William Walljasper - Senior VP & Chief Financial Officer Terry Handley - President & Chief Executive Officer.

Ben Bienvenu - Stephens Irene Nattel - RBC Capital Markets Christopher Mandeville - Jefferies Ryan Gilligan - Barclays Capital Shane Hagan - Deutsche Bank Anthony Lebiedzinski - Sidoti & Company Bonnie Herzog - Wells Fargo Kelly Bania - BMO Capital Markets Chuck Cerankosky - Northcoast Research Ryan Domyancic - William Blair Bob Summers – Mcquarie.

Good day, ladies and gentlemen, and welcome to the Q1 Fiscal Year 2018 Casey’s General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I’d like to introduce your host for today’s conference, Mr. Bill Walljasper, Chief Financial Officer.

Sir?.

Good morning and thank you for joining us to discuss Casey’s results for the first quarter ended July 31. 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 disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

We’ll first take a few minutes to summarize the results of the first quarter, and then afterwards we will open up the call for questions about our results.

Terry?.

Thank you, Bill, and good morning, everyone. As most of you have seen in the press release, diluted earnings per share for the first quarter were $1.46, compared to $1.70 a year ago.

The majority of the earning shortfall from last year was related to a change in the provisions of our long-term incentive plan, an increase in the Illinois state tax rate.

With respect to the long-term incentive plan, there was a change in the retirement provision for the current year grant award that resulted in the company having to accelerate the recognition of a $7.3 million expense in the first quarter. This represented a $0.12 impact to earnings per share.

Grant awards have historically been expensed over a three-year vesting period. The overall total expense of the current year grant over the three-year vesting period has remained comparable to a year ago.

The long-term stock incentive plan was also changed to include three-year performance conditions related to return on invested capital and total shareholder return. These two performance components represent 75% of the potential award. The change in the Illinois state tax rate impacted earnings per share by about $0.05.

Nearly, all of this impact is related to a one-time adjustment to our deferred tax assets and liabilities. The economic conditions in our market remained unchanged and consistent with our comments in previous earnings calls. This environment continues to put pressure on customer traffic at virtually impacting same-store sales across all categories.

However, we are encouraged to see that our basket ring inside the store, excluding fuel have stabilized for the past several quarters and we continue to be an industry leader in same-store sales growth in both fuel gallons and inside our stores. I would like to give you an update on the progress of the share repurchase program.

As a reminder, the program authorizes repurchases of up to $300 million of common stock over the course of two years. As the press release indicated, during the first fiscal quarter, we repurchased just over 718,000 shares for approximately $78 million. Since the start of the program, we have repurchased nearly 1.2 million shares.

We continue to believe the share repurchase program is an important tool in providing shareholder value. I would now like to go over our results and some of the details in each of the categories. In the fuel category, retail fuel prices continue to be low, resulting in same-store gallons in the quarter being up 1.7%.

Total gallons sold for the quarter rose 5.4% to $565.1 million. The average retail price of fuel during this period was $2.16 a gallon compared to $2.14 last year. The average fuel margin in the quarter was $0.193 per gallon, down slightly from the same period a year ago.

The first quarter margin benefited from the sale of renewable fuel credits commonly known as RINs. During the quarter, we sold 15.7 million RINs. for $10.5 million. This represented nearly $0.019 per gallon to the fuel margin. RINs. are constantly trading around, excuse me, RINs. are currently trading around $0.85.

For comparison purposes going forward, last year in the second quarter, the average RINs. sold were approximately $0.89. Gross profit dollars in the fuel category for the period was up 4.6% to $109.2 million. Total sales in the grocery and other merchandised category were up 5.5% to $597.4 million in the first quarter.

Same-store sales were up 3.1% during the quarter in line with our annual guidance. The average margin in the quarter was up 30 basis points to 31.9% compared to a year ago, primarily due to a product mix shift to higher margin items.

As a result of this and the increased sales, gross profit dollars for the quarter in the category were up 6.3% to $190.4 million. In the prepared food and fountain category, total sales were up 7.5% to nearly $262 million for the quarter.

Same-store sales were up 3.7%, which fell short of our annual guidance, as we experienced lower traffic counts during the quarter. We believe this pressure is related to the agricultural economy in our market area and the continued spread between food at home and food away. Another contributing factor was the excessive heat during the month of July.

The average margin for the quarter was 62.5%, down 30 basis points from the first quarter last year, primarily due to several cost increases. However, this was in line with the top-end of our guidance range. In the quarter, prepared food gross profit dollars rose nearly 7% to $163.6 million.

In the current environment, we recognize that our customer has become more value conscious. In light of this, we will build upon our existing value-added offerings in this category along with new seasonal items that we anticipate to help lift the overall prepared food sales. For the quarter, total operating expenses increased 10% to $321.2 million.

As I mentioned earlier, the company recognized an incremental $7.3 million of expense related to the accelerated recognition of changes in the provisions of the current year grant awards under the long-term incentive plan. Without this, total expenses would have been up 7.5%.

In the previous earnings call, we discussed numerous opportunities that we are undertaking in an effort to better control wages in fiscal 2018. We were encouraged by the progress in this area.

And as a result of these measures, store level operating expenses for open stores not impacted by any of the growth programs, were up approximately 3.9% in the first quarter, which includes our decision back 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.

Without this change, store level expenses would have been up slightly over 3%. This will continue to be an area of focus for us, as we move throughout the year. I would like to now turn the call back over to Bill to discuss the financial statements..

Thanks, Terry. On the income statement, total revenue for the quarter was up 6.3% to $2.1 billion, due to sales gains mentioned previously and an increase in number of stores and operations this quarter compared to the same period a year ago. Depreciation in the quarter was up 14.2% in line with our expectations.

