Ladies and gentlemen, thank you for standing by and welcome to the Q2 Fiscal 2020 Casey's General Stores' Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Bill Walljasper, Chief Financial Officer. Thank you. Please go ahead, sir.

Good morning and thank you for joining us to discuss Casey's results for the quarter ended October 31. I am Bill Walljasper, Chief Financial Officer. Darren Rebelez, 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, we’ll take a few minutes to summarize the results of the second quarter and then open for questions about those results. I would now like to turn the call over to Darren to discuss the results of the quarter.

Thanks, Bill, and good morning, everyone. As you've seen in the press release, diluted earnings per share for the second quarter were up 23% to $2.21 compared to $1.80 a year-ago. The results were driven primarily by a stronger fuel margin versus the second quarter last year, continued operating expense control and sales gains inside the store. Year-to-date, diluted earnings per share of $4.52, up over 22% from the same period a year ago. Excluding the one-time impact from tax reform, this quarter marks the sixth consecutive quarter of double-digit earnings growth per share compared to prior year quarters. We continued to execute on key elements of our long-term plan this past quarter, positioning us well for future growth. I would now like to go over our results and some of the details in each of the categories. During the quarter, in the fuel category, we experienced a favorable fuel margin environment combined with our ability to leverage the implementation of PriceAdvantage, which is our fuel price optimization tool. These factors enable us to achieve an average fuel margin of $0.229 per gallon, up nearly $0.03 per gallon from the same period last year. As a result, gross profit dollars increased nearly 19% in the quarter in the fuel category. Same-store gallons sold were down 1.8% in the quarter. This was primarily due to our efforts to optimize gross profit dollars in the category by striking the appropriate balance between gallon growth and fuel margin. The average retail price of fuel during this period was $2.47 a gallon compared to $2.73 a year ago. Despite the decline in the same-store gallons, total gallons sold for the quarter were up 3.4% to 614 million gallons due to the strong contribution from new stores opened in the last 12 months. Same-store gallons…

Yes. Thanks, Darren. We continue to stay focused on controlling operating expenses. For the quarter, total operating expenses increased 8.5% to $373.4 million. The increase was mainly driven by operating 84 more stores this quarter than a year-ago. Same-store operating expenses were up 2.6%. Year-to-date, our operating expenses were up 7.1%, which includes the impact of senior leadership transition costs as we bring on new talent. For the fiscal year, we anticipate these costs to have an adverse impact of approximately $6 million or $0.12 on earnings per share. On the income statement, total revenue in the quarter was down slightly to $2.5 billion, primarily due to lower retail fuel prices from a year-ago, offset by operating more stores compared to the same period a year-ago and sales gains inside the store. Depreciation in the quarter was up 2.5%. The change in the annual guidance range was primarily due to the positive impact of appreciation from the one-time adjustment related to the useful lives of the underground storage tanks and the deferral of some store replacement activity. The effective tax rate for the quarter was 24.2% down from a year-ago, primarily due to a reduction in unfavorable permanent differences. We expect our effective tax rate for the fiscal 2020 year to be between 23.5% and 24.5%. Our balance sheet continues to be strong. At October 31, cash and cash equivalents were $44 million. Long-term debt, net of current maturities was down to $715 million as our $569 million bullet payment due next August moved to a current liability. As interest rates move down, we were looking to refinance all reporting of this debt. We do not anticipate a risk and our ability to refinance this debt. Our trailing 12 month net debt to EBITDA ratio was 2.1x. We anticipate us moving downwards as we continue to execute on our fiscal 2020 operating plan. For the six months, we generated $312 million in cash flow from operations and capital expenditures were $248.7 million compared to $201 million a year-ago in the same period. Adjusted EBITDA grew 10.5% in the quarter compared to the same period a year-ago, our capital expenditure estimate for fiscal 2020 remains at $516 million. I would now like to turn the call back to Darren to update you on our unit growth.

