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

All right. Well, thank you for joining us for our 2024 On-site Analyst Day Presentation. Presenting shortly here will be Darren Rebelez, Board Chair, President and CEO; along with Steve Bramlage, Chief Financial Officer. During the presentation, we will not be providing an update to any second quarter financial performance nor will we be providing any more information on the upcoming Fikes acquisition other than we still do expect to close this calendar quarter as previously disclosed. Before starting, I'd like to remind everyone that presentation and Q&A will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements we make today. The factors that could cause our actual results to differ materially are discussed in the company's most recent forms 10-Q and 10-K as filed with the SEC. With that said, I'll now turn the floor over to Darren.

All right. Thanks, Brian. And good afternoon, everybody. I hope everyone is well fed and welcome to everybody online that's dialing in. I appreciate those of you taking time out of your schedule to do that. And of course, for everybody in the room from traveling to Ankeny, Iowa, to see what we had to show today. And so with that, I'll dive right in. And wanted to start by talking a little bit about our strategy map and our strategy, and just a couple of points on this. This is our entire strategy. It's on one page, and pretty simple, not as simple to execute, but pretty simple in concept. And we like to keep it that way. We like to have it on one page. So there's a great focus on the things that are most important, and equally as important, we don't allow ourselves to get distracted by a lot of things that are happening in the world. If it's not on this page, we're not worrying about it. We're going to stay focused on the things that drive value. And so at the top of that map, you see one of our primary objectives is to drive EBITDA growth of 8% to 10%, and that puts us in the top quintile of the S&P 500 retail set. So we achieved that through a couple of different ways. We have deep guest insights, and we focus on that and try to understand what it is that our guest is looking for from their convenience store experience. There's a few things that our team has uncovered that they want. Shockingly enough, one of the things they want is convenience. And we have a little saying around here that the prime directive is that shall not have an inconvenient convenience store. And so that's what guests are looking for, so we need to make that experience convenient. They also want consistency. They want to be able to rely on us to be able to provide the goods and services that they need when they come to our store. They want craveable food. And hopefully, for those of you that are in the room today, got to go to our culinary innovation center, you got to see that process and how we create that craveable food that our guests are looking for. They also want affordability. They want to be able to get a good value for their money and they want to be rewarded for that. And then finally, they just want the right assortment. We have a fairly simple business here. We have small boxes. And if we put the right stuff in those boxes, we're going to make the sale. If we don't have the right stuff in those boxes, we don't make the sale. So I think you saw for the folks in the room, down in the merchandising lab, we put a lot of effort around understanding what our guests are looking for and dialing in that assortment to make sure that when the guests come in, they get what they're looking for. But there's three primary objectives that we're going to leverage to really achieve that top quintile performance. The first is accelerating our food business, and we'll talk about that in a little bit, growing the number of units and then enhancing operational efficiency. Now all of that is supported by an enabling foundation. When we talk about that, we're talking about technology, supply chain and leveraging data and analytics for deeper insights to make better decisions for our stores. And none of that can happen without our team. And I'm really proud of the progress we've made in building our team and the evolution that we've made on that journey. So with that, I'll get into a little bit more detail on each of these. But first, let's talk about the EBITDA growth. And what you see here is a depiction of the companies that have been able to achieve that top quintile EBITDA growth over a 1 year, 1 in 5 year, 1-, 5- and 10-year period. And you can see in the 1 year, there's a handful of names there. So about 12 of the 42 S&P 500 retailers were able to achieve that 8% EBITDA growth in a 1-year period. That list narrows down to about 5 if you have to do that over a 1-year and 5-year period. The hurdle becomes much higher. When you get 1, 5 and 10 years, then you see that list go down to 3, 1 of whom has kind of been struggling over the last year or so and may not make that list if you go to 11 years. So what you're seeing is a level of consistency that Casey's has been able to maintain over a long period of time in delivering that top quintile EBITDA growth. That's become a little bit more challenging thing in the world today. But I think you saw, and we'll talk about how we go about achieving that so we can maintain that consistency. We also like to say we have a high say-do ratio. So when we say we're going to do certain things, we put a really high premium on making sure that those things actually happen, and this is a big one for us. This is one that will die on the hill for to make sure that we deliver that 8% to 10% EBITDA CAGR that we've committed to the investment community. Probably the biggest pillar in terms of driving that growth is accelerating our food business. And so why food? Why do we focus on food? Well, it's our single biggest differentiator. There's 150,000 convenience stores in the U.S. It's important that we stand out from all the rest if we're going to get a disproportionate share of the business, which is what it takes to drive that kind of EBITDA growth that we're talking about. So food is our differentiator. And I think you've seen through the process that we use to create the food to the level of execution that we deliver that in the store, that, that is unique in our industry. There's only a couple of players that I can think of that focus on food like we do, and it gives guests a number of reasons to come to our store outside of the traditional categories. And it makes sense when you think about it. A lot of times, I'm asked, well, doesn't fuel drive all the traffic into the store? Well, the answer is no. About 3/4 of our guests come to our stores for nonfuel purchases. And why is that? Well, most of what we sell is consumed immediately upon purchase, and it makes sense. People eat 3, 4, 5 times a day. How many times do you fill up your car with gas? Once a week maybe, maybe a little bit more frequently, maybe a little bit less, but about once a week. So having a differentiated offer inside the