Fikes Wholesale, Inc. (CASY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Casey's acquisition of Fikes Wholesale, Inc. and its 198 CEFCO Convenience Stores. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Johnson. Please go ahead.

Thank you, and good morning, everyone, and welcome to Casey's conference call to discuss the announcement of our agreement to acquire Fikes Wholesale, Inc., owner of CEFCO Convenience Stores. Joining me today to deliver prepared remarks are Casey's Board Chair, President and CEO, Darren Rebelez; and the company's Chief Financial Officer, Steve Bramlage. Darren and Steve will also be available for a brief question-and-answer session after the remarks. For your convenience, in addition to this morning's news release, we have posted a presentation to the Investor Relations section of our website. We will make some references to this presentation during our opening remarks. Before we begin, I'll remind you that certain statements made by us during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to the ability to consummate the transaction, the potential impact of consummation of the transaction on relationship with third parties, expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, business and/or integration strategies, plans and synergies, growth opportunities and performance at our stores. There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by those forward-looking statements, including, but not limited to, the execution of the company's strategic plan, the integration and financial performance of the acquired stores, wholesale fuel, inventory and ingredient costs, distribution challenges and disruptions, the impact and duration of the conflict in Ukraine or other geopolitical disruptions as well as other risks, uncertainties and factors, which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. With that, I now will turn the call over to Darren to discuss the transaction and related details. Darren?

Thanks, Brian, and good morning to everyone. We appreciate you taking time out of your day to join us on such brief notice. We're thrilled to be with you today to announce our agreement to acquire Fikes Wholesale Inc. and its 198 CEFCO Convenience Stores. This transaction is highly strategic and will help the company accelerate execution of its 3-year strategic plan. This acquisition will quickly expand Casey's presence in Texas, a very attractive market for Casey's. In addition, we'll be able to expand our footprint further into the South as well. The transaction will deliver EBITDA accretion in the fiscal year and create value for our shareholders, team members and guests. We're also very thankful for Raymond Smith, President of Fikes, and his team for their cooperation throughout the process. We're pleased to have reached this agreement and are excited about Casey's future. Before getting into the details and anticipated outcomes associated with this transaction, I'll first remind you of Casey's current 3-year strategic plan that we shared in June of 2023. At that time, we committed to adding at least 350 new units by fiscal 2026. This transaction coupled with our strong growth in fiscal 2024 will enable Casey's to achieve that target less than halfway through our plan. Acquisitions of this size and strategic fit do not come along very often, and we seize the opportunity to add these large, high-quality stores to our network. The fit between Fikes and Casey's is outstanding. CEFCO's large-format stores average over 4,800 square feet comparable to the new stores that Casey's builds today. This will give us the ability to add kitchens to the 85% of the stores fairly easily as we eventually expand our pizza offering to Texas and the South. The transaction will also include a dealer network as well as a fuel terminal. The fuel terminal gives Casey's another fuel capability, as we continue to evolve our fuel procurement and distribution strategy. Texas has been a highly strategic state for Casey's since the 22-store Lone Star acquisition last fall, and adding CEFCO stores will give us the scale to continue to grow both organically and via M&A throughout Texas and the South. Once completed, we will have over 170 [indiscernible] in Texas, making it the seventh largest state in Casey's network. This opportunity really reflects the progress we have made in recent years and our ability to source, acquire and integrate stores into the Casey's portfolio. In fiscal year '22, we acquired 207 stores, including 182 in 3 separate transactions. In fiscal years '23 and '24 combined, we acquired an additional 159 stores via multiple acquisitions. Today's announcement is another stop along that journey. Our team's deep integration experience, along with our strong balance sheet, put us in a position to execute this transaction. We've demonstrated the ability to successfully integrate stores in an efficient manner over the past several years, and we consider this acquisition to be business as usual for us. This acquisition will not prevent us from continuing to ratably grow in the coming years as well. This transaction is a testament to our two-pronged approach to growth and highlights our ability to be highly selective when it comes to acquisitions. With that, I'll turn the call over to Steve to walk you through the financials. Steve?

