Casey's General Stores, Inc. (CASY) Q1 2019 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Q1 Fiscal Year 2019 Casey's General Stores' Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Bill Walljasper, CFO. Sir, you may begin.

Good morning, and thank you for joining us to discuss Casey's results for quarter ended July 31st. I'm Bill Walljasper, Chief Financial Officer. Terry Handley, President and Chief Executive Officer, is also here. Before we begin, I'll remind you that certain statements made by us during this investor 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 related to our possible or assumed future results of operations, business strategies, growth opportunities, and performance improvements at our stores. There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including our ability to execute on the value creation plan or to realize benefits from that value creation plan 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. This morning, Terry will first take a few minutes to summarize the results of the first quarter and then provide an update on the progress with our value creation plan. We will then open for questions about those results. I would now like to turn the call over to Terry to discuss those results.

Thank you, Bill and good morning, everyone. Before I begin, I would like to take a moment in memory of those lives lost 16 years ago as a result of the attacks on 09/11. This was the day in our history that we will always remember, and our thoughts go out to those families and loved ones of those lost that day. Thank you. As most of you have seen in the press release, diluted earnings per share for the first quarter were up 30% to $1.90 compared to $1.46 a year ago. The results were primarily driven by operating 105 more stores, stronger fuel margin from the first quarter of last year, reduction of hours worked inside the stores, benefits of tax reform and share repurchases. We continue to be on schedule with the execution of our value creation plan and are encouraged with the early progress we have been able to achieve in the fuel category. I would now like to go over our results and some of the details in each of those categories. In the fuel category, we continue to build out our fuel team in the preparation for the launch of our formal price optimization initiative. In the interim, the fuel team has been in close coordination with our store operations team and taken a more proactive approach to our fuel, retail fuel pricing strategy. This increased focus enabled us to achieve a higher average fuel margin of $0.205 per gallon for the quarter and drove a 13.1% increase in gross profit dollars from the fuel category. Same-store gallons were up 0.5% with total gallons sold for the quarter up 6.5% to nearly 602 million, primarily due to a strong contribution from recent new stores, acquisitions, and replacements. The average retail price of fuel during this period was up nearly 27% to $2.74 a gallon. Same-store gallons in August are below our annual guidance with an average fuel margin within our annual range. In the grocery and other merchandise category total sales were up nearly 8% to $644.8 million in the first quarter. Same-store sales were up 3.2% during the quarter, slightly above our annual guidance as packaged beverages exceeded expectations and cigarettes performed well during the period. The average margin in the quarter was up 50 basis points to 32.4% compared to a year ago, primarily due to a product mix shift to higher margin items. As a result of the favorable product mix and increased sales gross profit dollars for the quarter in the category were up almost 10% to $208.9 million. Same-store sales in August are trending at the high-end of our annual guidance. In the prepared food and fountain category, total sales were up 7.3% to nearly $281 million for the quarter. Same-store sales were up 1.7%. The average margin for the quarter was 62%, down 50 basis points from the first quarter last year, primarily due to increased promotional activity including additional promotions around our 50th Anniversary celebration. Even though our margin was down compared to last year in the first quarter, we maintained a margin at the high-end of our annual guidance. In the quarter, prepared food gross profit dollars rose nearly 6.4% to $174.2 million. Same-store sales thus far in the quarter are trending below our annual guidance as we cycle against the strongest monthly same-store sales comparison during the last fiscal year. For the quarter, total operating expenses increased 11.9% to $359.4 million. The first quarter operating expenses were impacted by the following items: credit card fees and fleet fuel expense increase of $8 million, primarily due to a 27% increase in fuel price; a $3.6 million increase in healthcare cost, primarily due to an increase in claims paid and severity of claims. Excluding the impact of these two items, expenses were up approximately 8.2%, primarily due to operating 105 more stores this quarter compared to the same period a year ago. Same-store operating expenses excluding credit card fees were up 1.6%. We continue to make adjustments to help offset some of the macro effects on operating expenses, such as hours worked, 24 hour and pizza delivery reductions, and work with our budgeted calculators. I would now like to turn the call over to Bill to discuss the financial statements.

Thanks, Terry. On the income statement total revenue in the quarter was up 23.6% to $2.6 billion, primarily due to rising retail fuel prices, and an increase in the number of stores in operation this quarter. Depreciation in the quarter was up 12.4%, which was below our annual guidance, primarily due to a decrease in accelerated depreciation from replacement stores. Activity -- effective tax rate for the quarter was 21.2%, down from a year ago due to the Federal Tax reform and a change in two of our state tax rates. We continue to be -- we continue to expect our effective tax rate for fiscal 2019 to between 24% and 25%. Our balance sheet continues to be strong. At July 31, cash and cash equivalents were $44.8 million. Long-term debt net of current maturities was $1.3 billion. Our debt-to-EBITDA ratio is now at 2.7 times. For the quarter, we generated $149.2 million in cash flow from operations, with capital expenditures at $98.3 million compared to $94.9 million a year-ago in the same period. We expect capital expenditures to be at the -- to be higher in subsequent quarters as new store construction continues, and we complete our replacement projects budgeted for the fiscal year. Our capital expenditure estimate is $466 million for fiscal 2019. I would now like to turn the call back over to Terry to update you on our unit growth and the progress with our value creation plan.