store is what really drives the traffic. The second thing is it's the highest margin category we have. It's nearly double the margin of the rest of the store. So not only do we get that additional traffic, but we also get the additional margin benefit. And I think when you look at our margin profile overall for the inside of the store relative to the rest of the industry, you see a notable difference there and that's driven entirely by that prepared foods business. But we've made a number of -- or we made a lot of progress over the last several years, primarily on the innovation process. And so you got to see today in the culinary innovation center, how rigorous that process is. And that is absolutely a process that a restaurant company uses. I know that from my time in the restaurant industry, Carrie Stojack, our VP of Guest Insights. She used to do that in the restaurant industry. This is a restaurant level process. This is what you see in most convenience stores out there, and it delivers the right outcomes for our guests. So we talked about in that session, and you see here on the slide our sandwich lineup. Now 3 of those 4 sandwiches that you see on there, we already sold. We just didn't have the right quality of product. So that team went out and tore down to the studs and started over again, different protein, more abundant protein, different spices, different bun, different build, down to the pickles, we even change a pickle on the sandwich. That's how dialed in they got. And now we roll that out. We added one more sandwich in that category in the first quarter was up 85%, 85% and that's just taking something we already did and just doing it a lot better than we did before. That's what that team is capable of now, and that's how they look at every single product that we make. We also have new platforms. So the Thin Crust pizza, which we rolled out last year, is a great example of that, where the team identified a gap in the assortment. And we were losing guests because we could see that in a household where some people like Thin Crust and some people like the original crust that there is a veto vote. We actually saw where somebody will come to a Casey's buy one of our original crust and then go to a competitor to get a Thin Crust. Well, that's nuts. That's crazy. We had them in the store. We're selling pizza and they had to go to 2 different places or worse yet, they didn't even come at all because they couldn't get a Thin Crust. So we solve for that. We hit immediately 12% of the mix, which is about the industry standard for that. So we're able to innovate and now we don't have that defection from that guest that was coming to our store. We've also enhanced our omnichannel marketing. We've got some new leadership in our marketing department. We've really changed the agency relationships now. Now we have a team of agencies that handle media buying, creative, social media, public affairs communications. And so now that integrated team is really able to better communicate the offering, the value proposition of Casey's to the guests. And then something that we've always done on the Grocery and General Merchandising side, but now we've really dialed in deeper on the food side is what we call joint business planning. And that's where we -- our team sits down with our key supplier partners and really understands what they're trying to accomplish in their business, we share what we're trying to accomplish in ours, and we create the plans together to go execute. And what we're finding on the food side is we have a lot of really big suppliers out there with a lot of great capabilities that can help us win in prepared foods. They have guest insights of their own. They have culinary teams of their own. They have engineering resources. There's a lot that they can bring to the table as part of that relationship. And so as we build those deeper ties, we get better outcomes, we get faster innovation, we can drive this business. The second pillar is growing the number of units. And if you were to ask Steve about our growth algorithm, it's pretty simple. We grow the number of units by about 4% per year, and we grow the mother ship organic growth with same-store sales and margin expansion, everything else, 4% a year. We do that, we get our 8% EBITDA growth and everything else above that is gravy. So we have tremendous opportunity to grow this business. So when you think about the white space we have available, 90% of our stores are in only 9 of the 17 states we operate in. So to give one stat that I think is a fun fact. We have 550 stores in Iowa. Anybody know what the population of Iowa is? Almost, it's 3.1 million people. We have a -- when we closed the Fikes transaction, we'll have 170 stores in Texas. Anybody know what the population of Texas is? Nearly 30 million, over 29 million. So 10x the population of Iowa. So does that mean we're going to have 5,500 stores in Texas? I don't know. But to say that we would have a 1,000 in Texas, I don't think is a stretch by any means. So we have huge white space. State of Michigan, we have 3 stores. I'm pretty sure we can get a few more in there. Ohio, Tennessee, Kentucky, a lot of these states, we're just getting started. So tremendous white space in our existing geography. We have a flexible approach to development. So we can do M&A and M&A gets talked about a lot because that's what makes the headlines, but we also have a really robust organic store growth capability, where we can -- where we identify real estate where we want based on the network plan that we've developed, and we go and buy and build stores in those sites. And that gives us the ability to build or buy and continue to grow the stores, whether we have good valuations because at times, in the M&A world, sometimes valuations get a little bit rich and it doesn't feel right. We have a better alternative. So we just lean heavier on organic growth. When we have a lot of inflation in construction costs, like we're experiencing right now, but valuations have come back down to earth on M&A, we can lean heavier on M&A. We can go either way. But we never have to worry about there being a scenario where we can't grow because we can do either way. Speaking of M&A, we -- it adds a lot of value for us. And we have an approach where we primarily focus on smaller deal tuck-in M&A, and we can do those all day and longer. Those don't make the headlines, but we're pretty easily now with the machine that we've built, we can do 50 or 60 of these small tuck-in acquisitions every single year, and it's pretty ratable. And those we buy at 6x to 9x EBITDA, and people ask, well, how do you get those low and then you got these chains, you're buying for more -- for a higher price. And well, when Brian and his team have a conversation with a single site owner, it doesn't look anything like when we have an investment bank involved and there's -- and we're talking to a big chain. They don't know what EBITDA is. They don't -- that's not a thing. EBITDA isn't a metric. What they're looking for is, what do I need