Casey's General Stores, Inc. (CASY) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Casey's General Stores Incorporated Second Quarter Fiscal Year 2016 Earnings Release. At this time, all participants on the lines have been placed on mute. Later we will conduct a question-and-answer session. [Operator Instructions] Please do note today’s program is being recorded. [Operator Instructions] I'd like to now introduce Bill Walljasper, Chief Financial Officer, for our opening remarks. Please go ahead sir.

Good morning and thank you for joining us to discuss Casey's results for the quarter ended October 31st. I'm Bill Walljasper, Chief Financial Officer. Bob Myers, Chairman and Chief Executive Officer, is also here. Before we begin, I'll remind you that certain statements may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As discussed in the press release in the 2015 Annual Report, such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from future results expressed or implied by those statements. 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. We'll take a few minutes to summarize the results of the second quarter, and then afterwards open for questions about our results. As all of you’ve seen, diluted earning per share in the second quarter were up 56% to $2 compared to $1.28 a year-ago. Year-to-date diluted earnings per share were $3.57 compared to $2.56 in the same period last year. EBITDA was up over 38% in the quarter compared to a year-ago. The result reflects a strong fuel margin environment as well as strong sales performance across all categories. Before we go over each category to get more detail on what is driving the results, I'll remind everyone that we’ll release the detail of November same-store sales on Tuesday, December 15. During the second quarter, we experienced a strong fuel margin environment, resulting in an average margin of $0.247 per gallon compared to $0.195 per gallon in the same period a year-ago. Year-to-date the fuel margin is $0.211 per gallon, well ahead of our annual goal. Casey’s trailing four year fuel margin is $0.17 per gallon. The second quarter margin benefited from increased volatility of wholesale costs during the period, as well as an overall decline in wholesale fuel costs. We also benefit from the sale of renewable fuel credits, commonly known as RINs during the period. During the quarter, we sold 13.6 million RINs for $4.7 million. This represented about $0.01 per gallon improvement to the fuel margin. Subsequent to the recent announcement from the EPA, RINs are currently trading around $0.75. Last year in the third quarter, the average RINs sold were approximately $0.60. Lower retail fuel prices from a year-ago benefited same-store gallons resulting in an increase of 3.3% in the second quarter, while total gallon sold increased 7.7% to $496.2 million. Same-store gallon sold year-to-date were up 3.3%, with total gallon sold for the year up 7.8% to $997.4 million. The average retail price of fuel for the quarter was $2.35 a gallon compared to $3.19 last year. Fuel gross profit for the quarter was up nearly 37% to $122.7 million. Total sales in the grocery and merchandise category were up 10.6% to $516.6 million in the second quarter. Same-store sales were above goal, up 7.5%. We experienced double-digit sales increases in nearly all areas of the category during the quarter compared to a year-ago with an average margin of 31.5%. As a result, gross profit dollars was up nearly 8% to $162.9 million. The margin in the quarter was affected by a $5.2 million out-of-period adjustment relating to the correction of warehouse costs from the first quarter that were not properly captured. The adjustment had no impact on year-to-date results. For the year, same-store sales were up 7.2% with total sales up 10.3% to $1 billion. The average margin year-to-date is on goal at 32.1%. We are pleased with the gains in the category and anticipate continued growth throughout the fiscal year, as we benefit from the continued roll out of operational initiatives and new store openings. The prepared food and fountain category continued its strong performance with total sales up 14% to $229.4 million for the quarter. Same-store sales in the quarter were up 9.4%, with an average margin of 63.4%, up 410 basis points from a year-ago. This was primarily due to