Thank you, Bill. Our target this fiscal year is to build 60 stores, and acquire at least 20 additional stores. This quarter we opened 15 new store constructions, acquired one store, and have 14 additional stores under agreement to purchase. You should expect a relatively even distribution of new store openings this fiscal year, due to the efforts of our store development team over the past two years. Currently, we have 103 sites under agreement for new store construction. We are on track to achieve our unit growth target and believe we are positioned very well for future growth. I would now like to discuss our value creation plan. As we indicated on our previous earnings call, we intend to provide you with an update each quarter regarding our progress towards execution on that plan. As a reminder, our multi-year long-term plan is comprised of several key programs and value drives including a new fleet card program, price optimization and digital engagement programs, as well as a continued focus on controlling operating expenses and capital reallocation. We are confident these key initiatives will drive accelerated growth and profitability, and deliver increased returns for our shareholders. We had completed several key milestones over the course of the last quarter. I would like to begin with our fleet card program. This program which represents a more aggressive approach to better address this important customer category is right on track with a schedule we outlined in our last call. As we reported previously, we selected FLEETCOR, as our vendor. This past quarter we on-boarded a new fleet card manager to work with FLEETCOR, and together they will be launching this new program in October. We expect to see benefits from this program in Q3 of fiscal 2019, resulting in an incremental lift in fuel volume and in-store sales driven by increased traffic. In addition to the fleet card program, we have been busy executing on our fuel product optimization plan. During the quarter, we converted an additional 592 stores to biodiesel, and 78 stores to premium or diesel. By the end of Q2, we will add one of these products to 344 additional locations. Biodiesel, regular diesel and premium fuel all carry a significantly higher margin than other fuel products. We believe these will have a positive impact to our overall fuel margin going forward. The next initiative I would like to update you on, is price optimization. Price optimization will allow us to leverage the sales data, generated by our broad network of stores combined with market data to make centralized rules based pricing decisions at the pump and in the store, which will improve sales and margin in every category throughout our network. Since our last call, we have selected price advantage as our platform for fuel optimization, and Dunnhumby [ph] as our platform for grocery and other merchandise and prepared food and fountain categories. We will begin piloting fuel optimization in select locations this month with a planned network wide rollout of fuel optimization later this fiscal year. We will also begin testing price optimization inside our stores over the course of Q2 and Q3 with a planned rollout of select items to begin later this fiscal year. In the first quarter of fiscal 2020, we will expand the program to all our remaining categories. This program represents a fundamental shift in our marketing process for both fuel and in-store purchases supported by an increased visibility into our pricing and promotion strategy. We are excited about this initiative and the benefit we believe it will bring to the company. We continue to progress with our digital engagement program and have reached several key milestones over the last quarter. Since our last call, we have selected the following platforms. SAP Hybris for our e-commerce and mobile ordering solution, YieldSoft [ph] for integration services layer and Salesforce for the customer database and marketing tool. We have also engaged Deloitte Digital as our e-commerce implementation partner. Upon integration of the digital engagement program, we intend to create a seamless customer experience both online and in-store that offers new digital product categories and facilitates personalized marketing and rewards. This will involve an enhanced website, a redesigned mobile app, a loyalty program, in-store technology, and enhanced enterprise infrastructure. This digital platform will allow us to gain a deep understanding of our customers and better serve them by providing the seamless convenience they value and target effective promotions that drive additional customer visits. We are targeting a pilot for our e-commerce platform, a new mobile app and our loyalty program in the fourth quarter, with a broader rollout starting in fiscal 2020. In anticipation of the increased sales volume generated by the value creation plan and new store growth, we are currently in the process of evaluating our distribution system to identify long-term optimization opportunities, with a focus on cost and efficiency. This review is expected to be completed in the next 30 days. Another element of our value creation plan is a disciplined approach to capital allocation, and increasing shareholder value through dividends and share repurchases. Our capital allocation strategy will continue to prioritize investments with attractive return profiles, including our value creation programs, as well as discipline store growth through new store construction and strategic acquisition opportunities. In closing, while the rapidly evolving retail landscape continues to prove challenging. We have taken transformational steps to enhance store performance and deliver long-term profitable growth. Moving forward, we believe Casey’s has the right team in place and the correct strategy to successfully execute on the next chapter and drive significant long-term shareholder value. We will now take your questions.

Thank you. [Operator Instructions] Our first question comes from Ben Bienvenu from Stephens Incorporated. Your line is open.

Yes. Thanks, guys. This is Daniel Imbro on for Ben. Thanks for taking our questions.

You bet Daniel.

I wanted to start on gallon growth in the quarter, a little bit lighter than the guidance but fuel margins were at the higher end of the range. Can you guys talk a little bit about how you’re thinking about that trade off? Was that margin a function of some early price optimization you guys are taking or was that more of the beneficial mix shift, I think you mentioned.

I would tell you, Daniel, that’s a combination of both. But primarily knowing that the price optimization strategy is forthcoming with the support of the price advantage tool, we saw an opportunity with Nathaniel Doddridge, our Director of Retail Fuels and the work that he is doing with his team, as well as Debbie Grimes, our Vice President of Fuel Procurement an opportunity to identify markets where we could grow gallons, and those -- also some markets where we could grow on the fuel margin side. So we are really looking for a long-term balanced approach, and as we do with all of our categories managed to gross profit dollar expectations. So we have a strategy in terms of trying to find that balance, and we will look at different markets in terms of where we're going to be more strategic regarding growing gallons versus other markets where we know we can maximize margin. So, right now, it's a new opportunity for us to work within a venue and the store operations team, and certainly we'll see continued balance in terms of that strategy.

