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

Good morning, everyone. Thanks for joining us, and welcome back to the 10th Annual Jefferies Winter Summit in sunny Colorado Springs. I'm Matt Fishbein, the U.S. grocery and convenience retail analyst here at Jefferies. And I'm honored to be here with key members of the Casey's management team for a discussion about the business. Casey's is now the third largest convenience store player on a retail store count basis and the fifth largest pizza chain in the United States. The company's diversified three-pronged approach with fuel, grocery and prepared food has certainly been tested, but we think, proven out throughout the pandemic. And with the recent announcement of the largest acquisition in the company's over 50-year history, it's definitely an exciting time for the Casey's team. With us today is President and CEO, Darren Rebelez; CFO, Steve Bramlage; and Senior Vice President of Investor Relations and Business Development, Brian Johnson. I'll be leading Q&A today, but listeners are able to submit questions alongside the video in your web browser or app, and we'll do our best to fit these in if we can. So without further ado, for those not as familiar with the Casey's story, I'll hand it off to the team to share a quick overview about the business.

All right. Thanks a lot, Matt, and thanks for hosting us today, and good morning, everybody. I'm Darren Rebelez, President and CEO of Casey's. I've been here about 1.5 years. And prior to that was in the restaurant business as President of IHOP restaurants. And prior to that, was the COO of 7-Eleven. So I've really spent the bulk of my career in the convenience and food space, and this has been a great fit for me personally, and happy to be here to share our story. As Matt touched on, we are the third largest now convenience store chain in the U.S. with 2,200 stores in 16 states in the Midwest. And probably the thing that differentiates us, one of the many things that differentiates us from a lot of other convenience retail players is our rural footprint. We have -- over 50% of our stores are in small rural communities of 5,000 people or less. And that's really the legacy of how Casey's developed. As Matt mentioned earlier, we're 52 years young and embarking on a lot of different initiatives that we shared in our Investor Day about a year ago this month, actually, when we unveiled our new strategy. And the strategy is really built around a few key pillars. We first said that we would be able to maintain top quintile EBITDA growth among the S&P 500 retail set. And so that equates to about an 8% to 10% EBITDA CAGR over the next several years, and we can talk about that. But that was really underpinned by 4 key pillars. The first was going to be around reinventing that guest experience and making that more contemporary and really delivering on a unique guest experience, and I'm sure we'll touch on that as we go through the discussion this morning. The second pillar was creating investment capacity through capturing efficiencies in our operating model, and we've made some great progress on that. Still more work to do there. The third pillar was accelerating our store growth. And as Matt touched on, our Buchanan Energy acquisition is a part of that pillar of our strategy. And then lastly, but certainly not least, was making an investment in our talent and our people. And we've made significant progress over the last year in terms of enhancing the skill set of our team, diversifying our leadership team and really bringing together a very talented, very experienced leadership team to execute against the strategy. So Matt, with that, I guess, I turn it over to you. That's a brief overview of the company, and we're certainly happy to entertain your questions.

Perfect. Yes, I think a good place to start is that long-term financial outlook that was outlined last January. As it relates to the top quintile of S&P 500 retailers or that rough 8% to 10% EBITDA CAGR. A lot has obviously changed in the retail landscape since last January. So I guess a 2-part question. Why was this the right target pre-pandemic? And how are you grading the company's post-Investor Day performance now? And why or why wouldn't convenience stores, in Casey's, in particular, given your differentiation, be better positioned in a post pandemic environment than other retailers in that comp group?

Yes, sure. When we look at our goals and our strategy, we just wanted to set a high bar for ourselves. And so we looked at the S&P 500 retail as a benchmark, and we wanted to be in the top quintile. And we feel confident we have the ability to do that in, really, in any environment. And I think that's proven itself out during the pandemic. Certainly, this time a year ago, in January, we didn't anticipate a pandemic. So our -- everything that we present on Investor Day was through the lens of a more normal operating environment. But that being said, I think what we've experienced with the pandemic has really proven the resiliency of our business model. And I really like to think about that in a couple of ways. We have -- the first is we have this diversity of lines of business where we're in the fuel business, we're in the grocery business, and then we're really kind of in the restaurant business as well. And what that does for us is it gives us a lot of latitude to be able to adapt and adjust to different operating environments, different macroeconomic environments and gives us multiple levers to pull when one thing may not be working as well, we have other things to lean on. And that's really been true in the pandemic. The other thing that I think really helps us is that rural footprint. We get to enjoy a little bit more market share in some of these smaller communities. In some cases, we are the pizza place, we are the coffee place, we are the grocery store, as well as a fueling stop. And so we're able to really insulate ourselves from some competitive pressures that some of the larger metro areas have to experience. And it really allows us to adapt to these different environments. I think coming out of COVID, the same situation will apply. I've been particularly proud, if you ask me how I would measure our performance over the last year, what I'm really probably most proud of is that we've been able to continue to execute against our strategy in spite of the pandemic being here. We've been able to shift and adjust and still execute on that strategy. So we've made a lot of progress against our strategic plan over the last year in spite of the environment, which will only make us stronger when we get back to more normal times.

