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

Okay. Well, thank you very much, everyone here. And yes, thanks for joining us at the Sidoti June 2022 Small Cap Conference. My name is Anthony Lebiedzinski. I'm the equity research analyst that covers Casey's General stores. Ticker is CASY. We are very pleased to have with us today Steve Bramlage, the CFO of the company; as well as Brian Johnson, Senior VP, Investor Relations and Business Development; and Chad Brunt, Senior Analyst of Investor Relations. So Brian will start us off with an overview of the company and then Steve will talk about the strategic plan as well as a scorecard shared at yesterday's Analyst Day. Afterwards, we'll have a fireside chat, and we'll open up for questions from the audience as well. So if you do have a question, so you can type it at the bottom of your Zoom screen, and I'll go ahead with asking the questions. So with no further delay, Brian, please get started.

Thanks, Anthony, and good morning, everybody, and thank you for spending some time with us this morning. Marie, if you wouldn't mind maybe advancing to next slide. One more. There we go. Thank you. So yes, so Casey's General Stores, we're a large convenience store chain located in the Midwest. You can see here the 16 states we've highlighted as where our stores are located. This last year, we're just shy of $13 billion in revenue. I think what I'd probably like to call your attention to is the upper left of this slide. We are the third largest convenience store chain in America. And how that stacks up, there's roughly 150,000 convenience stores in the country, and we're the third largest at only 2,400. So it's a highly fragmented industry. In fact, 65% of the operators in the industry own 10 stores or less. So -- and we'll talk about our growth strategy here in a minute, but that's a big part of it. The other thing that I'll point out is we are the fifth largest pizza chain in the United States as well, which is one of our key differentiators. In fact, Marie, if you could maybe advance to the next slide. When we talk about our business, the things that set us apart from the rest of the industry are really these top 3 things that I'll focus on, and that is our rural footprint located Midwest, as we mentioned, over half of our stores are in towns of 5,000 people or less. So a lot of advantages for that rural operation from a competitive standpoint, there's not a lot of competition in those markets. A lot of times, the cost to operate stores is less. And really what you find is you're more than just a gas station of those communities. You're oftentimes -- the grocery store of the community, you're oftentimes the best restaurant in the town. And so -- which leads me to my next bullet when I mentioned that we're the fifth largest pizza chain in the country. Our prepared food is a significant differentiator as well. Our pizza is our flagship product. It is a proprietary program, where it is a Casey's-branded program, and it serves us really well. It makes us less dependent on fuel, less dependent on tobacco than our traditional committee store peers. Finally, I'll touch on our vertical integration. It is also somewhat unique in the industry, not a lot of people do it. We do not partner with the wholesaler. We do it all ourselves. So we have 3 distribution centers located in our footprint, and we distribute 90% of the products from inside the stores out of these distribution centers. We also own our own fleet of tanker trucks and deliver approximately 75% of our fuel. The result, especially of the grocery distribution, we have best-in-class inside margins relative to anyone. And that is a common due to a combination of our vertical integration as well as our high-margin prepared foods. Marie, if you can hop to the next one. With respect to our rural footprint here, you can kind of see the breakdown of our stores. I think what I'd probably want to leave you with this slide, though, is the amount of white space we have to grow our business. I mean, just even within the existing 16 states we operate in, there's 72% of the towns in those states do not have a Casey's. And so we think we see tremendous -- particularly in the small towns, we see tremendous M&A opportunity with respect to those small operators. You can oftentimes acquire those for 6 to 9x trailing EBITDA pre-synergy, and we trade at 11x. So we really like that math. The other thing I'd point out to with respect to our 2,400 stores in these 16 states, only -- probably 2,200 of those 2,400 stores are only in 9 states. So we have a tremendous amount of white space within those 7 states. Michigan is a great example of that. We only have 1 store in the state of Michigan, and we see it as a very promising place to do business. Marie, if you go to the next slide, please. I think this is an important slide on a variety of fronts. Obviously, our prepared food business, as I mentioned, is a key differentiator. But I think it's important to understand the impacts to our business, both by way of revenue and gross profit dollars. As you can see below, fuel is our largest category from a gross profit dollar standpoint. However, from a revenue standpoint. However, when you look at the gross profit dollar mix, you can see we make tremendous amount of money inside the store relatively fuel. I don't want to discount feel, it's an important proper business, and we're seeing record fuel margins recently. That's sort of driving profitability. We've added some capabilities to make that happen. But you'll often times when we talk about our business, we're usually spending a lot of time talking about inside the store because that's where the money is paid. Marie, would you advance please? Yes, one last, again, on the vertical integration. These are some pictures of the 3 DCs that we currently operate. Generally speaking, we try to stay within 500 miles of the distribution center that we find that to be the optimal area to run stores. We with -- you can see here in the distribution network has served us really well during COVID with the supply chain pressures we've had. So for example, we can use our grocery trucks to go pick up deliveries of cheese. For example, we found that our suppliers have no problem making the cheese, but they ran into difficulty getting the cheese to us. So we were able to dispatch our trucks to bring them in to keep us in stock. With that, I'm going to turn it over to Steve here. If you want to go the next slide, Marie, just to give us kind of a brief summary of our strat plan and how we're doing so far.