Great. And a quick follow up on that -- looking at the guidance, Fleetcor kicking in later this year, and anticipate that being a boost to comps, should we anticipate kind of gallon growth in this level, maybe until that benefit kicks in in the back half of the year, is that a right way to think about the cadence?

Yes. So certainly -- this is Bill. Certainly we expect an uplift from the rolling out of the Fleetcor program, and I think that's a good way to think about that. Certainly right now, we're looking to optimize gross profit dollars like we always have, and certainly we anticipate a bump in fuel gallon movement Q3 and into Q4 as that Fleetcor program comes online.

Okay, that's great. Thanks for the color. Can you talk a little bit more about operating expenses. They're up 12% in the quarter. I think you guys said up 8.2% to excluding credit card fees and the healthcare, but could you parse out a little bit more detail on some of the buckets between maybe what new stores contributed or prior initiatives, and was there any beneficial impact from pairing back the prior initiatives in the quarter like delivery in 24 hours.

Yes, I'll take that. Yes, certainly, we had 11.9% increase maybe to just give you a little bit more color on the breakdown. Roughly, the contribution coming from new stores, and Daniel not only it’s new stores but our replacement stores and newer acquisitions was roughly almost 6% of that lift. When you take a step down further, about 2.2% comes from the increased credit cards and fuel expense. As we called out health insurance, we did have a little bit more unusual activity in the quarter. Our high dollar claims were up about 73% in the quarter, actual claims paid in totality were up almost 20% in the quarter. That ultimately drove a little over -- roughly about 1% of that 11.9%, and that gets you quickly down to that 1.6% number or thereabout. Obviously, the value creation plan, we continue to believe that's going to be about a 1% impact over the course of the year, and certainly we're trending in that direction. But on the other side of that, the new stores also contributed roughly half the EBITDA contribution that we saw in the quarter, and one of the positive things that we're seeing from the new stores that we are putting up right now is they certainly, at least early on, are ramping up at a much higher clip than previous new stores that we had in the prior years. So, we're encouraged by that. We think that's a credit to our store development team and the locations and the efforts we're making here so far this fiscal year.

Okay, great. Thanks, Bill. Last one for me, a little bit more of just a follow-up. Terry, I appreciate the color on quarter to date. You gave you called out August I think was the toughest comp for prepared foods. But how do the monthly comps look for the remainder of the quarter in each segment? Do the monthly compares get easier kind of across the board?

Yes, I would tell you Daniel that throughout the back half of the fiscal year, those monthly comps should be easier than what we are certainly experiencing in the month of August. If you recall last August was just a tremendous month of ideal weather. We also certainly had a short-term bump from the solar eclipse, and here in the Midwest, that really was a big sales impact. So certainly, as we look to September/October, the comparisons will be much more favorable than what we have here in August, and as you get into Q3 and Q4, again much more favorable, so we see some positive opportunities in the back half of the year.

That's great. Thanks guys and best of luck.

Thank you.

Our next question comes from Bonnie Herzog of Wells Fargo. Your line is open.

Hi. Thank you good morning everyone.

Hey, Bonnie.

Good morning.

Hi. I had a question on your value creation plan. I guess, I was hoping if you guys could give us an update on the timing on a high level. You mentioned in your release that you plan to expedite it. So could you give us a sense of maybe how soon you'll be able to finish implementing these initiatives? I guess I'm trying to get a sense of how much you might have shorten the timeline. And then your FY2021 guidance, should we think about your ability to hit some of these targets earlier?

Yes, this is Bill, Bonnie I’ll start that off here and so, looking at the glide path of these different programs that we have, we’re certainly right on track with the execution of the fleet card program, coming right out of the gates, back in March with the announcement of value creation plan we indicated starting Q3 of this fiscal year, we should start seeing benefits and I believe we’re at -- we’re on pace to do just that. With respect to the price optimization, again I think we’re right on track with that. The timeline for that obviously, when you’ll start seeing some benefits from that price optimization and when I say price optimization that’s the former rollout of the price optimization, but that will be in the later part of Q3 and into Q4. And then with respect to the digital transformation, we’re continuing to look to accelerate, we we’re right on pace from our original execution or original commentary. And so I think we’re actually setting up very well to have a Q4 with respect to all of these things coming to head at that time as we kick-off and look forward to the next fiscal year. So, from a quantitative perspective, Bonnie, you’ll start hearing us talk about some of those quantitative aspects as we head into Q3. Right now it’s really more qualitative and making sure we hit the milestones so that we can communicate to the Street that we are executing and planned execute on this plan.

Okay, that’s really helpful. And just a quick follow-on regarding this topic, could you guys update us on the investments required for your value creation plan, especially in light of your decision to stop buying back to stock. I just want to get a sense if anything has changed there in terms of what will be required in terms of your investments to implement a lot of these initiative?

Yes, there has been no material change to what we anticipate investing to standup these programs. Last quarter we articulated the CapEx budget $466 million including in that was roughly about $23 million to $24 million of investment to standup the digital program. The other two programs have very little investment and very little OpEx to standup. And so really the investments is going to come through the additional transformation. However, I would say that next fiscal year I would not expect to see a CapEx increase in that neighborhood. I think that’s when you’ll start to see a little bit more of an OpEx increase. And as we move forward into the course of the later part of this fiscal year and into the next fiscal year, every quarter we’ll update you on that.