to get out of my business so I can retire and spend a little more time on the golf course? And so we've figured out that price, and that's what we pay. When we do the math then, reverse engineer it comes out to 6 to 9x EBITDA, pre-synergy. So we love that math. Now if we had bundle all those together and say, "Hey, we did 60 of these things and bought it at 9x and get 5x post synergy," it would be great. You'd read about it more, but we just got to do those one at a time. And then the big deal stuff, that's more opportunistic. The big guys aren't for sale every day. You kind of have to go for those when you have those opportunities, and that's what we do. We have a lot of relationships. We talk to a lot of owners. And sometimes, the time is right, sometimes it's not, and that's okay. We can wait. We'll wait for the right time, and then we transact on those as best we can. And then we have some flexible formats. So when we're doing our own organic growth, we have 5 different formats that we can build. So if we're in a small town, we have a format that's smaller box, still has all the offer of a normal Casey's, just a little more efficient footprint, lower cost that meets the needs of that town all the way up to an interstate truck stop type of offer that meets the needs of an over-the-road trucker with showers and laundry and those sorts of amenities to meet the need of that guest where they are. So the Fikes deal is the thing that's probably been top of mind for most in the last couple of months. And so there's a lot that we like about this deal. One thing is that it is a really high-quality portfolio of stores. And there was a point several years ago where Fikes was assessing their business and they decided -- they made the decision to stay in the industry as opposed to selling. And so as part of that process, they sold off 50 or so stores, took the money, reinvested it in their existing physical plant. They built new stores, really refreshed the portfolio. And maybe said in another word -- in another way, they did a lot of the work that we would have had to do if we had bought them then, but they did all that. So it's a very high-quality portfolio, average 4,800 square feet. That's perfect for what we do with our kitchens. Great geography. You can see here on the map, very complementary to where we are. And even though we did an acquisition in Texas, North Texas late last year, of all of those stores in Texas, there is one store that's within a 7-mile radius of one of our existing stores. So very clean, very complementary. We've talked about Texas. We like Texas. And so this gave us a running start to expand in that market. Also opened up some additional geography to the Southeast and the Florida panhandle, Florida, Alabama panhandle, that's very complementary. The stores are run well. They're high volume. They bring with them some other capabilities like a fuel terminal, so we've talked a number of times about what we call Fuel 3.0, where we move our procurement of fuel capabilities further up the supply chain. Well, that's what Fikes had already. They've been doing this for about a dozen years or 10 or 12 years or so. They had a fuel terminal. So this just accelerates that process for us, and allowed us to pick up some knowledge that we're still building ourselves. Moving on to operational efficiency, the third pillar. I hope you got a good sense today in the stores of how we're approaching that. Now I know we've had a really nice run of being able to control our operating expense, particularly store labor. Last quarter was our ninth consecutive quarter of same-store labor hour decreases. And I know I've been asked by some, well, hey, are you cutting too deep? Are you cutting into the muscle? Are you going to have to do what some others have done and come back and have to reinvest in the labor? Well, I hope you got a sense today that what we're doing is very strategic and very thoughtful and very methodical. We're not just hacking hours away. That's not what we're doing. We're identifying where there is inefficiency, and we're removing that inefficiency by either eliminating the work, replacing the work, outsourcing the work, doing something different so that, that labor is not there in the store that is not needed anymore. We have a continuous improvement team that this is all they do is assess processes in the store, talk to our store operators, find out ways how to take anything that we do in that store and make it easier to do or make it so that we don't have to do it at all. And that's been a real big benefit to us, and that's why we believe that's sustainable. We've also made improvements upstream in our supply chain. I think you saw the warehouse today. We've made some improvements there, whether it's pick-to-light or just being more efficient in our transportation operation. We've invested in technology to help us become more efficient. And with that continuous improvement team, we're building that muscle. So we're kind of looking at everything now through the lens of continuous improvement and finding ways that we can be more efficient in whatever it is that we're doing, whether it's running kitchens in our stores, running the accounting function, whatever the case may be. And then finally, like I mentioned before, the team member value proposition. And this is something that's really been an evolution. If you were in our Investor Day 5 years ago, when we talked about people, what we were talking about is organizing to win, getting the right structure in place, getting the right talent on board, cleaning up our act, frankly, on administration and payroll and simple things like blocking and tackling. With this iteration of our plan, now this is far more strategic. We got all that stuff out of the way. Now this is a fun stuff where we get to grow and develop our people, and we get to motivate our people. And so Chad Frazell, our Chief Human Resource Officer, was briefing our Board in the last quarter Board meeting, and he showed a slide with some of the leadership development courses that we have here at Casey's for our leaders at different levels of the organization, there's 8 of them. And I ask Chad to put the date on when those actually came to life. And it's been in the last 3 years that all of those courses have come to life. So our leaders are really getting developed and that's translating into better leadership in the field, in our stores, in our DCs around here. And you see the results, lower turnover, higher levels of engagement -- the highest level of engagement we've ever had, guest satisfaction scores at the highest level we've ever had them. And that's with removing labor at the same time in our stores. So we're starting to get that flywheel turning where teaching people how to lead, helping, giving them the resources to lead, making their job simpler is starting to impact every facet of the business and make that flywheel turn that much faster. And so with that, I'm going to turn it over to Steve, and he'll talk some of the finances. Here you go, Steve.