Yes. Good morning, everybody. Thank you for allowing us to participate, and then thank you as well. We had a sell-side Analyst Day yesterday at our headquarters in Iowa. Anthony was kind enough to join us as well. And so both of the 2 visuals, I will speak to are included on our website where we posted, these for people's reference and the transcript associated with that event is also posted on our website for those not familiar with the company. The way we're trying to run the business now obviously aligned with our strategy that the overarched goal of the 3-year plan, which for us is our fiscal years '21, '22 and '23, was to deliver top quintile EBITDA growth for the S&P Retail subset of that group, and that would be EBITDA growth of 8% or greater. Underpinning our path to achieve that, we really have 4 pillars within the plan. The first was reinventing the guest experience. And so things like remerchandising inside of our stores, the center of our store and Baltic or most of our grocery and general merchandise sales are sold completely reimagining and relaunching our breakfast daypart prepared food menu is where our pizza lives in prepared food. That's a breakfast daypart item as well. It's a lunch of the menu item. And overall improving guest experiences through our digital ecosystem and infrastructure, things like our mobile app, things like our Casey's Rewards program like our ability to deliver through third-party aggregators and provide convenience to our guests in nontraditional ways, all of those under pick the things we're doing to improve our guest experience. Those investments that we're making to be paid for with something. And so our plan pays for those by driving more efficiency through the business than we historically had. And so some of this are things as simple as creating a strategic sourcing organization where the company did not have on previously or standing up an asset protection organization to help our stores deal with protecting the assets and the inventory that we have. Some of it is kitchen and store simplification related. We run a small restaurant in all of our stores. Historically, we haven't necessarily targeted the operations of our kitchen the way a restaurant might do that. So there's a lot of opportunity for us to take advantage of scale and overall technology to improve the efficiency, and that's where we're focused on. The third leg is accelerating the unit growth. The company historically has grown units by 2% to 3% a year over a very long period of time. That's a balance of building stores and buying stores with historically definitely more of a lean into on the building of new units versus buying. This strategic plan continence is going at a faster pace. So we're trying to grow at about a 5% new unit CAGR. That will be about 345 units over this period of time. We're in very good shape, and I'll come to that in a second against that growth. But to Brian's earlier visual, there's a lot of white space in our geography for building and/or buying where the attributes of a rural community within reach of our distribution centers at attractive prices, building or buying. I think we feel very good about continuing to put our incremental dollars towards EBITDA and ROIC accretive unit growth. All of that has to get underpinned with people. We're a people business. We have 42,000 employees. About 41,000 of those employees work in the field in guest facing, positions. And so the importance to us of retaining those folks, developing those folks inculcating that into the culture of the company and the culture that we want with the relationships with our communities is critically important to us. We provided yesterday, and if you could advance on one visual, please. Just the status of it, how are we doing so far in the spirit of holding ourselves accountable? So we had articulated 2 years ago 6 largely financial metrics that we were going to target and try to deliver against it. So we need a little bit of a scorecard yesterday. This is meant to reflect 2 years of actuals. It's not reflective of what we think, whether won't happen from a guidance perspective this year. And I'll zip through these very quickly. EBITDA growth, certainly the most important and highest profile metric. The company has grown EBITDA at 11% in each of the last 2 years. And so we feel well positioned so far versus achieving that top quartile 8% to 10% CAGR target. We've had a big year of buying in the prior year. And so we're about 80% along towards that target growth of 345 units after 2 years. And I think we feel well positioned vis-à-vis that goal. Inside the store, same-store sales have performed very, very well. So we've grown at about a 5.5% average CAGR for last 2 years, so comfortably at that mid-single-digit number. Fuel gallons, we have that as yellow, definitely a pandemic influence here. So we were negative in fiscal '21, for sure. The pandemic definitely was a headwind. The pandemic also provided a bounce back for us in the last fiscal year where we were positive about 4%. And so 1 year a positive, 1 year negative. The average is, we're down about 2%. From a gallon standpoint vis-à-vis the starting point in fiscal '20 and hence, the yellow. Gross profit margin, Brian made a reference fuel margins for the entire industry have been at historical levels really for the last 2 years. We are no different in that regard. We're mid-30s each of the last 2 years. That compares to about a $0.20 a gallon number in our fiscal '19, which was the last year of pre-pandemic. Inside the store, we've been about -- we have been at 40% gross margin in the last 2 years. That's a little bit below where we were in FY '20. It feels good to hold the line in a high inflation environment. But nevertheless, we were a touch behind where we started. Operation efficiency, so OpEx definitely been the biggest challenge for the company with the pandemic gave the industry in terms of buoyancy of fuel profitability that pandemic took away for sure with operating expense pressure. We are no different than that. We tend to have more people in our stores because of the kitchens vis-à-vis our peers. And so our operating expense is grown about 14% on average a year over the last 2 years compared to that 11% EBITDA growth for the reasons everybody is aware of: labor shortages, higher wage pressure, higher credit card fees in the industry. We added a lot of units last year early in the year. But from where we would like to be, and we'll continue to work against that. And I'll close with cash flow, the company had the 2 past years of free cash flow in its history in fiscal '21 and '22, $825 million of free cash flow. And listen, we continue to generate about $800 million a year cash from operations. And I think we feel good about the cash flow generating capability of the organization on a sustainable basis as we stand here today. And with that, I will close our prepared comments, and Anthony, I'm going to throw back to you and let you kind of drive on how you like Q&A or the discussion to go from here.