As I’m sure all of you have seen, the effective tax rate in the quarter was 38.1%, up 460 basis points from a year ago in the same period. Majority of this increase was due to a change in the Illinois state tax rate and a decrease in the tax benefits related to share-based awards.

The state of Illinois raised their corporate income tax rate during the quarter, which had 220 basis point adverse impact to the effective tax rate. Approximately, 200 basis points of this impact is a one-time adjustment to the company’s deferred tax assets and liabilities.

In addition to this, last year, we had an incremental 170 basis points favorable tax benefit, resulting from the adoption of a new accounting standard around tax treatment of equity awards. As a result of this activity, we expect our effective tax rate for fiscal 2018 to be between 37% to 38%. Our balance sheet continues to be strong.

At July 31, cash and cash equivalents were $159.1 million. Long-term debt net of current maturities was $1 billion, bringing our debt to EBITDA ratio to 2.1 times, which is one of the lowest in the industry.

For the quarter, we generated $117.1 million in cash flow from operations and capital expenditures were at $94.9 million, compared to $85.2 million a year ago in the same period. We expect capital expenditures to increase as new store constructions accelerate and we complete additional major remodels and replacement projects.

In fiscal 2018, we expect capital expenditures to be between $500 million and $600 million. I would now like to turn the call back over to Terry to talk about our unit growth and the progress of our growth programs..

Thanks, Bill. This quarter, we opened two new store constructions and completed one replacement store. We acquired three stores and have 18 additional acquisition stores under agreement to purchase. We also completed 11 major remodels in the quarter. We currently have 47 new stores, 27 replacement stores, and 16 major remodels under construction.

We believe, we’re well positioned for future growth. Currently, we have 132 sites under agreement for new store construction. We have increased resources to the store development area this year to sustain our future and new store construction pace at a higher level. And we will further augment unit growth with acquisition opportunities.

Our store count at the end of the first quarter was 1,980 and we’re excited about opening our 2,000 store later this fiscal year. I’m encouraged by the progress we have been able to make in controlling our operating expenses. Wages has been the biggest contributing factor to the increase in operating expenses over the past year.

As we discussed previously, operating expenses for stores not impacted by our growth programs were up 3.9%. If you exclude the Department of Labor changes, they would have been approximately 3.2%. We will continue to work at other opportunities throughout the year and keep you posted on our progress.

Growth programs continue to be a key part of our long-term strategy. We converted 56 locations to a 24-hour store – 24-hour format and 37 stores to the pizza delivery format. Currently, we have 1,050 stores that are open 24 hours, 621 stores that deliver pizza, and have completed 475 major remodels.

For the fiscal year, we are planning to complete 75 major remodels. In addition to these programs, we are encouraged by the performance of our online ordering program. Total downloads of our mobile app that now exceeded 930,000.

The amount of pizza orders completed online has climbed to 15% and the basket ring of an online order continues to be around 20% higher compared to a telephonic order. We are optimistic that contribution will continue to grow as the number of downloads of our mobile app increases.

As I mentioned in the call after our most recent quarterly earnings release, we will be taking steps in fiscal 2018 towards enhancing the digital engagement with our customers, including the launch of a loyalty program. We believe, this program will give us the opportunity to widen our customer base and significantly increase revenue.

Since the last earnings call, we have been interviewing consultants with expertise in this area to assist us with development of this new program. We are in the final stage of that process and we’ll have the consultant selected in the next several weeks. We will continue to keep you updated on our progress throughout the year.

At the same time, we were reviewing consultants for the digital engagement project. We were also interviewing consultants to assist us with developing a new price optimization program. Currently, many of the products at our stores are priced consistently across our 15 state market area.

We believe we have an opportunity to take advantage of differences and market conditions related to pricing of certain products allowing us the ability to drive incremental gross profit dollars. We will have the selection of this consultant in the next several weeks as well.

In addition to these programs, we recently hired a Director of Fuels to assist us in refining, enhancing our retail and procurement fuel strategy. We’re optimistic about the benefit this new position brings to our company.

In closing, we are excited about the long-term growth opportunities as we’re positioned well for unit growth this year and into fiscal 2019. In addition, we are in the initial stages of several programs that we feel have the opportunity to drive significant long-term shareholder value. We will now take your questions..

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

Yes. Thanks for taking my question. I wanted to just clarify on the OpEx comment that you made. You called out the stock grant vesting charge or headwind in the quarter. Ex back you controlled OpEx spend much better.

Should we be thinking of that stock investing charge as an ongoing headwind to total OpEx, or is it a one-time charge in the first quarter of this year?.

Yes, Ben, this is a Bill. That won’t be an ongoing, that would typically be a Q1 assuming that grants continue for the company. What it really was there was a time provision that was put into play, and we just had several people – quite a few people that already hit their retirement provision.

And such, we had to accelerate that expense over that period. So just that 7.3 is just to clarify was an incremental expense. Next year in Q1, we will have a similar expense, but it won’t be an incremental expense. But that’s not to be expected as we go forward into Q2, Q3 and Q4.Hope that answers your question..

It does, understood.

And just to be clear, was this pull forward reflected or baked into the 9% to a 11% operating expense guidance that you have developed?.

No, it was not..

Okay. Secondarily, on RINs, it looks like you guys sold less RINs this year despite total gallons being up.

Could you just talk through that dynamic why that total amount of RINs sold might have been lower this year?.

Yes, RINs sold that is just a function of same-stores, excuse me, gallons sold in the respective states that we have the opportunity to get RINs. So if you look back at the same similar period probably had just a little bit higher gallon movement than we did this particular time incrementally that’s just a function of that..

