Caseys General Stores Inc Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter Fiscal Year 2020 Casey’s General Stores Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s conference is being recorded. I would now like to introduce your host for today's program, Bill Walljasper, Chief Financial Officer. Please go ahead, sir.

Good morning and thank you for joining us to discuss Casey’s results for the quarter ended April 30th. I’m Bill Walljasper, Executive Advisor and former Chief Financial Officer; Darren Rebelez, Chief Executive Officer and Steve Bramlage, Chief Financial Officer are also here. Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and needs, the company's supply chain, business strategies, growth opportunities, performance at our stores, and the potential effects of the COVID-19 outbreak. 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 made by those forward-looking statements, including, but not limited to, our ability to execute on the strategic plan, the impact and duration of the COVID-19 outbreak and related governmental actions or to realize benefits from that strategic plan as well as other risks, uncertainties, and factors which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. This morning, we'll first take a few minutes to update you on our response to the coronavirus pandemic, highlight a few trends that we experienced during the fourth quarter, and then summarize the results of the quarter, followed by a question-and-answer session. I would now like to turn the call over to Darren.

Thanks, Bill, and good morning, everyone. We hope you and your families are doing well and staying safe during this time. Before we discuss the results of our fourth quarter and recent trends, I want to take a few minutes to update you on our response to COVID-19. I am incredibly grateful to all our team members for their hard work during this crisis. This is one of the most challenging times our industry has faced, and I am proud of how our team has reacted. I also want to acknowledge the efforts of everyday heroes across our country, especially healthcare professionals. We appreciate everything they do for our communities. As we navigate this pandemic, our top priority is the health and safety of our team members, guests, and the communities we serve. Consequently, we have implemented several changes across our company. We increased pay and offered free meals for all store and distribution center staff, provided extra operational bonuses for key field and support staff, extended additional paid leave for affected team members, supplied personal protective equipment, installed plexiglass shields at cash registers, enhanced cleaning and hygiene practices, conducted health checks at distribution centers, designated exclusive shopping hours for high-risk guests, marked six-foot distances in our stores to encourage social distancing, and established contactless delivery. We also recognized the increased needs in our communities during this crisis. As our communities face challenges due to the coronavirus, we found two substantial ways to have an immediate impact. First, we launched the Slice of Thanks program to honor essential workers. Since April, our team and partners have donated nearly 15,000 slices of pizza to healthcare workers and first responders. Second, in May, we announced a year-long partnership with Feeding America to focus on local impacts through food banks serving our neighborhoods. This partnership aims to address hunger for children, families, and rural communities. I look forward to sharing more about these efforts as we continue our partnership this year. Moving forward, Casey's will keep engaging our guests, partners, and team members to show that we are committed to our communities. Now, before I comment on the fourth quarter results, I want to take a moment to reflect on my first year with the company. When I joined Casey's, I expressed my excitement about being part of such a successful organization and my admiration for the three distinct aspects of our business model: Fuel, convenience, and food service. This diversity allows us to manage through challenging times and continue to create shareholder value. Although there is uncertainty in the short term, I feel optimistic about our long-term outlook and our ability to execute our strategic initiatives. I am confident we are on the right track and will emerge from this pandemic in a strong financial position with enhanced capabilities. We will remain disciplined in our capital spending to drive long-term value for our shareholders. With that, I will now review the fourth quarter results. As stated in the press release, diluted earnings per share for the fourth quarter were $1.67, compared to $0.68 a year ago. The results were primarily influenced by a significantly higher fuel margin compared to last year, though guest traffic decline related to COVID-19 offset this. However, similar to many companies, our fourth quarter was marked by two different periods. We started strong, with many of our strategic initiatives gaining traction. This momentum persisted and even strengthened through the first two weeks of March, with inside same-store sales up in the mid-single-digits and same-store gallons up in the low single-digits, excluding the leap year day. However, as COVID-19 restrictions grew more widespread starting in mid-March, we saw a rapid drop in guest traffic, resulting in decreased same-store sales. This decline was most evident in April, where we reported significant changes in same-store sales. Fuel gallons fell by 34%, but this was more than offset by an exceptional average fuel margin of $0.63 per gallon. Grocery and other merchandise dropped by 9%, while prepared food and fountain sales decreased by 30%. In response to the negative impact on our business, we made substantial operational adjustments, which we will discuss later. Since mid-April, we have witnessed a steady recovery in comps across our business as these adjustments take effect, the weather improves, and state and local restrictions are lifted. I will provide further details on current trends as we cover each category. Year-to-date, diluted earnings per share were $7.10, reflecting a 29% increase from the same period last year. As we navigate this short-term challenge, we’ve implemented numerous changes to maintain flexibility for continued long-term success. These actions include deferring discretionary capital spending, adjusting store hours to align with guest demand and optimize profitability, expanding third-party delivery options, broadening delivery items beyond prepared foods, enhancing online product offerings, and modifying food production to reduce waste. Alongside these changes, we continue to advance key elements of our long-term strategic plan that will position us well for future growth. Now, I would like to discuss our results and some details in each category. During the quarter, in the fuel category, we faced an unprecedented environment regarding both demand and margin. Because of decreased demand starting in mid-March due to various restrictions, same-store gallons were down 14.7% for the quarter. The most significant impact occurred in April when we saw a drop of between 35% and 40%. However, same-store gallons stabilized in mid-April and have been gradually increasing since. Simultaneously, as the pandemic affected our business, the fuel supply environment was disrupted, leading to a considerable margin benefit across the industry. Our average fuel margin for the fourth quarter was $0.408 per gallon. Fuel margins peaked