Okay. And then I had a question on your pizza promo strategy, which seems like you might have tweaked a bit during the quarter, since you mentioned that you had minimal effect on your margins. So just curious to hear about any changes you might have made and then possibly more opportunities to refine your pricing and promo strategy for this business?

Terry, take that one.

Yes, I would tell you that we still remain in terms of the pizza promotion strategy, it certainly remains a very competitive market as you know and it’s very obvious to us that we need to be in that game. So you will continue to see promotions that would be along the line of single topping promotions to forward prices, you occasionally see maybe some additional or maybe even increased promotions on our supreme and other higher value pizzas if you will. So, I think the bigger thing here is taking an opportunity to understand where we can get some leverage in our morning day part, and in our noon day part with sandwiches and breakfast pizza combos. But certainly the single topping pizza promotions to forward pricing is going to continue to be strategy as we work very hard to regain that market share. And that’s the competitive environment we’re in today, not only with the major pizza brands, but also with the major QSRs and even some of our fast casual competition. So again continues to be a very competitive area with regards to promotional activity and we’re going to have to continue to refine that strategy and I know the marketing and the food service teams are doing that as we speak. And we’ll continue to work very hard to drive those sales upward.

All right, thank you.

Our next question comes from Kelly Bania of BMO Capital Market. Your line is open.

Hi. Good morning, thanks for taking my questions.

Hi, Kelly.

Hi. I was wondering if you could elaborate a little bit on the distribution system review. You mentioned, I think in process maybe just help us understand what that's focused on what you expect to get out of it. And is that related to the test on the more frequent deliveries or if that's separate, maybe just an update on that as well?

Yes, sure Bania, this is Terry. I would tell you that a combination of several things. Certainly as we continue to grow the enterprise with the number of units, we have to ensure that we can support those stores. And as we anticipated after the construction and opening of our Terre Haute facility, we would have to be looking in the near-term for what might be distribution center number three. And -- but we also wanted to make sure that that was the right play. And so we have undergone a very significant study internally and actually working very hard to complete that here during Q2, so we can come back to the Board of Directors and provide them a recommendation of what our next steps would be. But in conjunction not only with the value creation plan and the anticipated increase in sales from those initiatives, we also see opportunity in terms of different product mixes whether that be fresh products, also the high volume stores where we know we need to be in stores more than once a week. What are the most cost effective opportunities to do that? And so as we consider DC number three, we also looked at also third-party distribution opportunities that may be in combination with DC number three or an alternative to DC number three. And so that study will come to a conclusion here during Q2 and as I said, we'll report to the Board of Directors at our Q2 meeting. And we'll set the path forward in terms of what that distribution network will look like.

Okay, look forward to that. Another question just on all the different vendors you’re working with, I was just listing them out from the Deloitte to Salesforce to Dunnhumby. How do you just feel about -- it just seems like a lot of change and a lot of new teams communicating with outside vendors. Just curious how you feel about the communication and execution with all these different things going on at once?

Yes, so this is Bill, Kelly. So, when we look at the vendors that Terry mentioned the SAP, Neilsoft and Salesforce and Deloitte. Obviously that’s part of the reason why we hired a Chief Marketing Officer. We’re also in the process right now looking to hire a Vice President of Digital. We just on-boarded a Director of Digital as well. And so we’re starting to build out that team, but we certainly understand that perhaps currently, we don’t have the skill set to execute on some of these this is why we’re going out to these vendors to leverage their skill set during the interim to try to stay on these programs. So we think certainly there’s tremendous value in the digital transformation. We obviously see just on a small piece of that, how our fuel saver program has resonate with our customers in the past. And so we think, we can execute to that type of leverage in other areas of our business. And so definitely the people we’re bringing on-board have the skills and expertise to coordinate these activities.

Okay, perfect. And then in terms of the fleet card, you talked about that kind of giving a lift to the gallons. Can you maybe quantify, what kind of lift you’re expecting and how you come up with that assuming that’s in your guidance for the year, given where things are tracking, but maybe just help us understand how you’re thinking about that more specifically?

Yes, on the fleet card program, as Terry mentioned our partner in this -- or our vendor in this process is FLEETCOR. So when we went out and actually did an RFP looking at to secure that partnership, we certainly heard back from several vendors and their experience in the lift that they typically see when a new fleet card program is executed. Also the experience for our new Director of Fuels coming on-board who stood up similar programs also has experience in this area as well. The combination of those two gives us the information as far as the lift and gallon movement. We also know obviously that these new fleet card members also come in and do shopping inside the store. So that’s what to the comment that Terry may we believe will have a lift inside the store as well. And so one of the things that really we get excited about with the fleet card program is the density of our stores in the Midwest. These partners have not seen density of the stores like ours. And so there are certainly an excitement around that to execute on that program. So we'll report more here kind of in the December call kind of see how we're tracking.

Okay, very helpful. And then just another one on prepared food category. You commented about the competitive environment there. I think you took some price increases in July. Just curious it sounds like there is maybe some noise near-term with the weather impacts and comparisons. But just curious how you feel about the unit movement in that category relative to your prior experience when you implement some price increases and just how you're generally feeling about price increases going forward?