Thanks, Bill. Our target this fiscal year is to build 60 stores and acquire approximately 25 additional stores. Through the second quarter, we have opened 36 new stores, acquired five stores and have 12 additional stores under agreement to purchase. Currently, we have 97 sites in our pipeline, including 31 under construction, which positions us well for future growth. As mentioned in an earlier press release, we're excited to announce our third distribution center to be located in Joplin, Missouri. We plan on breaking ground later this month with an estimated completion date in the spring of 2021. Upon completion, we plan to immediately serve approximately 500 stores from this center, which will allow our network to operate more efficiently and alleviate pressure off of our current distribution centers, so also give us the ability to efficiently expand into new markets. In closing, we have recently completed a comprehensive strategic planning process to more clearly define the direction of the business over the next three years. We will continue to execute on our current initiatives we have under way. At the same time, we believe we have a tremendous opportunity to enhance current capabilities instead of new capabilities that will accelerate business performance. We will be hosting an Investor Day in January to announce and discuss this strategic plan in more detail. We continue to take transformational steps to enhance store performance and deliver long-term profitable growth. We will continue to review and add skill sets to successfully execute on driving significant long-term shareholder value. With that, we will now take your questions.

[Operator Instructions] And our first question is from Casey Short from Barclays. Your line is now open.

Hi. Karen Short. How are you all?

How are you Karen?

Good. Just wanted to talk about prepared food for a second. So I mean I appreciate on the last call you talked about the fact that the trends have accelerated kind of sequentially to end August pretty strong, and you didn't quantify that. But I guess I would characterize prepared food to be lower than expected. So, maybe a little color there in terms of what you think the real pain points are, I guess?

Yes, Karen, this is Darren. I think if you look through the quarter, we had a couple of good months and one bad one, I guess is how I'd characterize second quarter. We did end the quarter strong with some nice momentum, and then moving into this quarter, we're seeing that momentum carry forward. So again, I think the sequence of or the cadence of the months through second quarter didn't quite work out as well as we had hoped although we did accelerate. And then as we move forward, we're expecting the launch of the rewards program to have an impact on prepared foods. If you recall, we had originally planned to launch that program earlier in the year and then we ended up pushing that out. So, we expected that to somewhat soften the prepared food comps as we move through the year.

But any color specifically, also the impact to the app, because I think you thought that the app would also help accelerate the prepared food comp?

Yes. The app is having an impact, and actually about 27% of our whole piece orders are coming in through the app at this point, and so, that is having a positive impact. We are seeing a little bit of softness inside the store that's somewhat offsetting that. So we're still optimistic that the app, along with the loyalty program will continue to help build that momentum.

Okay. And then in terms of the price zones in general, I think in the last call you said it was more of a margin lift versus the sales lift, but I guess maybe clarify that a little bit. Is that just a function of the fact that you have for every item of SKU you have that you could think you can raise prices, you have a similar number that can lower so it's less of a lift to sales, but maybe a little clarification on that and how that impacted the quarter this quarter?

Yes. When we think about price optimization, it's not about price increases necessarily. It's about optimizing the right retail price to strike the right balance between volume and margin, so depending on the category and depending on the geography that may cause us to move up or down on those prices, but we're trying to strike that right balance. And so, price optimization won't always translate into increased retail prices. It will be more of a rightsizing of the prices to optimize gross profit dollars.

Yes. Karen, this is Bill. Just maybe to add a couple of pits of color on some couple of those questions here. First of all, your first question. I just understand, make sure we understand the cadence of the digital transformation that we're undergoing. So, there's two pieces of the platform that we have currently underway with the third being the loyalty program that Darren spoke about, but e-commerce platform just kicked off at the beginning of the fiscal year. The mobile app that you referenced, we actually integrated roughly towards the end of the first quarter. So, we really only have that up and operational for one quarter at this point. And so, what we have seen thus far has certainly continued traction on a number of fronts, which we're encouraged by and I think that's reflected in Darren's comments relative to the sequential movement of comps in prepared food. We continue to see our basket rings move forward, conversion rates to move forward, inside customer traffic continuing to get better and better over each month. And then, as Darren mentioned, into this so far at least quarter-to-date, we're seeing that continued improvement. So, I think we're encouraged by that traction. So I hope that adds a little more color.

Okay. Yes. And then just lastly – thanks, that's helpful. And then just last question, ex-tobacco, so you gave the grocery comp ex-tobacco, but I just feel like I've gotten a lot of questions on JUUL specifically. Can you maybe just parse out what exactly the impact would be on or is from JUUL? And if there was a more broad-based renewal, what that would do to the comp?

Well, we haven't seen a lot of erosion in JUUL with the recent changes. And what I’d have everybody keep in mind is that JUUL, while it has been a growth category for us, it's a relatively small part of our overall mix. It's about a 1.8% of our grocery and other merchandise sales, about 1.2% of our overall merchandise sales. So while it has shown positive growth, it's really not as large a category or large an impact as one might expect. Bill, I don't know if you want to add anything else to that.