lower commodity costs and prior retail price increases. We are currently locked in on our average cost of cheese for the quarter at $1.89 per pound compared to $2.43 a pound year-ago. The forward buy contract for cheese extends through December of 2015. For comparison, the average cheese cost in the third and fourth quarter of last fiscal year was $2.05 per pound and $1.89 per pound respectively. Year-to-date, same-store sales were up 9.8%. Due to the sales increases and margin enhancement, we were able to lift gross profit dollars in the quarter nearly 22% to $145.5 million. We are pleased with the gains in that category and anticipate continued growth throughout the fiscal year as we benefit from the continued roll out of operational initiatives, including online ordering as well as new store openings. At the six-month mark, operating expenses were up 8.7%. Over the quarter, operating expenses increased 9.5% to $268 million. Approximately 80% of this increase was due to a rise in wages and payroll taxes. This was primarily related to an increase in the operational initiatives, operating 48 more stores from a year-ago in the same period and an increase in bonuses as a result of the Company’s strong performance this quarter compared to the same time period a year-ago. On the income statement, total revenue in the quarter was down 10.5% to $1.9 billion, due to a 26% decrease in the retail price of fuel from the second quarter last year. The revenue decline was offset by strong sales gains due to an increase in the number of stores in operation this quarter compared to the same period a year-ago and the additional roll out of operational initiatives to more stores. Year-to-date total revenue was down 10.5% due to lower fuel prices. The effective tax rate in the quarter was 35.8%, down primarily related to an increase in favorable permanent tax differences and a decrease in State tax expense. We now expect our effective tax rate to be around 35.5% to 36.5% for the fiscal year. Our balance sheet continues to be strong. At October 31st, cash and cash equivalents were $65.6 million, up from $48.5 million at the end of the fiscal year, primarily due to the strong year to date results of the Company. Long-term debt net of current maturities was $830.6 million, while shareholder equity rose to $1 billion, up $134 million from fiscal year-end. At the six-month mark, we generated $245 million in cash flow from operations and capital expenditures were $210 million compared to $230 million a year-ago in the same period. This was down due to a decrease in acquisition activity year-to-date compared to the same period last year. We expect capital expenditures to increase as new store construction accelerates and we complete more major remodels during the second half of our fiscal year. This quarter, we opened 17 new store constructions, and completed 4 replacement stores. Acquisition activity has been slower thus far in the year, as we’ve seen transaction multiples and seller expectations increase. We believe this is due in part to the higher fuel margin environment that exists generally throughout the industry. We will continue to remain patient. Additionally, we’ve completed 24 major remodels and have 26 new stores under construction as well 39 major remodels under construction. We anticipate opening a total of approximately 50 new store constructions and completing 100 major remodels by the end of the fiscal year. Our store account at the end of the quarter was 1,904. In addition to the unit growth, year-to-date we’ve converted 100 more locations to a 24-hour format and added 20 more stores to the pizza delivery program. We are also nearly complete will rolling out online ordering to all of our stores. With the completion of this at the end of this month, we will begin a comprehensive marketing campaign starting in January, which will include the introduction of our mobile app for this new service. Preliminary results for the soft roll out thus far have been very positive and we’re excited and optimistic about this new initiative. That completes our review of the quarter. As I mentioned previously we’ll release November same-store sales on Tuesday, December 15. We will now take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Karen Short with Deutsche Bank. Your line is open. Your question please.