Yes, so we did take a couple of price increases one was in May that was predominantly on piece of slices and some hot sandwiches. And then we took another in July on our donuts. And so as of -- currently as we speak here, we have not seen there is any elasticity with that. I think more of an overriding issue that we have is and generally in the industry that affects us is a customer count. Specifically in our area obviously with the continued farm income being down that does kind of put pressure on discretionary income. And so that’s something we need to be cognizant of. And going forward with price increases, that will kind of be on a case-by-case basis to see where we have opportunities. As we've mentioned in prior calls, we do competitive pricing service on a very regular basis on our key products. And so to the extent, that we believe that we might have an opportunity to take some strategic price increases for instance like donuts or piece of slice, we'll take those -- take advantage of those. So…

Okay, thank you.

You're welcome.

Our next question comes from Chuck Cerankosky of Northcoast Research. Your line is open.

Good morning everyone. Great quarter.

Thank you, Chuck.

Bill if I -- without getting into too deep, I glanced at your working capital numbers and it looks like it was pretty well managed this quarter. Looks like quite a bit better than in the past. Anything going on there you want to talk about?

Well, there is probably a couple of things I probably called out. One on the fuel side is we've taken a much more conscious effort of some of the products that don't turn quite as often and understanding that and perhaps maybe having a max fill rate on some of those tanks with respect to our diesel and premiums. And we do a little bit of job in inventory management on some of those what I'll called some secondary products on the fuel category. The other thing that we've made a change here recently is in the cigarette category, tax stamping we have a difference in the pre and post-tax stamping, which has cut down probably about 50% of our inventory in the cigarette category here in this past quarter. It also is helping improved operating expenses as well as we’re able to relocate some of those people elsewhere in the business. So those will be the two things that I would call out at this point.

And then you also talked about the fuel management team, marketing team working more with in-store. Can you expand on that a bit please?

Yes, Terry will take that one.

Chuck, this is Terry. I would tell you that historically and we've talked about this in the past with regards to our retail pricing strategy and it was a very decentralized strategy managed by our store operations leadership team. While they certainly had data available to them. It was very dynamic if you will in terms of how we price. We follow the competition, we’ve made sure we weren't undersold. And it was a market-to-market optimization if you will. Today, what we're looking at is the combination if you will that makes it more of a centralized pricing opportunity with Nathaniel Doddridge and his team on-board, they are working very closely with that store operations leadership. They have more in tuned, more diversified data points, opus information and so forth that's available for them. They certainly have a higher level of expertise with regards to what the markets are doing. And so they are working very closely with that store operations leadership team to make some of the decisions regarding -- and recommendations regarding how we might attack a particular market whether that be to grow our gallons. And so if we see an opportunity to grow gallons, we may become a little more proactive as oppose to reactive, with regards to our retail pricing strategy. But also looking at certain markets where we see opportunities to maximize margin. Because we're probably where we're going to get in terms of the gallon opportunity for that particular period of time. And so we see an opportunity for balance and that’s really what we were trying to do as we’re kind of strike that balance to maximize gross profit dollars.

Thank you very much.

Our next question comes from Christopher Mandeville, of Jefferies. Your line is open.

Good morning. Bill, could you just I think how you referenced the May strength the recent packaged beverages, can you speak to the comp cadence throughout the quarter for all categories. And then when we think about your quarter-to-date comments for fuel and prep food in particular, did those two items actually remain in positive territory?

Yes, I’ll take your first one, the cadence obviously made across all categories, kind of carried the way as we might have mentioned in the last call and we may have with a very solid weather month relative to May previous month and certainly that was -- that permeated across all lines. And then as far as when you look at what will be the weakest month for us would -- actually June and July were roughly about the same in that regard. So definitely May was a very strong month for us. And so as we head into the second quarter just by way of comparison this was a question that was asked previously, but August last year was by far and away the strongest prepared food month of any month in the fiscal year, that was one of the strongest fuel gallon month as well as grocery. And so that’s what we’re comparing against currently, so there maybe a little bit comparison issue from the commentary we made roughly in the first quarter. And now I will put out Chris at this point from a two year stack basis, we are seeing acceleration on a two year stack, the month of August will be an acceleration on a two year stack relative to the last four or five months that we’ve had. Hope that’s helpful.

That’s actually -- that is very helpful, thank you. And then on the grocery performance, really some of the best results that we have seen over the last two years on the comp and gross profit dollar generation. But when we think about either the gross profit dollar growth or even the margin expansion of over 50 basis points, was that really just a byproduct or the sales mix shift, or was anything else, and to what extent is that maybe sustainable, as we move into price optimization in the coming quarters?

Yes, so price optimization will be interesting dynamic, as we move into the later part of the fiscal year, because in some cases we will probably see a lift in margin and some we will see lift in volume depending on the location, in what direction we want to go with the pricing. And that’s something that we’ll report on as we go forward obviously. With respect to the margin specifically in the quarter, Terry touched on in his commentary, we did see several items like for instance packaged beverages had a significant uptick in the quarter obviously May was a very strong month relative with the weather, couple of other things that we’re doing we continue to rollout more liquor sales to our stores, which has a higher margin than that particular category, doing very well. The other side of it the OTP, the other tobacco products have done very well for us and continue to grow as that product innovation continues on the manufacturing side. So those were just a few kind of takeaways as to kind of what’s helping. Now I will say this Chris, historically Q3 and Q4 will be generally speaking our lower margin month and a normal course of a fiscal year, just because we don’t sell as many of the higher margin items like for instance i.e., some of the packaged beverages.

Right, okay. And then I suppose, when I think about OpEx, if we were to kind of utilize baseball terminology, what inning are we in today as it relates to the reduction in the labor average per store?