Yes. I think the only color I'd add to that is to maybe more direct to your question, if you look at our comps that we've been able to put up here in the second quarter and first quarter, you're roughly between 100 and 150 basis points of that due to the acceleration of the JUUL product. We have cycled over the rollout of that product, and it continues to be a very popular product. But to Darren's comments, I want to reiterate that, it's a very small overall piece to the equation with respect to grocery and general merchandise.

Okay. That's helpful. I'll get back in the queue. Thanks.

You bet.

Thank you. Our next question is from Chris Mandeville from Jefferies. Your line is now open.

Hey, good morning. Bill, if you impact that 150 basis points of prep food margin erosion a little bit more, just based on that 2018 and pricing for cheese, I'm not quite getting to that magnitude of compression. So was there anything else that we should be aware of? Whether it be increased shrink or greater promos or something you can provide some color there on?

Yes. So there's really two major components that would make up that differential. Obviously, the biggest one is the cheese cost differential. And so if you just – by way of reminder, about every $0.10 per pound swing in the cost of cheese is roughly about 35 basis point adverse impact of the overall prepared food and fountain margin, remaining piece of that to get to your question is going to be from additional promotion activity that we are doing with our digital team. So obviously, as you know, it's been a competitive landscape over the last 12 to 18 months, albeit, we haven't seen any increased acceleration in a competitive landscape here in the quarter. We continue to be more promotional and trying to obviously provide value opportunities for our guests and the rest of that would be centered around that.

Okay. Is there anything on the coffee front, I suppose. I guess it's a much more moderated input, but nonetheless pricing has risen to some extend recently. So I was just trying to think if it had anything in points as well?

Yes, not in the second quarter. But as we head into first quarter, we did launch a new coffee program, obviously new flavor profiles, new packaging and we did have some special pricing promotions in the month of November to introduce that new product to our guests. And so that will be playing and we'll talk more about that in the Q3 results.

Okay. And then maybe turning to the OpEx, can you just reference what credit card fees were in the quarter and just based on the year-to-date performance. I mean is there any reason to believe that you can't necessarily manage to hit the low end of your guidance? Or is there anything that we should be thinking about? And can you provide any real update on just that time and motion study?

Yes. So to answer your first part, $39 million was the credit card fee cost in the second quarter. With respect to the second quarter, up 8.5%. You noticed we did not change obviously the range for operating expenses. So we anticipate an acceleration. We are slightly behind in Q1 with respect to new store openings. And so we are catching up on that, so intuitively, we will have more operating expenses in the back half relative to that activity. So there’s a couple other call-outs, I would say from the Q2 OpEx. We mentioned a little bit on the senior leadership transition costs for the year. This is spread out throughout the course of the year, so roughly about $1 million came into the second quarter for that. We do have a store manager bonus that was a little higher than we had in previous quarters, that's due to the performance of the company and the new bonus program. Just a couple of call-outs there. So we continue to move forward on the time and motion study that you mentioned. Right now, looking at Q3, Q4 to have that completed and rolling out, so I would not necessarily see a tremendous impact from that in this next quarter, you might see some tailwind impact in the fourth quarter of this fiscal year. They are probably more or so of a next fiscal year impact. But we're right on track with that Chris.

Okay. And then just the last one for me, since cost controls have really become a greater focus over the last year or so. When you look at some of the newer stores that have been opened with the greater emphasis on that line item, how are those returns looking relative to older vintages? And maybe if there is any update with respect to how the returns profile is trended on the stores that eliminated the likes of delivery and/or 24-hour model?

All right. I mean, I get all the of the – we had a lot of sub questions in there. So I'll try to gather all of those. So I think your ultimate question is new stores and how they might be ramping up relative to some of the previous stores that we've built in general. And if that's the question, I would say that, and Darren kind of alluded to and obviously the new store contribution continues to perform in line or above our expectations. And so certainly that's helping us the results that we currently have. Now, I would say this as we get further down the path with the digital transformation, further down the path of price optimization and fuel procurement, I think we have an opportunity to shrink the maturation cycle of the new stores that we open and then increase the returns ultimately of those stores. So we're excited about all of those opportunities going forward.

Okay, great. I'll leave it there. Thanks guys.