And if we can touch on really what those COVID-19-related business impacts are and kind of last week's business update, which parts of the business are currently, today, experiencing the greatest tailwinds, and which operational challenges are currently creating the greatest headwinds? And what COVID-19 P&L impacts or initiatives put in place because of the pandemic could be longer-term in nature or more likely to linger after the pandemic?

Yes. I think the areas where we've experienced some tailwinds, certainly, as people have been more restricted at home and that sort of thing, the restaurants have been closed, bars have been closed, we've seen an uptick in our alcohol category, in particular. That's performed very well in this environment. We've had some benefits on the fuel margin side. As fuel volumes have contracted, margins have expanded to kind of offset that volume loss. So we've experienced some tailwinds there. But those -- some of those tailwinds have been offset by some challenges. As I mentioned, the fuel volume has been a particular challenge as people are working from home and not commuting as much. Our prepared food business, although hanging in there, has probably been the most impacted by the pandemic. As commuting traffic dropped, a lot of our breakfast business, in particular, has dropped as well. Now fortunately, for us, being the fifth largest pizza chain in the U.S. has enabled us to accelerate our growth on the whole pizza business. So the evening daypart has performed exceptionally well. It has helped to offset some of that pressure that we experienced in our prepared foods. But overall, as we mentioned in our business update, we're still experiencing negative comps from the prepared foods business, although that has continued to improve over the course of the pandemic. The last thing that's really been somewhat of a challenge is just on the operating expense side, we spent over $30 million in COVID-related expenses, be it PPE or enhancing safety measures at our store support center, or appreciation pay for our team members who are having to work in those stores and distribution centers every day. And so that's certainly a headwind that we have experienced. We've been able to overcome that and still perform exceptionally well from a financial standpoint. But that is a headwind, and we expect most of that to go away once the pandemic is subsided.

Okay. And if I can shift gears a little bit, I wanted to pick off -- pick up, sorry, where we left off, I guess, following the Q&A session at ICR and ask a few questions that maybe aren't brought up frequently to sort of round out the conversations you've had over the past 2, 3 months. So for those that have missed the Casey's presentation at ICR last week, maybe that's some good light reading on your flight back home this afternoon from Colorado. Today's inauguration day, so special day for the country. As the new Biden administration begins to execute on its policy goals and now that the Democrats control both House and Senate and Congress, what labor or tobacco or fuel regulatory changes is the company expecting? And which have the greatest impact to the P&L from a potential impact perspective?

Yes. I think there's a couple of areas that we're certainly keeping an eye on. And the first one is a potential for a $15 an hour minimum wage. You saw as part of the stimulus plan, the $1.9 trillion stimulus plan, that element was actually inserted into that plan, at least preliminarily. Now we'll see if it survives Congress. But that's certainly on the agenda, and we'll have to see how that plays out. It's unclear at this point over what period of time something like that will be transitioned in. Certainly, that will have an impact. I would expect some different treatment on corporate taxes. I don't know what that is, whether it's just unwinding what the Trump administration put in or if it's something different altogether. I would expect they're probably going to go up, not down. I think the real trick inside of all of this is that those things are working kind of against a pretty fragile economy at this point. So when any of those cost increases would come in relative to how the economy is performing at this point is a little bit undetermined. So we're not really sure on the timing of that. But those are really the big things. Certainly, from an environmental standpoint, the Biden administration will be far more aggressive. How that looks, a little bit uncertain at this point. I would imagine fuel efficiency standards may increase, which could put some pressure on miles driven. But as the economy opens up, miles driven will increase. So there could be some offsetting pressures there.

That's helpful. And given the environmental focus of the administration and given the company's revenue exposure to fuel and tobacco, Casey's, and really, the convenience store space in general, isn't frequently highlighted in discussions that at least I have around ESG. How does the company view itself through the ESG lens relative to its convenience store peers, but also maybe retailers of the market more broadly?