Well, I would say we’re right in the middle of a game, I mean, we continue to be focused on this, Terry alluded to some additional things that we continue to tweak and realign budgeted hours or one of those. We continue to see opportunities here and there at specific stores to carbon hour rather there to be more efficient, than we currently are. And that has had some tremendous benefit. We have had just some anomalies in the first quarter, obviously the higher retail fuel price was one that kind of was coming into play. I will mention that we will start cycling against higher retail fuel prices towards the end of the year. So that comparison has a chance to mitigate. Also on a long-term incentive plan, we did have an acceleration of some of the expense in the long-term incentive plan into Q1, we will not see that acceleration in Q2, Q3 and Q4. And so that’s another thing that's creating a little bit of noise in Q1. And then the last one I think I talked about a little bit is with healthcare costs just definitely saw a rise in claims paid and especially high dollar claims. So with coming into the next calendar year, we're in the process now of reevaluating healthcare and our program and we're looking for opportunities to tweak that plan. And again, it all comes back to my previous comment about ways for us to continue to drive OpEx and focus on OpEx.

Okay. And then just two quick ones for me. The $8 million [ph] year-on-year increase between credit card fees and fuel costs, what's the actual general breakdown between that? And then what was the RIN contribution in the quarter to the fuel margin?

Yes, so the RIN contribution was $4.6 million on $17.2 million RINs sold. And I'll stop there. Just before I get to second part of that, probably good illustration of earlier commentary, we've made in calls that we believe that RINs don't necessarily drive the margin. Here we have a $0.205 fuel margin in a quarter where we probably have some of the least dollar contribution coming from RINs probably in the last I know two years for sure, if not three years. So that's part of the reason that we remain silent in the press release and the 10-Q, but certainly happy to discuss those things. And you mentioned the other question was credit card fees. The dollar amount of credit card fees this quarter was $37.6 million. You want to break that 2.2% roughly about, roughly about 1.9% or 2% of that really would be coming from the credit card fees the recipe the fuel expense for cost to the company.

Fantastic, thanks again.

You bet.

Our next question comes from Ryan Domyancic of William Blair. Your line is open.

Hey, good morning and thank you for taking my question.

You bet, Ryan.

Hi, Ryan.

So with the relatively lower gallon growth number we saw is that having an impact on the amount of customer trips to the site? And if so is that resulting in less trips inside the store? And then if that is the case, is there any way to measure what kind of impact that is having or is had on the retail comparable sales figures for the inside sales? Thanks.

That’s great question. It’s one that we’re very cognizant of, don’t necessarily we have a concrete answer for in that regard. I think we will have a concrete answer as we get the digital platform stood up have the ability to kind of watch that. Because we do have a fair amount of customers, we believe that we come just for fuel and move on. But it’s kind of hard to bifurcate that. But definitely the lower gallon movement certainly could have that. And Ryan, you probably know this vehicle miles traveled here over the course for the last probably four or five months is moving on a downward trend, not just in our area, but across the nation. And so we continue to buck that trend a little bit, but that is a trend nevertheless. And part of that might has to do with the higher retail fuel price. I can tell you for sure, though, with the higher retail fuel price, we have fewer gallons per transaction.

That fewer gallons per transaction is the helpful number there. Well, thank you very much.

You bet.

Our next question comes from Damian Witkowski of Gabelli and Co. Your line is open.

Hi. Good morning, Bill. Good morning, Terry.

Hey Damian.

Kind of just go back and -- just going back to price optimization on the fuel side, what’s the -- are you willing to lose market share in certain markets to optimize the fuel margin?

Well, Damian, I wouldn’t qualify it as losing market share, I think what we’re trying to find is truly isn’t optimization, is trying to find that balance. And so as we think about our pricing strategy. I would tell you in certain markets, we certainly can be the dominant player in terms of the number of locations. And so the question is, whom are we competing against? And so we need to make sure that we still are being competitive, but we’re maximizing the margin opportunity. So we’re not going to give up market share necessarily, what we’re looking for is a balance. So I don’t really know how else to explain it to you except…

No, that makes sense.

… there opportunities.

Yes. And then if you look at that opportunity, we’re sort of early in that process. Is majority of the gains on the CPG side? Will those be realized in the first 12 months? And then it gets much more difficult, I mean, it’s an ongoing process or it should be sort of still a nice tailwind beyond 12 months?

Yes, so a couple of things there to follow what Terry has mentioned there. Yes, I think there’ll be gains in the next 12 months on the CPG with the program that Terry alluded to. Keep in mind, we’re just talking about retail pricing strategy right now and there is a whole another dynamic with our fuel program going forward. We touched on it just a little bit in the last call and probably good time to touch on it now that’s the fuel procurement side of the business. And so we actually are currently looking to hire a procurement manager, we’ve just on-board a several pricing analyst as well, we’re now securing opus data, all of which is leading us down in the direction of looking at different alternatives in the way we purchase our fuel. And that could run the game and maybe different areas, it will really depend on probably quite frankly the area of our business. But we do believe that we have a certainly a significant opportunity not only on the retail pricing side of the fuel equation, but also on the procurement side of the equation to drive CPG moving forward. And so, -- and we will talk more about that as we get further down the fiscal year, but I think that’s the dynamic we’re looking for. And to follow-on to one of Terry’s comments on the price optimization, I do believe the rural environment of our business lends itself for opportunities to take margin without sacrificing any type of market share.

Okay. And then just quickly on the new store, remind me new stores typically ramp up, mature over what period?

It’s roughly about a five year period, and definitely encouraged by what we’re seeing in so far.