Okay, great. And then just one last one. You noted in your press release that prepared food comp slowed in July.

Is the reduced guidance reflective of the slowdown persisting into 2Q? And what you want to just talk around quarter to-date trends? Are we at a similar level so far in the quarter higher or lower than you saw in 1Q?.

Sure, good question, Ben. I’ll give you a quick snapshot of what we’re seeing so far in the month of August. I can tell you up by the respected categories, I can tell you that fuel gallons in the month of August are trending above their current guidance range.

Growth in general merchandise is trending to the high-end of the guidance range, and prepared foods is also trending into the high-end of the guidance range..

Okay, great. Thanks, and best of luck..

Yes. Thank you..

Thank you. Our next question is from Irene Nattel of RBC Capital Markets. Your line is open..

Thanks and good morning, everyone..

Hi, Irene..

Good morning. Just looking or your commentary at the end of your presentation around consultants that you’re hiring.

Is it sounds though, you’re taking a step back and taking a really hard look at how you go-to-market across all category? So I guess, my question is, is that a fair statement and where and why do you think that you need to get that little bit of extra help?.

Well, I’ll try to answer that in two ways, Irene. In terms of the digital aspect of the consumer engagement, we know there are several opportunities, several companies out there with a loyalty programs in play.

We want to make sure that we not only incorporate a loyalty program, but that we reached beyond that opportunity to communicate to our customer base to make sure that we are speaking to them through the mobile capability.

We want to make sure that we’re engaging with the consumer more prominently going forward, not just to offer points program, but to really show them the offerings that we have to drive opportunities to the store. We think that’s an area that is – continues to develop. It’s changing on a regular basis.

And we don’t want to step into this program and find ourselves short. We want to make sure that we’re out ahead of it. And so we’re looking for consultants that can assist us in this strategy going forward. So if we’re going to do it, we’re going to do it right the first time.

When it comes to the price optimization opportunity, while we are pretty much static in our retails across our 15 state market area, we do have some fluctuation opportunities we believe.

I know we talked a little bit about it in the Investors Conference back in July about the prepared food category and where we might have some viability to maybe become more localized in our pricing. And so we think we need to have that expertise.

If you take a look at a particular system or software that might allow us to do that more effectively and to support our store operations team to make sure that we maximize the revenue potential..

That’s really interesting. I mean, have you, I know you’re in the very early stages.

But any quantification of kind of size of the price there?.

Well, I would tell you that as we choose the consultants, the partners in this project, we certainly believe that we were going to establish the business case and the potential ROI opportunity. So that is forthcoming yet, but we certainly hope to do that in the next several weeks.

We also a year ago had a group in here, McKinsey, partners from Chicago. McKenzie assisted us in some elements of our organization of the future discussion. And as we looked at that, we saw the opportunities that could come from price optimization, they gave us some guidelines in terms of expectation.

And so certainly, we want to make sure that we take that into account as we look forward, and that will be the numbers that we strive for..

That’s great. That’s very helpful. Thanks, Terry. And then, if I could, there was some commentary in the prepared remarks around the consumer behavior and we know certainly in prior quarters there was a bit of a challenge in terms of responsiveness to some of the promotions that you implemented.

Can you just talk a little bit about what you’re seeing? How challenging it is to try and get more traffic in the stores, sensitivity around promotional events and things like that?.

Yes, Irene, this is Bill. Yes, and to your point, Irene, I think what you’re referring to back in the fourth quarter, we did a couple deep discounts value propositions that sort of didn’t go as we had expected.

This particular quarter, we did not have any of those deep discounts, but we continue to look at value-added propositions common meals, things of that nature, especially in the environment there we’re in, because the ag economy continues to be suppressed.

We have a consumer that is certainly very conscious of number of things and certainly we want to try to match our offerings with that type of mindset. So we’ll continue going forward, as we talked about in the opening remarks about adding value propositions, new offerings, things of that nature..

Irene, I would add to that in terms of the March promotion that we did with bakery, I think, we were at $0.69 pretty aggressive program or promotion that we’ve done in the past. And since that time, we’ve actually had an upward trend on bakery comparables. So we think that, we certainly got some attention in terms of that bakery promotion.

I don’t think you’re going to see us do a deep discount on that in the near future. But we certainly believe that that was a benefit to us since that time and also the new innovation, new product introductions, just some rotation of items being more deliberate in that arena that certainly helped the bakery category as well..

That’s sort of interesting.

So as you see kind of the – although the promotion didn’t necessarily payoff, there’s a kind of [indiscernible] what shall we be doing to maybe grab a little bit more tension on grocery categories?.

Well, certainly, the areas of focus for us are going to be prepared foods and no key areas in the grocery category, case in point would be beer.

Beer is an area, I think, we’ve talked about in the past in terms of the market being very aggressive, especially in relation to response to the big box stores doing buy two get one frees on these premium case products. We have been following that, if you will, and trying to compete.

And while we have great unit growth, it doesn’t make up the difference in terms of the impact on sales. And so, we’re going to walk away from that strategy.

We’ll let them go ahead and be aggressive on those 24 packs those cases of premium, and we’re going to concentrate more in our wheel house, which would be the six packs to 12 packs, and even singles. And in terms of the beer categories, well, beer and liquor, there certainly appears to be a change or a shift, if you will.

Millennials are moving more towards liquor and wine away from the beer, although they’re still very strong in the crab sales. So we have over 800 stores now, where we sell liquor, it’s our fastest-growing category, subcategory as part of beer and liquor.

So, we’re going to continue to look at this – the SKU rationalization and make sure that we’re closing the gap in terms of that product offering and trying to find a better balance there, because I don’t think that you’re going to see us keep up with the Walmarts of the world in these big discounts. It’s just not – it’s not our program.