Yes. When we look at ESG, I think we stand pretty well, certainly, relative to the industry. And we certainly have more work to do in that space as I think really every company does. But we have disclosed in our proxy, some of the things that we've done with respect to ESG. And I think in our industry, it probably doesn't get a lot of attention because you don't have a lot of public companies that are in this space. So it's really limited to a handful that they can get any attention. But from an environmental standpoint, we've done a lot of work in that space, everywhere from LED lights that we've installed in virtually all of our stores, longer saving enhancements. We blend a lot of ethanol. We're in corn country here. So we blend about 3 billion gallons a month of ethanol, which is cleaner burning, higher fuel efficiency. So certainly, from that standpoint, we do a lot. From the social standpoint, we're embedded in the communities that we operate in, and Casey's really plays a special role in those communities. So from a charitable giving perspective, we do a lot to support those communities. And this year, we announced a partnership with Feeding America, where we've contributed significant dollars to 54 local food banks in our footprint. We just wrapped up a fundraising campaign for 2 veterans organizations, the Children of Fallen Patriots and Hope for the Warriors. We contributed almost $1.5 million to those causes. So certainly, within that space, we've done a lot for our communities. And on the governance side, we had a Board refreshment a couple of years ago. Our Board was just recently recognized as one of the very few in the S&P 500 that has over 50% women. As Board members, we have a declassified board. So we've done a lot from a governance standpoint as well to really be a little more progressive on that front. So I think overall, Matt, we're in pretty good shape from an ESG standpoint. But again, we have an internal team that's continuing to look at this and we'll have more robust disclosures as we move forward.

Cool. And then thinking about the M&A environment, following 7-Eleven's acquisition of Speedway, Casey's is now the third largest operator in the U.S. So multipart question here on the M&A environment. What are the key differences between the company's approach to M&A relative to other top 10 operators? And following the Bucky's acquisition and the dealer-wholesale capability that came along, what does the company's target profile look like now? And why or why hasn't that target profile changed? And maybe just in light of recent industry events, the company's largest peers operate outside the U.S. and have entered or perhaps may be considered entering retail adjacencies. Why or -- why hasn't the company been interested in this type of expansion?

Yes. I guess with respect to the M&A environment, some of the larger operators in the space have really -- have grown to the point where they have to do bigger deals to make it material to their business. And so they're in this trick bag now where there's a smaller number of larger deals just to be had, or smaller number of larger chains to be potentially acquired, and so they're going for pretty competitive rates. So now, you're having to have people pay up to get those things. And you saw that with the 7-Eleven-Speedway deal. 13.7x-ish EBITDA. That's a pretty rich multiple for a 4,000-store chain. And so you're starting to see that with the larger operators. Our strategy, as we've said it, is to focus more on the smaller operators. And we believe we can do that because we have a track record of doing it. And we've stood up a dedicated M&A team to specifically go after those smaller operators. We can buy those in the 6 to 9x EBITDA multiple range pre-synergy. We trade at around 11x today, so immediately accretive. We can get much lower once we get post-synergy. And we actually bring a lot more to the table from a synergy standpoint with a smaller operator than you would with a larger, more sophisticated one. So we think for a lot of reasons, our approach to smaller chains really makes a lot more sense for us. With respect to the Buchanan transaction, that was the largest in our history, larger than we had done before. But still, we're talking about 100 stores. This isn't thousands of stores. So from a risk standpoint, very low risk. We were able to buy it at an attractive multiple pre-synergy. And we thought we brought a lot to the table. I still believe we bring a lot to the table from our scale, sophistication and particularly on prepared foods. They run great stores. They do a nice job in a lot of ways. But their prepared food mix is only 7% of their sales versus ours at Casey's is 33%. So significant synergy there. And they're right in our backyard. It's a very good fit geographically. And so for a lot of reasons, that deal made sense. So we're always going to be open to the larger deals, but we don't feel the need to overpay. And so we're focused more on smaller deals, and we'll take a look at larger ones. And when they make sense, we'll participate in those processes.

Great. And another differentiator I wanted to touch on here. The company generally self distributes its inside merchandise and prepared food ingredients from company warehouses using company trucks. And that's a very different supply chain model compared to other U.S. operators. So what's the background on how and why the company began using this model? And what have been the model's advantages or drawbacks that you've experienced during the pandemic? And lastly, I guess, how scalable is this self-distribution model? Or maybe how does the self-distribution model slow or speed up the pace of the company's unit growth relative to operators that are simply supplied by distributors?