around the beginning of April and moderated throughout the month. The average retail price of fuel during the fourth quarter was $2.05 per gallon compared to $2.46 per gallon a year ago. Total gallons sold for the quarter decreased by 10.7% to 488 million gallons, while gross profit dollars increased by 96% due to the previously mentioned margin environment. For the fiscal year, same-store gallons were down 5.1%, while gross profit dollars in the fuel category were up 32% compared to the same period a year ago. During the quarter, we completed the conversion of our stores to digital price signage. This signed conversion is the final step in our plan that will allow us to increase flexibility in adjusting retail prices to react more quickly to the changing fuel environment. We are also pleased with the progress we made in fuel procurement in the fourth quarter, allowing us to finish the fiscal year with approximately 50% of our total fuel volume under contract. Lastly, in the fuel category, we continue to gain traction in our fleet card program. Over the course of the fourth quarter, we continued to add new cardholders. To date, we now have over 8,100 accounts and 20,000 cardholders. We remain optimistic about the potential of all of these initiatives going forward. Same-store gallons have improved sequentially throughout the first quarter and for the past 14 days are trending down in the mid-teens, while the average fuel margin is trending in the low to mid $0.30 per gallon range. We anticipate same-store gallons to continue to improve as we head into the summer months; the state of Illinois recently lifted their stay-at-home mandate in June. For context, Illinois represents approximately 20% of our store base. Moving to inside the store, total sales in the grocery and other merchandise category were $568.1 million, up slightly from a year ago in the fourth quarter. Same-store sales were down 2% during the quarter, adversely impacted by stay-at-home restrictions related to COVID-19. To put this in perspective, for the first six weeks of the quarter, same-store sales in this category, excluding the extra day for leap year were up over 5% compared to the last six weeks, where we saw a decline in comps by approximately 9%. There were several subcategories that were more resilient during this time, such as beer and alcohol as well as tobacco. The average margin in the quarter was 30.4%, down 110 basis points from a year ago in the same period due primarily to an adverse product mix shift to lower margin items related to COVID-19. As a result, gross profit dollars for the quarter in the category were down slightly to $173. For the fiscal year, same-store sales were up 1.9% with an average margin of 32%. As you may recall, the year-to-date margin was adversely impacted by a $6.6 million one-time adjustment that occurred in the first quarter. Without that adjustment, the margin was 32.3%. Same-store sales have improved sequentially throughout the first quarter, and for the past 14 days are trending positive in the low single-digits. Given the current environment and recent regulatory changes in tobacco, during the fourth quarter, we paused on the rollout of additional items to the price optimization platform inside our stores. We'll update you on this area as we continue to navigate through the current environment. The prepared food and fountain category has been one of the areas most impacted by the effects of the coronavirus pandemic. Through the first six weeks of the quarter, excluding the extra day for leap year, we experienced same-store sales of 5.5%. In the last six weeks, we saw a decline of approximately 30%, resulting in same-store sales down 13.5% for the fourth quarter. Historically, whole pies make up about 25% of this category, with the remainder coming from items that are primarily self-serve offerings either in our food warmers or bakery cases or from our coffee and fountain. Our whole-pie business as a destination item has been very resilient during this time, showing significant double-digit same-store sales gains. In contrast, the remaining 75% of this category is more dependent upon everyday traffic that comes from people commuting to and from work or other activities. As a result, this is where we have experienced the greatest adverse impact in prepared foods from the pandemic. Also, during this time, several areas in our footprint restricted our ability for self-service food items as well as our coffee and fountain offerings. In addition to this, to protect the well-being of our guests, we voluntarily suspended self-service across our entire chain for a period of time. We since reopened our self-service platform where allowed as restrictions begin to ease across our territory. Subsequently, we have seen gradual improvement in self-service items while maintaining strong double-digit sales for whole pies. As a result of these events, total sales for the quarter were down 9.5% to $230 million. The prepared food margin in the quarter was down 220 basis points to 60% due to an increase in promotional activity and higher commodity costs. We were pleased with the acceleration in our comps prior to the impact of COVID-19 in the quarter as many of our initiatives were maturing and gaining momentum. Despite the current environment, we're excited about the traction we're gaining with our digital platform and how our guests are responding to our rewards program. We currently have over 2.2 million active members enrolled compared to just under one million members five months ago when we launched the program, and this number continues to climb. Also, approximately 50% of all pizza orders are conducted digitally now, and over 20% of all of our transactions have a rewards participant. We look forward to the opportunity to learn more about our guest preferences, which will allow us to serve them even better. We believe that our new suite of digital platforms will continue to drive additional traffic. Year-to-date, same-store sales were down 1.5% with an average margin of 60.9%. The margin moved down from a year ago, primarily due to higher cheese costs and the adverse impact from a special promotion we ran in November to launch our new coffee program. The average cost of cheese for the fourth quarter was $2 per pound compared to $1.73 in the same quarter last year. With cheese costs currently trending down, we were successful in locking in a portion of our cheese cost through the end of the calendar year. We'll continue to monitor the market closely, looking for additional buying opportunities. Same-store sales have improved sequentially throughout the first quarter and for the past 14 days are trending down in the low teens. We anticipate same-store sales to continue to improve as additional areas in our territory ease self-service food restrictions, we head into the summer months, and the state of Illinois recently lifted their stay-at-home mandate in June. Currently, we still have approximately 25% of our store base adversely impacted by self-service restrictions. Again, Illinois represents approximately 20% of our store base. We continue to move forward with our culinary innovation initiative as part of our long-term strategic plan. We completed the initial phase of this plan with the hiring of our new Vice President of Food Service, Michelle Wickham. Michelle is a 30-year veteran of the food service industry. We look forward to her energy and passion to enhance our already successful food service business. I'd now like to turn the call over to Bill to discuss operating expenses and the financial statements.

