Caseys General Stores Inc (CASY) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to Caseys General store third quarter fiscal year 2017 earnings conference.

At this time all participants are in a listen-only mode.

(Operator instructions).

We will have a question-and-answer session later and the instructions will begin at that time.

As a reminder, this conference is being recorded.

Now I would like to welcome and turn the call to the Chief Financial Officer Mr. Bill Walljasper.

Thanks, Carmen and good morning and thank you for joining us to discuss Casey's results for the quarter ending January 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 the 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 relating 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, 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 third quarter I will then provide some additional details and then afterwards we'll open it up for questions about our results.

Thank you, Bill and good morning every one.

As most of you have seen in the press release, diluted earnings per share for the third quarter were $0.58 compared to $0.97 a year ago.

The primary reason was attributable to a combination of increases in operating expenses and depreciation offset increase in gallons sold and inside sales.

Year-to-date diluted earnings per share were $3.72 compared to $4.54 in the same period last year.

Like many others in the convenience and grocery store sector as well as the broader food service industries we experienced downward pressure on customer traffic which adversely impacted same store sales across all of our categories.

We believe this pressure is related to the agricultural economy in our marketing area, the growing spread in pricing between food away and food at home as well as big box retailers continuing to increase promotional activities.

The quarter started very strong in November with same store sales in line or above our annual goals across all areas with customer count at it's highest point in nearly a year and then tapering off in the back half of the quarter.

Same store sales were further impacted during January by calendar shift as well as inclement weather.

The calendar shift in the month represented approximately 50 to 100 basis points to same store sales depending on the category.

As a result, same store customer count in the quarter was flat to slightly positive although we were encouraged to see an increase in basket ring inside the store excluding fuel for the first time since the third quarter of fiscal 2016.

Despite the more challenging environment we continue to be an industry leader in same store sales growth in both fuel gallon and inside our stores.

In addition we are excited about the new share repurchase programming authorizing repurchases of up to $300 million of common stock over the course of the next 2 years.

The company is always focused on providing a strong total shareholder return and this will augment our growing new store pipeline and dividend payments.

I will now turn the call back to Bill to go over our results and some of the details in each of our categories.

Thanks, Terry.

In the fuel category same store gallons continued to benefit from low retail prices and Fuel Saver program during the third quarter.

This resulted in an increase in same store gallons sold of 2.6% in the quarter while total gallons sold for the quarter rose 5.5% to 498.1 million and the average price of fuel during this period was $2.12 a gallon compared to $1.88 a gallon last year.

The average fuel margin in the quarter was $0.179 per gallon slightly but our goal of $0.184 per gallon.

This was down due to rising wholesale costs throughout the quarter.

Year-to-date the fuel margin was $.0187 per gallon just ahead of our annual goal.

Third quarter margin benefited from the sale of renewable fuel credits commonly known as RINs.

During the quarter we sold $16.3 million RINs for a total of $14.5 million.

This represented nearly $0.03 per gallon improvement to the fuel margin.

RINs are currently trading around $0.35.

For comparison purposes going forward last year in the fourth quarter the average RIN sold was approximately $0.71.

Same store gallons sold for the year-to-date were up 3% with total gallons sold for the year up 6.5% to $1.6 billion.

Gross profit dollars in the fuel category for the quarter were $89.3 million up 4.5%.

Total sales in the grocery and other merchandise category were up 5.1% to $476.3 million in the third quarter.

Excluding cigarettes total sales would have been up nearly 6%.

Same store sales were up 3% during the quarter which fell short of our annual goal primarily due to the deceleration and the customer traffic for reasons outlined by Terry earlier.

Total sales across all major areas of the category showed mid to high single digit increases.

The average margin in the quarter was 31.1% consistent with the same period a year ago.

As a result gross profit for the quarter in the category was up 4.7% to $148.1 million.

For the year same store sales were up 3.5% with total sales up 6.1% to $1.6 billion.

The average margin year-to-date was 31.6%.

We're encouraged about our growth opportunities in this category as we benefit from the continued rollout of major remodels and replacement stores and new store openings.

In the prepared food and fountain category total sales were up nearly 9% to $228.3 million.

Despite the economic environment in our market area, same store sales in the quarter were up 5.8% which was an acceleration from the mid year results.

Our various growth programs continue to perform as expected.

Sales in our unchanged store base were below the expectations which we attributed generally to the challenges in the broader convenience and food service industries.

The average margin for the third quarter was 61.7% down 30 basis points from a year ago primarily due combination of increase in supply costs and slightly higher cheese costs as we cycle out of the cheese contract that expired December 2016.

In the quarter prepared food gross profit dollars rose 8.3% to $140.9 million.

Year-to-date same store sales in the prepared food category were up 5.4% with average margin in line with our annual goal of 62.5%.

We're optimistic about the growth in this category as benefit from the continued implementation of pizza delivery stores, the major remodel program as well as new store openings.

For the quarter, operating expenses increased 12.6% to $292.3 million.

At the nine month mark operating expenses were up 11.2%.

Approximately 2/3 of its increase in the quarter was due to a rise in wages and payroll taxes.

Also the combination of credit card fees and fuel expense were up to $3.5 million.

Store level operating expenses for open stores not impacted by any of the growth programs were up approximately 9.6% in the third quarter.

Again this was up primarily due to wage rate increases including our decision in December to keep our commitment to salary increases for our store managers stemming from the proposed change by the department of labor to increase the minimum salary for exempt employees.

On the income statement total revenue in the quarter was up 13% to $1.8 billion due to a 13% increase in the retail price of fuel from the third quarter last year and sales gains due to an increase of number of stores in operation this quarter compared to the same period a year ago as well as additional rollout of operational programs.

Depreciation was up 16.7% this was consistent with the increase in the first 6 months of the fiscal year and in line with the comments we made during our last earnings call.

We expect the percentage increase for depreciation to be up in the mid teens for the fiscal year compared to a year ago.

Year-to-date total revenue was also up slightly due to sales gains mentioned previously, offset by lower retail fuel prices for the first nine months compared to the same period a year ago.