Hi. Thanks for taking my question. How are you?

Good Karen. How are you?

Good. Just my standard question would be related to online orders. So obviously, you said you would kick off a mass marketing campaign in January, but any color you could give us in terms of the attachment rates and add-ons in terms of online order? And then, maybe help me understand if there was some benefit to the gross margin in prepared food from it?

Yes, first of all, the preliminary results from online order, we haven’t had a tremendous amount of result at this point. I can tell you right now Karen that the results are very favorable. It ranges not only from an increase in whole pie orders at [technical difficulty] online ordering, but also probably just a significant would be the increase in add-on sales. Things like extra toppings, bread sticks, buffalo wings, things like that. We are going to probably stop short at this point to get out any type of financial indication at this point. However, I can tell you that based on the information we seen thus far, we’re very optimistic about the roll out. That combined, the online ordering combined with the continued roll out of operational initiatives. Next fiscal year certainly it gives us, lets’ say, we’re cautiously optimistic about the results and opportunities for next fiscal year in prepared foods.

Okay. And any color on the gross margin in prepared foods. Could you obviously -- it can kind of back into what cheese contributed, but any other color, because it was a little higher than we’re looking for?

Yes, absolutely. Yes, the 410 basis point improvement in the prepared food margin predominantly is due to the commodity costs. So cheese costs represented about 215, 220 basis point improvement. We are still at two price increases that were implied in the quarter, that lifted about a 150 basis points. Also about a 15 basis point improvement from the lock that we’ve on coffee that goes into next year, so that will give you the majority of that increase. Now I will say, we did just lapse in November one of those price increases.

Right. Okay. And then, credit card fees in the quarter?

Credit card fees in the quarter were about $27 million.

Okay. And then, I guess, just last question, in terms of OpEx -- M&A its been trending lower obviously I think a function of the lower acquisition environment less than expected acquisition environment a little bit, but how do we think about the operating expenses in the second half and especially with the new DC opening?

Well, the second half, as I indicated, we’re going to start accelerating major remodel activity. We are committed to do a 100 major remodels this year. So right now the majority of those can be back loaded into this last two quarters. So obviously that brings benefit to the Company, but also increases the operating expense. You could see a slight acceleration in operating expense, because of that and an acceleration in new store openings. With respect to the second distribution center, we expect that to somewhat of a neutral impact going forward in the first year of operation. Also keep in mind that will become operational in February, so we will only have a few months within the fiscal year.

Okay. That’s helpful. I will get back in the queue. Thanks.

Thank you.

Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is open. Your question please.

Hi, good morning. Thanks for taking my questions.

Hi, Kelly.

Good morning. I was wondering if we could talk about fuel margins. I understand it’s difficult to predict, but clearly the backdrop was volatile, but $0.247 seems just extraordinarily strong. And then just curious, if you’re sensing just a more seismic shift in the fuel margins going forward or you think this is really all due to the volatility that’s been going on in the market?

Well, good question. It’s hard for us to predict any future fuel margins. But we talk about kind of what we’re seeing here currently and some things that have been going in our favor. And certainly in this third quarter we had two or several phenomenons happening. One, we did have an overall decline in the wholesale cost of fuel during the period, but also within that timeframe we did see volatility up and down in conjunction with what I will call rational pricing from the -- from our competition. So all of that combined elevates us to that $0.247 if you back out RINs, it was about $0.237. Still a record fuel margin, but over the last, as I mentioned in the narrative, the trailing four-year fuel margin is $0.17. So that has continually gone up over the last -- or probably seven to eight years. We believe it’s a function of continued pressure on overall gross profit within our industry where people are offsetting that pressure and it happens to be in the fuel margin area. So its hard -- again, it’s hard for us to predict where that will go in the future. The announcement from the EPA at several weeks ago certainly seem to create little more stability, or I should say uncertainty in the RIN environment. Now where the RIN stay, where they’re at currently we can’t certainly predict that, but it certainly has created some of that uncertainty and taking that out of the picture.

Got it. I guess, the commentary on the acquisition front too, I guess, it sounds like maybe some potential targets or looking at the fuel environment and at least wanting to continue to participate in that and maybe turning down some offers, is that kind of the right way to characterize it?

I’d say partly that. I mean, what we’ve seen in the market area probably over the last 6 to 12 months is the acquisitions that have been done have been at pretty high multiples. And so if you’re a seller, whether you’re a small seller or not, you still are cognizant of those that activity, and so the multiples in there are creeping up and I think the seller expectations are creeping up, but I think you’re on point there in that people that are going to sell their business and maybe an elevated cash flow at least for them certainly have a higher expectation. So that’s where we’re going to be patient. We are not going to over pay for an acquisition, just so we can tell someone that we increase the number of units in our business. We will be very patient.

Does that make you think about building up the pipeline for organic growth a little bit more over the next couple of years or just kind of continuing to balance the two?

Certainly that would be one of the logical thought process is now for us to accelerate organic growth. We certainly start needing to do that now and we’ve been -- we’re doing that in the preparation actually for the second distribution center. We’ve added staff in the store development department over the last year or so in an effort to continue to adding the landscape.

Got it. And then, can I just ask another about the operating expenses? You mentioned the bonus impact. Can you quantify what that was on a year-over-year basis?