Thanks, Darren. In response to COVID-19, we made numerous adjustments in our business operations outlined previously, intended to help protect our team members and guests in navigating through this crisis. As a result of these changes and operating 61 more stores this period compared to a year ago, total operating expenses in the quarter were up 6.2% to $367 million. This includes additional COVID-related expenses of approximately $12.5 million. Despite these added expenses, we were able to drive same-store operating expenses down 2% for the quarter, driven by refinements made to store hours and labor scheduling to better align with the changes in consumer demand caused by the pandemic. Same-store labor hours were down 10.3% during the quarter. We'll continue to monitor the environment closely and make the necessary adjustments as appropriate. Year-to-date, our operating expenses were up 7.7%. On the income statement, total revenue in the quarter was down 16.8% to $1.8 billion, primarily due to lower retail fuel prices from a year ago and the adverse impact from COVID-19. Depreciation in the quarter was up 3.7%. The effective tax rate for the quarter was 21%, up from a year ago, primarily due to a lower benefit from federal tax credit in this period. We expect our effective tax rate for fiscal 2021 to be between 24% and 26%. Our balance sheet continues to be strong. Our net debt-to-EBITDA at the end of the year was 2.1 times, while our cash and cash equivalents at April 30 were $78.3 million. Long-term debt net of current maturities was down to $715 million, as our $569 million bullet payment due this August moved to the current liability earlier in the year. Over the past quarter, we have been finalizing the note purchase agreement for the refinancing of our $569 bullet payment due this August. As mentioned in our last call, the blended interest rate for this refinancing was 2.9%. With this refinancing, the average pre-tax cost of our long-term debt will decrease from 4.4% to approximately 3.3%. For the fiscal year, we generated $504 million in cash flow from operations and had capital expenditures of $472 million compared to $463 million a year ago in the same period. EBITDA increased 48.4% to $158 million in the quarter compared to the same period a year ago, primarily due to the higher contribution from fuel discussed previously. For the year, EBITDA increased nearly 15% to $647 million. I'd now like to turn the call back over to Darren to update you on our unit growth.

Thanks, Bill. For fiscal 2020, we completed 60 new store constructions, acquired 18 stores and had two additional stores under agreement to purchase. Thus far in the first quarter, we have opened six new stores and have eight stores under construction. Given the current environment, as we head into fiscal 2021, we'll be focused on liquidity and maintaining a strong balance sheet. With that in mind, we'll continue to be prudent in our capital spending in order to maintain flexibility until we have more certainty around what the new normal may look like. Because of this uncertainty caused by these unprecedented times, we will not be providing guidance at this time for the fiscal year ending April 30, 2021. This will be reevaluated as conditions warrant. Before I close and open for questions, I'd like to briefly outline some of the recent changes we've made within the executive leadership team. The additions include Ena Williams as Chief Operating Officer; Steve Bramlage as Chief Financial Officer to fill the role vacated by the retirement of Bill Walljasper, which was announced earlier this year, and Adrian Butler, as Chief Information Officer, which is a newly created role. We're excited to have such talented leaders join our team to strengthen our efforts in executing on our strategic plan. In conjunction with these changes, Brian Johnson, a 17-year veteran of the company, will take on the responsibility of leading Investor Relations, in addition to the new mergers and acquisitions team. Many of you are already familiar with Brian as he helped lead Investor Relations previously in his former role as Vice President of Finance. In closing, despite uncertainty around the near-term impact of COVID-19, we believe, given our strong liquidity and balance sheet, we are well positioned to successfully navigate through this crisis, continue to execute our strategic plan, and take the appropriate actions that allow us to emerge even stronger. We'll now open it up for questions.