Thanks.

Thanks.

Thank you. Our next question is from Bobby Griffin from Raymond James. Your line is now open.

Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions.

You're welcome.

First, did the fuel procurement strategy of moving toward more contract purchasing have a noticeable impact on fuel margins during the quarter?

Yes. So it would have – I would say, when you roll up the fuel margin for the quarter, the predominant – when it comes to the initiatives that we're undertaking. The predominant impact came from price optimization as opposed to fuel procurement. So we have been successful during the course of the second quarter and increase in number of our fuel gallons under contract. But just by the nature of the timing of when those were executed, those will be more balanced through the back half of the year.

Okay, that's helpful. And then at the midpoint of guidance, the guidance implies the second half of your margins are relatively flat to modestly higher year-over-year. Is the industry pricing environment starting to slow down?

Well, I would say we would characterize that. If you go back and look at our historical Q3 and Q4 fuel margins, you'll typically see a drop in our fuel margins in every fiscal year that we have probably in the last 10 years. It's a function of the structural dynamics of that particular category. So it's not necessarily we have now. To that degree, I think we have opportunity to offset some of that with some of the initiatives we have going on with price optimization and procurement.

Okay. And then lastly for me. Can you expand on some of the labor initiatives you're working on and how much more of an opportunity do you see from labor allocation?

Great question. I kind of touched on a little bit in the last answer with this time and motion study, and just to reflect as a reminder, what that is, it's really, we have many – all of our cash are reputable across our 16-state area. And so with that, we can certainly provide an opportunity to have the time it takes to say, make a pizza to take out the garbage wherever it is, that should be the same in every store. And so they will layer that on top of the scheduling tool that we have which will be able to assist the store operations individuals to better move their schedule with the movement of their stores. So as traffic increases, we have the ability to increase the scheduling and vice versa. So I think we're excited about that opportunity as we headed primarily into next fiscal year. But along those same lines, we continue to always have an emphasis on looking at our labor hours in the store, our labor hours in the store continue to be down. We are cycling over here in Q2, Q3 and Q4 some significant labor hours reductions that we took last year. So it will continue to be an area of focus.

Okay. Thank you. And good luck on the balance of the year.

Thank you.

Thanks.

Thank you. Our next question is from Paul Trussell from Deutsche Bank. Your line is now open.

Good morning.

Good morning, Paul.

Thanks for taking my question. Maybe let's just touch on the grocery category. You had nearly a 6% comp I think ex-cigarettes, maybe just talk a little bit about the puts and takes there along with the margin performance of that category and what kind of mix shift you're seeing to drive that year-over-year gain?

Yes. There’s a couple of call-outs from the same-store sales perspective in the grocery and general merchandise. We touched on one of those early with the vapor product, specifically JUUL being very popular and continues to be very popular. And so that's part of the lift. But also there are some other categories that continue to gain some pretty significant traction. That would be like in the packaged beverage category, the energy drink, for instance, with the advent of a Bang and Rain. So those two categories are doing very well and then the Apple and beer category continues to make great strides as well. And there is a couple of things to call out there. We had a few state law changes that allowed us to sell a stronger alcohol content beer which those intuitively are moving forward, but we're also looking at additional store resets of line as well as additional resets of alcohol, that seems to be doing very well and resonating with our consumer. Now the margin side of that all those products, I just mentioned are higher margin items and certainly as we make a product mix shift that's the predominant reason you see that that margin. But also as you may recall, Paul, the State of Illinois had a cigarette tax increase back in the first quarter. And with that they did not tax the inventory on hand, and so the inventory that we have currently in our warehouse is now funneling through a sales aspect in the second quarter. And so there is a benefit to the margin that's running through there of roughly about 30 basis points.

Got it, that's helpful. Then maybe just touch on the fleet program, you remained optimistic about the potential there adding a lot of cardholders, maybe just give an update or what you're seeing?

Yes. Yes, we've had made some great traction last quarter. We've got a couple of larger accounts come on and continue to be very diligent and bringing on new accounts to our specific fleet card, but probably more – probably the bigger story here, Paul is looking at our universal fleet program of way to component is that fleet card that, I think you're referring to. So we'll continue to – I'm confident we'll continue to gain traction on the fleet card program, but sorry about the beginning of the fiscal year, roughly maybe even back in the fourth quarter, we made some changes to the overall universe of fleet program that allow us to be a little bit more competitive in some of the discounts that we're offering. And as a consequence, over the last three quarters, we're averaging roughly about an 8% to 9% increase in universal fleet gallons quarter-over-quarter in those respective periods. So we continue to gain traction that brings more customers into the store and allows us more intersection points as we launched a loyalty program. So you get to those customers as well on that – on our loyalty program.