We don’t give you that granular information, but it certainly was an impact and you can -- obviously we’re tracking on a record year this year so far from six months relative to the six month a year-ago. And so we still don’t give that information out, Kelly.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Ben Bienvenu with Stephens Inc. Your line is open. Your question please.

Thanks. Good morning, guys.

Hi, Ben.

So, just one follow-up on the roll out of the online ordering with a nationwide ad campaign. Would you expect expenses to move up meaningfully with that from an advertising spend perspective or do you think you can keep the staple as a percentage of sales?

I would not expect that to be meaningful. It certainly will be an uptick as we have a little more comprehensive campaign. But I don’t think that that will resonate through the operating expense line to a greater degree. If it does, though Ben we will certainly point that out in the next call and future calls.

Okay, great. And then, when we think about the roll out of accelerated initiatives in the back half relative to last year, how should we think about the cadence 3Q versus 4Q and even potentially within the month, if you’re willing to provide that level of granularity?

Yes. So we look at I think you’re referring to the major remodels and pizza delivery, as well as the new store constructions. And so when you look at those, pizza delivery we indicated at the beginning of the year, we’d plan on doing roughly about a 100 of those conversions. We only done 20 of those, so the remaining 80 are going to be back loaded probably pretty equally in the last two quarters of the fiscal year. The major remodel we still have 76 of those to go in relationship to our goal. I’d say those might be slightly weighted towards the fourth quarter relative to the third quarter, but probably relatively equal there as well. And same would hold true of new store construction. I think we’ve more openings in the fourth quarter than the third, nevertheless relatively equal.

Okay. That’s helpful color. Thanks. And then, given lower cheese prices, have you thought about extending a forward buy beyond where we’re today at the end of this calendar year? What’s your thought process there?

Yes, we’re always looking at opportunities to advantageously lock in some of those volatile costs like cheese for instance. I know that our food service department is looking at that very diligently. Right now we’ve not extended that lock past December 2015. But its certainly it is our radar screen and to the extent that we do execute any future contracts, we will certainly make everybody aware of that.

Okay, great. And then just one last one for me, You called out the $5.2 million warehousing costs adjustment in the quarter, I assume that was one-time, but should we have an expectation for that to show up in the next couple of quarters?

No, not at all. That was just a one-time anomaly that was picked up in the second quarter, corrected and as I mentioned, year-to-date results weren’t affected, so just a one-time anomaly.

Got it. Okay. Thanks and best of luck.

Yes, thanks Ben.

Thank you. Our next question comes from the line of Stephen Grambling with Goldman Sachs. Your line is open. Your question please.

Hey, good morning. Thanks for taking the question.

Good morning.

Just on the grocery margin, I may have missed this, but if you could potentially quantify some of the just the impacts there, what’s actually driving that? Is it a mix shift to tobacco and other factors? And then just as a follow-up, I know you talked about potential benefits in the past from an increasing direct distribution. Can you just give us a sense for maybe what percentage of grocery is direct from vendors and where that number could go? Thanks.

Yes, I will take the first part [technical difficulty] is here. For the first part of that question, we’ve seen just over the [technical difficulty] point on here for the last 6 to 12 months for lower retail fuel price. And that shift really is a trade up in a couple of areas. One I mentioned as in the prior conference call, create premium brands of cigarettes. The majority of the premium brand of cigarette carry a little bit lower margin. And the cigarette category as a whole. Also in conjunction with that, we have seen an uptick in carton purchasing relative to packages -- again has a lower margin than the pack. So that phenomenon is playing into that as well. We are seeing a slight product shift as well. The other phenomenon we have seen is; is an increase in premium brand of sales within the beer category, and again those are lower margins within that particular aspect of the overall merchandise category. So those are playing into it. But I would say this as a takeaway, anytime you see a significant margin movement within the grocery and general merchandise category its probably related to cigarettes, because it dominates the category, its 35% to 40% of the overall revenue in that category. So you might -- to run the second part of your question by us again.

Yes, I was just -- as we think about some of the potential opportunities on that grocery margin, I think you had referenced the potential to deal a little bit more direct distribution, any sense for quantifying that?