And again majority of those are 105 new stores versus a year-ago, those are fairly -- I mean, how many of those are in new markets, sort of where Casey’s maybe isn’t as prevalent?

I would say probably half of those stores are what I would characterize as a newer market. Now we maybe -- let’s say newer market, I mean, say like Arkansas for instance, Tennessee, Kentucky, we have been in those states for several years, but it’s probably a less mature state.

Okay. And then lastly, we talk about the Farmer and their income and the headwinds there, but is it Farmers income or is it the Farmer -- because if I look at like [indiscernible] put a presentation in their investor deck that talks about Farmers cash flow and that seems to be pretty stable on a year-over-year basis?

Yes, I hope that’s right, I mean, that if it’s stable there is an indication that perhaps we maybe were at the bottom of this cycle and are headed upward. I can’t say that to be 100% true, but certainly that seems to be an indication.

Okay.

Yes, the other side of that equation -- the one last comment on that. The other side of that equation there is dependent on where these tariffs go that could have an adverse impact on the farming income.

Okay, thanks.

You bet.

Our next question comes from Ben Brownlow of Raymond James. Your line is open.

Hi, good morning, congrats on the quarter.

Hey, Ben.

Just a quick follow-up on the fuel pricing strategy and the product conversion and I know Terry you mentioned that, there was a kind of the combination of the two that’s really driving the fuel margin. Is -- can you give a little bit more granular in terms of the biodiesel at the 500 locations, what kind of benefit that had? And as you look to the 78 or roughly a quarter of the 350 sites that are converting over to premium gas and diesel is that a bigger benefit than the biodiesel at the 500 locations? Just how should we think about the balance of the benefit between the product conversion?

Yes, I’m going to take that. Yes, so when you kind of look at order of magnitude, I would say the efforts that our fuel team in conjunction and coordination with the store operation team is probably having the biggest impact at this point. The other product optimization certainly will continue to be tweaks for us. Just by way of an example the diesel blending will have a margins significantly higher than our stated fuel product. I would say the impact in the first quarter is roughly in total, roughly $1 million for the biodiesel conversions. The fuel product evolvement with respect to the premium diesel, we only did 78 stores additional in the quarter, so that’s probably less of an impact at this point. However, as Terry mentioned we’re going to do almost 350 conversions here in the second quarter and we continue to look for opportunities to drive those in future quarters. I mean, it really comes down to trying to match the customer demand with the right product and this is kind of what we're trying to do. And at the end of the day it will ultimately drive CPG.

That's helpful. And then so with the premium diesel gasoline conversions of the 350, would that be a bigger impact than the biodiesel? Or is it relatively on par?

It'll be it'll be on par and just to clarify that, that 350 some of those will be diesel and some of it will be premium and not all necessary premium conversions it would to one of those two products.

Great. And just one last one for me the -- most of my questions were answered, but on the other revenue category. I think there was a onetime incentive payment of around $1 million from the new vendor any color there?

Yes, so as we go forward with the fleet card program, it's common to have something of that nature. Now keep in mind we ran that through the first quarter, we anticipate utilizing those dollars to market that program going forward.

Great. Thanks and congrats again.

Thanks.

Thanks, Ben.

Our next question comes from Ryan Gilligan of Barclays. Your line is open.

Hi, thanks for taking the questions. Just following up on the fuel pricing and in-store traffic relationship, I think you mentioned in the prepared remarks that you took more margin in some markets, while getting more aggressive on price in others. What were the in-store transaction trends in the market that you took more margin and how does that compared to overall traffic?

All right. So with respect to that, I mean, most of our gains that we had are coming through an increased basket ring. Traffic is -- it would be probably one of those things that we're trying to evolve right now. So definitely the basket ring is what we're talking about. And we don't have -- I don't have any specific metrics about those stores that we took these programs in or not. Keep in mind right now Ryan all the promotional activity that we do whether it's two medium pieces for $6.99 or whatever, those are across the entire chain. So it would be hard to probably make those types of distinctions. Now going for that that's going to be a different dynamic and that's what digital will bring for us is the ability to regionalize the pricing and promotion strategy. And so we can have a little bit more granular look at that very question.

Got it. And then I guess why do you think bakery trends were soft when breakfast was strong. Do you think that was in response to the price increase you took on donut?

No, there’s a couple things there. So we have a new product coming into the category, that’s a Breakfast Bowl product that has done, I would say very well so far in its initial rollout. That’s helping offset some of the softer -- softness of the donuts and bakery. Now I also would say that we did take a price increase on the breakfast pizza slices -- breakfast pizza and that’s also helping to alleviate that as well. Now going forward here in the next quarter, we just completed the test of a several new donut lines that we’re very excited about. We think they’ll be well received by our consumer. We are also will be undertaking the creation of a larger cake donut and rolling that out here coming up in the next quarter as well. And so both of those things I believe will be great value propositions to help lift that area.

That makes sense. And then just lastly on share buyback, how should we think about that for the rest of the year?

Share buybacks right now, I can tell you that on the share buybacks. As you know Ryan, we completed what I’ll call the original $300 million share repurchase authorization. The Board did authorize another $300 million. Right now, we are not executed on that as we stand up these value creation plans. But certainly, keep in mind this is a two year window and certainly that doesn’t change our mindset.

Got it, that’s helpful. Thank you.

You bet.

Our next question comes from Paul Trussell of Deutsche Bank. Your line is open.