Thanks for the color. Best of luck.

Thanks, Paul.

Thanks.

Thank you. [Operator Instructions] Our next question is from Ben Bienvenu from Stephens. Your line is now open.

Hey. Thanks, good morning.

Hi, Ben.

I want to ask first about fuel and you touched on earlier with some of the progress that's been made on procurement and that should be more impactful at the back half of the year. I wanted to get a sense of, based on those changes, what percentage of your fuel mix is procured via contract and I think you had previously referenced that 30% of the mix would ultimately be procured under contract by the end of the fiscal year, is that still a reasonable watermark for us to think about in terms of the mix of procurement?

Yes, Ben. This is Darren. If you look through second quarter, where actually at 37% of our overall volume is under contract at this point that and that was building throughout the second quarter. So as we look to the balance of the year, we're expecting to get roughly 50% of our overall volume under contract by the end of the fiscal year.

Okay, great. And then following up on cheese, obviously the commodity price inflation is causing some margin pressure in prepared food. It looks like you at this point chosen to absorb the majority of that, if not all of that versus passing along pricing increases. Is that how you'd expect to continue to handle it or are you waiting to see what the competitive response is among your peers before you make a decision around passing along higher prices? How should we be thinking about how you navigate this environment?

Yes. This is Darren, again. We're kind of taking that day-by-day to be frank, looking at the commodity market and looking at the competitive environment as well and trying to strike that right balance. We expect that the cheese cost will start to come down at some point, and so we don't want to put ourselves in a competitive disadvantage well, from a value proposition standpoint. So we're continuing to monitor that and we'll see how it go. But at this point, we've elected to not pass that on to the consumer and we're looking for opportunities to opportunistically procure the cheese or more advantageous price.

Okay, great. And then one last one for me. Congratulations on the distribution center announcement. I know when you guys built the Terre Haute facility, there was a significant reduction in stem miles in addition to opening up some contiguous geographies that you could build into, when you think about the benefits that this Joplin facility provides, if you could give us a sense of how much of it is continued stem mile reduction and efficiencies and transportation versus opening up new geographies kind of more south westerly? That'd be helpful.

Yes, sure. I would say that the bulk of it is really from improved efficiency within our distribution network. Right now that southwestern part of our geography is being serviced out of Ankeny, Iowa and Terre Haute, Indiana. So that's a pretty long haul. When we open up that facility in the spring of 2021, we'll immediately be able to service about 500 stores out of that facility, which will really start to right size our distribution infrastructure and reduce the overall cost to serve those stores. That being said, it does expand our ability to reach into some new geographies that we're not currently in. So the immediate impact would be on the efficiency side and perhaps a little bit longer-term would be on the development side.

Okay, thanks. Best of luck with the rest of the year.

Thanks.

Thanks, Ben.

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

Good morning. Thanks for taking my questions. Just wanted to ask about traffic, I think Bill, you may have mentioned that it was sequentially improving, but just can you help us understand where that lies and what you're seeing? And then on the loyalty program, can you help us understand kind of what you experienced in the test, it sounds like the acceleration that you're hoping for here in prepared foods rests largely on the loyalty program. So maybe just help us understand what you've seen so far with the test there?

Yes. I'll try to get to all those questions answered, but Darren and I want to make sure that we gather that. So on the loyalty – I'll start on the loyalty side, with respect to that, we certainly see that we are in a position now that we believe that we in some cases have – well, take a step back. I think we've seen the fuel saver program that's been out for probably six, seven years now how that resonate with our consumers and so that's a form of a loyalty program. We see many of our larger regional players have loyalty programs coming on board. The success that they have obviously and so we believe certainly this is going to be a positive impact for us. But I don't want to miss – have you come away from this call thinking that that's the only thing that's going to be driving prepared foods going forward. So as Darren mentioned we'll be having an Investor Day here in January and there are a number of other opportunities that we think outside of loyalty that we have in play coming up in the next fiscal years to drive that program forward, so more to come on that. The first part of question, Kelly, can you repeat that for me?

