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0:05 Good day and thank you for standing by. Welcome to the Casey’s General Store’s Third Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]. 0:31 I would now like to hand the conference over to our speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead..

0:39 Good morning and thank you for joining us to discuss the results from our third quarter ended January 31, 2022. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today is Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer.

0:56 Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company’s supply chain, business and integration strategies, plans and synergies, growth opportunities, performance at our stores, and the potential effects of COVID-19.

1:31 There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of COVID-19 and related governmental actions, as well as other risks, uncertainties and factors which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q, as filed with the SEC and available on our website.

2:06 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.

A reconciliation of non-GAAP to GAAP financial measures referenced in this call, as well as a detailed breakdown of the operating expense increase for the third quarter, can be found on our website at www.caseys.com under the investor relations link.

2:37 With that said, I would now like to turn the call over to Darren to discuss our third quarter results.

Darren?.

2:43 Thanks Brian and good morning everyone. We’re looking forward to sharing our results in a moment, but I’d like to start by thanking our 43,000 Casey’s team members for their tireless efforts as we continue to overcome the ongoing challenges with COVID-19 and the resulting supply chain issues as well as weather conditions in our geography.

Our team members have done an outstanding job navigating through these difficult situations and the team's ability to perform under the circumstances is something I'm especially proud of and grateful for. 3:14 At Casey's -- our purpose is to make life better for our communities and guests every day.

As a rural Midwestern operator, we play a significant role in the towns we operate in, it is a privilege and a responsibility we take to heart. In February, we once again activated our hunger campaign in partnership with Feeding America. This partnership raises funds that support 52 local food banks in the communities where we operate.

Hunger continues to be a real issue in our communities. We appreciate monster energy's partnership this -- in this year's campaign and all our team members and guests who supported the effort. The campaign raised over $500,000 and will fund over 5 million meals.

In the third quarter, we closed our third strategic acquisition of the year with the 40 pilot stores in the Knoxville, Tennessee market, underscoring our commitment to accelerating unit growth. These stores will help us further build out our footprint in Tennessee and will be supplied from our existing distribution center in Terre Haute, Indiana.

4:18 I’d like to personally welcome those employees to the Casey's family. We're excited to become a part of the Knoxville community and appreciate your partnership as we integrate those stores into our network.

We're also excited about the strong progress we've made integrating our 2 previous strategic acquisitions of Buches [ph] and Circle-K, which are on track to realize expected synergies.

Overall, we're highly confident in our ability to deliver on our strategic commitments and managed through the near-term challenges presented by the current environment as evidenced by our third quarter results. 4:52 As you've seen in the press release, we delivered an outstanding third quarter.

Diluted earnings per share was a record breaking $1.71 of 64% from the prior year. Total gross profit dollars increased $124 million to $664 million compared to the prior year. Net income was $64 million, up 66% from the prior year. Same-store sales were strong for both inside sales and fuel as guest traffic continued to improve.

Inside same-store sales were up 7.6%, fuel gallons increased 5.7%. Our inside margin remained relatively flat versus the prior year, despite supply chain in price inflation issues. In fuel, margin increased over $0.38 per gallon, despite a volatile cost environment during the quarter.

5:44 I’d now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 7.6% for the third quarter, compared to the prior year with an average margin of 39.4%.

Same-store grocery and general merchandise sales were up 7.7% and the average margin was 32%, an increase of 130 basis points from the prior year -- same period a year ago.

We've been able to expand margin due to the great work our team has done navigating supply chain and inflation challenges by making price adjustments and leveraging strong supplier partner collaboration. We performed well across all categories with non-alcoholic beverages and salty snacks, continuing to perform exceptionally well.

6:31 Non-alcoholic beverages in total were up over 24% on a two-year stack basis. Alcohol same-store sales were mid-single digits despite challenging comparisons and remain up over 23% on a two-year stack basis. This growth is being driven by approximately 1,500 stores that sell hard alcohol.

We've significantly broadened our assortment of spirits in these stores, and it shows in our results. This scale and liquor licenses is a unique competitive advantage to Casey’s relative to the rest of the industry. 7:06 Same-store prepared food and dispense beverage sales were up 7.4% in the quarter.

The average margin for the quarter was 58%, down 260 basis points from a year ago. Pizza slices continue to perform well, up 24% for the quarter, while hot breakfast sandwiches were up close to 49% as part of the company's breakfast menu relaunch that began in September.

Margin has been adversely impacted by supply chain challenges and inflation, partially offset by menu price increases. 7:38 During the third quarter, same-store fuel gallon sold around 5.7% with a fuel margin of 38.3 cents per gallon, up approximately $5.4 per gallon, compared to the same period last year.

The fuel team continues to do a tremendous job balancing fuel volume and margin to optimize the profitability of the category. Fuel margins remain strong, which we view as a long-term favorable trend, as the industry remains reliant upon fuel margins to offset higher operating costs.