Absolutely. Well, thank you very much for the terrific overview of Brian and Steve. So yes, I'll get started here with questions. So Obviously, you guys just reported last week and hosted at the Analyst Day and certainly enjoyed that enjoy being with you guys yesterday. So can you just talk about current trends that you're seeing in the business and kind of bifurcate that inside sales versus the fuel?

Yes, I'll start, let Brian chime in. I'll start with fuel. That's the question we get from us. I think the biggest change in behavior we have seen so far, and this is a quarter-to-date come and it's not meant to be different than what we've talked about on the earnings call because the behavior hasn't changed is people are filling up more frequently and they're buying fewer gallons in an individual transaction. So I think we're about a gallon below on average a typical fuel fill up from this time last year, but that person is coming in more frequently. It doesn't appear yet. People have really fundamentally changed their buying habits. So they're filling up with the money that they have. But -- or I'm sorry, they haven't changed their driving habits. And so if the driving habit doesn't change, things got to come more frequently and come back and buy fuel. So I think that's a reality for sure that we have seen. There is a little bit, and Darren, our CEO, Darren Rebelez, reference this on our call. There's been a little bit of trade down of price points of fuels, so less premium being sold more kind of 87 octane fuels. A little bit less clear fuel today being sold, a little more ethanol blending being sold because the ethanol dynamics are making a cheaper Street price for people. So we don't think that's had a big net impact on gallons so that we can see, but for sure, kind of reshuffling down. Brian, any more comment on fuel?