I was just curious about the traffic.

Yes, traffic count. So right now traffic count inside the store is roughly flat and we have actually – that's an improvement as we have been actually slightly negative here for the prior quarters and we have been seeing a gradual increase or probably the last three to four quarters. So we're encouraged by that, we believe some of the things that we are doing with respect to the digital transformation are helping that. Did I miss anything there?

No, that was helpful. Thank you. And I guess just another one, as I think about what you're talking about in grocery, some real favorable mix shift from higher margin categories. I guess there was some impact from the cigarette tax, but still some, it sounds like favorable mix shift and that seems to be very different from what's happening in the prepared food side where you're doing more promotions and it just seems to be characterized as a tougher environment, so just curious if you had any thoughts on kind of the differences in the two categories?

Yes. Kelly, this is Darren. I think if you look at those two categories, I mean, obviously, in our prepared foods category, we've got a big reliance on our pizza product and we have a high mix of that and cheese being the single biggest component of that cost of goods. And so when you see the commodity markets get out of whack like they are right now. So that's obviously going to put a direct pressure on margins. That doesn't impact the fact that the guest still wants our pizza and they continue to buy it. If you look at the grocery category by comparison, you see people shifting among products, so carbonated soft drink tend to be declining and that's been a trend that's been going on for a while now and they're shifting over to energy drinks, while the energy drinks have a higher margin than the carbonated soft drinks. If you look at the cigarette category, people are smoking less combustible cigarettes and moving over to the electronic cigarettes, which have higher margins. So you're seeing those behaviors with the consumer where they're shifting away not because of pricing pressures, but they're shifting wave out of preference to the products that are naturally higher margin. Bill mentioned earlier, the development of our liquor and wine categories again premium beers are starting to decline, craft beers are growing, liquor and wine is growing, all of those are favorable shifts from a margin standpoint. So there is some natural margin accretion there.

Thanks. That's helpful. And I guess just maybe one more – just on retention levels and turnover both in the store and at the DCs just a general update on what you're seeing there? Thanks.

Well, it lack of store level, I mean it continues to be anytime you're an entry-level retail. It's always going to be a competitive landscape rate pressure. Obviously, we have seen that in the second quarter and that's part of the operating expense question that in fast earlier. So we continue to evaluate our markets to make sure that we're competitive on our rates and – but it's still very challenging, especially with the low unemployment that we have experienced throughout the Midwest here. With respect to the corporate offices here or the distribution, we generally tend to have low, very low turnover rate there. So there's nothing really to call out at this point.

Thank you.

Thank you. Our next question is from Chuck Cerankosky from Northcoast Research. Your line is now open.

Good morning, everyone. A couple of questions, looking at the Joplin, Missouri distribution center, what kind of operating radius, will that have and what's the total number of stores you expect it to be able to support after the initial 500 start-up?

Yes. Chuck, this is Darren. We typically operate our distribution centers with a 500 mile radius. So that gives us a pretty broad swath of stores that we can service. Our optimal efficiency range is a little bit south of that, but we currently support stores within a 500 mile radius there.

And how many could it support over time. Is it 1,000 or more than that?

Yes. I mean our initial push on store count will be 500, but we could service upwards of 1,000 stores out of that distribution centers. So we have plenty of room to grow. I guess the other thing that I'd point out is that in addition to the existing facility that we're designing – and we're designing this to be more automated and more efficient than perhaps our other two distribution centers. We also have additional land adjacent to the site that we could expand, if we need to. So we've got a couple of levers in there.

And great, yes. I think I remember in the press release, the acreage purchase sounded a little high, so that covers that. On the – I think, Bill you've mentioned some store projects that were deferred that led to the D&A reduction. Can you talk about that a little bit?

Yes, absolutely. So coming into fiscal year, we certainly have an idea of how many stores that we feel our candidates can replace over the course of the year. And so once we make that decision to replace its stores, it changes the useful life of that, so we had to accelerate the depreciation very quickly. And so as we were looking at our plan about halfway through the fiscal year, we made a decision to defer roughly about four of those sites in the next fiscal year and consequently accelerate appreciate than we planned for was not coming through and that's part of that appreciation testing.

All right. Thank you very much.

Thanks, Chuck.

Thank you. Our next question is from John Royall from JPMorgan. Your line is now open.

Hey, good morning, guys. Thanks for taking my question.

Good morning.