Yes. No. We really like the self-distributed model. And there's a couple of reasons for that. But I think the history behind it -- and Brian, feel free to chime in. You're more the historian than I am on this. But I think it's really just borne out of where we are, where we operate in the rural footprint. There's not a lot of wholesale distributors that are out in our country. And so from time to time, we've looked at third-party distributors to see if that made more sense. But the reality of it is we can actually distribute more efficiently in these rural markets than a lot of those third-party wholesalers. So I think that's the first point. The second point is with our scale, the way we are now, there's not a wholesaler distributor out there that has capacity to take on 2,000 stores. And so what that requires is they would have to build facilities to be able to support that, which means we'd have to engage in a very long-term commitment to be able to get that supply. And then that leaves us a few options from a cost standpoint when we're trying to negotiate that. So I think for a lot of reasons, it makes sense for us. What I really like about it, though, is it gives us a lot of flexibility to manage assortment, to be responsive to different environments like a COVID type of environment where we can bring products in, we can source products, we can get products to our stores faster because we control the entire supply chain. So it makes a lot of sense for us in our geography. From a growth standpoint, it's certainly scalable. We have 2 distribution centers open and operating today. Our third one is about to come online. We're probably at the midpoint this year, this calendar year. And that will -- that distribution center will have capacity to support up to 1,000 stores. It will operate -- open with 500 stores right out of the gate. And so it expands our geographic reach, brings us some efficiencies. We'll take 1.8 million miles of driving off the roads when we open up this warehouse. So it certainly is an efficiency play for us, helps us broaden our footprint, and just enables us to be more efficient. So we have a long runway for growth just with the distribution centers we have.

Great. And one last one. The company rolled out its loyalty rewards program about a year ago also. And since that time, the pandemic has really accelerated several of the company's planned digital strategy initiatives. What have been the biggest surprises or most interesting learnings on the digital front since Investor Day? And what areas of the total digital strategy really remained in early innings in terms of adoption rate or P&L impact? And I just want to squeeze one in because it wouldn't be a Casey's Q&A without some talk about the pizza business. How has the whole pizza business evolved through the pandemic and -- as it relates to the company's digital strategy? And why or why wouldn't the company's old pizza sales base revert to pre-pandemic levels?

Yes. I'd say with respect to the rewards program and a lot of our digital initiatives, it's -- they've really exceeded our expectations. Our rewards program, we're over 3 million members right now, which really ramped up faster than we had modeled, and that was with the pandemic. And so that's been very well received. We get a lot of engagement with our guests. And so I think it's really reinforced for us the power of the brand and the affinity to the brand. And we've been able to leverage it in a lot of ways. I'm not sure that there's been a lot of big surprises other than how quickly it's ramped up. We did have to pivot some things. Curbside delivery is a good example where it was on our digital road map, but not anytime in the near future. The pandemic hit, all of a sudden, that became a big guest need. We pivoted quickly on our digital team, and we're able to roll that out system-wide in August when it wasn't really even on the plan for a couple of years when the pandemic hit. So I think that was a good example of being able to pivot. The whole pizza business has been supported with the app and our e-commerce platform and our engagement there through rewards. We expect to be able to continue that, I think, for a couple of reasons. One is that we've got more people eating our pizza, our whole pizza than we ever have before. We make our pizza from scratch every day, made from scratch across high-quality ingredients. I think more people have experienced a level of quality that we have versus our competitors. And so we think that's going to be sticky and then that will just be reinforced with our rewards program, with our DoorDash relationship, with our e-commerce platform. So a lot of those things we brought to bear during the pandemic, but we think those are things that will still satisfy needs moving forward.

Yes. And one of the things that I think you mentioned last week at ICR that stood out was when people are ordering pizza and ordering it from Casey's through DoorDash, they'd go to DoorDash with maybe not necessarily the idea of pizza in mind or not necessarily Casey's in their mind. Otherwise, they'd go straight to your own website. So it's really been, I would say, incremental, to the business as opposed to just a full just transfer of channel. Does that sound correct?

Yes. That's right. And it's really just a consumer behavior issue. If -- when consumers are looking to go eat, and they're a DoorDash consumer, they go on the DoorDash app, and then they start scrolling around to see what they want to eat. So if you're not in that marketplace, you're not in the consideration set. So we think it's a worthy relationship. And from what we've seen so far, it's been highly incremental.

Perfect. And with that, I think we're right at time. Gentlemen, thank you very much for your time today and to everybody tuning in. And hope to see you back in the real Colorado again next year. Take care.

All right. Thanks a lot, Matt. Appreciate it.