It’s not our strategy. And so it’s – let’s make sure, we do what we do best..

That’s great. Thank you..

Thanks, Irene..

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

Hey, good morning. I was hoping to maybe start off on just the quarter-to-date comment versus that we the – prepared food guidance provision, trying to square those two.

I’ve realize it’s only one month out of the quarter, but curious are you guys, or did you guys see something specific to the month of August, such as an elevated lotto or something along those lines that would may need to believe that maybe prepared food doesn’t maintain what levels we’re seeing quarter-to-date, or are there anything else that we could kind of look through in terms of competition?.

Yes. Well, Chris, we definitely did see obviously an increase in lotto in July, that doesn’t necessarily equate into a higher prepared food sales per se. I think what the anomaly was, as we look at the first quarter results for prepared food in a 3.7%, we did make a comment about the excessive heat in the month of July.

July actually was a negative customer count for us, typically that’s a very high-customer account month for us. That kind of premiered across all lines of our categories, especially in the prepared food categories, we tend to have people getting out and above and certainly with respective in the specific in the Pizza line of our business.

So as we talk a lot of that into the month of August, I think, we’re coming back into a more of – really more in line with our expectations, that’s what we put in. So in addition to that, as far as the new guys that we have, as we look forward, we talked about continue to be conscious of value-added propositions.

We do have easier comparisons in the back-half of the year as well prepared foods..

Okay, that’s helpful.

And actually speaking to just the month of July, am I correct in realizing that there was maybe an actually one last weekend day versus the prior year, that that have any affect in terms of what you’ve been seeing…?.

Yes, exactly right. We had one last Friday in the month of July than we did a year ago. So, when you look at a month’s time, there can be some calendar shift anomalies..

Okay. And then maybe just turning to the input cost, I was hoping you could update us there for prepared food principles, cheese AMD pricing have actually come down quite a bit in recent weeks.

So can you just remind us of what you have contracted out to-date and how you find yourself positions maybe capitalize on these lower prices?.

Yes. So we’re always looking for opportunities to extend any forward buys just at a point of reference, so we are locked in with our cheese at roughly about a $1.86 through the end of December here at the Ankeny distribution facility. We were locked in at the Terre Haute facility through the end of August at the same price.

So we’re currently buying those – brought market down in that area. That market price tends to be very similar to what the lock is at a $1.86. So as we will continue to monitor cheese, and I think if it moderates downward, the futures are getting to a point for us that we feel good about locking will do that and certainly keep you abreast of that.

We did see higher input costs on pizza topping throughout the quarter. You’re correct that these has come down here recently. That’s more of a post quarter of phenomenon for us than anything. So hopefully that continues in that direction that will be a tailwind for us to look at..

All right. That’s it for me. Thanks..

Before the next question, do you want to clarify the initial question from Benden [ph] avenue with respect to RINs, Ben, we did have last year timing issue look back and looked. We actually had about 2.5 million RINs get pushed into the first quarter.

So that’s creating a little bit of a disconnect when you look at the number for RINs Q1 over Q1, I think, that might be a better answer for you there. So we’ll go and take the next question then..

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

Hi, good morning. Thanks for taking the question..

Hi, Ryan..

I know you have picked the consultants here.

But can you give a sense for how long you think it will take to get to digital and price optimization initiatives up and running?.

Well, as far as the choice, Ryan, this is Terry. As far as the choice that will come here in just the next several weeks. So that we certainly are looking forward to getting started in terms of that engagement towards the end of the month.

As far as the long-term strategy here, it will probably be an eight to 10-week process to conduct the business case, get a sense of what opportunities they are, what’s the strategy around that? What are the ROI expectations? And so, especially with the customer engagement, the digital aspect now is going to obviously be a little more involved.

And I’m ascertain that what we’ll be looking for from our consultant partner is to be here and speaking to numerous people within the organization and even getting out into the field as well, because we certainly want to make sure that we understand the consumer behavior and the consumer expectations.

We’re going to want their feedback, in that regard their guidance. So I can see that being anywhere from 8 to 10 weeks to get that done. We’ll go into Phase 2 then with a strategy and start looking at the potential platforms that we want to integrate in order to get this program off the ground.

And once we have that in play, we can begin to test the program. So, if we get into Q1 next year, I would certainly hope in fiscal 2019 that we have a plan in place, we have an understanding where we are going, we have a direction and we have already tested it. And so, I’m going to look to fiscal 2019 as really being the opportunity.

Now certainly, we think there may be some near-term quick wins potentially, but we’re going to leave that to our consultants to take a look at that and see if it’s of any value to do that now, or just to roll that up under the customer engagement program as we release it sometime next fiscal year..

That’s helpful. Thanks. And I guess, you guys obviously made good progress on improving the operating expense run rate this quarter.

Can you quantify some of the savings from your initiatives, so like suspending the automatic pay raise?.

Yes, there are several things that we undertook here in Q1 and there is obviously several things we’re continuing to rollout. But if you look at the automatic, I think, Ryan, you just mentioned the $0.25 automatic pay raise after 90 days. That’s over the course of the year will be somewhere in the neighborhood of $4 million to $5 million.

But we also had other issues too that we took on play. One of things that we’re looking at right now is, refining the budget calculator for our stores, looking at budgeted hours. And intuitively, as we have maybe revenue has stepped back at a slower pace, we might have opportunities also to make some adjustments in the budgeting and scheduling.

So we’re working hard on that and look for opportunities in that as well. But also from an advertising perspective, we talked about that. We did have a substantial increase in the advertising spend in fiscal 2017, especially as we introduced and opened the second distribution center and started getting penetrating some newer markets for us.