8:10 I’d now like to turn the call over to Steve to go into some detail on the financials.

Steve?.

8:14 Thank you Darren and good morning. Before I jump into the financials, I'd also like to take a minute to acknowledge the team given the strong performance throughout the entire business this quarter.

The company fired on all cylinders from operating the stores, to managing fuel, merchandising the floor, generating momentum and guest engagement with our various marketing initiatives. All the while strongly collaborating with our partners to manage the inflationary and supply chain challenged environment.

Total revenue for the quarter was approximately $3 billion, which is an increase of $1 billion or 52% from the prior year. Total inside sales rose 15.4% from the prior year to $1 billion.

For the quarter grocery in general merchandise sales increased by $108 million to $733 million, an increase of 17.3% and prepared food and dispensed beverage sales rose by $29 million to $293 million, an increase of 10.9%. 9:20 Please note the reported figures are favorably impacted by 9% more stores operated on a year-over-year basis.

Though I'll point out prepared food and dispensed beverage was less favorably impacted due to the timing of kitchen installations that are recent acquisitions. We won't start selling our prepared food menu in these new acquisitions until we finished remodeling the stores.

Retail fuel sales were up $851 million in the third quarter, driven by a 19.9% increase of total gallon sold to 622 million gallons, as well as a 48% increase in the average retail price per gallon. The average retail price of fuel during this period was $3.14 a gallon and that compares to $2.12 a year ago.

10:12 As a reminder reported fuel results do not include the Buchanan Energy wholesale fuel business, which is included in the other revenue category and is responsible for the vast majority of the $53 million increase we saw this quarter in this line item.

We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $664 million in the third quarter, an increase of $124 million or nearly 23% from the prior year.

This is driven by higher inside gross profit of $52.3 million, or 14.9%, as well as an increase of $67.4 million, or 39.6% in fuel gross profit. 11:02 Inside gross profit margin was 39.4%, down 20 basis points from a year ago, the merchandise team did a tremendous job offsetting cost increases the costs across all categories.

Inside gross profit margin was also negatively impacted by 70 basis points from a higher than normal LIFO charge. This non-cash charge is a function of the higher costs of existing inventory and was particularly impactful to our prepared food and dispensed beverage margins.

11:37 The grocery and general merchandise margin was up 130 basis points to 32% from a year ago. The increase was driven by an improved product mix of single serve non-alcoholic beverages and snack items, as well as a favorable comparison to the merchandise discounts that were taken last year during our store resets.

Those resets have made a positive impact to inside sales and margin throughout the last 12 months. Prepared food and dispensed beverage margin was 58% down 260 basis points from prior year.

The decline was due to significant cost increases that occurred in our prepared food and dispensed beverage ingredients and pizza toppings as well as an approximately 100 basis point impact from the higher than normal LIFO charge I previously mentioned.

The merchandise team was able to partially offset the cost increases with around of proactive menu price increases anymore significant round of increases is scheduled for mid-March. These increases should more than offset the adverse impact of higher cost of goods. 12:45 Cheese costs did not have a meaningful impact to margin this quarter.

The quarters costs were $1.99 per pound, and that compares to $2 per pound last year. While supply chain challenges have improved since the second quarter, notably in cups, the company's still experienced disruption within prepared food and dispense beverage.

Bakery items specifically are popular glazed doughnuts continue to be an acute short supply as our vendor partners experienced COVID related disruptions. Fueled gross profit benefited by over $10 million from the sale of RINs. All RINs generated were sold in the quarter and there was no carryover from previous quarters.

13:27 Our grocery and general merchandise gross profit increased $42.6 million, our prepared food and dispensed beverage gross profit increased to $9.8 million. We also saw a $4.5 million lift and other gross profit. This is primarily due to the dealer network activities and carwashes that we acquired from Buchanan Energy acquisition.

Total operating expenses excluding credit card fees were up 16.6% to $443 million in the third quarter. Total reported operating expenses were up 18.5% or $77 million, which is consistent with our expectations and a reduction from our second quarter growth rate by several 100 basis points.

Approximately 9% of the operating expense increase is due to unit growth, because we operated 202 more stores than in the prior year. Approximately 4% of the OpEx increase is due to same-store employee expenses, and that was offset by 2% reduction in store hours worked.

Our store operations team has done a great job right into the challenge to operate our stores more efficiently given the wage pressure impacting the industry. Store level wage rates were up 10.5% from the prior year.

14:50 Finally, due to the higher retail fuel prices mentioned earlier, same-store credit card fees also rose and less accounted for another 2% of the operating expense increase in the quarter and finally 2% of the increase is due to higher incentive compensation.

