Caseys General Stores Inc Q2 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Casey's General Stores Second Quarter Fiscal Year 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Johnson, Senior Vice President of Investor Relations and Business Development. Please go ahead.

Good morning, and thank you for joining us to discuss the results from our second quarter ended October 31, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, Board Chair, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. 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 and performance at our stores. There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including, but not limited to, the integration of the recent acquisitions, our ability to execute on our strategic plan and to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions, as well as other risks, uncertainties and factors that 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. A reconciliation of non-GAAP to GAAP financial measures referenced on this call, as well as a detailed breakdown of the operating expense increase for the second quarter, can be found on our website at www.caseys.com under the Investor Relations link. With that said, I would now like to turn the call over to Darren to discuss our second quarter results. Darren?

Thanks, Brian, and good morning, everyone. We'll discuss the excellent second quarter results in a moment. First, I want to thank our team, including the new team members in our 17th state of Texas for their dedication and hard work. We're excited to welcome the great state of Texas to the Casey's community. I know I speak for our entire team when I say we're extremely humbled by the response from our caring guests and dedicated team members to our annual Veterans giving campaign in November. This year's campaign resulted in over $1.2 million, just an outstanding outcome for two great causes: Hope For The Warriors and Children of Fallen Patriots. We are so grateful to our communities and guests for their generous act of rounding up their purchase. As a veteran myself, I know the great sacrifices these families have made and the challenges they face. Thank you to our partners at PepsiCo, who contribute to this campaign, our Casey's team members and especially to our guests who truly do good when they shop at Casey's. Now let's discuss the results from the quarter. Diluted earnings per share finished at $4.24 per share, a 16% increase from the prior year. Inside sales remained strong, driving inside gross profit dollars up 10% to $553 million. The company generated $159 million in net income, an increase of 15% and $306 million in EBITDA, an increase of 13% from the prior year. Inside the store, same-store sales were up despite lapping a very strong second quarter last year, while margins improved both sequentially and year-over-year as ingredient costs improve. On the fuel side of the business, we continue to strike the right balance between volume and margin. Similar to the first quarter, there are no significant macro events that impacted wholesale fuel costs. With each passing quarter, it becomes more evident that higher industry fuel margins are here to stay. With another strong quarter, which led to our highest EBITDA in the first 6 months in the company's history, the strength of our unique business model was again on full display. The team continues to do an excellent job operating the business efficiently and effectively, both inside and outside the store, as evidenced by same-store labor hours being down 2%, while our overall guest satisfaction score was up over 400 basis points over the prior year. I would now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 2.9% from the second quarter or 11% on a 2-year stack basis with an average margin of 41.1%. We saw notably strong performance in whole pizza pies, bakery, and dispensed beverage. We're also very pleased with the continued inside margin expansion this quarter. Same-store Prepared Food and Dispensed Beverage sales were up 6.1% or 17.2% on a 2-year stack basis with an average margin of 59%, up approximately 230 basis points from the prior year. Whole pies performed well in the quarter, and we also saw a strong performance with appetizers and sides. Margin was favorably impacted by softening in commodities, notably cheese during the quarter. Same-store Grocery and General Merchandise sales were up 1.7% or 8.7% on a 2-year stack basis with an average margin of 34%, an increase of approximately 70 basis points from the prior year. We saw positive momentum in the category, notably in alcoholic beverages, our private label program continues to be a great value option with bottled water and Casey's Chips performing well in the quarter. For fuel, same-store gallons sold were flat with a fuel margin of $0.423 per gallon. Our fuel team is striking the right balance between volume growth and margin and the results continue to show it. This quarter marks for the tenth quarter in a row with fuel margins above $0.345 per gallon and 5 of the last 6 quarters have been over $0.40 per gallon. Our volume continues to outperform our geographic market as well as Opus fuel gallon sold data shows the Mid-Continent region down approximately 5% in the quarter. I'd now like to turn the call over to Steve to discuss the financial results for the second quarter. Steve?