We want to make sure that we put our best foot forward in brand recognition there. And so this year, certainly not going to have a similar increase, and in fact, we’ll be more tactical in our approach with advertising and look for that advertising spend to come down.

I want you to have, the advertising spend was down approximately 24% in Q1 already and we’ll continue to gain traction on that throughout the year..

That’s helpful.

And just quickly, what were credit card fees in the quarter?.

Credit card fees in the quarter were $30.1 million – about $30 million, $30.1 million..

Great. Thanks..

You bet..

Thank you. Our next question is from Shane Hagan of Deutsche Bank. Your line is open..

Yes, good morning and thanks for taking the questions. Just a quick follow-up to Ryan’s last question on the OpEx. You guys came in pretty strong at 3.9%, excluding your various programs.

Should we expect kind of a sub 4% growth rate going forward for the rest of the year? And I know you guys are going to benefit from cycling some of the increases in the store level managers always, but is that kind of how we should think about the run rate going forward?.

Well, I can tell you this, Shane, and prior to the last couple of years, the run rate we’ve been having and the unchanged store base has been roughly between 3% and 5%. That will fluctuate a little bit with some dynamic like, for instance, the last question on credit card fee, that goes into that particular account.

And so that does ebb and flowed a little bit, but from a wage perspective that’s kind of a target where we’re going to see. One of the things that we’ve did mention on the OpEx was looking at a 3% merit increase, that’s the budgetary constraints that we have in this fiscal year.

And so that will obviously gain traction as we head further into the fiscal year. So those are the things that are going to be impacting us, but I think you’re on the right track..

Okay, thanks. And then just on to your guidance, obviously, you guys lowered your prepared foods comp outlook, but you guys maintained the margin guidance.

Does your full-year margin guidance include any room for incremental promotional activity or price investments? And Bill, I believe you guys mentioned that you may be introducing some value-added offerings.

Can you just help us think about kind of what gets you to the higher-end or lower-end of the margin guidance for prepared foods?.

Yes, I think to sustain at a high-end of that range, we’d even go ahead of that range. There is one big unknown that we have right now and that’s that cheese. We will follow off – what we have follow off is cheese lot in Terre Haute and then at the end of December we will go outside that cheese lot here at the distribution center in Ankeny.

And so there is a little bit I know what cheese costs as you head into the back-half of the year, so that’s what’s kind of given us a little bit of a pause at this point to make any changes in that. The value-added-proposition that we talked about, I don’t believe it’s going to have a significant impact or a detriment to the margin side of it.

If it does, that will be fine, because that means that we’ve executed effectively, I mean we have actually driven gross profit dollars at the end of the day. And so at the end of the day, that’s kind of what we’re looking to achieve..

It sounds like you guys haven’t seen anything particularly different out of the larger pizza chains in terms of promotional activity, I know that’s been a challenge for you guys in recent quarters.

Is that correct and how are you guys seeing your competitors on the pizza side?.

You are correct in that. We haven’t seen any substantial changes in that area in promotional activity for the past several quarters, so pretty consistent right now..

Okay. And then just last one from me. Can you guys quantify the margin benefit you are getting from Terre Haute, and I know obviously it’s been open for some time. But as capacity continues to ramp in that facility, how should we think about the margin impact on both the grocery and prepared foods side? Thanks..

We haven’t really quantified the actual margin impact. But a way to look at those just, prior to that second distribution center, we were significantly overcapacity in the Ankeny Distribution Center. So we were not running anywhere near the optimal point. Right now, we’re running up towards the higher-end of capacity in the Ankeny facility.

We are running probably somewhere in that 60% to 65% capacity at the Terre Haute facility. And so now to look forward with our growth plans in the next several years, we’re starting initial conversations about a third distribution center.

I can tell you that the distribution center in Terre, Indiana became accretive after about 9 months to 10 months and continues to gain traction.

What it does allow for us and that we didn’t probably really have the opportunity was to grow geographically, so now part of the expansion story that Terry talked about in the call is certainly direct reflection of the fact that we now have a second distribution center that we can effectively look into eastern side of Tennessee, Kentucky, looking to Ohio, looking to Michigan and other states like Virginia, Carolina, and to Texas, and to those types of opportunities.

So, we’re really excited about that. As we progress and our discussions on a third distribution center, we’ll certainly keep you posted..

Got it, thanks..

Thanks..

Thank you. Your next question is from Anthony Lebiedzinski of Sidoti & Company. Your line is open..

Good Morning and thank you for taking the questions.

So, thanks for providing the quarter-to-date commentary, so it sounds like to me that the recent increases in gas prices really haven’t been impactful on what you’re seeing in your stores, is that correct Bill?.

Yes, just kind of, you’re talking about the impact like Hurricane Harvey?.

Correct..

Certainly we did see, I would say a substantial cost increase and obviously we had a corresponding retail adjustment with that. Now, having said that, it’s been pretty short-lived, we now seeing some volatility and some cost reductions coming down. Obviously volatility is typically an opportunity for us in the margin side of the equation.

Obviously we indicated that the current same store gallon movement in August is trending above the current guidance range. So there hasn’t really been a supply disruption of any substance for us at this point..

Got it, okay.

And then you also slightly increased your new store plans, what’s driving that and as far as any – I know you talked about the Michigan and Ohio and some other new states, can you talk about where the increase in new stores is coming from?.

Yes, a couple ways to handle that.

