis. A little more breakfast daypart traffic would make that a very good trade for us if we could hold the whole pie volumes going forward.

Okay. Interesting there to note, just kind of the change in the mix of some of your prepared food. I'm curious, menu innovation was a big piece of what you guys talked about earlier this year and kind of elevating what is already a really, really strong brand and offering in your stores and a really solid product, but maybe bring some freshness and innovation to the menu. I'm curious now that we're in a different environment. How, if at all, has this environment changed you're thinking about what types of new products might make sense to launch? And when? And generally the evolution of that process that it's going to be underway?

The timing of COVID actually is -- it really hasn't proven to be a problem in this particular regard for us because we really have just completed the building of a new prepared food leadership team in the organization. We were literally hiring the leader of that team a couple of months into COVID. And so they have kind of come into those roles, dealing with this environment. So we were fortunate not to have had 6 months' or 12 months' worth of work under a different construct. And now we somehow have to try to pull that back and start over. So I think that's been -- where the timing has been fortuitous for us in that regard. But the fundamental precepts of what we thought was the case, SKU rationalization, menu simplification, right, being smarter with the procurement of raw materials and ingredients that are going into this, those are still just as relevant as they were before. I personally like the fact we have a very restaurant-focused, oriented mindset in that leadership team. I think that's helpful in this regard for us, right? How do we get the right equipment in the stores that's -- for sure, that allows our capital to go a little bit further, that's a good outcome. But that allows us to put more SKUs through the same piece of equipment or pull pieces of equipment out and put in something different that saves space and saves time in the kitchen and it doesn't really change your product offering to the public. And so I think we're going to make a lot of progress on that. We're further ahead on our merchandising efforts on the grocery side of the business because we had started that earlier. We clearly get to take advantage of some vendor support, and the vendors can bring a lot of expertise to the table than they are more so than on the prepared foods side. But I think our plan is very consistent what it would have been pre-COVID. And that will -- that's going to play out over the next, really, several years for us as we continue to think about how do we make it easier for the stores and by having fewer items with greater consumer awareness, interest, price points, all of that in the mix.

Yes. Along those lines, another really timely capabilities that you guys have added, it has been the enhanced digital platform and loyalty, and that ability to interface with the customer now as important as ever. I'm curious kind of what you think that offering means for you? What loyalty means for you? What learnings you're seeing in early days on this front? And just the general level of engagement, and maybe pull forward of the evolution of that kind of ramp process to some extent, I'd be curious to hear what you have to say there.

Yes. I think Casey's Rewards in our digital efforts broadly, whether that's third-party aggregator relationships with DoorDash or its curbside pickup or its delivery out of stores, there is no doubt we have accelerated all of that as a result of COVID over the last couple of quarters, and it's exceeded our expectations by a mile. I think that team has added just tremendous value to the company financially, but just to the brand and just our attractiveness to consumers and to partners as a general rule. So we're very happy with the uptick. We have -- I think we have said 2.7 million or so Casey's Rewards members, the time we last gave a number and far exceeding our expectations of what we would have over that period of time, right? Just for reference, right, there's only 3 million people in the state of Iowa. And so we almost have the equivalent of every single citizen of Iowa of the Casey's Rewards program as we sit here today. So we've got further to go. There's -- we believe we can get that number at a fully mature level, closer to 8 million to 10 million over multiple years, certainly, the pace of increase eventually will slow down. The data has been a pleasant surprise for us. So we've -- not that we have more visibility into consumer preferences and buying habits, we expected that. But I think we're -- we feel like it's more actionable in the short term than maybe we had originally thought, right? But the ultimate objective with some of the data is to be able to tailor a bespoke promotion or offering, Ben, to you around your pizza preference or to me around my grocery item preference. We're not there yet. We can we can tailor it by geographic region today and provide the same kind of promotion to everybody who lives in Des Moines, Iowa or St. Louis as an example, but we can't get down to the individual level. But we're moving in that direction for sure. The uptake in terms of just utilization of what we would call digital to physically place orders has been much better than we thought it was going to be. We are -- digital today is about 20% or so of our prepared food orders. It's some kind of a digital order. And so we've got a long way to go in that regard. And I think we have been able to maintain a good level of pricing discipline in that regard. The most common question I get is, hey, is this thing accretive to you guys or not or are you diluting margins when you use a third-party aggregator, as an example. And at the moment, they're accretive to us because we -- the starting point is different, right? We tend to -- we do not promote the price for something in the DoorDash partnership, whereas if you go into a Casey's Rewards app directly or you show up at the store, right, there's always some kind of buy 1 get 1 free or 2 pizzas for $9 offer. And so the higher price point on the third-party aggregator order more than offsets the fees that we end up paying for delivery, and so we like that aspect of it. And so far, we feel like the majority of orders are incremental, not all of them, but more than half appear to be incremental to us, and that's basically because the ordering process seems to be different. If you're a traditional Casey's customer, you know you can call the store, you can show up and place an order or now you can go into the app and place it directly. Most of the DoorDash business seems to come from people whose thought process starts with, hey, I don't know exactly what I want. Let me go on DoorDash and see what's available. And then they end up on pizza sounds pretty good. Let me see who's on the marketplace. And oh, by the way, now let me go to Casey's. And so they may not have otherwise ended up at Casey's as a starting point. So far, so good with incrementality. It won't always be probably to that extent as it just becomes more prevalent, but we're very pleased with where we are right now.