Thank you, Darren, and good morning. Our performance was excellent in the second quarter as we saw great results inside and with fuel, while we continue to operate the stores efficiently. This was despite a challenging comparison from the second quarter last year, and that's a testament to the resiliency of our business model and our team's execution. Total revenue for the quarter was $4.1 billion, an increase of $86 million or 2% from the prior year due primarily to higher inside revenue. Total inside sales for the quarter were $1.3 billion, and that's an increase of $78 million or 6% from prior year. For the quarter, Grocery and General Merchandise sales increased by $47 million to $964 million, an increase of 5.2%. Prepared Food and Dispensed Beverage sales rose by $31 million to $382 million, an increase of 8.9%. Results were also favorably impacted by operating more stores on a year-over-year basis. Retail fuel sales were up $11 million in the second quarter, as a 4% increase in gallons sold to $730 million was partially offset by a 3.5% decrease in the average retail price per gallon. That average retail price of fuel during the period was $3.62 a gallon, compared to $3.75 a year ago. We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $886 million in the second quarter, an increase of $75 million or 9.2% from the prior year. This was driven by both higher inside gross profit of $48.8 million or 9.7% and higher fuel gross profit of $24.4 million or 8.6%. Inside gross profit margin was 41.1% and that's up 130 basis points from a year ago. The Grocery and General Merchandise margin was 34%, an increase of 70 basis points from prior year. The increase was due primarily to favorable vendor-funded promotions and volume discounts, a lower LIFO charge in the prior year as well as private label increasing its share of our mix. Prepared Food and Dispensed Beverage margin was 59%, up 230 basis points from prior year. The category margin benefited from lower commodity costs, specifically cheese, which was $2.12 a pound for the quarter compared to $2.24 a pound last year, a decrease of about 5%. Margin also benefited from a lower LIFO charge in the prior year as generally input costs softened. Fuel margin for the quarter was $0.423 per gallon, up $0.18 per gallon from the prior year. Fuel gross profit benefited by $8.4 million from the sale of RINs, down $2.7 million from the same quarter in the prior year. Total operating expenses were up 7.5% or $40.5 million in the second quarter. Over 3% of the total OpEx increase is due to unit growth as we operated 129 more stores year-over-year. Same-store employee expense accounted for another 1% of the increase, as increases in wage rates were partially offset by the reduction in same-store hours, Darren previously mentioned. The company also incurred higher variable incentive compensation, repair, maintenance and insurance expenses that composed 2% of the total increase. Depreciation in the quarter was $85.6 million, and that's up $7.5 million versus the prior year, primarily due to operating more stores. Net interest expense was $12.3 million in the quarter, down $1.2 million versus the prior year, aided by rising interest rates on our cash balances. The effective tax rate for the quarter was 23.6%, consistent with the prior year. Net income was up versus prior year to $158.8 million, an increase of 15.4% and EBITDA for the quarter was $305.9 million, compared to $271.7 million a year ago, an increase of 12.6%. Our balance sheet remains in excellent condition, and we have ample financial flexibility. On October 31, we had total available liquidity of $1.3 billion. Furthermore, we have no significant maturities coming due until fiscal 2026. Our leverage ratio, calculated in accordance with our senior notes is now 1.6x. For the quarter, net cash generated by operating activities of $253 million was purchases of property and equipment of $107 million resulted in the company generating $146 million in free cash flow. This compares to generating $115 million in the prior year. At the December meeting, the Board of Directors voted to maintain the quarterly dividend at $0.43 per share. During the quarter, we also repurchased approximately $30 million of stock and have $340 million remaining on our existing share repurchase authorization. Investing in EBITDA and ROIC accretive growth investments remains our primary capital allocation priority, but as we mentioned at our Investor Day, our balance sheet affords us the opportunity to be more opportunistic than in the recent past with regards to share repurchase. Our M&A pipeline remains strong, and our integration capabilities continue to expand. The transaction with EG Group mentioned last quarter has closed, and that transaction, as well as the other announced deals are being funded with cash on hand. The majority of these payments either occurred in the second quarter or will occur in the third quarter. And this includes the transaction of 22 stores in our 17th state of Texas, which closed on November 16. As a result of the strong financial performance and unit growth year-to-date, we are updating our fiscal 2024 outlook as follows: fiscal 2024 EBITDA growth is expected to be in line with the long-term strategic plans goal of 8% to 10%. The company also expects to repurchase at least $100 million in shares throughout the fiscal year. Same-store inside sales are now expected to increase 3.5% to 5%. Net interest expense is expected to be approximately $53 million, and the tax rate is now expected to be approximately 23% to 25% for the year. As discussed in the first quarter, the company expects to add at least 150 stores in fiscal 2024. That's more than the originally planned 110. As a result of this, total operating expenses are now expected to increase approximately 6% to 8%, though same-store operating expenses, excluding credit card fees, are expected to only increase approximately 3% for the year. Depreciation and amortization are now expected to be approximately $350 million for the year. The company is not updating its outlook for the following metrics: we expect inside margin to be approximately 40% to 41%. The company expects same-store fuel gallons sold to be between negative 1% and positive 1%. And the purchase of property and equipment is expected to be $500 million to $550 million. Our results for the current quarter are as follows: First, November inside same-store sales are consistent with the updated range of the annual outlook. Fuel gallons are near the midpoint of the annual outlook and CPG is nearly $0.40 per gallon. Current cheese costs are modestly favorable versus the prior year. And now on a final note, as a reminder, in the third quarter of fiscal '23, we had a one-time operating expense benefit of approximately $15 million due to the favorable resolution of a legal matter. This benefit will not recur. Thus, total third-quarter operating expenses will be up near the low teens in percentage terms, and that's primarily due to lapping the one-time benefit as well as store growth and several million dollars of one-time integration costs. If we were not lapping this one-time benefit from the prior year, total OpEx would be up approximately 8% to 9% in the third quarter.