Depreciation in the quarter was up 15.9% driven primarily by the store growth along with a new distribution center and placed in service at the start of our fiscal year. 15:17 Net interest expense was $14.4 million in the quarter that compares to $11.5 million in the prior year.

The increase is due to the additional debt taken on the fund in the Buches in the pilot acquisitions. The effective tax rate for the quarter was 23.4% and that compares 21.3% in the prior year, driven primarily by timing associated with the recognition of tax credits in the prior year.

15:45 Net income was up in the prior year versus the prior year to $64 million, EBITDA for the quarter was $173.5 million, compared to $125.7 million a year ago and increase of 38%. The Buchanan Energy, Circle-K and pilot acquisitions were all accretive to EBITDA in the third quarter as we expected. 16:10 Our balance sheet remains strong.

The January 31, cash and cash equivalents were $187 million, and we have a full capacity of our $475 million in lines of credit available, giving us ample liquidity of $662 million. Our leverage ratio remained at 2.4 times post the closing of the acquisitions, and that's consistent with the first and second quarters.

For the quarter, net cash generated by operating activities of $81 million, less purchases of property and equipment of $105 million, resulted in the company using $24 million in cash flow. This compares to generating $7 million in the prior year.

The slight decline in free cash flow the quarter -- for the quarter, which is seasonally our lowest, was primarily attributable to the payment of payroll taxes we made this quarter that were temporarily deferred last year as part of the federal Cares Act.

17:08 At the March meeting, the Board of Directors voted to maintain a dividend of $0.35 per share, unchanged from the second quarter. We will continue to remain balanced and our capital allocation going forward, leaning into the many EBITDA and ROIC accretive growth related investment opportunities that we have.

But continuing to repay that gradually towards two times and consistently returning cash to shareholders through our dividend. The Board recently approved and increased share repurchase authorization of $400 million and we will remain opportunistic in this regard. So far this year, the company has opened 11 new stores and has acquired 191 stores.

The company is maintaining its fiscal 2022 outlook that was previously disclosed. 17:56 The fourth quarter is off to a good start, and we expect that to continue through the end of the fiscal year. Casey’s expects the fourth quarter same-store sales, below single digits for fuel and up mid-single digits for inside the store.

Fuel margins are currently trending in the low-to-mid 30s CPG Quarter to date. We continue to expect fourth quarter operating expenses to improve from prior quarters and increase between 11% to 13% versus the prior year. There have been no changes in our expectations for operating expense items that we control.

However, given current retail fuel prices, we are going to be at the high end of that range. The recent rise in retail prices of fuel from the conflicts in Ukraine should they continue at current levels have the potential to push us above the range as credit card fees would continue to rise.

Regardless, we expect net earnings in the fourth quarter to be higher than the prior year. 18:58 And I'll turn the call back over to Darren..

19:00 Thanks, Steve. As you can see our business is really starting to take off as the country gets closer to normal in the wake of the pandemic. Cases has shown tremendous resiliency throughout COVID, and we're positioned especially well to deliver future value to our shareholders through our strategic plan.

As a reminder, the 3 pillars of our strategic plan are to reinvent the guest experience, create capacity through efficiencies, and be where the guest is to be disciplined to growth. All 3 pillars are supported by investing in and growing our talented team. 19:35 Our industry leading prepared food program is poised outperform.

This category was more heavily impacted by COVID due to the disruption in daily commuter traffic, patterns compared to the traditional convenience store items like beer and tobacco. We believe the resurgence we've begun to experience this quarter is likely a sign of things to come.

Casey's rolled out a successful breakfast relaunch with innovative new items such as our toast which signature handheld loaded breakfast burrito in bean-to-cup coffee. The result was a mid-teen percentage lift and morning daypart traffic and same store sales.

This is a great example of the kind of culinary innovation you can expect from cases moving forward. 20:17 In addition to our new products, core menu items such as pizza slices were up 25% for the year and are not showing any signs of slowing down. Overall, as guest traffic improves.

We're well positioned with our prepared food program to disproportionately benefit. The progress we've made reinvent the guest experience with our digital engagement will further bolster our business. Digital sales were up 11% in the third quarter, on top of a 95% increase in the same quarter last year.

Our cases rewards enrollment continues to grow and now sits at 4.6 million members. We have never had a more accurate and efficient means of communicating personalized offers to our guests than we have right now.

21:02 Finally, with curbside pickup in all of our stores, in addition to our partnerships with third party aggregators, it's never been more convenient for our guests to try our made from scratch pizza and other items. We now have over 1,400 stores that offer some sort of delivery service for our guests.

Our private label program continues to grow and take market share. Not only are the products high quality, but there are also a more affordable alternative for our guests seeking value. This is particularly relevant in the current inflationary environment that our guests are experiencing today.