Effective tax rate in the quarter what you 35.9% up from the third quarter last year due to a decrease in favorable permit differences.

We expect our effective tax rate for the fourth quarter to be around 33.5% to 34.5%.

Our balance sheet continues to be strong.

January 31st cash and cash equivalence were $115.7 million up from $75.8 million at the end of the fiscal year primarily due to the additional debt we secured for future growth and year-to-date results of the company.

Long term debt was net of current maturities was $915 million while shareholder equity rose to $1.2 billion up $132 million from the fiscal year end.

At the nine month mark we generated $316 million in cash flow from operations and capital expenditures were $339 million compared to $317 million a year ago in the same period.

We expect capital expenditures to increase as new store construction accelerates and we complete more major remodels during the fourth quarter of the fiscal year.

I'd like to turn the calling back over to Terry to talk about the growth programs and our unit growth and close out our opening remarks before taking questions.

Thank you, Bill.

Let me begin by providing you an update with the growth programs.

We are on track to complete an additional 46 major remodels during the fourth quarter bringing our total at fiscal year end to 102.

Year-to-date we have also converted 89 locations to a 24 hour format and 134 stores to the pizza delivery format.

Currently we have approximately 997 stores that are 24 hours and 552 that deliver pizza and have completed 416 major remodels

In addition to these programs, we are encouraged by the gains in our online ordering program.

Subsequent to the rollout in January 2016 total downloads over our mobile app have exceeded 700,000 and it continues to grow.

The amount of pizza orders completed online has climbed to over 13% and our basket ring of an online order has increased and is over 20% higher compared to a telephonic order.

We are optimistic the contribution will continue to grow as the number of downloads over our mobile app increases.

We believe our mobile app was a great first step into on going digital engagement with our consumers.

As we head into fiscal 2018 we'll be very focused on increasing these efforts.

This quarter we open 13 new store constructions completed seven replacement stores and acquired eight stores.

We also have eight additional acquisition stores under contract to purchase.

We also completed 32 major remodels in the quarter and in addition to all of this activity we are currently have they 33 new stores and 21 replacement stores under construction.

Our second distribution center that was opened in February 2016 continues--to perform well.

One of the benefits of this facility is that it opens up new geography for us to efficiently expand our footprint.

This along with increased resources in our store development department have positioned us well for accelerated unit growth going forward.

With this in mind, the number of sites that we have under agreement for future new builds continues to grow.

At the end of the third quarter we had 91 sites under agreement, as of today that number has risen to 100.

As a reminder, we consider a site under agreement to be either a written contract or a verbal agreement to purchase.

The vast majority of written contracts.

Please keep in mind all of our agreements have contingencies that may trigger a site to fall off our list before it gets released to construction.

We are planning additional resources to the store development area this coming year to sustain our future new store construction pace at a higher level augmented with acquisition opportunities.

Our store count at the end of this quarter was 1,954.

We are accelerating our store development efforts and have a robust and growing new store pipeline which will benefit from leveraging our second distribution center in Terre Haute, Indiana.

I'm encouraged of the progress we have mane over the past several quarters in this area and believe we are positioned very well for future growth.

As we have grown the company we have always focused on total shareholder return.

The guiding principal of the capital allocation strategy is to take a balanced and disciplined approach to the use of our cash and balance sheet while maintaining flexibility to invest in areas with the greatest return to shareholders.

This includes investments in the growth of our business, continued quarterly dividends, selective M&A and share repurchases.

I'm excited about the recent share repurchase authorized by the board of directors as it is another reflection of our commitment to delivering shareholder value.

Despite some of the macro economic challenges that we currently face, we remain confident in the long term direction going forward.

That completes our review of the quarter.

We we'll now take your questions.

Ladies and gentlemen (Operator instructions).

The first question is coming from the line of Ben Bienvenu with Stephens.

Thanks for taking my questions.

Hi, Ben.

I wanted to first ask about OpEx.

That you what the biggest surprise relative to my model and those we talked to as well.

Obviously the unchanged store base growing at a much more robust pace.

It sounds like the composition of that growth has some permanence.

As you have seen comps slow how do you think about your OpEx spend relative to mid single digit comps and the resulting deleverage and then do you have a paradigm that you think about in terms of EPS growth that you want to target?

Does the OpEx growth that you have committed to suggest that you think comps continue to improve?

Maybe some commentary about how you think about flexing up and down the OpEx spend.

You bet, Ben.

I'll try to get all those answers, if I don't--keep me honest there.

With respect to the operating expense.

Certainly this will be an area of focus as we move forward into fiscal 2018 and we certainly recognize the slowing of our comp base in relationship to the OpEx.

Now, more specifically to the results that you mentioned in the third quarter, there are several things that are running through the third quarter that may not have been running through prior quarters.

First of all, dimension in the narrative, we did keep our commitment to our store managers to increase their salaries with respect to the Department of Labor proposal.

As we indicated in the last earning call that would be approximately over the next 12 months an impact of $10 million, so roughly you are talking about $2.5 million on a per quarter basis.

That you what running through this and so that will be something that will be there until we cycle over that come next December.

Actually next November if we started the process in November.

Also running through, this would be more of a one time issue.

Roughly $2 million is running through that.

We did in the third quarter roll out new uniforms to our stores.

We don't anticipate that being an on going process.

We obviously are currently -- we're very conscience of obviously customer service and that just happens to be an extension of that.

And so we did have $2 million running through that as well.

With respect to the total OpEx, getting away from the unchanged store base a little bit, one of the things we haven't talked about we have a new HRIS system, a payroll human resource system and ongoing expenses for that will be about $1.5 million per quarter.

We didn't see it necessarily in the third quarter -- excuse me the second quarter as it started rolling out in the tail end of the second quarter.

That's in the total.

I wouldn't run through the unchanged store base but that would be in the total.

A couple other nuggets to think about, with respect to OpEx and the unchanged store base credit card fees do roll through that unchanged store base, we have seen an increase in credit card fees.

We kind of called that out in the commentary and so to the extent that retail prices continue to rise to any degree we should probably see an increase in credited card utilization along with that.