Let me add my welcome to, everybody, for coming out to Iowa on a nice sunny autumn day. I'm just going to spend a couple of minutes here, reaffirming what we've committed to, both with the investor community and within this management team and then talking a little bit about how we plan to spend the money. I would hope for those of you who are more familiar with the story that there's absolutely nothing new that I'm going to cover. The commitments are the same. We feel very good about where we stand vis-a-vis these objectives. We're 5 quarters into a 3-year plan. I think we generally feel great about each and every one of these. And certainly, we're going to be very, very consistent with how we're going to allocate the capital the organization is going to produce. But specifically on the commitments, just to remind them, when I walk down these, we're almost walking down the way the algorithm works. So the output of the algorithm is the EBITDA growth percentage. That's what Darren talked about, the top quintile performance. We certainly feel like we've demonstrated a pretty good medium- and long-term record of delivering this. I realize, as the company gets bigger, the numbers have more zeros attached to them to get the same percentage. That has not escaped my attention, and we still feel very good about being able to deliver that kind of growth. And the components of the algorithm to get there, Darren referenced it, right? It's kind of half and half. And so the store growth, the second row is half of the way the algorithm gets generated. And so this is the one metric versus our Investor Day that we had last year or 18 months ago, that we have changed the numbers. So we started off with expecting to have at least 350 new units in light of the pending Fikes acquisition, which is going to bring us almost 200 stores. We did adjust this number up to about 500 just based on what we're going to inherit here shortly. The reality is we will make a couple of changes with our internal pipeline of building out new stores to be able to remodel the Fikes stores as fast as we can, and we should land very close to that 500. The distribution of the build versus buy will be a little bit different as well versus what we had set out. We had inherently assumed a 50-50 mix building versus buying. We will index a little bit more to the buying side just because of all the Fikes' units that are coming in here. The other part of the algorithm growth is the mother ship, right? That's the 4% or so we need from the mother ship. So that's the third row here of same-store sales. There's really 2 components there. There's the part of the business inside the store, inside same-store sales for us, and then there's the business we call them the forecourt or outside the store on gallons. These -- both of these metrics are really consistent as well with what the company has done over the last decade plus. So the inside number, the mid-single digits for us, we're going to take advantage of a bunch of stuff. There's some price in there. There's some mix enhancement of course, in there. There's all of the things on the innovation side, on the prepared food side of the business and in the merchandising that we reviewed earlier today to drive traffic generally through the store, but we feel very good about our ability to deliver this number. The fuel side, I think if there's a single question we get asked in every single conversation we have, it relates to fuel, right. What's going on with fuel and what's going on with fuel margins? I'll come to margins in a second. But on the gallon side, for all of this math to work, we need the mother ship gallons to be flattish, right? And that's pretty consistent with the performance the company has had in the last 10 years as well. Our same-store gallons have been flattish, somewhere around zero, plus or minus a little bit. We continue to believe, given our geography, given all of the investments we've made and capabilities inside the organization to drive or to focus on gross profit dollar growth in the fuel category, we can continue to outperform our geography around just same-store gallon growth and have been able to do that so far and feel very good about it. The other part beyond just the top line for the mother ship is what's going on with margins, right, and how do we drive more velocity on gross profit dollars? So inside the store, really today was a great illustration of all the stuff we're doing inside the store to enhance gross profit dollar throughput and margin enhancement. So the growth of the private label portfolio, the investments we've made in strategic sourcing, the joint business planning that we take on with all of our partners, frankly, the decline of tobacco as a percent of the mix and the natural margin accretion that you get from that, all of the enhancement and the innovation we're doing on the prepared food side, all of those things in the bowl are margin accretive. And we're not going to drop all of those to the bottom line necessarily, right? We will reinvest some of that incremental margin back into things that help us drive more same-store sales growth, and we'll do that on purpose. But we feel really, really good. We have plenty of levers there. And recently, we certainly have benefited. There's been a lot of momentum on the grocery side of the business for us, right, on the Grocery and General Merchandise side. And that's allowed us to keep our value proposition in a good spot on the prepared food side of the business, right? So our -- most of you know our prepared food business, highly commodity oriented on the inputs, that stuff goes up and down. Cheese is probably the most prominent one, and so margins will ebb and flow a little bit in that category, and we allow that to happen because we don't want to jerk around the retail price point of the prepared food to a greater degree. And all of the progress we've been making inside the store in the grocery business has facilitated that. And so we tend to talk about this business from an inside gross profit margin percentage. So think of that as like 40%, 41%. We get a lot of questions on what's the grocery margin, what's the prepared food margin? Those are important