We currently offer over 250 items and are confident in our ability to achieve our longer-term goal of 10% penetration of the grocery and general merchandise category. We're currently trending at our exit rate goal for the year of 5% mix in Casey’s branded products with new items on the way.

21:57 Our efficient self-distribution system has been instrumental in helping us navigate through one of the most difficult supply chain environments, the country is experienced in decades.

Our new distribution center Joplin, Missouri allows us to more efficiently support stores and our existing network will also enable us to expand our reach into new markets within our geography.

We believe that, coupled with our proprietary prepared food program will help enable our goal to continue to deliver best in class margins inside of the store. 22:26 Considering almost 65% of the convenience stores in America are operated by owners of 10 stores or less.

The capabilities I just mentioned provide cases with a significant competitive advantage, particularly in the rural communities we call home.

Larger operators [Indiscernible] prepared food program, the smaller operators often don't have the scale to make investments in digital customer engagement, omnichannel retail, self-distribution, or private label brands.

22:56 Cases is in the fortunate position to leverage this advantage to be where the guest is and grows units organically via new store construction, or as you've witnessed more recently, through acquisitions. Our dedicated M&A team has been busy executing on 3 significant acquisitions and is ready for more.

Income tax uncertainty, labor shortages, supply chain challenges, and inflationary pressures have brought about significant consolidation in our industry, in cases is poised with an incredibly healthy balance sheet to take on many more deals to come.

23:30 Given that roughly 2,000 of our stores are only in 9 of our 16 states we operate in, we have tremendous white space to grow our business, both within our current footprint and in contiguous markets. Now none of this would have been possible without the incredibly talented leadership team we've assembled here in Casey’s.

The team has a strategic plan of long-term Casey's leadership and outside talent with a fresh perspective on the business. Centralized procurement, loss prevention, and consumer insights are just some of the new capabilities we've recently added to the business.

24:06 So as we begin to finally emerge from the pandemic and embrace the new normal, I think you'll find that the strength of our business model to really come to the forefront.

We are incredibly excited about the future ahead and firmly believe we have the right strategy and team in place to achieve long-term sustainable shareholder value, while also making a positive impact on the communities we serve. We're now prepared to answer your questions..

24:33 Thank you. [Operator Instructions] But you please limit yourself to one question and one follow up. Our first question comes from Karen Short with Barclays. Your line is open..

24:48 Hi, thanks very much. Sorry for this short term question.

But I'm wondering if you could just first start off by giving a little color on the price, the actual percent price increase that you took in this quarter, and then the impact the comp this quarter, and then the anticipated price increase that you will take I think you said in March, and how that will impact the comp and then I had one or two other bigger picture?.

25:12 Yeah. Good morning, Karen. This is Steve, I'll start with that.

We incurred about a 4% cost increase across the across the board if you think of our goods for resale and so over the course of the quarter, we took about a comparable percentage increase in price, they didn't all occur on the first day of the quarter to be fair, and it was kind of layered in over the course of the quarter.

So the net was a little bit less than that. But we will roll into a 4% increase, and then the price increases that I mentioned coming in March, are going to be somewhere in the neighborhood of 5% to 6% on average, across most of -- most of our prepared food SKUs and again, those we won't absorb all of that in the current quarter.

But annualized, that's what that number will be..

26:12 Okay, so when we think about the gross margin decline in prepared foods, so -- so that would be a function, obviously, a lag in taking place, but within grocery, you would say that -- that was much more maps to the cost increase? Or maybe I'm just trying to understand how to think about gross margin beyond – beyond 4Q?.

26:36 Yeah, I think your assumption is correct.

We were -- I think lined up, the price increase in the cost increase was more closely aligned in the grocery business, because that business primarily is contractual for us and so as we worked through annual contract renegotiations, over the last couple months with our supplier partners, we had a pretty good sense of where those we're gonna land and we're able to act on retail adjustments, really about the same time that the cost started coming through the prepared food business is much less contractual and much more commodity oriented in nature and so it's a little bit tougher for us to line that up, exactly an enhanced tends to lag.

But I would point out on the prepared food side, the LIFO charge just mechanically was much heavier impact in the quarter on that particular side of the business, just by the nature of how it -- how it works for us..

27:40 Thank you. Our next question comes from Ben Bienvenu with Stephens. Your line is open..

27:44 Hey, thanks. Good morning. Just following up on Karen's question there as it relates to the prepared food margins.

Two part question, one, was the LIFO charge that you saw in the quarter, is that isolated to that quarter? Would you expect to take any subsequent charges associated with LIFO expense and then typically, the prepared food margin? I don't know that there's so much seasonality, but it does have a pattern of declining sequentially from 3Q to 4Q.

I'm wondering if that would be the case again this year, just given that LIFO dynamic and then, just given kind of where we are on, as you say, the commodity backdrop?.

28:30 Yes. This is -- this is Steve, I'll – I’ll start with that on the mechanics of LIFO.