There are few things going on there in that regard.

Hopefully that gets most of your questions answered, Ben.

Thank you.

I appreciate the color.

Thinking about the cadence of comps.

Helpful commentary there around the start to the quarter in November.

Am I right to think the balance of the two remaining months in the quarter were equal in nature in terms of the same store sales contribution or was more month weaker than the other.

As you cycled out of that, do you have renewed confidence that slow down in same store sales was transitory in nature?

Maybe some commentary there.

Yeah, just kind of you give you some cadence of same store sales throughout the quarter and I think what you're asking also what we might be seeing in that regard.

As Terry indicated on the call, we saw-- I would say I'd use the words very strong comps in November.

As he mentioned we either at goal or above goal in most all the categories.

Even the sub categories.

We took a step down in December roughly probably started roughly the second week of December and then took a further step down in January.

That's kind of -- when you look at the impact with respect to each month that's how it rolled out.

Now January we had some things rolling through January specifically.

We did have a calendar shift in January where we saw anywhere -- we're comparing against less Fridays and Saturdays-- that is quite impactful in a month and Terry talked about that impact by the month.

Now in the quarter we did not necessarily have a calendar shift.

But also we did have two I would say significant weather patterns that hit our stores we had an ice storm that hit part of our market there as well as a snow storm starting roughly in the mid part of January.

Definitely saw an impact from that as well and so to answer your questions we definitely saw an acceleration into February from what we were experiencing in January.

Okay.

Thanks.

One last one for me.

On the other revenue line item that was down materially year-over-year.

You called out an immaterial reclassification of your sales in your 10-Q.

Is that $11.4 million sales level -- is that a reset that we now sequentially grow off of or is that a one time step-down in nature?

The downward movement in the other category -- keep in mind last year at this time we had about half a billion dollar lottery and you saw a significant influx in the other category-- it is a theme frenzy when the jackpot gets to that level.

That's what we were comparing to.

That's really the dynamic of differential there.

Fair enough.

Thanks.

Thank you and our next question is from the line of Ryan Gilligan with Barclays.

Hi, good morning.

Thanks for taking the question.

Hi, Ryan.

You can talk about the consumer response to the price increases and stepped up promotions you took in the third quarter?

Yeah.

Absolutely.

We had several price increases.

The major one was in the prepared food category.

Roughly 1% to a 1.5% price increase.

We did see an acceleration of 70 basis points sequentially speaking Q2 to Q3 in that regard.

If it wasn't for the weather pattern that we had in January, that would have been north of 6%.

So it would have been on the line with what you probably would have expected all things being equal and so from a units perspective we do not believe we saw any price elasticity.

We were very calculated in what we were were taking up.

We took up specifically coffee and pizza slices, were the two major components and did not see any necessarily any type of discernible change in traffic pattern for those 2 products.

It's with respect to -- go ahead, Ryan.

No, go ahead, please.

I was going to talk about the grocery and general merchandise We did take some price increases in the grocery and general merchandise and the same commentary would hold true.

We had a 3% -- roughly a flat sequential movement of Q2 to Q3.

Again, if it wasn't for some of that-- weather patterns we had in January we would have saw a sequential movement upward.

So definitely saw it as I mentioned in advanced commentary an acceleration out of January into February.

That is really helpful.

Thanks.

And then is there an update on developing your own fuel saver card or partnering with other retailers in markets where there are not Hy-Vee locations?

We continue to move forward on that.

This is a much larger perspective than just a fuel saver card.

We do have a fuel saver card partnered with several grocery stores down in southern parts of the area where we do not have presence with respect to Hy-Vee.

We continue to look at the whole digital engagement with our customer.

This is really a -- something we'll be really focused as we move into fiscal 2018.

It goes way beyond just having a fuel saver card or rewards program.

It is really trying to integrate every aspect of how we interact with the customer and make it a seamless transaction for the customer whether it's coming into our store, whether it's telephonic order, whether it's someone using their phone to interact with us.

So, this will be definitely a focus for us.

So, kind of wait more to come on that one, Ryan.

Fair enough.

Lastly, you can just talk about how the pizza delivery rollout did in the smaller markets?

I will say we were encouraged by that.

When we rolled the pizza delivery in the smaller markets this is what I would be-- in the test mode at this point and it was a limited -- it was like Thursday through Sunday.

So it was a limited number of days of the week because of that smaller community.

I can tell you roughly we anticipate roughly about 40 basis points of that comp and the prepared food came from that rollout.

Which we were very encouraged by and so to the extent that this continues to perform well, I think it does open up a more opportunities in pizza delivers in some of the smaller communities.

We'll continue to test that and keep pushing it forward.

Great, thank you.

You bet.

Thank you and our next question is from the line of Shane Hagan with Deutsche bank.

Thank you for taking the questions.

Hey, Bill can give color around the competitive environment.

You called out some more promotional activity.

Are you seeing any particular regions that are -- that have become increasingly promotional or is it broad based?

Any color there would be great.

Shane, this is Terry.

I would tell from a regional perspective I think this is more of an industry consideration.

When we think about the food service category, there's a lot more promotional activity with regards to some of the major pizza retailers.

We have to be aware of those promotions in markets where we face them one on one.

And also with regards to the QSR's because those folks are also our competitors.

We need to make sure that we are staying vigilant with regards to combo type promotions and so these are areas of focus that we have going forward.

That's certainly a shift, in terms of what some of the competition is doing.

And on a case by case, market by market basis we'll be aware and be more proactive in that regard.

Do you see a step-up say today versus maybe three or four months ago?

I would say in terms of promotional activity in the last year we are starting to see some of that in our major markets with the combo programs from the QSR's.

With regards to the pizza promotions those are more likely to have come here within the last 90 days to 120 days.

We're seeing much more than that and as a result we'll have to be more proactive in those markets.

When I talk about those markets those would be Metro locations where you face the Dominos and the Pizza Huts and the Little Caesars of the world.

That is something we are going to have to make sure we are aware.