Thanks, Steve. I'd like to thank the entire Casey's team for another quarter of outstanding results. We know that it's a challenging time for consumers everywhere, and we're so proud of the ability of our team members and stores to serve those guests with high-quality products. Our private label program continues to shine, and we saw positive growth in units and gross profit dollars during the quarter and continue to see a favorable impact on inside margin. Our guests are gravitating towards Casey's Rewards as we have over 7.3 million members today. On the Prepared Food and Dispensed Beverage side, Thin Crust Pizza continues to do well and has achieved a 13% share of whole pies throughout the quarter. The innovation team also moved to the breakfast daypart for the launch of the Ultimate Waffle breakfast sandwich, which has come out of the gate strong. Our continuous improvement team deserves praise for all it has done to operate the stores efficiently and effectively while maintaining or improving guests' and team members' satisfaction. The team was able to take out another 2% of same-store labor hours in the quarter. We continue to expand our store count with complementary geographic growth. Recent acquisitions have strengthened our Eastern footprint in Kentucky and Tennessee, while we've also ventured into Texas, which we think is a hand-and-glove fit in our Southwest footprint. All of the stores are within our existing distribution radius; they fit the Casey's playbook of rural and suburban geographies. On the fuel side of the business, we had another strong quarter, both in fuel margin and gallons. With each passing quarter, we are becoming more confident that our industry has the necessity due to higher operating expenses, reset to a higher fuel margin environment. And with our team and the capabilities that we've stood up, we're focused on continuing to maximize gross profit dollars. As we look ahead to the second half of fiscal '24 and beyond, I'm excited about Casey's and our ability to execute our strategic plan. Our balance sheet affords us the ability to be disciplined but opportunistic with our store growth, and our capabilities throughout the organization will allow for that growth to be efficient and innovative. We'll now take your questions.

Our first question comes from Ben Bienvenu with Stephens.

Steve, I want to follow up on the commentary you gave on quarter-to-date. You noted that the inside same-store sales results in the month of, I guess, November, and I don't know if that includes the stub period of December, but it's within the range of the annual guidance. Does the composition of the same-store sales growth look similar to 2Q and that Prepared Foods is outpacing grocery? And any color that you can offer on kind of that divergence grocery moderating in the second quarter while same-store sales in Prepared Foods remains very strong, would be helpful.

Sure, Ben. I'll answer the first part of that and let Darren talk a little bit about the experience in the second quarter. The commentary is meant to be quarter-to-date, so it includes a little bit of a stub period into December. And yes, generally, we're within the annual range for total inside and Prepared Food quarter-to-date is running a little bit stronger than Grocery similar to what we experienced in the second quarter. Darren, do you want to add a couple of comments on that second quarter experience?

Yes. In the second quarter, Ben, we saw a little bit of softness on the Grocery and General Merchandise side that was primarily in the tobacco category, specifically cigarettes. I think you've seen that throughout the industry that cigarette volume was significantly softer in the second quarter, and so that offsets some strength in some of the other categories. We also encountered a little bit of weather anomalies, which I don't typically like to talk about, but it does impact the beverage business to a certain degree, and we saw some of that in October as well. But I didn't see anything trend-wise outside the cigarettes that was very concerning. And I think what was encouraging to us is that our Prepared Food growth actually accelerated from the first quarter into the second. And so a very strong 2-year comps plus 17%. And so we're seeing the overall business perform very well.

My second question is about your guidance for operating expense growth. You mentioned that the year-over-year growth for the third quarter will be higher and indicated in your updated guidance is a significant decrease in growth from the third to the fourth quarter. Is this mainly due to comparison issues or is there more to it? You made good progress in terms of labor hours during this period.

I would anticipate that year-over-year total operating expense growth will be highest in the third quarter. This is mainly due to the comparison with last year's benefits, combined with the fact that recent acquisitions, particularly the EG and Texas transactions, will result in several million dollars in integration-related expenses, most of which will occur in the third quarter. I expect that while we can make adjustments in the fourth quarter, we will return to a more normalized rate at that time, although we will have a higher number of units integrated into the system. The 3% figure we provided for same-store operating expenses, excluding credit cards, should remain consistent from quarter to quarter, which speaks to the effective management of operating expenses at the stores currently.

Next question comes from the line of Anthony Bonadio with Wells Fargo.