to us, but they're not as important as that inside blended number. And when we expect accretion inside the store, it would be at the inside margin line. The operational efficiency, great examples given in the store today. This is the ninth consecutive quarter that Darren referred to. I think it's fair to say that, historically, if the company had a [indiscernible] over the last 10 to 15 years, we struggled to have this relationship on a consistent basis. I think that's very fair. I think in the last 3 to 4 years, we've had much better results. And that because of all of the investments that the company has made. We feel really good as we continue to expand the store base. We can keep OpEx growth growing at a slower clip than EBITDA. So most of you know, 25% of our OpEx is non-store related, so distribution centers, trucks, corporate stuff. For sure, we should keep spreading that over a larger store base, right? We definitely don't need to invest linearly on that. And then for the 75% of cost that relates to the store, you take advantage of all of these initiatives that we've gone through in terms of making the store operations efficient. And so I feel like we've got a lot of traction here, and that we can continue to stay in front of the cost curve, right? From the algorithm standpoint, if we're growing units at 4-ish percent and you're trying to get to 8% for EBITDA, that means OpEx needs to be 7-ish or less. So we have several hundred basis points kind of to absorb OpEx growth and pressure in the mother ship, stay on market from a labor wage rate standpoint, et cetera, and then you partially offset that with more efficiency inside the store. And finally, on the cash flow side, we are a very, very light working capital intensity business. And so as operating profit grows, that tends to fall directly down to operating cash flow. We don't really have a lot of absorption with working capital. So free cash flow should grow, right, as profit grows. There's really not a great reason free cash flow should not continue to grow. We've seen that in the last couple of years. We've committed to continue to make sure that, that follows the pace of earnings growth because we understand as the stewards of the company and the investors' money, what we do with that money from an allocation standpoint. It's one of the most important jobs that we have. And so we take that really seriously. And there's certainly nothing on this page that's meant to be new at all. So how do we think about how we invest investor money. Unit growth remains the first stop on the bus for us. That is unchanged. It's going a little bit faster than it has over maybe the 10 years proceeding, but it's still the first stop on the bus. And so if we can find an opportunity to build or buy something, that's going to be EBITDA and ROIC accretive for us, we're going to spend money on that, right? It fits within the geographic profile of the distribution centers, et cetera, that is for sure where we're going to spend that first dollar. You've probably heard us say that of the PP&E that we spend, about 75% of that relates to growth. So we spend about 1/4 of our PP&E on what I would call maintenance, so distribution assets, IT assets, store maintenance inside the existing fleet of ships. But the majority of our traditional capital spending is going to go to growth. Obviously, if we buy something, it shows up on a different line, and that would be growth related, too. The second point would be leverage. And so our leverage is going to go up a little bit. As most of you know, when we closed the Fikes acquisition here, hopefully, in the next month or 2. But it will be brief. We'll land somewhere around 2.4, 2.5-ish depending on the day, we should be back down to 2x within 12 months. And I think we'll get there for certain. I know we will. Our run rate status quo is a 2x number. Clearly, this business model can carry a lot more than that. We don't think we will be rewarded for that. We don't think it would be a positive thing for anybody who has money invested in the company. The industry doesn't run higher than that, and there's no reason for us to either. We generate plenty of cash to invest in growth opportunities without needing to permanently take up the leverage of the organization. When we are at 2x leverage, we have about $3 billion of kind of borrowing capacity available to us to, at the right moment in time, would we go back up again like we did with Buchanan or Fikes we would, but again, that's going to be opportunistic. One question we don't get asked very much about is the dividend, like almost never, but we take it really seriously. We've increased the dividend 25 years in a row. We're proud of that. We do have some logic as to what we do with the dividend. We triangulate around keeping the dividend increase consistent with medium-term EBITDA growth, right? So it's kind of an 8% to 10% CAGR over a multiyear period of time. And the payout ratio is going to be somewhere in that 15% to 20% of the prior year earnings is generally how we will calibrate what's the appropriate amount of dividend to be paying. And then the last stop on the bus, last year was a really good example of it. As the company grows, I referenced our ability to generate more free cash flow than we have historically. If there's not an opportunistic acquisition available to us, the company is likely going to generate more cash than we can reinvest in a discrete period of time. And when we find ourselves in that situation, last year was a good example, and we've met the other priorities on this list, we will buy back shares. So we bought back shares last year. We would do so again if we get ourselves back to 2x, and there is no large deal on the table, I think you'll see us buy shares back again, right? We're not going to do much in the next 12 months because of the leverage -- deleveraging commitment that we have, but we will certainly lean back into shares if and when we're -- we find ourselves in that situation, and the Board remains very supportive of doing that. Okay. So I'm going to turn it back over to Darren for a couple of closing comments here before we rearrange a little bit for some Q&A. All right. Thanks.