Also, Shane to add to that we also have seen-- any time we see increased promotional activity from big box retailers that usually permeates down to the grocery stores as well.

So we don't price right now with most of our products with grocery stores and any time they become more promotion and whatever products that might be that just increases that spread between our price and their pricing.

So, like we called out last quarter and still true is increased promotional activity in the beer category, for instance.

So these things do effect us in the indirect manner.

I do believe you're seeing increased activity in that regard.

Okay.

Thanks for that.

And just a question on the share repurchase program.

Just curious about the timing.

Why does the board announce that the authorization today and does it signal anything about your future CapEx plans or maybe about your approach to M&A today?

Well, we know we've done numerous share repurchase programs in the past.

In terms of the timing, there's nothing significant with regard to timing.

We're looking at an opportunity to leverage that balance sheet and we want to make sure that we're balanced in that approach to provide that total shareholder return.

And along with our continued growth and the dividend allocation, we just felt that the share repurchase opportunity was another way for us to bring total shareholder return.

That's nothing specific to timing just the thought that the Board thought this was an opportunity for us to bring that return.

And how should we think about your leverage ratio target?

Well, assuming--kind of give you an idea just -- this will-- the share repurchase will be funded out of cash on hand, cash from operations as well additional debt.

If we took the entire $300 million debt our debt to EBITDA would go to 2.1 times.

At the high watermark we've been at 2.6 times.

That was shortly after the major recap that we did back in 2010 on a share repurchase.

We don't necessarily have a target at this point but we are very conscience of our leverage.

We get more and more questions and have been getting more and more questions over the last probably 12 months about capital allocation and so -- we are very cognizant of shareholder comments.

I bring them up on a regular basis to the board.

And so they have an understanding of what our shareholders are saying.

And so consequently we're having a lot more conversations about share repurchase in the past 12 months.

You look at our debt to EBITDA presently at 1.5 times and it will continue to go down as we grow EBITDA.

Even if we -- even with the share repurchase that was just announced.

We will quickly move downward from that 2.1 in the next several years.

This will be something that we continue to evaluate each and every year or each time the authorization expires.

Got it.

Thanks so much.

You bet.

Thank you.

Our next question is from the line Bonnie Herzog of Wells Fargo.

This is Adam Scott on behalf of Bonnie.

How you doing?

Just fine, thanks.

Just a couple of questions.

First on RINs which is a topic that is investor focus right now.

In a world where the point of obligation for ethanol blaming does change how does that impact you?

We're assuming that the terminals are blending ethanol, RINs would effectively fall to zero and splash blenders would lose the ability to sell RINs.

Want to get your thoughts on if you think you'd be able to capture any of the economic profit from splash funding in that scenario or if you think you would basically have zero benefit from any further ethanol blending?

Right on point.

It has been a hot topic.

Get a lot of questions on RINs and you probably saw some of that announcement and so forth last week or so with executive order that didn't happen.

But having said that, just a couple of things to think about with RINs.

I want to make sure everybody understands, first of all we happen to be a publicly traded company-- we're not the only people in the mid-west that secure RINs.

The private operators also have the opportunity to secure RINs as well.

The reason I bring that up is this, is-- yes we are benefiting in the gross profit dollars from the RINs currently but so are those operators to the extent that anything happens in a dramatic fashion there is a theory that they would be more rational in the retail pricing to offset that loss of gross profit dollars.

No different than any other pressure that comes into their business whether it's a minimum wage or increased legislation on other products.

So, that's one thing I want to make sure people understand.

Secondly, there could be already -- this could be in competed away right now.

So this may not be as much of an impact as people think there is.

One last thing that I want to have people to thing about here is, it would be very challenging for the point of obligation to change at this point.

You're talking about the number of obligated parties less than 200 currently changing that focus to include retailers or people at the rack.

You're talking about thousands and thousands of obligated parties now.

So, I think that would become a challenging dynamic to manage and enforce and I'm not sure how you would enforce that.

Even with us we don't secure RINs really east of the Mississippi.

We're not in position there to purchase the two products separately and so if you're a small operator, I'm not sure how that's going to look going forward.

So, I can tell you this, this is something that does not keep us up at night.

RINs are not a strategy in our long term forecast.

is is just something that we secure based on how we operate our stores and where we operate our stores.

Hopefully that gives you a summary there.

That's very helpful.

Thank you very much.

Just one other question on an entirely different topic.

Tobacco.

Sounds like from your press release that same store sales in grocery accelerated X cigarettes which implies tobacco decelerated.

Some of that in the past has been around the de-premiumization trend to switch back from packs versus cartons but if you look at your margins implies that maybe that is not happening.

Wanted to get a little bit of color on some of the specific mechanics of the underlying trends within tobacco and what-- is it mixed shifts or different formats?

Obviously are customers down trading in a way that they haven't been.

Just some specific color would be helpful.

Thank you very much.

Absolutely.

Cigarettes and I think we might have made a few comments in the last conference calls.

Cigarettes over the last 9-12 months we have seen a gradual move away from carton purchasing to pack purchasing.

We have also seen a gradual moving from full value to more of a generic brand.

When that happens it is a lower ring and it will effect the comps.

Those typically are higher margin items but you need to make a significant move to drive the margin.

Keep in mind, the grocery general merchandise margin is comprised of a number of things.

One of the things that we mentioned in the last call, maybe the last two calls, we did change our ice program and so we're not -- we have not fully comp through that.

Now we go through a -- we used to bag our own ice and now we go through a third party to do that.

As you might recall that was a 50 basis point impact.

So we're still cycling over that.

So, that's what is really kind of playing in at this point.

But cigarettes, as you know, it's a declining category and has been for some time.

I will say that we're probably bucket to trend nationwide with respect to cigarettes and cart movement.

Great.

Thank you very much.

You bet.

Thank you.

Our next question is from the line of Kelly Bania with BMO Capital Markets.

Good morning.

Thank you for taking my question.

How are you?

Good.

Wanted to just clarify a comment.

I think you said Bill, maybe that you saw an acceleration of what you saw of January into February.

I wanted to clarify.