Well, one thing I'd like to add on fuel, because I've been getting a lot of questions here lately on OPIS data and OPIS data lately has shown us some pretty thin fuel margins. And I think OPIS data is a great barometer of where things are, but one thing I'd urge caution for those on the call that might be using that data is it's import to understand what that data is. And that is a current -- it's taking a single day and comparing the current days retail price to the current days cost at the closest terminal. And I want to remind everyone that it takes us about 6 days to turn that inventory. So that OPIS data tends to make margins look worse than they really are during rising cost times, they tend to make margins look better than they really are falling cost types because in a rising environment, the inventory we're selling, we purchased at a cheaper rate than what the current retail spread is and no differently than the following environment, we will be selling higher cost inventory than what the current term will in. So just maybe a word of caution on those out there that might be looking at that data. With respect to inside the store, we continue to benefit from a couple of things. First off, as we come out of COVID, during COVID, we saw a package size increases. So then we're buying larger packages of beverages, for example, we seem to be returning back to what I call the single serve. So single-serve alcoholic beverages, single-serve energy drinks. We're also benefiting that in the prepared food category where we've seen a slight downturn in whole pies, but we've seen a really significant increase in our pizza slices. So particularly in the grocery general merchandise side when we go to those smaller pack sizes, we see a margin benefit, which is why the gross, in general, margin improvement has been there. On the prepared foods side, markets can be a little more volatile. That's the ingredients we have in our pizza agrees we have in our other prepared food items is more commodity driven. So we have seen some volatility within those products. And it's difficult to pass those on timely. We've taken too many price increases so far in the last 6 to 8 months. With respect to where we -- where our retail prices are falling, I still think we're considered kind of more of an affordable option relative to our peers. So we do have dry powder to take more should we need to. And we kind of like to see where the commodity elements continue to go from here before we take any more increases the price increases we are incurring in the grocery general merchandise category, by the way, are a little more organized. Typically, you'll see the manufacturers in those categories come certain times a year. They're also impacting the entire industry, and they usually accompany a suggested retail price. We tend to take price up immediately when we incur those cost increases at an amount above what the cost increase was so we can preserve margin.

Got it. Yes. Thanks for that very thorough answer. So given -- again, just to kind of follow up on what's going on in the world now, given all the concerns about a slowdown in the macro economy. Can you just kind of compare and contrast the cases now versus prior recessions? And would you consider perhaps yourselves as a trade down beneficiary?

Yes, we certainly are. And if you look back into the last 2 recessionary periods, I go back to 2008 and 2014, you'll find that our company performed very well in both those time periods. In 2008 in particular, you had high fuel prices back then along the other companies in a recession. 2014, we didn't say at the price, the fuel price dynamic we certainly went into recession as well. We definitely benefited from a trade down in a couple of fashions. First of all, with respect to the restaurant industry, people view our whole pie business that evening daypart as a value as basically a way to treat your family to a night out and not have the TAV that you have at a restaurant. So we certainly see that benefit Steve already mentioned in high rising fuel price times, we tend to see that frequency increase. So people put a little less gallons per transaction in the car, but they don't change -- materially change their driving habits, so they got to come to the store a little more frequently. Fortunately, and that's why we saw that benefit back in 2008, 2014, we saw that uptick in inside sales. We performed, by the way, back then, high single-digit, low double-digit same-store sales in prepared foods and grocery so merchandise. Fast forward to today and some capabilities we have now in a business that we did not have back then, I think the first and foremost is our private label program. It's done tremendously well. We just launched it about 1.5 years ago. We exited the fiscal year at 5% of the grocery, John merchandise category. We have goals to get that to 6% next year. And that is a value proposition to our guests that we just did not have back in the previous 2 recessions that we only had national brands in the store. So we see, by the way, just over the criteria we have for our private label products, there's 3 requirements that we do not bend on. One is, obviously, the retail price point has to be lower than the national brands its competing with. The penny profit has to be higher than the national brands its competing with, and the quality has to be on par or higher than the national brand its competing with. So we see that as a tremendous opportunity as we head into a potential recession time. We think that's going to be a -- continue to be a value proposition that our guests will take advantage of. The other thing we have that we did have back then is our rewards platform. We have tremendous visibility into our customer right now, our guests that we just didn't have before. And we are just now taking kind of next step in our journey on guest engagement by having much more customized promotions. So Anthony, if we know you're buying breakfast pizza 3 times a week at Casey's. It doesn't do us any good to send you a doughnut coupon. However, we're trying to attach something to that slice or maybe try to increase your frequency. We're going to have some sort of promotion around that pizza slice that we know what you're buying on a regular basis. Again, that's a way that we can meaningfully impact guest behavior, and that's something we didn't have in the previous 2 recessionary times.