All right. Thanks, Steve. So I'll try to put a bow on this and just kind of refresh everyone's memory. I think there's been a list of things that I think investors have always liked about Casey's. And I don't think anything on that slide would be anything new to most of us. We do have this unique footprint where a lot of our stores are in smaller towns, rural communities. There's a lot of benefits that come with that from competition, from cost to operate, from labor pool, et cetera. So we really like that, and we continue to maintain that. We talked about the white space to grow. We have tremendous white space. We can continue to grow in our existing footprint for really years and years and years to come. Our prepared foods, we also talked about that. That's the crown jewel of the Casey's business, and we take a lot of pride in that. We put a lot of energy behind that, and that's a big differentiator between us and most of the industry that we compete in. The vertical integration has always been important. And I hope through the DC tour today, you got an appreciation of why that is so important to us, and how we think that gives us a unique competitive advantage versus virtually everybody else that's out there in our industry. And we talked a little bit about that compounding growth and that ability to drive that EBITDA performance, not just in the short term because you can do it -- anybody can do it for a year, it's being able to do that consistency over time in a variety of different environments that I think makes us unique and I think has been attractive. Now a lot of times, what I hear from some is that, yes, that's great. You guys are doing a great job. We love you. That's fantastic. But you're just kind of expensive. The last 10 years, you trade in a range of 10 to 13x EBITDA, that's just -- you're kind of at that top end right now. And so you're just kind of expensive. I'm waiting for the right point to come in. Well, some people have been waiting for that point for years and years, much of a disappointment, I would say, at this point. But I think, if you look back, I think the operative word in that phrase is historically. And so historically, that was a true fact that we were 10 to 13x. But also historically, we didn't have a lot of the things going on that we've spent most of the day talking about either. And so a couple of years ago, we did an investment sentiment survey. And many of you, either in the room or online, participated in that. And you gave us some feedback. And so we took that feedback to heart, and we've done something with it. So you look at OpEx management. Steve referenced this before. That was the one thing that we kind of got feedback on, that historically, we didn't have our arms around that, and then we got feedback in the survey that we didn't have our arms around it. So what do we do? We got our arms around it. Pretty simple. You tell us what's on your mind, we'll go fix it. And so we did. And so you see, over the last several years, we've had that growth in OpEx lower than the growth in EBITDA. And I think you've seen through a lot of initiatives that we've implemented that we're doing it the right way and it's in a sustainable way. I feel very good about our ability to have this under control. We were told that our ROIC wasn't all that great. We're now -- we're at 12%, a little bit over 12%. That is a historically high number for this company. That is different than what you used to look at when we were trading in that 10 to 13x. Free cash flow was something that we got criticized for. We weren't generating enough cash for what we -- for the business we are running. Our free cash flow has almost tripled over the last several years. So we think we've got that dialed in as well. We've expanded capabilities. So we've done all of that while, at the same time, investing in digital technology, investing in procurement and guest insights, in asset protection, in capabilities that this company didn't have before that enable us to do all the things and achieve the kind of results that we've been able to achieve more recently. And then the M&A side. Now historically, the company did M&A. It was always a small tuck-ins, and it was usually at a smaller scale, lower number. In the last 3 years, we've almost acquired 600 stores over that period of time. We've demonstrated an ability to integrate larger scale acquisitions. We have a dedicated team for integration. We have a dedicated team for M&A to find those sources. So we have a capability now to find, buy and integrate those assets that we didn't have before. So as you think about that investment decision, I think really looking at the right side of this page and thinking what's different about Casey's now than maybe before, that's what I would point to is say, this is a fundamentally different company. It has all the same things that you always loved about it. And then we've cleaned up some things and maybe you had some reservations about in my 5-plus years here, I've never felt better about the position we're in than I do right now. So with that, I'm going to take a little bit of a pause. We're going to bring some chairs up. We'll have the team up here, and we'll be able to answer some questions.