We actually take LIFO charges almost every quarter, just the way that the accounting works, in a kind of non-inflationary environment, they tend to be de minimis and we don't obviously talk about them very often because of the environment that we're in and because so much of our grocery business is on a calendar year, the renegotiations all really began on January 1 and so the way you do that is you take a charge when they come through and so hence, that's a January 1 item.

For us, our most -- our most typical LIFO item we adjust would be tobacco, because we tend to get those more frequently. But again, it's just -- it's more acute this year, given the size of the inflation, that comes through.

To your question on seasonality of margins, for sure, the third quarter, just based on the weather in our geography tends to be our lowest margin business from -- from a prepared food standpoint.

Fourth quarter is a little bit more of a blend, right as we move into the warmer months at the end of our fourth quarter, that's going to be accretive to margins as a as a general role..

29:54 Okay, great. Thank you. And then my second question is just related to your taking pricing relative to any elasticity you're seeing from your customer set. I know the -- the backdrop is changing rapidly kind of day-by-day and it's increasingly dynamic.

What are you seeing if anything, with respect to price sensitivities from your customers, migration across categories in the floor – in the store, trading down, etc.? That'd be helpful to hear. Thank you..

30:29 Yes, and this is Darren, and I would say, generally speaking, we've seen – we’ve seen good momentum in the business as you can see from the inside sales and -- and that is a blend of both increased velocity from a unit standpoint as well as price. So, we're pretty balanced at this point in that respect.

But one thing I would say is, we have seen a ramp more recently with, with the private brand products and you can see that mix start to shift a bit. And so we probably are experiencing some trade down. But that really accrues to our benefit, because the penny profit in those private brand items is actually higher than in the national brand.

So and that's per our strategy with private brands. So we actually, we don't mind seeing that and like I mentioned earlier in the narrative that we've hit -- right around that 5% exit rate goals. So we’re a couple months ahead of schedule on that and that I think, is important from that mix shifting..

31:34 Thank you. Our next question comes from Kelly Bania with BMO Capital Markets. Your line is open..

31:40 Hi, guys. This is Ben Wood on for Kelly Bania. Thank you for taking our question. I first wanted to dig in on store growth by our math, you'll need to add about 80 stores in 2023 to hit your 2023 goal, which is down significantly from the 225 stores this year.

So does the lumpiness of acquisitions this year limit your ability to grow next year? If not wondering how you're thinking about potential upside to target that target store number in 2023.

Is another 200 stores possible in this environment?.

32:12 Ben, this is Darren. I'll start so answer your second question, I guess is, the -- the acquisitions we bought this year aren't going to impact our ability to do more deals or to grow the store base next year.

And we haven't given guidance for fiscal ’23 yet, but we are highly confident that we'll hit our three year commitment of the 345 stores over the three-year period. So we don't have any concerns there. And, and so -- so really, that's it and with respect to could we do another 200 store growth here.

A lot of that has to do with acquisitions and in the timing of those things. So we're not the ones that -- that ultimately control when somebody is for sale, and at what price. But we are very active in the market.

We have a dedicated M&A team, and they're having a lot of conversations right now and like I mentioned before, this current -- current environment, it's just becoming more and more difficult for smaller operators to get through the day, frankly, let alone to be able to do effectively compete. So, we -- we see a pretty frothy M&A market.

But we're going to remain disciplined about where we buy the type of assets that we buy, and what we pay for those assets. So this is one of the reasons we like to have organic growth along with M&A capabilities.

So we don't force ourselves into a box of having to buy assets that we wouldn't otherwise like or overpay for those assets, just to keep the growth rate moving in the right direction..

33:54 Okay, thank you. That's, that's very helpful. And then just a quick one on the breakfast day part.

I know you guys mentioned a little bit, but could you -- where's the breakfast date part relative to 2019? Just trying to figure out the 17% increase in same store sales? Like how much of that is the new items from the new menu? Or how much of that it's just traffic pattern recovery?.

34:19 Well, what I would tell you is I think the guest traffic is a result of the menu, the menu launch we've got we have new product news, we did put some media behind it, and we have some unique items.

The toast which item is something leverages are made from scratch pizza dough, it's -- it's highly craveable, it's highly affordable [ph], it's value price, and it's something unique that you can't get anywhere else. And we upgraded our coffee program at the same time.

So we put those cup that combination together, we started to see some improve traffic in the morning day part and then that -- that benefited the entire store because not -- not everybody gets a prepared food item.

But we sold the toast which sandwiches, we sold the load of breakfast burritos, and people will buy other items across the store to complement those food products. So I think that really accrued our benefit. Like I said we saw mid-teens increase in both traffic and sales during the morning day part..

35:21 Thank you. Our next question comes from Chuck Cerankosky with Northcoast Research. Your line is open..