Our first question comes from Chris Mandeville from Jefferies. Please go ahead with your question.

Hey, good morning, guys.

Hey, Chris.

Darren, appreciate all the color. I was hoping maybe if there's an ability for you to do so to help us try and better understand the impact of the self-serve restrictions. Is there a way of parsing out or splitting performance maybe throughout the back half of the quarter or even quarter-to-date for those stores that are now fully reopened and have all of their offerings accessible to the consumer versus those that might still have some restrictions?

Yes, Chris. We've conducted quite a bit of analysis on that. I would say it is somewhat of a moving target, as there are many different types of restrictions that have fluctuated over time. Generally speaking, between the groups, we observed same-store comps affected in the high single-digits. So, when we move to full service, that impacts us in the high single-digits compared to being self-serve.

Okay, that's very helpful. And then I think you've now got a few weeks' worth of DoorDash under your belts. I was hoping if you could maybe offer up some color on performance that you've seen thus far, how we should maybe be thinking about the impact of the P&L near-term? And then also how should we be thinking about product expansion through that platform, as I think you have maybe close to north of 100 SKUs available now?

Yes, that's correct. We have added 600 stores to that platform, which I believe will be by the end of April. We have experienced some nice growth, with a significant portion being incremental. In some stores, we weren't delivering before, so that was 100% incremental, while in others, we had delivery, and this just enhanced it. On an average day, we're receiving about 2,000 orders from those stores. It's been a nice boost, and we are beginning to see good traction with the additional items beyond just the pizza business.

Perfect. And then the last one for me before I hop back in the queue here is just on your comments around having contracted out some portion of your cheese costs; can you just put a finer point on that, maybe in terms of the percentage that has been contracted and at what price?

Yes. Yes, Chris, this is Bill. Roughly 70% of our cheese has been contracted out at a price just south of $2 per pound. Currently, cheese is trending from all-in basis for us, just slightly over $2 per pound. So, we will start seeing a tailwind here as we head into the back half of this quarter and into the second quarter. So, that will be a nice plus for us.

Perfect. Thank you, guys.

You bet.

Thanks, Chris.

Thank you. Our next question comes from the line of Karen Short from Barclays. Your question please.

Hi thanks very much and Bill, I just want to check if this is the last time we'll be talking to you on earnings?

Well, you might have another call with me in a couple of days, but this will officially be my last earnings call. Don't lose track of me, Karen.

It's been great working with you.

Yes, great working with you. Been great support.

I wanted to discuss fuel briefly. You provided an updated percentage on contracts, which shows a slight increase from the end of the third quarter. I'm curious whether this higher percentage or just the 50% contract impacts you in the current volatile environment. Specifically, could your margins have been even higher if you had relied entirely on spot pricing? I want to explore this further, as it seems we could face volatility for some time ahead.

Yes, this is Darren, Karen. Yes, we definitely anticipate being in a volatile environment for a while. But actually, the way the contracts are structured, they're indexed off of a benchmark price. And so as costs come down, it tends to be that index price minus a certain cents per gallon, depending on the contract and where we are. So, if it goes up, we're below that index. If it goes down, we're below that index. So, the volatility is still there. We're moving with that index, but we'll always be at favorable prices versus where we would have been otherwise if we were just buying off the rack.

That's helpful. Can you discuss the actual dollar amounts for expenses related to all these investments, such as plexiglass, and compare that to the reduction in hours? I assume those expenses will decrease as we move into 2021. Additionally, I'd like to know your current status on the reduced hours, so any extra details you can provide would be appreciated.

Yes, I'll give you some buckets, and then Bill can get you into the details. But I think there's probably two big buckets. It's the one is around increased pay for our team members working in our field operations and our distribution centers. So, that's one bucket, and that's probably the bigger bucket. And then there's another bucket around, or call it, safety precautions, and that's everything from PPE to things that we're doing more recently in the store support center as we start to plan for people to come back into this facility. So, those are probably the two buckets on, Bill, if you want.

Yes. Maybe just to be a little more granular with that. So of that first bucket, that special pay that Darren was referring to, that represents about $10 million of that $12.5 million. And then the remaining piece of that ran the gamut from plexiglass to personal protective equipment. We did have a handful of stores that had COVID outbreak, and we had to clean the stores and some cleaning around that. And so right now, our special pay is intended to at this point to go through the middle of June, and we'll evaluate that on an ongoing basis.