So I will go ahead and introduce the team up here. I think for those of you in the room met just about everybody today. But over here on my right is Nathaniel Doddridge. He runs all of our fuel operation. You know Steve Bramlage. Ena Williams, to my left, is our Chief Operating Officer. To her left is Chad Frazell, who's our Chief Human Resource Officer; and at the end is Tom Brennan, our Chief Merchandising Officer. So with that, I will open it up to Q&A. Krisztina?

Krisztina Katai, Deutsche Bank. So l had a 2-part question on your full strategy it's something that you've been very successful at. Obviously, 4 years have passed since you outlined the new process of the Investor Day in 2020. So can you take sort of a progress report in terms of the consumers that -- have you converted them? Two, is that those customers that have been buying food from you, is their spend per the category or your frequency is increasing? And I just wanted to tie it in, in terms of what the strategy might look like 12 to 18 months from now as you think about anything that might be coming [indiscernible]?

Okay. For those online, I'm going to try to repeat that. So it's -- the question was related to the food strategy, how that's evolved, how we're seeing consumer purchasing habits inside of that. And did I leave anything out. In 12 to 18 months from now, what does that look like? So Tom, I'm going to let you take that one.

Yes, do you want me to?

Yes.

So what I would tell you is that as we've continue to drive more relevancy through better innovation and through new platforms. We definitely are seeing more people engaging with the food platform. This is complemented by our growth strategy from a unit standpoint, right? So as we go into markets, where Casey's is a newer brand, we are also seeing some traction with guests in those new markets. And so we're always going to be thinking about, and we talked about it during the session where we're in the culinary innovation center, right? So we want to deliver what our guests are looking for, but we want to do it in a way that's efficient for the stores, that's efficient for distribution centers, and quite frankly, it's efficient for our marketing message. And so we want to be as broad as we need to be to satisfy the optimal number of guests while we continue to grow the business. And so I think we've been very effective in doing that. We highlighted Thin Crust, which launched, of course, 2 summers ago, and it was highly incremental to the pizza category. And then, of course, this past March, we launched our new sandwich lineup, which Darren pointed out, right, 3 of those 4 sandwiches, right, we had that offer in store, but it just wasn't good enough. It wasn't Casey's good. And so as we reengineered it, as we took it through our innovation process, we were able to turn that into an offering that had broader appeal, much broader appeal. I mean, we talked about our Q1 results, 85% growth in that category. And so absolutely, we continue to engage more consumers, more guests in Casey's footprint to try our food proposition. And then I think as we talked about also in the innovation center with each of the groups. So 5 years ago, a little less than 5 years ago at our Investor Day in January 2020, we talked about -- I talked about how we were going to build out that process. And in fact, as we've demonstrated, that process is up and running today. It's running so efficiently to the point now where we have more product ideas than we have windows to put them in. And so that gives us just even greater runway as we continue to develop our overall approach to not only just our existing menu, but think about new platforms or particularly as we go into new geographies. So we really, really like our prospects to continue to pulse in appropriate innovation, while at the same time, also having an eye for continuous improvement of our existing menu. And so we feel really good about where we've come in the 5 years, but we feel even better about where we're going to go in the next 5.

Yes, John.

Darren, can you talk a little bit about -- on the fuel side. I understand the strategy of the gallons and the mix and the margin. You got 3 stores within a half mile here. And you were [ 2.84, 2.89 ] and then across the street, we're [ 2.99 ]. Can you sort of unpack that a little bit and just help me how we get there.

I'm going to let Nathaniel unpack that one.