Does that mean the trends continue to weaken and just is that weather or is this anything else you're seeing promotional activities still upticking?

Yeah.

So exclude leap year, normalized leap year for a minute because that will skew the results it did last year and it will this year.

The intent of that comment was more so definitely acceleration from January.

The environment we're in is relatively similar to the environment we experience in the third quarter.

So some areas are seeing acceleration above and beyond we're at the nine month mark and some we're seeing flattish and some slightly down.

Just one of the those things the consumer is still very anxious out there.

I still think there is bit of an unknown out there particularly with health care costs.

Things still need to settle down before we get some confidence.

Okay.

And another question.

When you mentioned the competition from big box retailers and some of the other large pizza chains like Dominos and Pizza Hut, I feel like in years past you were more insulated from that.

If you think what is going on now is just so extreme that it's reaching your trade area or are some of those retailers expanding more in your regions?

It's not so much the expanding, Kelly but there are several components here.

There is has been increased promotional activity in certain products within the big box retailers and grocery stores and that creates a further pricing dynamic from their locations to ours.

That's one component . Terry mentioned other the component about these-- promotional deals that a lot of the pizza chains are doing.

I don't think the competitive landscape has changed that they've encroached more into our areas.

But I think the media has spread out and so, as you're in a small community, even though there may not be a Domino's or Pizza Hut chain there that becomes engrained in their mind and that's an expectation is there maybe at the forefront.

What Terry is alluding to, we need to be cognizant of those changes.

They have increased in the last 90 days to 120 days.

So we are circling back to see whether we have opportunities to be a little more laser focused in our pricing by region to combat some of those things.

Basically a price optimization by region.

Got it.

I don't know if you look at your stores or sales trends in this way, but are you seeing any really difference in kind of your Metro areas versus kind of the smaller rural towns?

It depends on what you are referring to typically in a larger community you'll see gallon movement in grocery and general merchandise higher than what you would in a smaller community.

I just think that's more of a foot traffic perspective.

Now from a prepared food perspective a small community-- the small opportunities are either in line or above some of the larger communities because of the lack of the competitive environment.

Got it.

And then just another one.

I wanted to just ask about the new store development.

I think several comments about accelerating that.

Just trying-- to understand what we should we be thinking about in unit growth expectations over the next several years.

Well, Kelly this is Terry.

I would tell you that our intent here is to I think increase the number of new stores on an annualized basis.

We scaled up our staff in the real estate department.

We have brought on new associates.

Not necessarily based here out of Ankeny but based in some of these growth markets looking to increase opportunities around the Terre Haute distribution center.

We have our first new store opening in Ohio on March 17 and we're looking towards Oklahoma and Arkansas and as well Tennessee and Kentucky.

We believe there is great opportunity throughout our what soon will be 15 state market area.

To continue to grow.

We want to ramp it up from what has been historical so you will see that number continue to grow.

We're looking for a baseline of a 4% from our new store growth.

So that's a priority for us.

And we'll not only do that in our new markets but also in our existing markets.

We understand there are great opportunity in our existing markets and a state we want to focus on as well-- is the state of Wisconsin.

It's in our backyard and we see great number of towns that are Casey's towns in the state of Wisconsin and we have some stores -- states here where we have solid ROI, state of Nebraska, states of South Dakota, Minnesota.

We want to continue to look there as well.

So we're going to increase the number of new stores going forward.

Got it.

And then could I ask another one on RINs.

It seems, Billy mentioned prices are now $0.35 down from $0.89 or so for the quarter.

But I think your comment that some of that could possibly be offset in gas margins because everybody in your trade area and other independents, many have been benefiting from that.

Have you seen that dynamic play out--in the past couple of months as that RIN price has moved down sharply.

When we talk about the fuel margin even though it's a very high-- we believe a very solid 17.9%, you break out the RINs, and look at the quarter, wholesale cost did rise in the quarter.

But the other thing that we didn't really mention is basically a flat volatility in the third quarter and so volatility -- when you have volatility no matter what direction the wholesale cost whether they're up directionally or down directionally, you have an increase in the margin.

We just have not seen that yet.

The environment with respect to the fuel margin and what you just mentioned, Kelly, we're not the only ones that's facing that.

If you are a smaller operator , operating at a lower major environment than what you have normally been in the last 9 months to 12 months-- something at some point will have to give.

We think the margins will rise at some point in time in the future or else we might see some opportunities for acquisitions as the pressure continues.

Because the maximum environment that Terry alluded to as you probably know is not specific to our company.

Right.

It is across the board.

So, I think we're positioned very well to take advantage of whatever direction this goes here.

And as Terry mentioned the unit growth just maintaining a minimum 4% unit growth from-- organic perspective and then augment with acquisition opportunities, we're certainly gearing ourselves up for a future accelerated growth pace.

Great, thank you.

Thank you, Kelly.

Thank you.

Our next question is from the line of Chris Mandeville from Jefferies.

This is Aaron (inaudible) on for Chris.

Thank you for taking the question.

You bet, Aaron

Where are market cheese prices today and if you guys have decided to lock in costs yet on that and if so at what price?

Currently right now the market price is a $1.75 a pound.

We're looking for any opportunity for a forward buy.

As far as an immediate lock in we don't have any plans.

We're keeping our eyes open to see if future prices become more inline with that current price and when that opportunity presents itself we'll make that forward buy.

Okay.

Understood.

And then on grocery you talked about grocery (inaudible) having accelerated.

Can you provide us with some numbers around that to better understand what that was Q2 versus Q3?

We're probably going to take a stop there to give that kind of granularity out, but the point we wanted to make there, Aaron, was the fact that this is the first time in probably three quarters that we have seen that movement go upward.

I'll not saying we're referring to as the bottoming of the economic conditions we're in but a signal.

The other side of that Terry did mention too is for the first time in almost a year we have seen the basket ring in the store go up.

Now the basket ring inside the store excluding fuel that was up somewhere in the 7% to 8% range from the second quarter.

Understood.

One last one for me kind of on the digital data front.