And where are you with respect to the hours?

The hours reduction. So the hours reduction in the quarter came down on a same-store basis, a little over 10%. But at certain points within the quarter, we were down upwards of 25% on store labor hours. And really, for us, it was really a matter of being more flexible to align our labor scheduling to meet that consumer demand. And so as Darren mentioned on the onset of this call, obviously very proud of the team, so the team, the operational team did an outstanding job of reacting very quickly to ebb and flow the schedules accordingly. And so as our business is picking back up due to a number of things we mentioned in the call, we are readjusting those hours accordingly.

Okay. And then just last question for me. As you're reintroducing self-serve, I'm actually just curious what your observation is in terms of the customers coming in and their willingness to engage in self-serve. I mean, I think anyone who's in the Tristate area thinks that, that will never be something that anyone will engage in again, but I don't know that that's necessarily how the whole country is thinking about that. I'm wondering if you could just give any color on how quick that was to kind of recover once it was reintroduced.

Yes, Karen, that's an interesting point. I've visited many of our stores, and I can tell you that when we transitioned to full service, our customers didn't appreciate it. Even though our staff wore masks and gloves while serving food, they disliked the wait. They were used to serving themselves. A key aspect of being a convenience store is the ability to quickly get in and out and handle things independently. Customers weren't happy with that change. However, once we started to lift those restrictions, we saw a positive shift, and customers seemed to enjoy it again. While I don't have specific data to quantify preferences, it's clear that we received complaints when we changed to full service, and customers were pleased when we reverted back, leading to improvements in our sales. At least in this region, it appears that people prefer the self-service model.

I agree with that, Karen. As Darren mentioned, as we transition from a full-service to a self-service model, depending on the specific category, we see an improvement of about 10% to 15%. This varies based on local factors. However, there is clearly a strong preference for the self-service approach, at least in our market area.

Great. Thanks. I will get back in the queue.

You bet.

Thank you. Our next question comes from the line of Bobby Griffin from Raymond James. Your question please.

Good morning everybody. Hope all along your family are staying safe. Appreciate you taking my question. I guess first, I wanted to circle back, Bill, on your comments about the locking in the cheese prices for prepared food. With that now locked in, is that pretty much the big driver to reverse the trajectory of the margins that have been going on there? Or are there some other factors that we should keep in mind as we model that business segment out going forward?

There are several factors to consider, Bobby. First, looking at the fourth quarter, the average cost was just over $2, compared to $1.73 a year ago. For context, each $0.10 increase per pound affects the overall prepared food margin by about 35 basis points. This covers a significant portion of the margin, along with our promotional efforts. As we navigate a COVID-related environment, discretionary income is limited, so we're striving to offer value to our guests. Consequently, we aim to be more promotional to drive business in the current environment. Additionally, it's important to note that there is a slight impact on our comp from the rewards program, which is around 90 basis points in the fourth quarter. Lastly, cheese costs have historically been a significant factor affecting our margins.

Okay, that's very helpful. Darren, I’m curious from a high level about how the business has reacted to this challenging environment. Were there any major initiatives discussed in January at the Investor Day that you think could be accelerated or need to be accelerated based on what you've learned from this situation? Is there anything interesting to highlight in that regard?

Yes. We advanced a few initiatives, especially in the digital area. The first was the DoorDash delivery; we initially had a small pilot planned and intended to roll it out more extensively later, but we moved that up and launched it at 600 stores within weeks. Expanding our online offerings beyond prepared foods was also on our agenda, but we had not prioritized it earlier in the year and decided to accelerate that as well. We're currently piloting curbside delivery, which was not originally part of our plans, but we recognized it as a customer need under the present circumstances and expedited the process. There are several such initiatives that we hastened. However, I feel confident about the strategic plan we shared in January. All the initiatives we outlined still remain relevant today and, in some cases, have become even more crucial. We are committed to continuing to execute that plan despite the current challenges.

Perfect, that's very helpful. And I guess, if I could sneak one model in the question here real quick. We try to tune up our models for gallons here in the first quarter, should we think about May as basically in between the April being down 34% in the last two weeks being down mid-teens or we kind of true-up to current trends?

Yes, I believe that would be a reasonable estimate. As we noted, there has been consistent improvement each week, not only in fuel gallons but across all categories. The state of Illinois lifted its stay-at-home restrictions around June 1, so we only have one week of eased restrictions to assess so far. However, if this trend follows what we've seen in other states, we anticipate continued improvement. Additionally, the summer months and the driving season will also play a significant role in this.

Okay, perfect. And Bill, I think we are talking maybe one more time, but if not, best of luck in retirement, and it's been good getting to know you here over these years.