Thinking about the capabilities that you guys have stood up over the last 1.5 years, I think it was really interesting to see the M&A announcement last week. I think when we were preparing for this meeting, we were thinking about asking more broadly oriented M&A questions. But I think given the recency of that news, I'd love to hear you kind of revisit why you think that deal makes sense for you. Does the dealer network capability give you the chance to put more deals down the road that you might not otherwise have considered in the past? And then just maybe talk a little bit about how those capabilities that you've talked about enhanced M&A opportunities. Because I think many in the investment community were pleasantly surprised by some of the synergy estimates that you provided as it relates to the Bucky's acquisition. And a lot of the synergy is coming from revenue synergy.

Yes. Yes. Listen, we couldn't be happier with the deal and with the opportunity to take on the Buchanan Energy and the Bucky's brand of stores. And Brian Johnson, our Head of IR, who's also our Head of M&A, gets a ton of credit. I think we worked on this for going on 15 months or something like that. It's been a long journey to get to this point for sure. But yes, we've been pleased with the reaction to the news. I think it has been pretty well understood. I think that our assumptions around value capture financially, people seem to believe them, right? The number is reasonable. How we're going to get it is reasonable. We got a pretty good shot of pulling it off. Of course, we agree with all of that. And it's on strategy, right? It's exactly the kind of thing the company said it was going to try to do when it had Investor Day back in January of this year. It's right down the middle of our geographical footprint, right? So we're already in Northern Illinois, we're already in Nebraska. The brand is recognized. And so the opportunity to put Casey's on the outside of the building and put a pizza oven inside the building, has resonance with people, right? So those neighborhoods know us as a pizza provider. And so I think the portion of the synergy capture that's coming from getting their prepared food mix something closer to what our legacy businesses, is believable to people. And so I think the 23 million, when I kind of look at the buckets we had, we're going to get 10% more volume in fuel. We should be able to get some value out of the 10% bigger buy with all of the capabilities that we've put into that area and the ability of our pricing teams to use the tools and technology that we have there for sure. Their inside the store grocery business margin is not at the level that our inside historic grocery business margin is. So there's no doubt for me, when we bring some merchandising know-how to bear, and obviously, we bring scale on the procurement side there to bear, there should be money there available to us for sure. As most people know, we're a self-op shop on the distribution side for both grocery and fuel. And pros and cons to that model, we obviously think there's more pros than cons, but one of the pros, for sure, is once you've got that infrastructure in place and you're just going to drop more volume through an existing set of fixed cost, you're going to get a good outcome. And pushing their grocery volume through our distribution, that will certainly generate value for us without a doubt. And then the re-footprinting of the stores, it will take some time. We're going to have to spend some capital to do that. We've got to go get a lot of zoning permits, et cetera. But to take them from 7%, I think, that's what they are up to closer to our 30-plus percent number, there's real value in that for sure. And so that is all, I believe, totally within our control from a self-help standpoint, and that's good. And I think on the reverse synergy side, I'll come to the wholesale business because that's a reverse synergy the way we would talk about it for sure. The other one -- they do some things really well inside the store. I think if you walked into a Bucky's, a newer Bucky's store today, they tend to be bigger than the average Casey's store for sure, and they're dispensed beverage as an example, they do that really well. And on average, they probably do that better than we do that on average. And I think there's some learnings there for us for sure. But specifically to your question on wholesale fuel distribution, that