Thank you, and good morning. I'd like to reiterate Darren's welcome to the Fikes and the CEFCO team. We are very excited to have you join the Casey's family and are eagerly anticipating what you can add to our company. Personally, I am really pleased about what this combination will do for Casey's, both strategically and financially. And before I start with the financials, I would just reiterate Brian's earlier comment that we've added and posted a deck with some supplementary information at the beginning of this call for reference. Let me begin with the $1.145 billion gross purchase price. This includes approximately $165 million of acquired tax benefits, primarily consisting of accelerated depreciation and goodwill amortization. The net purchase price is therefore $980 million. The acquired 2023 pro forma adjusted EBITDA is $89 million, and the primary pro forma adjustment is estimated EBITDA for newly or soon-to-be-opened stores that had not fully ramped. These 2 figures result in a multiple of 11x. We ultimately expect to achieve $45 million or approximately 50% of the acquired EBITDA in synergy capture once we have Casey's kitchens completely installed. Including the run rate synergies, the purchase multiple falls to 7.3x. Please note that the purchase price adjustment does not include an additional $20 million that we expect to monetize from the sale of some excess land, and that's primarily due to the uncertain timing associated with those prospective transactions. This transaction is consistent with our capital allocation philosophy. Opportunities to invest in EBITDA and ROIC accretive transactions that are on strategy are and will remain our first priority. Furthermore, we are committed to preserving the strong financial flexibility of the company to pursue this and other future opportunities that can add value. Taking advantage of the current strong balance sheet and the latent debt capacity that we enjoy, we expect to pay for the transaction with a combination of balance sheet cash and bank financing. At closing, we expect that the company's pro forma leverage level will reach approximately 2.4x. We will quickly reduce this to approximately 2x within the first 12 months of closing through a combination of modest but prudent deleveraging, growth and synergy capture. This transaction will not impact our dividend philosophy, which is to maintain a payout ratio of approximately 15% and to align dividend growth with medium-term EBITDA growth. We would not expect to be repurchasing shares immediately after closing, as we will allocate cash against the aforementioned priorities. The $89 million of pre-synergy pro forma adjusted EBITDA that we referenced represents a bit more than 8% of our fiscal year '24 consolidated EBITDA. We expect to incur approximately $35 million of onetime deal and integration expenses as part of the transaction, and approximately $20 million of those costs will be incurred at closing. Additionally, we expect to be EBITDA accretive in the first 6 months of ownership. Depending on the amount of cash that we ultimately apply to closing and the final interest rates, we expect to incur an incremental $70 million of interest and financing expense before any deleveraging in the first 12 months post closing. The buckets of synergies that we expect to deliver are largely consistent with other transactions. Overhead and fuel procurement synergies will come sooner. Supply chain and inside margin improvement opportunities are more dependent on our remodeling schedule and our success at getting permitting approved quickly. We would expect the deal to be modestly EPS dilutive in the first 12 months post closing because of the incremental financing, the onetime costs and the ramping nature of the synergy capture. Please note that given the expected closing of this transaction sometime during the fourth quarter of the calendar year, it will therefore primarily impact the second half of our current fiscal year. This means that we'll incur a large portion of the deal an integration-related cost in the fiscal year, but we won't have the benefit of a full year of acquired EBITDA to net against those costs. We plan to update our view on the fiscal year for Casey's at the end of our second quarter as normal, and we will incorporate all known impacts from this transaction at that time to the best of our ability. Now given the successful closing of this transaction, we do now expect to add approximately 500 new units in total over our 3-year strategic plan from our fiscal year '24 through our fiscal year '26. This obviously includes the new -- excuse me, it includes the 154 new units that we added last year. We will make some modest adjustments to our current new build schedule to ensure that we can expeditiously capture the expected synergies from this transaction via remodeling. Finally, one update for the fiscal first quarter. Our current CPG quarter-to-date is approximately $0.40 per gallon. With that, I'll turn it over to Darren.

Thanks, Steve. In summary, and before going to your questions, I'll just offer a few key takeaways. First is our strategic rationale behind this acquisition is clear, including an opportunity to get scale in a highly strategic and attractive market of Texas and to move further South -- into the South, add a fuel terminal and expand our dealer network. This transaction allows us to execute on our strategic pillar to grow units, and we have experience and confidence in an efficient integration. And this will create value for our shareholders on our path to growing EBITDA at a top quintile CAGR. Again, thank you for joining us today. It's an exciting time to be a shareholder of Casey's. And with that, we're happy to take a few questions. Operator, we'll turn it over to you to facilitate the Q&A.