Well, I think what you might be referring to, I’m going to take a stab at this, would be with some of the energy drinks that’s specifically going to Coke whether or not we [technical difficulty] product. Certainly those have always evaluated, and I don’t -- we don’t -- right now we don’t have any plans to take that [technical difficulty], but certainly are evaluating that and it makes financial sense if we will certainly do that, because that would free us certainly space in the distribution center for future expansion. Other than that it’s a little harder to drive the grocery and the merchandise margin because of the cigarettes and the [technical difficulty] that I mentioned previously.

And would that be a sizable percentage of sales that’s just going through those energy drinks?

I think it would be -- probably some all of you might think relative to category as a whole. So I’m not sure will make a tremendous impact.

Fair enough. Thanks so much.

Thank you.

Thank you. Our next question comes from the line of Bonnie Herzog with Wells Fargo. Your line is open. Your question please.

Thank you. Good morning.

Hi, Bonnie.

Hi. I just have a quick question on RINs. I’m curious will your strategy changing at all over the next year for RINs given the recent EPA ruling, and then how long do you expect prices will stay elevated?

Well, I wish I had an answer for the second one, but I can tell you that, we don’t have any plans right now to dramatically effect how we distribute fuel. We’re somewhat -- we look at our 14 state area either dominates with respect to our ability to secure the RIN, so we don’t have any different plans at this point. Now with respect to your second part of your question, it’s really difficult for us to predict where RIN values will go. But certainly the announcement from the EPA or where the [indiscernible] requirements will be over the next several years certainly has created or I should say has taken the uncertainty out of the RIN market. So whether they stay in this $0.70 to $0.80 range for a while it’s really -- it’s hard for us to predict, but certainly that’s a step in the right direction.

Okay. Great. Difficult to predict. And then I had a -- I guess a follow-on question on your prepared food business. It’s certainly still very strong, but your SFS dropped below 10% in the quarter really for the first time in a really long time. So I was hoping you could drill down just a little bit further on why trends are decelerating a bit there?

Yes and I’ll probably circle back to an answer I had with Steven on prepared foods. And so when we look at, I mean obviously a lot of the same store sales come from the rollout of these operational initiatives, the conversion of 24 hours, conversion of pizza delivery as well as major remodel and now more recently the online ordering. And so when you look at this in context, we have completed the 24 hour rollout, we did that in May. But we saw the long way to go on the back half of the year with respect to the rollout of pizza delivery and major remodels with which has significant impacts to the prepared food category. So I think perhaps that’s one of the reasons you’re seeing maybe a slight -- I wouldn’t -- I would hesitate to use the word softening when we’re doing 9% to 10% same store sales. But maybe the deceleration is temporarily until we get these rolled out. And then those two combined with online ordering and the comprehensive campaign that will start in January, that certainly led me to have the comment of that we are partially optimistic about opportunities in the prepared food category going forward. Hopefully that helps [technical difficulty] answer.

Yes, that makes sense. And then you’ve talked a little bit about cigarettes and tobacco, but I’d be curious to hear from you what else you are seeing in the category? I know a lot of the new contracts are rolled out. So just curious to hear from your perspective what the current competitive environment is like right now especially given rentals relatively recent acquisition of Lorillard?

Yes, the competitive environment for us is still very solid in our market area. The cigarette category certainly is a category that has been declined and has been for some time. So I think we’re positioned extremely well to be very competitive in that area as well as many other areas within the grocery and other merchandise category. But right now we haven’t seen any impacts -- I mean impact from that particular transaction that you mentioned. We’ll certainly continue to monitor that. But it appears that we have been taking market share over the last several years as you look at our grocery and general merchandise same store sales number which really is driven in a large part by the cigarette area that particular category. So we feel good about where we’re at in that area.

Okay. And then just one final quick question for me, it’s just I wanted to get a sense from you how realistic your goal is to build or acquire the 75 to 113 stores this year, because as I think you address, you really need to ramp things up in the second half? And I just want to get a sense of your confidence level of being able to do that.