is not something we do today within our footprint. And for those who aren't familiar with it, right, many of the small mom-and-pop operators, the way they acquire their fuel is through a distributor, right? They don't have a relationship directly with the oil company. And so Buchanan Energy serves as that distributor. They have contracts with oil companies. And then they go out and contract separately with individual mom-and-pop store operators, and they provide them fuel, and tends to be on a cost-plus kind of a structure. So it's whatever your fully landed cost is plus a nickel, right, on average, a nickel is probably a good rule of thumb. And so that's a very high ROIC business because the assets are already there. In terms of the fuel trucks, you're already using the fuel trucks to supply your own stores. And so we like, for sure, the accretive EBITDA that it's going to bring. But as it relates to flexibility for us -- historically, Casey's was very pure, we have been, around the type of targets we would consider, right? We wanted to make sure if we went in and bought an asset, we could reconfigure it, so it looked like all the other Casey's. It had a kitchen. It had enough space to do pizza, et cetera. And inevitably, when you go look for a chain of stores, whether it's 5, 10 or 20 stores, not all of those stores are going to be able to be reconfigured or refitted to look exactly like Casey's. And so often, we would pass on that particular set of assets because we just couldn't get it to work the way we wanted it to. What the fuel wholesale capability would allow us to do is, if we want to buy a chain of 20 stores and 2 of them aren't big enough to put pizzas into, we can contract with those 2 stores on fuel distribution. We can put them into this dealer network, but then sell the asset to somebody else to run it. And so it will allow us to stay in the running longer or think about a broader set of potential targets because they all don't have to fit the traditional Casey's mould perfectly, and we can still extract some financial value from them. That, I think, will be the biggest benefit to us over the medium term.

That's great detail. I think, kind of last question here, panning out, thinking a little bit more macro. Steve, your operating geography depends a lot or has depended a lot and passed on a healthy ag economy, which really isn't something we've seen for the last 5 years, yet Casey's has still been able to deliver really solid growth for shareholders over the last 5 years. Well, what a difference, kind of 3, 4 months makes to the ag economy, we've seen such a sharp mid higher in corn and soybean prices. There's some pretty favorable structural demand drivers that are evolving for U.S. farmers. I'm just curious, how significant do you think a stronger ag economy is in terms of influencing the fundamentals of your business?

There's no doubt, it's a nice-to-have, right? Of course, I think we would all prefer a much stronger ag economy as a general rule. And with the change of administration and potential changes in approach on some of the trade agreements, et cetera, that may bode a little bit better in terms of their ability to export some of their product as well. But it's a nice-to-have, it's not a must-have. The company has proven that, right? And so it's a tailwind for sure that I think would bode well for demand as a general rule, whether it's on the fuel side or it's on the inside the store side. But the company has clearly demonstrated an ability to drive EBITDA growth, and to continue to find good incremental unit investment opportunities, whether the ag economy is doing great or whether it's not doing so great. And so I would not put the ag economy strength as high on the list of things that would preclude our ability to reach the objectives we put out for people, right? We tried to be very clear. We've got an Investor Day set of commitments around EBITDA growth and unit growth, et cetera, that we have not walked away from and faced the COVID. And if we haven't walked away from them in the face of COVID, we're certainly not going to walk away from them due to variation in the strength or weakness of the economy in the center of the country.

Okay. Great. I think that's a great place to wrap up. Thanks so much, Steve, for your time today. I appreciate hearing about your business. And thanks to everybody for listening today.

Great. Thanks, Ben. Thanks very much.