No, that's -- thank you for paying attention to the retail fuel prices. So I will say we live in a very dynamic industry, right? Where we deal with on the fuel side of the business, one of the most emotional probably purchases people make. And so you think about traffic patterns, competitor sets. We are Uber focused on making sure at the end of the day, that we are attracting the guests we need to attract. And I think that's been the challenge over the last few years is finding that nice balance because some might say, you should be the same everywhere. But I would tell you that, that customer that's driving by that one location is not paying attention to maybe some of those other spots. So it's really around the optimization of that price, and we're constantly reevaluating what those strategies look like. And as you described, in a market like this where you have lots of Casey's stores, that's an advantage, but it can also be somewhat of a challenge as you look to see what that balance is. And as we continue to look at optimization of fuel pricing, I think that will continue to be where value is created from the fuel category because every penny we can make at the end of the day across the chain is $30 million. And so there's value there that we can extract, but we're constantly looking for that balance.

Kylie Cohu with Jefferies. Thank you so much for hosting us today. I guess, I kind of 2 questions thinking a little more high level. First one is just kind of on the overall health of your consumer? Any changes that you've seen in the last 12 or even 24 months and any insights there? And then also just kind of thinking about if new unit growth is roughly half of the EBIT growth. What would be the biggest risk besides unit growth when I'm thinking about that 8% to 10% target?

Okay. I'll go ahead and handle the first part of that one with the consumer. And Ena, I'll let you handle the store growth one. With health of the consumer, what we're seeing is, it's a little bit bifurcated right now. And on the, I'll call it, upper income side of the equation, things are largely as normal, not seeing any change. And where we draw that line is income of $50,000 a year or more would be the upper income, obviously, below that would be lower income. So for context, 75% of our guests are in that upper band, okay? So only about 23% are below $50,000 a year. I think for further context, you got to recognize where we operate. We operate in the Midwest, primarily. The most expensive state that we operate in is ranked 30th in cost of living. So we're in a very affordable geography, so that $50,000 goes a lot further in our footprint than it might in some other geographies. So all that being said, in the upper end, we're not seeing much change with the consumer. They're visiting the store, as frequently buying as they have historically bought. On the lower end, we're not seeing a change in frequency of visits, but we are seeing a change in decisions that they are making. In some cases, that basket is shrinking a little bit. So they may forgo that one extra item that they might have bought as part of their basket. In some cases, the snacking occasion has shrunk a little bit. We're also seeing some unique behavior shifts within the store. So one of the things I thought was interesting when we dug into this is that consumers have been trading out of candy because candy has been a lot more expensive, particularly chocolate with the rise in cocoa prices, and shifting over to our fresh bakery products like cookies and brownies, that sort of thing. It's still a sweet indulgence, but about half of the cost on the prepared side as it is on the candy side. And so those guests are looking for that indulgence. They still want to get -- they're just finding a more affordable way to do that, and we'll take that trade all day long because the penny profit is better on our prepared side and the margin is higher. So we like that math. But anyway, that's some of what we're seeing. But generally speaking, I think the consumer is hanging in there pretty good.

And for new store growth. So you can look at it different ways, right? So we grow stores by NTI, which is new builds. We build ourselves or through acquisition. So if you can call this a risk, a risk that we will take in building a new store if it's outside of our core footprint, right? If you look at our major states, the ones that Darren talked about, where we operate the most stores like Iowa, Missouri, Illinois, we're well known. Our brand is well known. The guests know us. We put in the store. We still have a lot of white space and it hits the ground running. If you go on the outside, where we have fewer stores it could be a risk of us building that business because our brand is not known. The good thing about that and how we take the risk out is through M&A. If we're going into a new market, and there's an acquisition, we can do a full blitz and have more assets in that one area. So we can put media to it. The guests will know us right away because we picked up a large set of assets, and that's how we mitigate some of that risk. Another risk on building on new stores is really on the cost side of it, the cost of materials, the cost of labor. We've seen that cost increase quite a bit to build a new store. But to mitigate that as well as M&A. So traditionally, on average, M&A is costing less for us to build a store. So we acquire a store, whether single site or chain, and it's already an existing asset. It's a C-store asset usually and the guest is already present. So we can mitigate those risks that way as well.

And when we do that, really our math right now is we can buy one of those stores, we can put, give or take, $1 million into that store to improve it, put a kitchen in, equip it, rebrand the entire thing and still be $0.5 million to $1 million below replacement costs at today's prices. So still very favorable on the M&A side. Who are you?

Bob Griffin from Raymond James. Appreciate the time from everybody and as well as the tour today. I guess 2 questions on the acquisition. I guess in the initial deleverage period in Fikes -- post the Fikes acquisition, does that take you out of the market? Or does it preclude you from doing anything large if there was a compelling acquisition to come about? And then secondly, maybe on the fuel side, can you talk a little bit about what picking up the fuel terminal does, maybe from a capability standpoint, back across the rest of the network, or what you're most excited about? And just help us understand what that addition because I believe this is Casey's first fuel terminal gives the business?

Want to handle the deleveraging.