First one is on uses of cash, you guys have had enough free cash flow to pay down some debt in the first half and you're sitting in the low 2% on leverage right now. So any thought at this point to utilizing the buyback in the near future?

John, we always keep that option available to us. I think you know we have a $300 million authorization for those share buybacks. So we'll always take a look at our cash balance and opportunistically when there is an opportunity we see that make some sense we can deploy that extra cash, so we'll continue to look for those opportunities and you'll see it if we do it.

Yes. Also John, on our debt right now, we have make whole provision, so that would be prepayment penalties to accelerate any payments on the current debt that we have. But as we look to refinance that certainly is – certainly an opportunity for us to and that's there in lies the comment that we made that we will look to refinance all or a portion of the upcoming debt. Hope that helps.

Yes, it does. Thank you. And then on the distribution center, is there a total cost number you guys can share with us at all or maybe how much is in this year's budget for it if not?

Yes. We've budgeted about $63 million for the construction of that facility.

Okay. And then maybe the sequencing, you said you're starting in 2021. So how much maybe should we expect next year?

Yes. Just to clarify, we'll be breaking ground later this month on that facility, and they'll take – give or take about 18 months to build. So we're targeting somewhere late spring of 2021 to have that facility fully operational.

Okay, understood. Thank you.

Thanks, John.

Thanks.

Thank you. Our next question is from Karen Short from Barclays. Your line is now open.

Hi, sorry. I just had a couple of follow-ups. With respect to the loyalty program, how many employees did you have on the test that if you gave that, I missed them?

Yes. So when we did tested loyalty program, it was really centered around here at the – first the corporate facility and then we just – as Darren mentioned, we put out a soft launch here beginning – roughly the beginning of this month, and then the cadence and we'll go to a global launch, then you'll get more details on that at the Analyst Day.

Yes. Karen it is about 2,000 employees ultimately that were on the program in our beta test and now it's open to the entire system.

And just to clarify that the testing for the employees was really intended to be making sure that the mechanics behind the loyalty program were working properly, the discounts were being done. And so that's where we want to make sure, did not want to make a global launch and have a nuance occur only have maybe a poor experience with our guests, so – and then that the – part of it also pushes certainly it's put media around a loyalty launch not sure you get the value out of that media here around the holiday season. And so we want to get pass the holiday season for a global launch.

Right. But initial test was more of the functionality and mechanics, not the substance necessarily?

That's correct.

That's right.

Okay. And then in terms of the second half implied range, it's a pretty wide range in terms of grocery comps and prepared food comps, maybe a little color on how to think about that? And then the second part would be, we haven't really necessarily talked about in store gross profit dollar growth versus SG&A growth, but can you maybe give some context on how you think about that more generally?

Yes. Well, I'll start and Darren – so as far as the guidance range as you know, we – in the past, we have narrowed the guidance range as we get further into the fiscal year. We just made a decision to keep those ranges intact and unless there were something like from the prepared food category, we do not think the upper end of the range was attainable in the back half year given what the results were at the six-month mark. And so I'm not sure there's anything to read necessarily into that other than that. And as far as gross profit inside the store for us, we are going to trying to drive gross profit, we stop short of giving any targets relative to gross profit increase, but we are seeing gross profit dollar increases either high single digits or low-double digits inside the store depending on the category, we're looking at.

Right, but gross profit does or SG&A growth seems to be exceeding gross profit dollar growth. I'm wondering and I mean depending on how you're including D&A in credit card fees and things like that...?

Yes. I'm not sure. Yes, so when we look at our total gross profit, we show exceeding the total operating expense growth, and you might be getting confused with or maybe with the same-store operating expense or same-store operating expense were up 2.6%. We happen to reference excluding credit card fees up a little over 3%. So our inside growth would be right comparable with that.

Yes, maybe I'll get offline because I think growth – yes, I think we're looking at...

And we do expect acceleration in both of those.

Like a widening of the gap, you're saying between gross profit dollar growth and SG&A growth?

Correct.

Okay. Thanks.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Darren Rebelez, President and CEO for closing remarks.

Okay. I'd like to thank everyone for joining us this morning and close the call by reiterating our key initiatives are designed to position Casey's for accelerated revenue growth and improved long-term profitability. We're looking forward to sharing with you our plan to build upon was currently under way and outline our new initiatives that we believe will continue our long-term track record of driving shareholder value. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.