Hi, good morning. You touched on real estate, but I did want to circle back to the topic and just maybe peel back or dig a little bit deeper on the performance of the new store and obviously very pleased with that. To what extent is that really just better locations or less competition in newer markets. If you could just expand upon that, that’d be helpful. And also with the stores that you’re acquiring, what are you seeing from a valuation standpoint and your overall feelings about the M&A environment?

Yes, so as far as the new store maybe a little bit too early to try to bifurcate actually the reasons for the increased performance. But as get a little more data on that we’ll certainly be more cognizant of reporting on that. I do believe that we definitely are focused on new store construction and we have a strong team out there that’s really using the data that we have from our existing store base, learning from that data and making those selections. Also the programs that Terry talked about are helping lift that up as well. So as we get further down the path with some of those new stores so we’ll kind of break that apart. As far as the M&A activity, I would characterize M&A activity as relatively robust and what I mean by that is in my time of CFO, which has been probably 15, 16 years now, is probably one of the years that we have -- I have seen more conversations with opportunities that doesn’t necessarily call mean that’s going to translate into acquisition deals, we’re still a very prudent buyer, a very disciplined buyer and we’re not going to necessarily go out and purchase budget stores to tell people we grew the units. But I think as we had -- get some distance behind tax reform, where I do believe there was an pause in acquisition activity, I think people are willing to have conversations about selling their business. And so we’re encouraged by that and certainly I think we’re in a good position to take advantage of those things.

Thank you for the color. And then just looking at the reduction that’s taken place on the 24 hour format, and overall kind of labor hour pull back. Could you talk to us about the kind of per unit productivity and profitability, and how that’s translated given post the changes you have made?

Yes, so referring to the reduction of 24 hour stores and pizza delivery stores. When I say reduction, I mean, it’s reduction of hours or reduction of days depending on the program. In some cases we stop the 24 hours, but -- and so roughly to give you kind of an idea, the impact that’s having on our reduction in operating expenses anywhere from a 0.5% to 1% depending on the category, benefits that we’re seeing there. As I mentioned in the last call, the impact on the bottom-line was about $1.5 million and continues to be tracking in that line as well. That’s a net benefit to the bottom-line.

Got it, thank you. Best of luck.

Thanks, Paul.

Our next question comes from Anthony Lebiedzinski of Sidoti and Co. Your line is open.

Yes, good morning and thank you for taking the questions. I got disconnected a couple of times, so I apologize if my questions are repetitive. But as far as the store closings or actually I should say the fewer delivery locations as well as optimizing the 24 hour locations. What was the impact of those initiatives on your same-store sales for the just reported quarter?

Yes, it would be about a 0.5% to 1%.

Got it, okay.

Depending on the category.

Right, okay. And as far as you OpEx guidance for the year, it does imply a deceleration in OpEx growth. I know you had some unusual medical claim costs, you also talked about the fuel prices, but those at the moment still are higher than a year ago. So if you could just maybe help us bridge the gap as to how you expect to achieve OpEx growth of 8.5% to 10.5% for the year versus the 12 % roughly that you just reported here?

Yes, well there are several things, Anthony, you touched on two of those and certainly the retail fuel price can change obviously in the later part of the year, but we do anticipate a less of an acceleration on the credit card fees as we start comping against higher retail fuel prices. The dynamic this quarter was a 27% increase in fuel price and certainly that has lent in itself to much higher utilization of credit cards. You mentioned healthcare, we did have an unusually I’d say high healthcare cost quarter, just a couple of metrics there, just to reiterate about a 20% -- 19%, 20% increase in claims paid during the quarter, embedded into that was roughly about a 73% increase in high dollar claims, that’s a little unusual. We don’t necessarily see that being a trend line that’s going to go forward with the rest of the year. In conjunction with the healthcare cost we are actually right in the middle of looking at healthcare, our healthcare costs for our renewal at the end of the calendar year. And so looking at opportunities to maybe be more efficient in the plan to help curve some of those costs going forward, which will be starting obviously January of next year. Probably the biggest -- one more then I’ll get to the biggest one, also one of the things that we don’t see continuing from an acceleration standpoint is the long-term incentive plan expense that ran through our Q1, that will not -- that -- we had something get accelerated due to the retirement provisions in that that will not continue in Q2, Q3 and Q4 at that pace. Lastly, probably the biggest one is we continue to make adjustment in refinements in our scheduling and budgeted hours calculator, looking to drive hours works down in the store. Our store operations personnel done a fantastic job thus far, but they think there’s still more opportunities and we continue to tweak that and to move that downwards. So those are just some nuggets to think about when it comes to our thoughts around operating expenses in the back half of the year.

Got it, okay. And what was the credit card utilization rate?

It’s still roughly about 66%.

Got it, okay. All right, well thanks very much and best of luck.

Yes, thanks Anthony.

And with no further questions in queue, I’d like to turn the call back to Bill Walljasper for any closing remarks.

I’ll let, Terry go ahead and close this out.

Yes, I would like to thank everyone for joining us this morning. And close the call by reiterating our key initiatives to drive shareholder value. Positioning Casey’s for accelerated revenue growth, and improved profitability through our long-term value creation plan. And continuing our strong track record of delivering value to shareholders through a disciplined capital allocation strategy, by prioritizing high return growth and profitability initiatives. We strongly believe the combination of these actions will unlock significant value for our shareholders. This concludes our call for today, we look forward to continuing a dialogue with our shareholders and updating you on our progress. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.