Yes. Thanks Bob. I appreciate it. Great chatting with you over the years.

Thank you. Our next question comes from the line of Ben Bienvenu from Stephens Inc. Your question, please.

Hi. Thanks. Good morning everybody.

Good morning.

Hi, Ben.

I'll echo my sentiments, Bill. It's been a pleasure. We'll miss you, and we wish you the best.

Thank you very much Ben.

I want to ask, Darren, you mentioned comments on kind of the deferral of capital spend. But I'm curious, in the broader context of the industry; you guys are still in a really strong position financially. You've got a flexible balance sheet. We've talked in the past about how incremental investment in stores for independent operators could drive more operators out of the industry and accelerate your opportunity for M&A. I'm curious in the COVID environment, particularly as fuel margins normalize and gallons are still down a bit, though recovering. Has that accelerated the opportunity for M&A for you all? And would you be willing to accelerate that activity despite some of the deferrals you made on the capital investment side of things.

Yes, Ben, thanks for that question. And yes, absolutely, we expect that we'll be able to accelerate M&A in this environment. I kind of look at this fuel margin is maybe a little bit of a short respite for some of these operators that we were kind of on the cusp. And so got a little bit of breathing room with some margins, but I wouldn't anticipate that these types of margins last forever, and that will create that opportunity. And that's why without something we outlined in our Investor Day, with standing up a dedicated M&A team, we have done that. And as I mentioned in my remarks, we've put Brian Johnson, who was our Head of overall Store Development. He'll be handling Investor Relations, but a big part of his job is going to be fully focused on M&A. And so his team is already building out a pipeline of potential opportunities, and we're talking to a lot of folks right now. We'll have to see how that plays out in the near-term. But I'm absolutely bullish in the long-term that we have a great opportunity there now we have a dedicated team focused on executing against that.

All right. Great. I want to ask about the prepared food and fountain margins and then also just the mix of the business. You noted that you had an uptick in whole-pie; I’m curious what impact that has had on the margins of the business? And then as you reopened, has that percentage of whole pie gone back down and you've shifted back more towards slices, and what impact has that had on the margin?

Yes, Ben, this is Bill. I'll address that. If Darren wants to contribute, he can join in. There are several developments within the prepared food category. Firstly, whole pies have seen an increase. As Darren mentioned earlier, about 25% of our prepared food business comprises whole pies, and this has grown to slightly over 30% in the fourth quarter due to our initiatives with DoorDash and enhanced promotional activities. Whole pies have a higher margin compared to the overall category. However, this increase is somewhat countered by a significant decline in the bakery case due to the self-service restrictions. Therefore, we are experiencing a more substantial drop in the bakery cases as well, creating an offsetting effect. If we can sustain the current progress, it will positively impact us once the other categories return to normal levels. Additionally, if we can keep the momentum in the pizza category, there’s potential to improve that margin, particularly given the favorable cheese environment we have secured.

Yes. The only thing I would add is that we've had great momentum with the whole pie business. We believe we can continue to grow that momentum while we start to recapture the slice business, as they serve different occasions. The slice business mainly caters to commuter traffic in the morning and lunchtime, whereas the whole pie business is primarily focused on dinner. They complement each other rather than compete. Therefore, we're optimistic about maintaining our whole pie business and recovering our slice business.

Yes. Anthony, this is Bill. I'll go ahead and start with that one-off. As you know, that's one of the key initiatives we outlined back in January during Investor Day. As we consider the next three years, we have a couple of areas where we plan to reduce costs and improve efficiency. Centralized procurement is one of those initiatives, and establishing an asset protection team is the other. Both are progressing well according to our January plan. We are currently in the process of hiring a Vice President for Procurement and have been working diligently for the past two to three months with an in-house consultant on various aspects, such as value capture, inventory optimization, and payment terms while developing an operating model. We haven't finalized the total benefit yet, but we do have some indications related to strategic plans, and we are right on track. In fact, we’ve accelerated some components based on our findings. More updates will follow.

Got it. Okay. Thanks for that. And so once you open the Joplin, Missouri distribution center. What's going to be the capacity in terms of number of stores that you'll be able to serve from the three distribution centers?

Currently, we are at full capacity at the Yankee distribution facility and operating at about 60% to 65% capacity in Terho, Indiana. As Darren mentioned in response to a question, once the new facility opens in Joplin, Missouri, which we are aiming for at the beginning of the next fiscal year, we plan to shift around 500 locations to relieve some pressure from the two existing facilities. It's challenging to quantify this in terms of the number of stores because our business can accelerate in certain areas and reach capacity suddenly. The Joplin facility will be somewhat smaller than the Terho facility, but it has the potential for expansion. Looking ahead, it would likely be four to five years before we consider building another facility. However, if acquisition activity increases, that could impact our strategy regarding distribution facilities.