So, as far as the movement of the lower end of our range, we’re – obviously we had three acquisition, 18 acquisitions under agreement, so right there we are well ahead of where we have been for the last several years at this point in time, so we think there’s going to be continued opportunity on the M&A front, but obviously on the new store construction you can see that we have substantially accelerated that, we are working on now opportunities in fiscal 2019 and beyond and so because of that that certainly gives us some confidence to increase that range and that we’ll certainly adjust that accordingly as we head further into the fiscal year.

Now with respect to your question, if you include the eastern side of Indiana, I would say someone at 40%, 50% of our stores are going to be what I would call newer markets for us. Again leveraging that second distributions centers capacity..

Got it, okay. And then switching over to your plan the improvements in digital engagement. So is this thought as far as the loyalty program.

Will that be integrated with the mobile app or is that can you just give an answer for that or is it too early to say?.

Terry answer that one..

Yes, Anthony this is Terry I would tell you that the mobile app as we rolled it out was a great opportunity for us at the time. But we know it needs to evolve, it needs to expand its capabilities. And it certainly will be a part of this integration in terms of the customer engagement the digital platforms.

So you will see a change in that mobile app structure. And certainly any time you make a change in your mobile app you’re basically asking people to drop one and restart a new one. And so we want to make sure that we do that properly.

We do it with the right timing, but it will all be a part of that in terms of trying to roll a loyalty program the mobile app, and the overall customer engagement. We want to make sure we do that all simultaneously and we do it effectively..

All right. Okay thank you very much..

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

Thank you. Good morning..

Good morning..

Hi, I was just hoping you guys could dig a little bit deeper on prepared food comp. And maybe you could touch a little bit more in from the puts and takes. And note anything that’s gotten better or worse.

I guess I’m thinking about key items such as your pricing action, pizza delivery, on line ordering et cetera, which are being offset by of course the soft traffic, less spending on food away from home, lower farm wages et cetera. And then I’m thinking about this in a world where macro prices continue.

So I’m just trying to understand if it might be possible to get back to the high single-digit growth range for your prepared food or should we really start to think about this business maybe being more of a low to mid single-digit growth business going forward?.

Yes, yes I’ll go and take that one Bonnie this is Bill. So as you look at a prepared food and farm category. There were – there was a little bit of an anomaly in that first quarter as we talked about that’s excessive heat.

We did see some nice gains in the month of August as we’ve alluded to a couple of maybe shout outs and up to the category in our pizza and hope high orders sort of significant increase in the month of August. And our bakery category continues to decline we’ve had some challenges in the bakery category last probably several years or so like.

And certainly taking strides in promotional activities and then some new products there that are nice jumpstart in that particular subcategory. So we’re excited about that.

With respect to the second part of your questions about the high single-digit I think it will be challenging to get back in the economic backdrop that you mentioned in this fiscal year to the high single-digits.

However, I would point out that commentary that Terry had with respect to the price optimization in digital engagement I think it’s very possible once those were up and rolling then we can get back into those areas.

We see the benefit of the fuel saving programs we’ve had and how that really is resonate with our customers and that’s truly is kind of a loyalty program on the fuel side.

And so we don’t – we see no reason why we can take that momentum and take it into the growth in general merchandise prepared food categories of our business and gain similar type of traction in that regard. Price optimization, Bonnie, as you know even follow us a long time.

There are only a handful of products that have differentiation market-to-market. And so we think we can capitalize on different market conditions sometimes that may be taking price up where the market dictates and might be taking it down and that’s driving gross profit dollars.

So I think I do think we some opportunities towards the back-half of the year and head into this fiscal 2019..

Okay that’s helpful. And then I have a question on your relatively new share repurchase program. It’s purchased some stock in the quarter. So I guess I wanted to get a sense from you if you plan to accelerate the pace of buyback in light of these external pressures.

And then given your stepped up store growth and some of the comments you’ve made recently regarding acquisitions becoming a bigger priority for you just wanted some color on how you think about weighing the return of capital to shareholders versus reinvesting in unit growth?.

Yes I’ll try to get all of those answers, if I don’t just circle back with me. So as far as this year repurchase goes we’re about halfway through if you look at the monetary amount that we’ve expanded. And so but that decision to accelerate or not to accelerate or continue to maintain a similar pace here we’ll be making here the next week or so.

But we did the two-year program. And we give little bit of time there so I don’t have a concrete answer on the acceleration side at this point. The second piece of that Bonnie you’re asking about capital deployment. Yes so if we have the opportunity to increase M&A activity that’s going to be more of a focus for us than the share repurchase.

So to the extent that we do see M&A activity increase or maybe had a larger acquisition coming or something of that nature we’ll suspend the share repurchase and divert that capital over to the M&A side..

Okay. And just a final quick one for me if I may. You touched on beverages inside your store. But I don’t think you mentioned tobacco or cigarettes.

And if I missed it just hoping to get a quick update on that category from you please?.

Yes, absolutely. Yes, cigarettes, obviously is declining you follow cigarette very closely, Bonnie. Cigarettes has been a declining category from a secular standpoint for sometime.

We saw a nice bump in cigarettes back – starting back roughly 2013 as more of our stores to MLP, especially in Missouri, Illinois area and really gained traction back from customers. We’ve kind of seen that back.

We kind of alluded in the start of fiscal 2017 and we thought cigarette will started moderate back in that mid single-digits to low single-digit comps and that’s kind of where we’re trending now. The consumer for us we continue to see are kind of coming back to that value conscious consumer comment we made earlier.

We can see to see people trading to more value added cigarettes that could be generic cigarettes Marlboro black product that’s considered value add proposition. So we do see that gain traction. We also see people gravitating away from carton purchasing back to pack purchasing. Our packs are out probably 85% tax versus cartons now.