Yes, and that’s a good question. That 75 number you mentioned there would represent a 4% unit growth. As we mentioned on the call, we’re on pace to do approximately 50 new store constructions. And so for us to get to that number we’re going to have to see an acceleration of acquisition activity, and given the environment that we have seen in the first six months related to the reasons that I mentioned previously, certainly will be a challenge at that point. So that’s why we are looking at other opportunities on a longer term basis maybe accelerating organic growth in future years. But it’s certainly going to be a scenario though Bonnie, that we’re going to remain patient and not necessarily get too anxious about a unit number and get wrapped up in a unit number and continue to focus on the core capabilities of the business and that -- for us that’s writing gross profit dollars throughout the business.

Okay. That’s helpful and makes a lot of sense. Thank you.

You are welcome.

Thank you. Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open. You question please.

Good morning everyone, and great quarter.

Hi. Thanks, Chuck.

I just want to talk a little bit about the cigarettes. When you talk about they are trading up to the cartons and the premium brands, Bill well there might be lower margins. Do you end up with more penny profit out of each of those types of sales?

Yes, those typically generate a little bit higher penny profit. So again kind of back to my -- just my last answer there, that’s what we really focus on at the end of the day is driving gross profit dollars.

And I don’t know if you’ll talk about this directly, but when you’re looking at your comps, how -- in prepared foods, to what degree were they helped in the most recent quarter but the online ordering at this point?

I would say, at this point since it was a very soft rollout of online ordering, I would say we would have a very nominal impact in the quarter. We had certainly a significant ramp up here in the last probably three to four months say online. But again we have not done anything comprehensive nor have we introduced the mobile app. And so that mobile app will be introduced later this month and then in preparation for that comprehensive campaign in January, and that’s where I think you’ll start to see the traction and the benefit from online ordering really take hold. And at the end of the day, Chuck online ordering it’s a service that quite frankly many of our customers demand, that’s how they interact with business. And it would be similar to when we rolled out pay at the pump years and years ago, you really need that service to stay competitive. I think this is one of those things that not only do we need to have that to touch more customers that may not be integrating with us but also driving other sales from a customer. So we’re excited about it.

And when you look at store development Bill; and not only new store constructions and remodels, but even some retrofitting. Could you talk about what products or services you might be testing? I know you’ve talked about car washes in the past, but maybe even like exploring different types of locations as you grow the chain?

Well several things there. Most of our product innovation typically comes through the prepared food category. So we’re always testing different products. It may be more challenging to have a homerun like pizza we introduced that back in the 80s, but we’re hitting a lot of singles with a lot of products and that’s kind of what we’re going to be gearing for going forward. And I think the online order will give us an opportunity to touch a lot of people [technical difficulty] forward. And so, in addition to the unit growth the second distribution center comes online in February, that is on pace to open up roughly the first part -- first week or two of February. And so what that will allow us to do is to extend the geography of our search for new sites as well, not only from an organic perspective but also from an acquisition perspective. So that will bring a new state like Michigan and Ohio for instance. It will also give us the opportunity to efficiently expand further east in Tennessee and Kentucky and even further south into Arkansas. So we think that we’re going to have some nice benefits in that regard.

Will you be distributing any new types of products, new distribution capabilities that you don’t currently have?

No, not any really new types of products. Certainly the new distribution center is pretty advanced technology, but nothing new that would pertain to what you’re asking about.

All right. Thank you.

Thank you, Chuck.

Thank you. Our next question comes from the line of Ben Brownlow with Raymond James. Your line is open. Your question please.

Hi. Good morning.

Hi, Ben.

Good morning, Ben. How are you?

Good. Congrats on the quarter. I just had a quick question, a follow-up question on what you just said recently on, in terms of the geographic reach with the new DC ramping up. Just wanted to know kind of in terms of the timing process in terms of when do you actually start looking at acquisition opportunities or assets in those far reaching markets? Is it February or do you start looking earlier than that?

Well, that’s a good question. And certainly when it comes to organic growth, need to start a little bit further in advance because those take a little bit longer to come to provisions to finally open the store. So with the advent of this distributing center coming online in February, we have already started looking at other geographic regions and expanding those.