At what point do you think you would become a little more sophisticated in regards to that as where you can target the customer with a specific promotion based on their prior purchases not just online but in the store as well.

Certainly during fiscal 2018 that's a priority project for us.

Between our store operations and IT teams along with marketing and food service that is a project that we want to move forward very quickly we understand our customer relations management is an opportunity of going forward.

We need to understand what is it that we're not providing to the consumer they're looking for and we also want to understand an opportunity through social media-- is communicate with our consumer and make sure when they're on premise we're providing them the promotional opportunities they're looking for.

We want to get a sense of what it is they're purchasing and so we can provide those promotions to them.

We understand that we want to be more sophisticated with that.

We want to make sure we're best in class.

And we're going to certainly move in that direction.

Understood.

Thanks, guys.

Best of luck going forward.

Thank you.

Thank you.

Our next question is from the line of Irene Nattel with RBC Capital Markets.

Thanks and good morning every one.

Hi, Irene.

Just continuing on the subject of digital.

When you talk about F18--should we be expecting an actual launch of something more sophisticated in F18 or more discussion around what your intention is to do?

Irene this is Terry.

As far as the potential launch I'm not going to guarantee there will be something in the front half of fiscal 2018.

Our goal is to truly understand what it is that we can do to establish a quote, unquote loyalty/rewards program.

We wanted to make sure it's a sophisticated program.

We don't want to just do something simple.

We understand that once we're in that program, it's something that needs to be dynamic.

And something that is also scalable going forward.

We're going to be thoughtful in our approach.

But we want to make sure by the back half of fiscal 2018 we have our next steps in place.

Obviously this is an opportunity that will be -- will continue to grow and develop and mature.

The first step to that launch, if you will, of a customer relations model is when we put out our mobile app on the pizza program and we're doing very well.

But we understand that it needs to be more dynamic and needs to be better and more engaging and that's our goal is to move that direction.

That's really helpful.

Thank you very much.

And certainly we look forward to getting a lot more detail on that.

Just a couple other questions if I might.

If we could come back to the whole food service piece and the prepared foods.

It sounds as though-- there's more opportunities perhaps for you guys to get a little bit more sophisticated or do more around bundling.

I know you do a lot of that already, but can you just talk about sort of the tools you're looking at to drive continued -- let's call it higher basket size on food.

Well, I would tell you that I think in terms of our basket opportunity, we do those basket rings or those basket opportunities where we bundle products together whether it's food, service and fountain or a bag of chips or another snack item.

I don't know that we've always done a great job in promoting that across the board.

So you'll see those maybe more happening along the line of an in-store promotion and in terms of it maybe more regionalized.

We want to make sure that when we think about our sub sandwhich program as well as our hot sandwiches and our pizza slice that we are conscious of what the competition is doing and we are making sure we are providing a great value to the consumer.

But we are also doing a better job of marketing that to our consumer.

It's not -- I would say it's been more of a hit and miss if you will, it has been a seasonal type situation and maybe more along the line of the summer months.

We see that this is something that we need to do more on a year round basis and provide that opportunity.

We're going to be more dynamic, if you will, in terms of its scope and also in the depth of the promotion.

And that digital process will help enormously, presumably.

Absolutely.

Digital is great way to get the promotions to the consumer.

We have -- with our social media capability and sending out promotions to our mobile app users, we're having great levels of engagement, but we know it needs to be more and again that's where an increase in development of that program is going to be vital.

It's one thing to have an in store motion and you see it when you come inside the store but we want to capture you when you're away from store and make you come into the store for a reason.

That's the opportunity is to be more engaging with our consumers-- at store level or someone who has never been to Caseys before.

That's helpful.

A couple more housekeeping questions if I may.

Your discussion around the -- I guess the trends in February suggest that step up from January but maybe not quite in line with the annual goals is that a fair comment?

Yes, it would be.

It would be more in line with what we've been experiencing in the last several quarters.

Okay.

That's very helpful.

And then finally just on the share repurchase.

Can you give us a little bit of color on how you plan to execute.

Will it be opportunistic or a consistent share repurchase.

Anything you can help out on that one?

It will be a combination of the two, Irene.

Certainly we will have -- we'll be -- our plans to purchase here is not an open window environment but also closed window environment.

Certainly we'll be doing that throughout the quarter.

That's right.

Each quarter may be different, obvious I will.

When do you plan on starting?

You know, we plan on starting this quarter.

Okay.

That's very helpful.

Thank you.

You bet.

Thank you.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research

Good morning every one.

Hi, Chuck.

Hi, Chuck.

When you're looking at those eight stores you have under contract in the 33 under construction are those going to open in the fourth quart -- be acquired and opened in the fourth quarter?

How would you put a timeline on that group of 41 units?

Yes, sir.

Those will all close in the fourth quarter.

That would be correct.

All right.

So then -- sounds like you'll be pretty darn close to the goal this year then?

We'll be below goal on the number, but certainly we have some opportunities in fiscal 2018 as we alluded to in the narrative.

We have a lot of sites that are under contract or verbal agreements and we feel very strong about that and certainly the -- with the increase in the number of staff that we have with regards to our real estate team, they're young and they're hungry and getting after it so we look forward to their continued aggressive activity in bringing more sites to us for the rest of fiscal 2018.

When you're looking at these operating expense increases, Bill, you went over in detail some of it, are there-- any line items you could push back on or does it have to be the recovery in sales growth to lever some of these operating-- expenses?

In other words, can we see the rate of increase, decrease in dollar terms perhaps?

Yeah.

I guess to answer your question, when you look for an operating expenses knowing kind of what Terry is alluding to with respect to what we are rolling out in the fourth quarter by the way of new store constructions and remodels and replacements and you head into a more aggressive activity certainly that promotes a higher degree of operating expenses.

To your question specifically when you look at the operating expense line, wages definitely commands the majority of that.

You put in perspective the Q3 OpEx increase, about two-thirds of that had to do with wages and payroll taxes.

We are taking a much stronger focus and look at opportunities we might be able to have and make adjustments in with respect to that.

Most of it has to do with rate.