Understood. Okay. And lastly for me, as far as the expansion of delivery programs, obviously, you announced DoorDash. Are you still looking at the other programs perhaps with Uber Eats or Grubhub?

Yes. This is Darren, Anthony. And yes, we are talking with Uber Eats as we speak and looking at Grubhub as well. And part of the process there is working on the technology integration to make sure we can make that as seamless for our teams in the kitchens as possible. So we're working through that process as we speak.

Got it. All right. Thank you and best of luck.

Thanks, Anthony.

Our next question comes from Kelly Bania from BMO Capital. What is your question?

Hi, good morning. Thanks for taking my question. Hi and Bill definitely want to wish you all the best and thank you for all the help over the years.

You bet. Couldn't work with you, Kelly.

I'm not sure if this is the best quarter to evaluate everything due to the volatility, but I'd like to know if there are any updates or insights you've gained in recent months, especially with the 400 stores handling multi-week deliveries. I'm curious about your thoughts on that and would also appreciate any additional details on the menu rationalization and innovation initiatives and their potential direction.

Yes, Kelly, I'll take that. This is Darren. When we reached the peak of the crisis, we suspended our multiple delivery per week test because our traffic and volumes had decreased significantly. It wasn't going to be cost-effective, and we needed to ensure we could maintain the efficiency of our distribution centers. Therefore, we decided to pause that for now. We haven't set a date to reinstate it, but we do plan to at some point and will learn more as we progress. Regarding menu rationalization, I believe there is a substantial opportunity, and the team is currently working on this. Properly executing this requires research and analysis to find the right solutions. Now that we have a capable team in place, they are beginning this work, and while we will have more updates in the future, there's nothing specific to share at this time other than we are making progress.

Okay. That's fair. And maybe just another one on the delivery and the partnerships, DoorDash, Uber and GRUB. You talked about the impact there a little bit on the topline. How should we think about that on the margins, particularly relative to your own in-house delivery service?

Yes, this is Bill. Generally speaking, when transactions go through a third-party aggregator like DoorDash or Uber, they typically result in lower margins. However, when we handle deliveries in-house, we usually achieve a higher margin. The important aspect here is the incremental gross profit dollars. We believe a significant portion of what we're seeing from the DoorDash platform is additional to our business. While it may carry a lower margin, it still contributes incrementally to our gross profit. Ultimately, that’s our perspective as we focus on driving gross profit dollars.

Okay. That's helpful. It might be too early to provide a definitive answer, but can you share your perspective on how the local farming communities are performing? Any insights you can provide for those of us in different regions regarding the main economic drivers there?

Yes, I can start with that, and then Bill can chime in. We have been taking a look at our stores in those towns that have less than 25,000 people versus more than 25,000 people. And as we've gone through this crisis, we started to see a divergence in the performance between those two with the smaller communities rebounding faster than the larger ones. And so I think some of that is just natural where some of the larger population centers have held on to local restrictions longer than perhaps some of the more rural communities that weren't as impacted by the virus. So, we have started to see that divergence.

Okay. Thank you.

Thank you. Our next question comes from the line of Paul Trussell from Deutsche Bank. Your question, please.

Yes. Good morning and my best wishes to you, Bill, as well.

Thanks, Paul.

I wanted to talk maybe first about fuel margins, obviously, it's been a unique environment, and you made a comment earlier that you certainly don't expect the averages to sustain at the levels that they've transpired over the last few weeks. But just curious if the needle has moved at all in terms of how you're thinking about what the go-forward steady state of fuel margin will be?

Well, Paul, this is Darren. If I could predict fuel margin, I probably wouldn't have to do this job long-term, but yes, it's a tricky one. There are a lot of factors involved. In this case, we experienced a perfect storm with a negative demand shock creating a fuel supply glut, compounded by tensions between OPEC members, particularly the Saudis and Russians, which further pressured supply. This resulted in a very unique margin environment. I find it hard to envision that scenario repeating itself, so the new normal is quite unpredictable, which is one reason we haven't issued guidance. A penny of fuel margin translates to about $22 million to $23 million in EBITDA for us. With margins where they are, even a small change in that environment could lead to a significant gap in our forecasts, making it a sensitive and difficult prediction at this time. However, over the past year, we have heavily invested in our fuel team and fuel price optimization. Previously, we managed this in a decentralized manner, but now that we have centralized the team with the right tools and visibility, we can maximize opportunities that we might not have been able to take advantage of just 12 or 14 months ago.

Thank you. That's helpful color and just back circling back to maybe some of the more near-term performance comments you made, are you able to maybe dig in a little bit more and help us think about how the business is performing excluding the state of Illinois, even just maybe some additional comments regarding those doors that opened up self-service in the first wave or back of stores that opened what's kind of transpiring there.