[Operator Instructions] Our first question comes from Krisztina Katai with Deutsche Bank.

Congrats on what looks to be a very exciting M&A deal that you guys put together here. So I wanted to further ask about -- I wanted to ask on the synergies and further -- and thank you for the slides as well. So you're doing the kitchen conversions. And it sounds like there's some other opportunities though, but I wanted to get your thoughts on where you see the biggest buckets where you think you have the greater potential and how we should think about more near-term versus longer-term synergies that you see.

Yes. Krisztina, this is Darren. Yes, with respect to the synergies, this is going to be comparable to some of the other acquisitions we made in the past, where we find the largest synergy that we bring is in our prepared foods business. Having said that, CEFCO has done a really nice job of building their own food business, and they have kitchens in a lot of their stores. So that should make the integration process go a little smoother for us. But still, we see that as our biggest synergy. Fuel would be the next largest synergy that we have, just vis-a-vis our scale. But in terms of the cadence of that, we would probably see the impact of overhead synergies and fuel synergies to come a little quicker, and then the food and merchandising synergies to come a little bit later as we remodel stores over the next few years.

Our next question comes from Bobby Griffin with Raymond James.

Congrats on getting this announced. Darren, I was just curious for me on the distribution side of things. And as you guys roll these in, where -- given the locations of these stores, are they more urban based or more rural based as some of the legacy Casey's stores? And then is there any changes to your distribution network that will need to come as well to complete the pizza rollout in some of the synergistic targets?

Yes. Bobby, to answer your first question, these stores are not really in the big cities. So if you look in Texas -- in particular, if you look at the triangle that would form from Dallas to San Antonio to Houston and back, they're really kind of in the middle of that triangle. So not really in the larger cities, but in smaller towns throughout that geography and then a little bit further West. And then in Florida and Alabama, it's all in the panhandle and some smaller areas around there. So very consistent from a geographic perspective with the mothership of Casey's. With respect to the distribution, the Texas stores will virtually all be able to be supplied out of our Joplin DC eventually. And then in Florida, we're assessing how we want to handle the Florida, Alabama, Mississippi stores.

Our next question comes from Bonnie Herzog with Goldman Sachs.

I have a question about your EBITDA targets. Just maybe curious to hear how this acquisition fits into your 8% to 10% EBITDA growth target through FY '26. Does this deal give you more confidence in your ability to hit this guidance and possibly at the high end of that range or above?

Bonnie, this is Steve. Our 8% to 10% guide that we have out there for our strategic plan, that always included some amount of unit growth, right? If you remember, our algorithm is kind of half of our growth comes from new units and half would come from the mothership. And so the 350 unit target that we had out there was always a critical part of achieving that. And so we feel like we're now safely beyond that 350 unit target. And so that should, ultimately -- of course, we're doing this to flatter EBITDA and have it be EBITDA accretive exactly how it falls within the individual years and the remainder of the plan. And that's a TBD just based on the timing of closing. But for sure, we expect this thing to be quite EBITDA accretive before synergies and after synergies. The timing is a little bit of a TBD for us.

Our next question comes from Michael Montani with Evercore ISI.

Yes. Just wanted to ask if you could give us a sense for potential rebranding. And then do you plan to retain any of the brands that are within the store? And then separately, what's the intention with the existing management team? Will they be continuing on as well?

Yes. Michael, this is Darren. With respect to the rebranding, yes, it would be our intention over the next couple of years, as we are able to remodel, that we would rebrand these stores to Casey's. There are a handful of stores that have some QSRs, and they're under franchise agreements. And so we'll have to navigate that, and that's not unusual. We have other stores that we've acquired over the years that have that same situation. And we typically do not rebrand those to Casey's until we've resolved the franchise QSR situation in those stores. But that would be our plan there. And then with respect to the team, certainly, store-level people, field-level people, we would certainly retain. And then everybody else, we would assess on a position-by-position basis to evaluate redundancy and where we need to retain folks and where we may make a different decision there.

Our next question comes from Irene Nattel with RBC Capital Markets.

Great transaction. A couple of more housekeeping items, please. Can you talk about your intentions with the wholesale distribution piece? That's, I guess, the first question. And the second is based on your commentary and the industry CPG year-to-date, is it fair to assume that the current LTM run rate is lower than the $89 million?