35:31 Good morning, everyone's, great quarter. I want to talk a little bit about kitchens.

You have a schedule you can provide with us as you add kitchens to the acquired properties?.

35:44 You know, Chuck, I don't have a schedule in front of me right now that I could share with you. And we can follow up on that.

But suffice it to say where we put those kitchens in as soon as we can get permitting available and in contractors lined up now we've done roughly 40 of the Buchanan Energy store so far and I'll tell you, we're really happy with what we're seeing in the performance of those kitchens.

If you look at the Omaha market, in particular, where were Buches, I would tell you at an -- I would what I would consider an above average prepared food program relative to the industry and we've already seen that we're more than doubled the prepared food volume in those stores in Omaha where our brand is more known.

36:31 Now, if you go out into the Chicago suburbs, where we're a little less known, we also have nearly doubled the prepared food volume in those stores, just at the lower rate than what -- what I would expect, our normal run rate to be and so that continues to grow. So we're having great success in those conversions.

But it'll -- it'll be probably the bulk of this next calendar year. There will be remodeling kitchens in the -- in the Circle-K and in the -- in the pilot acquisition, in particular to get all those stores converted..

37:07 So you've got 40, done out of all the acquired stores.

Is that a good way to look at it?.

37:14 Yeah, in the -- in the Buchanan energy, one of where we're actually remodeling some of the Circle-K stores as we speak and then we just literally finished the changing control at the pilot stores recently. So we -- we really haven't gotten started on that process yet..

37:34 Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs, your line is open..

37:38 All right. Thank you. Good morning, everyone. I wanted to ask you guys, certainly about fuel margins, which have remained elevated. And I think you mentioned they are trending in the mid 30, CPG range quarter-to-date. But, as we look at the past few days, crude has gone up very sharply and the outlook suggests is going to keep going.

So just curious, could you give us a sense of where fuel margins are trending? Honestly, just even in the last few days or a couple of weeks? And, and if in fact, they've turned negative, which I've seen in a few places, so I'd be curious to hear that.

And then on fuel gallons, given record levels of prices at the pump, have you guys seen any evidence of consumers, simply not filling up their tanks, and then and or decrease conversion into your stores in the last couple of weeks?.

38:37 Hey, Bonnie. This is Darren and I'll try to unpack all that. I'd be curious to know, where you're hearing about negative fuel margins, because it's certainly not anything that we're seeing or experiencing here.

What we've seen so far, and I'll just kind of box this over the last couple of days is that certainly, underlying cost of fuel has gone up precipitously, we've also been able to take price on the street pretty aggressively. And so we've been able to really balance that, that that margin out at this point.

And from a gallon standpoint, this will seem counterintuitive, but when -- when you see prices rapidly increasing like we have over the last week, the consumer behavior tends to be more of aggressive buying, as opposed to not aggressive buying because people are afraid it's going to be $0.20 more a gallon tomorrow than it is today.

So we're actually seeing the opposite effect happened where our gallons had increased far beyond where our current trend line had been going prior to all this happening. 39:50 Now, at some point when it hits a peak, people are going to have full gas tanks and we'll see a week or so lag of fuel volume, and they'll start to normalize again.

So that's kind of the short-term outlook. But I want to talk a little bit more broadly about this situation and put it into some -- into some context because I think what we're seeing in the headlines everything else is -- is a little bit of hand wringing.

And so when you think about $4 a gallon gas, it's been a -- it's been a long time since we hit $4 gallon retails in the US. But last time was in July of 2008. Certainly that was during the financial crisis, and it peaked out at $4.06 a gallon. By today's dollar – by today’s dollar, that would be $5.30 a gallon.

So we're -- when we're talking about $4, a gallon gas, all $4 aren't on created equal, we really -- we would need to get well over $5 a gallon before we start to see the same dynamic we saw in 2008. 40:55 Now, in 2008, you did start to see some demand destruction. But there's also a pretty significant recession taking place at the time.

Unemployment, at that time was 6% and rising, ultimately getting to 10%. When you look at -- when you compare that to the situation we have today, with 3.8% unemployment, and a labor shortage, and people starting to bring people back to work, companies starting to bring people back to work.

There's not a lot of that other structural impediment to growing fuel volume. Now, there is a price at which people will start to change behavior. But we think that price is closer to $5 a gallon than it is to $4 a gallon right now.

And then the last point I'd make is, the national numbers really don't describe what goes on in the Midwest and so the national numbers for retail prices of fuel are heavily influenced by the Northeast and the West Coast, which are well over $4 a gallon, as we sit here today in our market, we're sitting just under $4 a gallon across our 16 state geography in the Midwest, tends to be pretty low relative to others and part of that is because we blend a lot of ethanol and ethanol right now is trading at about $0.70 or $0.80 below gasoline.