Yes, hey Paul, this is Bill. Just to provide a little bit more color on that. Your first part your question on Illinois, it’s a little bit harder to gauge one state to another state simply because even though a state may have eased their stay at home restrictions, they may have in pockets of the state. Self-service mandate on products was kind of hard to gauge that, but as we talked about on that, we'll start with the state of Illinois relative to the chain in general, you're talking 300, 400 basis points differential. It really depends on the category, however, but on the self-serve side, you can see 10% to 15% differential depending on the category, so we definitely see once those restrictions have eased and we saw this, roughly starting about mid-April, that's roughly, first of all, when we started to pull back our voluntary ban on self-service, and then towards, I would say roughly the first part of the middle of May is when we first started seeing the state in our area, start ease the restrictions. And so we've definitely seen acceleration, when both of those things happen so that's, that's our comments about you know we believe we're going to see continued improvement in same-store sales, as these things start to transpire over the course of the upcoming months.

Thank you.

Thanks, Paul.

Thanks, Paul.

Thank you. Our next question is a follow-up from the line of Chris Mandeville from Jefferies. Your question please.

Hey guys, just two ones here. So Bill, we've talked about the in-store margins fairly considerably, but maybe we could just boil down it in terms of quantifying the actual buckets of impact within grocery and absolute between cost mix promos, et cetera?

Yes. On the prepared foods side, you can expect a commodity cost differential of about 100 to 120 basis points for the current quarter. The remaining factors affecting this will be related to promotional activities. There was a brief period of one to two weeks when our food waste increased due to a rapid decline in guest traffic, but we adjusted quickly towards the end of the quarter. These will be the main influences on margins for this quarter. Regarding core grocery and general merchandise, as previously mentioned, there was a shift in product mix. We saw a decrease in high-margin items like packaged beverages that cater to commuter traffic, while there was an increase in lower-margin items such as cigarettes. There has been a shift from purchasing packs to cartons for cigarettes, which carry a significantly lower margin. In the beer category, generally, beer is accelerating as a lower margin item compared to the overall category, and we noticed a shift from single-serve options to larger pack products, which also have a lower margin. Looking ahead, I believe you'll see a natural progression back to a different margin structure as these shifts stabilize. However, as we emphasized back in January, we expect sequential upward movement in margins for every category, excluding COVID, due to the initiatives we've outlined.

Okay. And then the last one just being on the time and motion study, I think I recall you haven't completed that at the end of this past fiscal year. So, I was just curious how you're thinking about that going into fiscal 2021? And if there's any ability to maybe quantify the expected savings there?

Yes, we are making progress with that, and we expect it to be ready in Q1 as previously mentioned. However, it's difficult to assess the impact right now. I believe we will discover that some stores have not had enough hours to properly serve customers, which will likely result in an increase in those hours and, consequently, an increase in revenue for those stores. Conversely, some stores may have had too many hours relative to customer traffic. Therefore, instead of just seeing a decrease in operating expenses, we might witness more of a revenue increase rather than a reduction in expenses. I don't have any specific details at the moment, but I anticipate further comments on this as we progress throughout the fiscal year.

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

Yes. Thanks Chris.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Darren for any further remarks.

Thank you all for your time this morning. As a few of you mentioned, this is Bill's last earnings call. After a 30-year career at Casey's, with nearly 17 years as CFO, Bill has certainly made his mark here. He has been a fundamental part of both Casey's and the investment community. As he considered his final year at Casey's, I doubt he anticipated breaking in a new CEO and managing through a global pandemic, but he handled everything with remarkable grace. I will truly miss his guidance and wisdom, but I look forward to maintaining our friendship. I want to welcome Steve Bramlage as our new CFO. I am confident that he is up to the challenge, even though he has some large shoes to fill. With that, I'll turn it over to Bill for a few comments, if you’d like, Bill.

Yes, definitely. As mentioned earlier, this will be my final earnings call. We were discussing how many of these calls I have participated in, and it's quite a significant number. Over my 30-year career with the company, with 16 or 17 years as CFO, I want to express my gratitude to everyone on the call. It's been wonderful getting to know each of you, and I appreciate all the support I've received. I feel confident about leaving the company in its current strong position, especially after what we shared during the Investor Day back in January. I'm excited about Steve joining us, and I believe you will appreciate his contributions. Once again, I want to extend my heartfelt thanks to all of you, and I wish you the very best.

Yes. Thanks Bill. And just to wrap things up, I'd like to thank everybody for joining us this morning. And even though we've had to make some adjustments in our business related to COVID-19, I'd like to close the call by reiterating the strength of our brand and our balance sheet, those combined with our dedicated team really leave me confidence in our ability to effectively manage through this challenge and continue driving towards our strategic plan that we outlined in January. And lastly, I'd like to thank all of our team members and business partners for their efforts during this unprecedented time. So, I hope you and your families stay safe and healthy and enjoy the rest of your day. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.