And really it’s a function of not wanting to spend $50, $60 or more for carton of cigarettes as opposed to just going back to packs. That’s trend and that’s going to come a slow gradual that we’ve seen over the last probably 12 to 18 months and we continue to see it here in the first quarter..

Okay. Thank you..

Welcome..

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

Hi, good morning. Thanks for taking my question..

Good morning..

First of all I’ll go back to the OpEx. I believe you said the accelerated expense that is this quarter was not in the guidance. So with the growth in OpEx dollars coming in well below the guidance for the year.

Just curious if there’s any opportunity to lower that expectation for 9% to 11% or should we see OpEx accelerate as more stores open up so they believe there was only five stores opened in the quarter. So to get to the guidance I would think store growth the pace of store openings. And you mentioned the acquisitions will really have to accelerate.

So just any comment on that dynamic?.

Yes no great question. Certainly there might be opportunity for us to make enhancement or revision to that OpEx guidance after our Q2 results. So I would say that we’re trying it’s a low end of that range. And I believe you’re right on point of your commentary.

So we’ll take a look at that after the second quarter results, because we do have a lot of activity from the construction side coming through store openings, and we’re making adjustment if necessary at that point..

Got it. And just in terms of the comp it seems like this quarter you mean you called off the weather, but in July but it seems like there was a little bit of a divergence between the grocery comps and the prepared food comps.

Do you attribute that to just the heat or is there anything else going on in the grocery comps that kind of helped that category to stay a little bit more stable relative to prepared food comps this quarter?.

Yes, yes no, no great question again and so certainly with hotter weather it may effect one piece of our business and in this case the whole pie orders there’s side equation it does benefit the items like beverages and beer.

And so an ice and so all of those things certainly we saw a nice up-tick and certainly helped kind of stabilize that growth in general merchandise category relative to what we saw in the overriding economic backdrop..

Okay And you mentioned I think some new seasonal items and some of the value promotions. So wonder if you could just expand on that a little bit more. And I believe you’re also testing more frequent supply deliveries to the stores. I think some seasonal items and some of the value promotions. So wonder if you could just expand on that a little bit more.

And I believe you’re also testing more frequent supply deliveries to the stores in terms of prepared food. I was just curious if you had any more color on why you’re doing that.

What do you think could be the potential outcomes of that test?.

Yes, well I won’t give you a lot of information on the promotional value added propositions just for competitive reasons. We don’t want to give anybody heads up as to what we’re doing or some of the seasonal items as to when we’re bringing them in.

But that it’s not uncommon for us to bring seasonal items and or rotate items within the prepared food category. We candid to be a nice little lift that kind of freshness to the category if you will with respect to some of our repeat customer traffic. I won’t be able to give a lot of guidance there.

With respect to I think you talked about twice a day deliveries is that what you were asking about..

Yes..

That’s week deliveries yes we continue to test twice a week deliveries. We recognized certainly consumers are looking for opportunities for healthier alternatives that means various things to various customers obviously.

And so we’re looking to continue to rollout the testing of that that type of delivery schedule to bring in certain items within the gross in general merchandise category to give alternatives for our consumers. So we don’t have a lot of extra traction at this point or information to tell you. But we continue to roll that out.

So we think that’s a vital opportunity to add more SKUs to drive revenue..

Great and then can you also just talk about I think there was a question about cigarettes and MLP. But specifically in Iowa are you seeing any more transition onto that program or what do you think from the dollar stores or other convenient stores.

In terms of competitive pricing in the cigarette category?.

Yes the MLP Iowa is probably one of the last holdouts if you will with the MLP conversions. And so in this core I mean approximately 20 additional stores were converted MLP.

We’ll continue to evaluate that on kind of a region by region within the state to see how our peers are moving in that direction and we’ll make adjustments accordingly if we feel that’s necessary..

Got it. And then just one last one for me in terms of your competitors your C-store competitors in your market. Do you have a sense of how they are dealing with this environment in terms of same-store sales.

And also it with how they are investing in digital or price optimization initiatives if at all?.

Yes as part of it is hard to get tremendous transparency and insight into our all of our peers, because most of them are private and smaller operators. So we don’t quite understand or how that may or may not be affecting them. But definitely a backdrop definitely it has to be effecting and as it is us.

With respect to digital the digital engagement side is an area that has really penetrated significantly into the C-store space. It’s definitely prevalent in the QSR world and a fast casual world. And we certainly see the benefits that some of our fast casual or the QSR peers retain from that.

And so that’s why we’re excited about that opportunity I would say this Terry correct me if you have different opinion that very few of our peers in our market will have any type of significant digital program they might have a mobile app, but it might be for various different reasons..

Great. Thank you..

You bet..

Thank you. Our next question is form Chuck Cerankosky of Northcoast Research. Your line is open..

Good morning everyone..

Hi, Chuck good morning..

It’s one just a quick housekeeping item Bill how many stores did you say were doing pizza delivery at this time?.

About 650..

All right. Thank you. Looking at all the new stores you’ve got on tap for this year. Could you talk a little bit about the ones in new markets that have opened in new markets. And how they’re performing versus expectations at this time.

And how you expected that ramp to go as you get the 40% or 50% that will be in new markets open?.

Yes no good question Chuck yes so far that the ones that we’ve opened up in the new markets have I would say are performing above our expectations.

As I mentioned earlier we put quite a bit of effort last fiscal year on brand recognition through our advertising programs in some of these newer markets to help establish a brand help us ramp up our stores a little bit quicker.

We think that’s paying some dividends now I know the stores in Ohio that we just recently opened here in the last three or four months have fired off considerably well. And we think there’s opportunity to kind of ramp up that maturation cycle a little bit to be more similar to our core states.