Even if you pull out the manager salary increases that I mentioned-- it's a competitive landscape out there.

We've had to take some rate increases like on shift differentials for the non-core hours in our 24 hour operations and pizza delivery drivers certainly want to be the employer of choice.

That's the area that I think we'll be able to make the biggest impact.

I'm not sure it's going to happen overnight necessarily, but that's something that we'll be focused on and probably talk more about in the next conference call in the efforts in that regard.

Okay.

And then, finally, you talked about the quarter to date trends in comps.

Is that both prepared foods and grocery category?

That would be -- that would cross all of it including fuel gallons as well.

Okay.

All right.

And then on -- how about the fuel gallon margin, Bill.

Would you be willing to talk about that quarter to date?

Well, I mean, yeah, the comment I would make is this.

I mention the previously we had a pretty flat from a volatility perspective in Q3.

That flatness kind of continues.

All right.

Thank you.

Yeah, you bet.

Thank you.

And our next question comes from the line of Mark Smith with Feltl and Company.

First up.

Just a housekeeping.

You can walk through again your tax rate assumption here going forward?

Yeah tax rate assumption was specific to the fourth quarter.

And that was 33.5% to 34.5% in the fourth quarter.

For the year-to-date we'll be more along the years of 34.5% to 35.5%.

Have you spoken to increased volatility in that tax rate with the new accounting for the tax impact on stock options.

Are you talking about the tax-- reform or the-- one that we implemented 3 quarters ago, yeah.

I'm trying to clarify your question, mark.

Yeah.

Yeah.

I think that's it.

The one that you put in.

The one that we put -- most of that is always going to be in Q1.

Because that's when restricted units become fully vested and that is when we have the opportunity to get that benefit.

We did have an influx last year in Q1 because we did have some people exercise some stock options that would go to that.

There will be an ongoing benefit but it tends to be a--little less in the quarters two, three and four.

So come Q1 we expect to see a benefit in that regard.

Looking at the major pizza chains doing over 50% of the orders digitally today.

Is there anything that keeps you over time being able to grow to similar metrics?

I think it might be a little more challenging for us to get to those levels.

Certainly we're striving to get higher penetration to the extent that we can.

The reason I say it might be challenging is the larger players that you are referring to are more metropolitan areas.

What we see the mobile app usage certainly more dominant in our more metropolitan areas than the rural areas.

Just because of the demographic it may be just a little bit more challenging to get to the levels.

Having that said, I think we have opportunities to grow from where we're at definitely.

As Terry mentioned this will be an area of focus for us.

We want to make sure we're fully engaged with our consumer.

Maybe I'll squeeze in one more.

Have you quantified the difference in the average check between a mobile order or digital order versus somebody in the store?

We haven't done the dollar amount, just the percentage increase.

But you can kind of -- we've given out the average basket ring will be around $7.70 excluding fuel.

But then it won't get you to what you're getting at.

We haven't necessarily broken up the dollar amount.

But it's probably closer to roughly $2 differential in the ring telephonic versus the online.

That's helpful.

Thank you.

Thank you.

Our next question comes from the line of Ronald Bookbinder with Coker palmer.

Good morning.

Hi, Ron.

The pizza delivery and the food and fountain it seems like you have a lot of nice positive drivers.

You accelerated the pizza delivery, the increased -- you had some strategic price increases.

The pizza app, the average order is 20% higher.

What was traffic down in the category and how is that going to change going forward?

Is it promotions or just flatly the economy?

We think it's the impact of traffic has to do more with the dynamics that Terry alluded to in the opening marks in the call.

It's a combination of the agricultural economy, farm income being very challenging right now --the outlook for farm income looks to be similar at least with the first part of calendar 2017 and that pricing spread between food away and food at home is another dynamic that is playing upon that.

Time to time, especially this time of year Ron we are going see some weather patterns that just in the short term affect traffic that is what happened-- we saw in January.

The customer count in January part of it had to do with calendar shift but also part of it had to do with the weather pattern with the negative customer count.

First time we had a negative customer count -- it in a month's time for about a year and a half.

Prior to that, November was extremely strong.

In contrast November was at one of the highest points that we had in the last two years.

For us it's looking to be diligent in our promotional activity to drive customers.

Terry made a great point earlier about the digital engagement of our customers to drive into our stores.

We want to know what they're buying and also what are they not buying.

So we can do a better job of engaging them to actually buy other products.

So it is going to be-- a focus for us going forward.

On rising input costs, when do other contracts roll off and how do the meat and coffee prices look compared to your contracts.

The other forward buy that we have is in coffee and that's locked in through the summer -- July of 2018 as Terry mentioned we are looking diligently at opportunities to maybe engage in another buy of cheese.

We just have not engaged that yet.

As far as meat and some of --- other we do not typically have forward buys in those categories.

We have seen a slight benefit for those but nothing meaningful at this point.

Lastly, as you look at these new markets and building new stores, are you looking at adding alternative energy, a place to plug in a car and how are you looking at this sugar tax on the soft drinks that we are seeing out of Philadelphia.

People are wondering how that could impact convenience stores if it spreads nationwide.

With regards to the alternative fuels, certainly we are aware as there seems to be some news worthy trends towards use of electric vehicles and driver less vehicles and so forth.

We want to be mindful of that and we want to look at you are metropolitan markets where that may be a greater opportunity than some of our rural markets.

As we move into new states.

We will certainly be mindful of what those opportunities may be.

With regards to the sugar tax I am not sure anywhere necessarily in our market area are we facing that sugar tax issue, but when it comes it will affect us like it does everyone else so we will be on equal footing.

Okay, thank you and good luck in the new quarter.

Thanks Ron.

Our next question comes from the line of Anthony Lebiedzinski with Sidoti and Company.

Thank you for taking the question.

Just wanted to actually follow-up as far as your commentary Bill, about November being extremely strong.

Any particular reasons why you think that was the case.

There were probably a number of reasons, one is that we did kick off a price increase in November and obviously that was helpful in November as it was in December and January.

The weather in November also was very strong so the comparable weather patterns were very favorable.