And so we just have some structural differences in our footprint, they're different than the rest of the country and allow us to maintain that retail at a lower price and maintain the margins..

42:25 Thank you for that. That's super helpful and great color. And a lot of that makes sense. I guess the only other consideration is the low income consumer this year to see how that trends as the year progresses. Maybe one final question for me just maybe a high level question on your next fiscal year. I know you're, you're not yet giving guidance.

But, given the expectations for crew to stay, at elevated levels this year.

How do you guys feel about your ability to deliver top quintile EBITDA growth for your fiscal year ‘23?.

43:05 Yeah, Bonnie, like event -- like events, we haven't given any guidance yet. But we're still very confident in our ability to deliver on that commitment. We've got a lot going on from the merchandising standpoint.

And still, I think, this situation aside, you know, that's, I do believe that's a little bit more of a short-term situation, when you look at how crude oil is trading right now in the futures market, the market is backward, dated pretty heavily, which implies that the traders are believing that crude is actually going to come down and in the next several months versus go up.

So we'll have to see how that plays out. But I think the industry is still, in a situation where the operating costs to run the business are just structurally higher.

And because of the fragmentation of the industry, they still have to extract higher margin to be able to offset higher operating costs, and that -- that's going to happen through retail fuel pricing. We've seen it over the course of the last several years with COVID.

We've seen it in the extreme when demand destruction really accelerated at the height of COVID. We saw fuel margins accelerate at a really aggressive rate.

So we believe that those margins are going to persist and then we layer on everything else that we've got going on from our merchandising perspective, and we're very confident in our ability to deliver those that type of growth and EBITDA over the next several years..

44:37 Thank you. Our next question comes from Anthony [Indiscernible] company, your line is open..

44:43 Good morning and thank you for taking the question. So in terms of the operating expense guidance, it was certainly encouraging to see that you guys were able to reaffirm that guidance, even with the retail fuel prices going up and likely to hurt the credit card fees.

So what's driving that? I know in the quarter, they just reported you had a 2% reduction in store hours.

Is that expected to continue? Or are there any other factors at play as far as operating expense management?.

45:11 Hey, Anthony. Good morning. This is Steve. I'll start with that. Nothing -- nothing has changed on our end at all regarding our OpEx expectation and for things we control in the quarter, so we did a really good job.

Managing the hours within the stores I'm confident we will continue to do a really good job managing hours in the store there's a lot of focus on efficiency within the operating organization today. We naturally will expand some hours seasonally.

But we've incorporated that already, we know, the wage rates that are prevailing in our markets are we're competitive in those markets, I think we have a good, a very good handle on what we're going to need to pay in that regard.

I'd remind you, in the prior year, we did take some one off impairment charges associated with putting new equipment into the store, etc, that's part of the reason, our percentage will tick down in the fourth quarter. So that sort of thing will not recur.

Anyways and so I do believe that the only real variable here relates to the -- relates to the credit card fees, which is associated with retail prices, I think we're covered it at a $4 a gallon number in our range and to the extent that would tick up, our credit card fees will pick up and your guests on that, which would be as good as ours.

But I don't think there's significant dollar risk associated with it, as we sit here today at this point in the quarter..

46:43 And Anthony, I just build on one of the things that Steve mentioned about the operations team and in managing the hours is they are labor productivity is really gone up a lot are, we were from a gross profit dollar per labor hour perspective, we increased productivity by 14% in the quarter and so that team has really done a nice job.

And at the same time, you saw the sales growth in the traffic growth. So they were -- they were able to really manage the controllables and be very efficient and still deliver a great guest experience and deliver on the sales expectations. So very happy with that team. And in as Steve mentioned, we don't see any reason for that to backslide.

And, and that's the most significant part of our OpEx, so we believe we have that well under control..

47:34 Got it? Yeah, but thanks for that the color and then switching over, it's just to the prepared food side.

So, given how successful you have been with the breakfast menu changes, are you planning to do any notable changes to the rest of your menu?.

47:49 Yeah, Anthony. We've got -- we've got a lot of different things in the works. We're not prepared to talk about any of those today in a sort of detail. But absolutely, the prepared food team and the culinary team in particular, are always looking at innovation and optimization as part of their mandate.

And so yes, we definitely have some things coming, but not ready to talk about that at this point..

48:17 Thank you. Our next question comes from Krisztina Katai with Deutsche Bank, your line is open..

48:22 Hey, good morning, guys. And congrats on a good quarter.

I just wanted to start on fuel, when we're looking at your price gaps versus peers, and just thinking about the smaller operators that do have to raise their prices to offset, the rising cost of their operations? Are you finding that your price gaps are stable? Are they widening in the current environment? And could that be a net benefit for you, especially when we're thinking about, you layering in your loyalty program to really communicate with the customer and stay top of mind?.