Got it. Yes, definitely a very thorough answer there. So -- and as far as -- just to add on to what you said about private label. I know yesterday, you shared that the private label is 5% of your grocery and general merchandise sales, but it's really 9% of gross profit dollars. So as that -- as you continue on that path, I mean, that should certainly enable you guys to post better margins as well. So I guess as far as fuel margins. So I know you touched on a little bit sharing the OPIS data. But as far as your long-term outlook for fuel margins, I know you guys don't give guidance per se for this quarter or for this year for fuel margins. But given the overall increases in inflation and operational costs, I mean what's your long-term outlook for fuel margins? How should we think about that?

Yes, I'll answer that, Anthony. So you're correct. We don't have a crystal ball that's any better than anyone else's. We have tried to communicate at least for the current quarter, we're currently slightly under the CPG that we've realized on the entire first quarter of last year. That has not changed from what we discussed last week on the earnings call. We do believe that the structural underpinnings of operating expense in the business are such that it should be conducive to higher run rates of CPG profitability for the industry than what existed pre-COVID, right? So the fact that profitability for the industry and for Casey's was gradually going up on a CPG basis for the 10-year period of time preceding the pandemic. And that's because the operating cost of running the business, compliance, labor, et cetera, were going up. And so there was a very slow grind up in company and industry profitability over that 10-year period of time. It was aided by the exit from the retail industry of a lot of oil majors at the beginning of that period of time, we're they were putting prices on the street with a difference of economic considerations to their entire kind of distribution chain. Once they got out of that business and sold those to independent operators who don't have refineries to worry about, prices started -- our profitability level started to slowly grind down. As we sit here today, the kind of reopening of a pandemic, it's hard to foresee operating expenses coming down. Obviously, they grow at a slower but than they have. But right wage rates are significantly higher than they were a few years ago. We're not going to pay people less. We don't have any expectation that, that could be the case. The EMV compliance, right, the pushback of fraud and credit card fraud, the Visa, MasterCard has happened for the whole industry. The cost of complying with that are here now. They weren't there before. The cost from an environmental compliance standpoint is higher than it was. It continues to go higher. Labor availability remains tough, albeit a little bit better than at the peak of the pandemic. And so because it's more expensive to run the inside of a store for the smaller operators who don't have a sophisticated fuel pricing/procurement team like the larger players do, they don't have self-distribution of supply chain to help on cost inflation for goods for resale. The only real lever that they have is retain or raise profitability at the fourth quarter. And so hard to believe that people go away from that or that people collectively decide we're going to make less money in the long run because that's a good thing to do. And so we do believe it continues at a higher level and what it was pre-pandemic [indiscernible]. Is that mid-30s? Is that low 30s? Is that somewhere between? We don't know that answer, but we do think it's higher than it was prepaid.

Got it. Yes. Steve. I definitely appreciate it. So we have a couple of minutes left here. We have a couple of questions from the audience. So what are the drivers of the increased credit card interchange fees? Can you just kind of go over that quickly.

Retail price of fuel, right? I mean our actual -- actually our rates that we pay on credit card fees was lower in fiscal '22 than it was in fiscal '21 by a couple of dozen basis points. But the absolute retail price of fuel was significantly higher, and we sold a lot more gallons because of the acquisitions that we made, the Buchanan Energy acquisition, Pilot acquisition and Circle K acquisition. So total fuel gallons sold increased, and total fuel revenue increased even more. And so a combination of those 2 things drove for us, I think ultimately, we paid about $55 million of incremental credit card fees in FY '22 vis-à-vis FY '21, and really it's higher retail price simply selling more gallons, which primarily are purchased with credit cards.

Got it. And given the time constraints, so we only have time for 1 more questions here. So -- and which is from someone in the audience here. But basically just asking about the level of maintenance CapEx, how should we think about that on an annual basis?

Historically, what we spend -- whenever our CapEx number is about 25%, I would consider maintenance. So things like IT, supply chain, trucks, store maintenance, et cetera, 75% of what we spend, I would categorize as growth oriented, whether that's a new store build or some buying land, et cetera, are relatively low on the maintenance capital needs of the organization.

Got you. All right. Well, it looks like we're out of time, but I definitely appreciate very much you guys sharing the Casey's story. So -- and thank you for everyone also participating on the conference as well here. So with that, we'll wrap it up, and hope everyone has a great day.

Great. Thank you. Thank you, every one.

Bye, every one.

All right. Thank you, guys. Take care. Have a good one.