So to answer your question, we’re pleased with the growth that we’re seeing there, really the efforts that we have put forward really pertain more in prepared foods than anything. Generally speaking in new markets, fuel and grocery and general merchandise ramp up similar to some of our core markets.

But certainly want to get that prepared food up and running faster than we have, I think, we’re so far achieving that..

So prepared foods takes the most to work [Multiple Speakers].

Yes, we’re not as well known of a brand, for instance, in your area there in Cleveland, you’re going to a convenience store, you’d expect it to sell fuel, you’d expect it to sell beer and packet beverages and cigarettes. But a lot of times, customers don’t expect it to sell fresh food.

And so that just take a little bit of a more of a learning curve from our perspective..

As the big – so prepared foods is also the biggest beneficiary of the advertising spend?.

That’s correct..

Now on the acquired stores that you have an Hopper and I guess you did a couple in the first quarter.

Any new attributes or departments, brands that come with those properties?.

Nothing different that could call out..

All right. Thank you..

Thanks, Jeff..

Thank you. [Operator Instructions] Our next question is from Ryan Domyancic of William Blair. Your line is open..

Hey, good morning, and thanks for taking my question..

Hi, Ryan..

So I believe you said in the past that getting a new payroll system up and running would help identify some further OpEx savings.

Can you give us an update on the progress of getting that live and when it could be in place? And talk about what kind of savings that may enable you to a identify?.

Yes, and I think what you’re talking about, one of the aspects of what we call Phase 2 of the new payroll system is a scheduler component. So that will give us – I’m going to see more transparency and insight into the scheduling aspect, especially at store level op performance. And so that’s just started rolling out here recently in the 1st of August.

So more to come, I guess, on that. And so, we think that’s going to be a certainly added advantage for us as we move forward in the back-half of the fiscal year..

Okay.

So look for that maybe again back-half or even at 2019 event?.

Yes, absolutely..

And then high-level, do you have any initial thoughts of kind of what those savings would look like relative to the wage savings you’re realizing now?.

I don’t really have at this point. But I think the whole concept area of looking at budgeted hours and scheduling really probably is as big, if not bigger opportunity than what we think the other initiatives are going to have.

Intuitively, you think about that, as we talked about before, if your revenue is increasing at a slower pace intuitively there’s going to be some opportunities to maybe same in our here there to speak little bit more precise on our scheduling and I think that, it may not sound like lot when you are talking about nearly 2,000 stores, 365 days a year in some cases.

It adds up pretty quickly. So, we think there is still opportunities to continue to work on operating expenses and that’s not just on a store level either. We still have opportunities here at the corporate office as well..

Okay great.

And then just quickly switching gears to the acquisition front, are you hearing or seeing anything new in the market and I guess as this prolonged softness for I guess 5, 6 quarters now, created more willing sellers or more opportunities for you guys?.

Well, I would say we have more conversation than we have had in the past year or two with opportunities, now whether that translates into an acquisition or not is not a guarantee, but I look back into fiscal 2016 for instance, I think we did five acquisitions in that year.

We picked that pace up in fiscal 2017 not to a huge extent, but we had at least people willing to talk to us about the alternative or opportunity to sell their business and I think that continues to gain traction here into fiscal 2018 and I think that’s evidenced by the fact that we have three done and 18 under agreement.

We weren’t at that pace at this time of the year, last year or the year before, so we are encouraged by that dialogue and we will continue to work those..

Great, thanks for all the color..

You bet..

Thank you. Our next question is from Bob Summers from Mcquarie. Your line is open..

Hi good morning guys. Just wanted to circle back to OpEx trends in the non-birth initiative stores, just ask a question and then more importantly make a point, I mean, so strong performance in the quarter, it sounds like re-normalizing it 3% to 5% growth level, but that’s hugely better than the 9%, 6% that you did in the third quarter.

So as you think about that almost 600 basis points of deceleration in the growth rate and you kind of alluded to some of these factors in the call, but if you had the rank on sort of the top three items that drove that reduction, how would you frame it?.

In the first quarter – so you are talking about sequential moment?.

Yes..

I would say that the top 2 would probably be the reduction in advertising expense relatively speaking in conjunction with that automatic rate of $0.25 was there. Those would be the top 2 that would be called out.

The merit increase that we talked about 3%, yeah we did kick that off, but that’s going to be more of a Q2 and going forward to gain traction..

Okay, and then pivoting back to the M&A front, can you just talk about how you are building out your capabilities, and I guess more importantly communicating your ability and willingness to pursue all these transactions, I would argue that there may have been some perception issues or challenges in the market in terms of your ability or willingness to do large deals, can you talk about how you are maybe addressing that?.

It is great question and a good point Bob.

So to answer to that question, how we are kind of positioning ourselves for further M&A opportunities, it is not just M&A, but just unit growth in general, it is as Terry mentioned we have added additional resources in our store development department, continuing to put and locating associates out in the field, office, not in their the home to be efficient, that is paying dividends for the new site construction.

But you are exactly right, I think there has been somewhat of a potential misconception about our appetite for acquisitions.

Now most of our acquisitions that we have done to date have always been smaller acquisitions, but that is by nature where we are located, you know over two-thirds of the C-stores where he operates 10 stores or less, but we are certainly willing and wanting to look at larger acquisitions that doesn’t necessarily have to be in our market area.

We certainly would look at other markets on the fringe of our current market area, even outside, if the value proposition was – what we thought was palatable for our shareholders. So definitely we have that appetite..

Okay. Thank you..

Thank you. I see no other questions in queue. I will turn it back for closing remarks..

This is Bill. I would just like to thank everybody for joining us on the call and hope you guys have a great rest of the week. Thank you..

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day..