48:55 Yes, Christina, when, when we look at that we look at our prices as is our differential to the low price in the market, and to the high price and then the average price and so what we're seeing is, we're maintaining our delta versus the low price in the market.

So we maintain our competitive position, we are starting to see that differential versus the high price in the market starting to widen out a bit and that -- that really typically is a reflection of the smaller operators because they need to extract more margin. And so they tend to do that.

So from that perspective, we would be able to gain some share and what for – and what we've seen based on opus data and from our public company peers is that we are gaining share our -- when we've normalized our fourth quarter to a calendar quarter and look at our public company peers.

The other two they've reported we're down in same store gallons versus the prior year and we were up nearly 5%. So we believe that even among some of the larger operators we are taking share and fuel, the certainly versus some of the smaller operators we are as well..

50:09 Got it. That's really helpful and just -- it sounds like, you feel really good about your business but maybe just, tackling if you could talk a little bit about the health of your core customer, you implemented some price increases in January, you said another 5% to 6% coming in March.

Just how are they feeling financially and how are you planning your business for any kind of a potential pullback in spending from -- from the customer in response to some of the high inflation that we're seeing?.

50:41 Yes, right now, we think the consumer is in pretty good shape, about 60% of our -- our guests make over $50,000 a year, and, in a lot of those have seen some of the -- the most accelerated wage increases.

So the -- so they're actually making a lot more than they have historically now, they're also having to spend more in an inflationary environment. But so far, we haven't seen any dramatic shifts in -- in behavior among our core guests. So we think we're okay there.

From -- from a future looking perspective, there's -- there's a couple things to keep in mind. One is that we do have our private label portfolio, which is really starting to take off and really provides a more affordable alternative for people they're seeking deeper value.

The other thing that tends to happen and in our industry in times like this is that we are the beneficiary of trade downs from higher or more expensive forms of retail. So in particular, in prepared foods.

51:45 So if you think about our prepared food offering today, it is already just naturally more value-oriented relative to QSR, fast casual, and certainly then, in full service dining, when you think about a specialty pizzas, an example, a whole pie that can feed 3 to 4 people being at around $16, $50, $17 a pie, that's a -- that's a really great value for a family.

52:13 In our breakfast menu, you can get a breakfast very easily for under $5 and so when you compare that to QSR, and other restaurant concepts, were very much an affordable trade down option. So we have historically seen that our prepared food platform benefits disproportionately in this kind of environment as consumers start to see more value..

52:39 Thank you. Our next question comes from John Royall with JPMorgan, your line is open..

52:43 Hey, guys, thanks for taking my question. So I had a couple of questions. I'm kind of downside risks in the economy and things like that, which I think you've mostly addressed.

I guess, the only remaining thing is there are some out there, a lot of commodity and with better forecasting, these $120 oil levels to persist for some time, or even worse than you depending on the geopolitics.

So just go through how you would expect, I think it's relatively unprecedented types of levels that we can see -- that we haven't in the past.

How would you expect a steel business to perform? Obviously, we'd have adhesive demand, what would you expect on the margin side would margin kind of start to come in a bit in that scenario, where you start to see demand come off from the consumer [Indiscernible]?.

53:39 John, again, I'll try to put the crude oil price in perspective, like I did the gasoline business. So back in 2008, when -- when we hit that $4.06 peak and gasoline crude oil is actually at $140 a barrel. And in those dollars, and so today's dollars, it's about $183.

So, again, if we persist at $120, that's expensive, but not -- not nearly towards a peak from a historic perspective and I and I think more importantly, from to answer your question on the margin is, regardless of whether crude oils at $120 or $140 or $180, or not, the structural situation we have in this industry isn't changing, underlying costs operate, this business is still going up, it's still getting more expensive for the smaller operators to continue to survive.

And so retail prices are going to support expanded fuel margin to compensate for those costs. And until the point in time where we actually see some demand destruction, I think that dynamic is not going to change.

And like I said before, I believe that we're not going to get any sort of meaningful demand destruction, vis-à-vis retail prices until we get closer to $5 a gallon and maybe even then we have to take over that before we start to see any meaningful impact there..

55:10 Understood. Thanks very much..

55:14 Thank you..

55:15 Thank you. I’m currently showing no further questions. I’d like to turn the call back over to Darren Rebelez for closing remarks..

55:21 All right, thank you. And thanks for taking the time today to join us on the call. I'd also like to thank our team members once again for their efforts this quarter. So we've had a great year so far and we look to close out fiscal ’22 on a high note.

Fortunately, we demonstrate our ability deliver results on our long-term strategic plan and fiscal year outlook in both normal times and during a global pandemic. And I'm confident, we will continue to drive long-term shareholder value. Thank you everyone and have a great morning..

55:52 This concludes today's conference call. Thank you for participating. You may now disconnect..