Even though we can't put a specific number on it, you had a lot of political unrest leading up to the election and I think the election results came in and there was a sigh of relief that part's over.

I think that kind of reengage itself as the new administration kind of set their foot forward there.

But I think those are the reasons that we are seeing right now.

Thanks for that color.

Anthony, before I leave that question.

The other thing I want to point out month of November we did have a different promotional activity in prepared foods.

We offered free bread sticks with a large pizza and we don't do that very often.

But that was certainly a strong player for us in the month of November.

Got it.

Thanks for that color.

And also, as far as looking at what you deliver, I mean right now primarily it's pizza and bread sticks and some other miscellaneous items.

Is there a thought to expand what you can deliver and perhaps down the road to deliver some grocery items or some other merchandise.

How do you guys think about that?

Anthony, this is Terry.

We'll keep an open mind with regards to those opportunities.

With our drivers going to the stores or going from stores to home, there may be the opportunity to add some grocery items there.

We'll look at it.

We may test that here during fiscal 2018 and see what products make the most sense.

Got it.

And lastly, as far as the potential price optimization in terms of region.

Any thoughts as far as the timing of when that could happen?

No.

I don't have any timing at this point right now.

It's something that we do have price optimization on key productions and fuel is one of them and beer and cigarettes are others.

We are-- and Terry was talking more about being more diligent about and cognizant about some of the promotional activity in certain markets and trying to combat those with different price optimization.

Fiscal 2018 is going to be an area that we're moving forward in.

Okay, terrific.

Thank you very much.

Thanks, Anthony.

Thank you.

Our next question comes from the line of Bob Summers with Macquarie Group .

Good morning, guys.

I want to compare and contrast the stores where you leverage initiatives versus the unchanged base.

Maybe along the lines of comp trends, gross profit dollars, EBIT margin and as you think about where you're falling short of your goals, which store bucket if at all is driving it.

And then, separate but maybe related, when I think about the leverage point, it's obvious that you're incurring costs for this year.

Where do you think about the leverage point in terms of in-store comps now and now and where it might be in 4 quarters.

I'll try to get to all the answered there.

With respect to-- the comps-- when we look at the growth programs, they are comping significantly above the unchanged store base.

As we get later in the innings of the rollout of some of those initiatives, that benefit will probably start to taper off as the base grows.

Even currently right now the 24 hour rollout that we have done-- those rollouts are stores where we already have modified hours on so intuitively will be a little bit less than ones we have done in prior years.

We also like to think in the other initiatives we picked some of the better ones so intuitively you would think that some of those would also start to taper off.

Still they are performing significantly higher than unchanged store base.

So we look at the comps and-- unchanged store base represents probably 1,350 stores, Bob so there is no discerning differential across the market area with respect to population or states in that regard.

Consequently we come back to the environments that we discussed on and so those would need to change for us to move that particular one forward.

Maybe -- I'm not sure of the other question if I got a you will your questions answered in that regard.

Just back to the point of leverage.

While the farm economy is a bit of headwind as you think about sort of modeling out your business and the incremental costs that have been absorbed.

Where's the leverage point now and can it be lower in three to four quarters once you anniversary some of these labor expenses, the HR system what have you.

Yeah, definitely-- I think you are talking specifically operating expenses and not debt leverage.

From an operating expense perspective and there are some things that we have incurred that we will cycle over and create a new base come December first of all with that minimum salary that we talked about.

Also come later second quarter of fiscal 2018 will lapse over the rollout of the new payroll system and HR system that we talked about.

The other think we did not talk about that was kind of skewing upward some of the OpEx here is the health claims.

Health claims have risen we have a higher number of high dollar claims, total number of claims are up as we grow the company.

And the dollar amounts continue to grow.

That was a little bit different in Q3 with respect to Q2.

And Q3 a year ago.

And then uniform is one off thing.

So, our anticipation as we head into next fiscal year is to provide a little different direction than we have in the past.

I'm not sure how that's going to shore up.

What I mean by that is guidance as opposed to goals.

I'm not sure again, how that will shore up.

One of the things that became clear we need to do a better job of guiding expectations of the analysts and that's something we'll be working on and part of that will be the operating expense line of that.

You'll see a different approach going forward and we'll be much more clear on an on going basis throughout the year.

Okay.

Great.

Thank you.

You bet.

Thank you.

Our last question comes from the line of Daniel O'Hare from Bank of America.

Hey, good morning guys.

Do you have any product launches that customers can look forward to in Q4 or fiscal 2018?

We're always launching new types of products.

They tend to be different flavor profiles of some existing products like specialty pizzas and different products in the bakery category.

Terry might have some insight more than I do so I will just turn it over to Terry then.

One area that we're looking at is the opportunity for take and bake pizza.

We're going to test that during if fiscal 2018.

We understand that is an area of opportunity that some of our consumers may be looking for especially where we may have a higher rate of snap and -- the snap customers.

So we'll take a look at that here very shortly with the test during Q1 and if that meets our expectations, that's an area we're excited about on a go forward basis.

Got it and then I was just wondering if you could provide any commentary on the impact or any impact that you have seen from the delay in tax refunds.

I'm not sure we can necessarily specifically spell out -- I heard that comment from a number of our related peers coming out.

I think intuitively that does play into it.

That's hard to say what that means to us.

Anecdotally that is an issue.

How much of the declined in the prepared food margin was attributable to the higher cheese costs?

Are you talking about Q3 over Q3.

Yes.

We had about a 30% to 35% basis drop.

About half of that was cheese cost and the other half was supply cost.

Got it.

For the supply cost, was it higher fuel prices?

That was the other come component?

No, when I say supply costs in the prepared food category I'm talking about some of the supplies like cups and things like that, wouldn't be food cost.

Got it.

Thanks so much.

You bet.

Ladies and gentlemen, that is all the questions for today.

I would like to turn the call back to Bill Walljasper for final remarks.

Thanks, Carmen, I appreciate that.

I would just like to thank everyone for joining us this morning and we look forward to next call come June.

Have a good week.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program and you may all disconnect.

Have a wonderful day.