And can you remind us again which is the mileage reaches from DC?

Yes, generally speaking about 500 mile radius from the distribution center.

In that year one would you be willing to go up to that 500 miles or are you trying to kind of work your way out over time?

No, I would say, here’s the plan with respect to distribution center. It will be a slow rollout in the first several months as we transfer stores and truck routes to that making sure everything operates efficiently. And then over the first full year of the operation of the distribution center you can plan on roughly about 30% to 40% of the store base or truck routes to be transitioned over to that distribution center. And certainly we want to make sure that we don’t overload the distribution center any capacity -- we want to make sure it runs efficiently before we get overly aggressively in expanding our geography.

Okay, great. Thank you.

You are welcome.

Thank you. [Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Your line is open. Your question please.

Good morning and thank you for taking the questions. So just a follow up on the new distribution center; I think Bill you had mentioned earlier that you expect this to be expense neutral in the first year of operations. Once you get past that first year, do you anticipate gaining efficiencies from that second facility?

Yes. We think there’s opportunities as we get more efficient in operating that particular and get little more capacity in that second distribution center. There’s opportunities certainly to gain efficiency. As I mentioned in some -- maybe some prior calls, we will eliminate all three day truck routes and majority of two day truck routes and certainly that leads to quite a bit efficiency from our perspective.

Got it. Okay. And also, just wondering what the lower fuel prices; have you seen any notable change in the regular versus premium gallon sold?

For us that’s probably not significant. We only have roughly about 100 to 125 stores that sell premium fuel. So it’s not a big fuel option in our market area given the world demographics. So we haven’t seen necessarily a notable uptick in that regard.

Got it. Okay. All right. Thank you very much.

Thank you. Our next question comes from the line of Bob Summers with Macquarie. Your line is open. Your question please.

Hi, Bob.

Hi. How are you doing?

Good. How are you?

I’m doing well. So just, from a gallon growth perspective, what does the industry look like in the geographies that you compete? And I’m trying to get a sense for the magnitude of your share gain at this point?

In fuel gallons?

Yes.

Yes. Well, first of all I mean, obviously one of the reasons that we have seen a nice uptick in same store fuel gallons has been in the differential and retail price period-over-period. Typically we see more gallons per transaction and that’s driving that. Now we will start cycling against some of the lower retail declined a year ago, so we’ll see how that moves forward. As far as the new markets, I really don’t -- I don’t have a perspective as to kind of what the competitive landscape is. I can tell you in the markets that we’re currently servicing, its very rational pricing.

Okay. And then -- and just, with respect to grocery and both prepared foods, obviously you’re taking share from somebody. Any idea who and any competitive response over time?

I can't necessarily point to one competitor response in regards to that. But certainly it’s going to be a wide range of different businesses that we believe we’re taking market share from. In the prepared food area it’s going to be any fast food or fast casual restaurant out there I think that we had an opportunity to take the market share from. Within the grocery and general merchandise, I think the big market share that we’re gaining there is in the cigarettes and certainly cigarette sales are dominated by the convenient store industry across the national. So intuitively I think we’ll be taking market share from other convenient stores in our market area in that particular area of our business.

Okay. And then the last one, so it looks like we’re going to see sustained strength in CPG, the RIN benefit is arguably better than you were thinking three weeks ago. You kind of tie these together; free cash flow should be probably higher than you were originally thinking. How do we think about the allocation of this? I mean does it go back to shareholders or does it build a war chest for acquisitions?

Well, I can't speak to any -- necessarily any future cash flow gains. But I think the general question is, for us we think there’s opportunities to grow the business and we do have a second distribution center coming online, and we think given that and the potential to expand our geographies, we think there’s going to be opportunity to put any type of additional cash flow if there is back into the business.

Okay, great. Thanks.

You are welcome.

I’m showing no further questions at this time. I’d like to now hand the program back over to Bill Walljasper for any additional remarks.

Well I just like to thank everybody for joining us this morning. And just again as a reminder same store sales will be released next week and everybody have a happy holiday season. Thank you.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.