Congrats on the nice quarter. So I just wanted to ask about fuel margins in the context of the new guidance. I'm getting something in the mid-30s per gallon, maybe a little higher implied in the back half to get to that new 8% to 10% EBITDA growth number. I guess, one, is that the right way to think about it? And then two, can you just talk about why that's the right number? And then just different puts and takes around that.

Yes, Anthony. Regarding the fuel margin, we tend to be somewhat conservative in our forecasts because it's a highly volatile area. However, we have observed that 5 out of the last 6 quarters have been in the $0.40 range. We don't anticipate any specific factors that would lead to a decrease in fuel margin, but we are taking a cautious approach. That's all there is to say about the modeling.

Okay. Got it. And then just on inside margins. Obviously, another very strong quarter there. I know you guys have kind of talked about being comfortable around that 40% level over the long term. It seems like the current environment, as I think about things like mix as well as a lot of the things you guys are doing internally, remains favorable. I guess can you just talk about the sustainability of what we're seeing today? And just how you're thinking about the trade-off between sort of flowing that through versus investing in value?

Yes. Well, we think the margins are sustainable for a couple of reasons. When you look at how the mix is evolving with the tobacco category being one of the lower-margin categories in the assortment and that the size of that category shrinking as a percentage of the total business, that's favorable to a margin rate as that mix becomes more heavily reliant on the higher-margin categories. The second piece of that is our Prepared Foods business. Our Prepared Foods business continues to grow, and you saw the margin expansion in that business. And so when you combine those two, that's a more sustainable margin mix. The third thing I would say is our private label continues to grow inside the portfolio, which also blends up the margin. So those three things are all working for us. Now with respect to investing in value, we do invest in value to a certain extent today primarily through our private brand. And so with our private label products, even though they represent significant value to the guest, those are highly margin accretive to us. So that works out well. And more recently, what we're seeing from a consumer standpoint is at the lower end of the economic spectrum, you're starting to see consumers shift heavier over to Prepared Foods as opposed to Grocery and General Merch. I think that's just a function of the relative value that our Prepared Food represents versus some of the other snack products and packaged goods you see on the other side. So all of that is constructive to margins. And so that's why we think that's sustainable, and we don't need to engage in extreme value offerings to maintain and drive the traffic.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

I had a question on your gross in general merchandise. First, your same-store sales were a bit soft. So for a little bit more color on the drivers of this? And more color on SIG sales the quarter, Darren, I know you called that out, but just curious to hear if your SIG business decelerated versus Q1 and wondering if you're making any changes to your nicotine category or possibly pricing on SIGs to mitigate some of these pressures.

Yes. Sure, Bonnie. I think on the SIG category itself, just combustible cigarettes were down about 4% in the quarter. And typically, what we've been able to do is pass on price and have that price flow through, and with the unit decline offset and still stay relatively positive on the dollars and the category. That was not the case in this last quarter. I think to a large extent, that's a reflection of where the consumer is right now. As you know, the cigarette consumer tends to be a lower-income consumer generally. And so what we've seen is a bit of trade down from that consumer into either not buying cigarettes as frequently or trading down to lower-tier brands. And so our team is assessing where to go from here on the cigarette category. But also that's not as significant a category for us as it is for others. So we don't feel the need to knee-jerk react. I mean, we still had a strong quarter. We were still constructive on margin. Our gross profit dollars are growing at an accelerated rate relative to our peers. And so we don't feel any sort of undue pressure to do something different. We'll have to see how things play out with that category over time.

Yes. That makes sense. And then curious to hear your color on the consumer and maybe how things have changed in the last few months and maybe your outlook also just in the context of that color on your dayparts, maybe where stronger or weaker than expected, especially the morning daypart.

Yes. I guess if I step back and I look at our consumer base, I'd just remind everybody that about 3/4 of our consumers make over $50,000 a year. And given our geographic footprint, we are in a very low cost of living geography. In fact, the most expensive state we operate in is ranked 27th in cost of living. So that $50,000 tends to go a long way. So with that cohort of guests, 75% or so, we're really not seeing any change in consumption behavior. The changes we're seeing are on the other 25%, which are lower-income consumers. And so we've seen a couple of things there. They're gravitating more towards our private label. Their cigarette purchases have been impacted, both in uni-velocity and in just what they are buying when they do buy, like we were just mentioning. They're pulling back on premium fuels and open more towards ethanol-blended fuels. But generally speaking, that's for that cohort of guests. So as we look forward, we still feel really good about the value proposition that we offer. 80% of our guests believe that we offer a good value for the money. And our traffic was flat over the quarter inside the store, and our gallons were flat outside of the store. And so we're not suffering from a lack of traffic, and we're seeing people gravitate more towards the Prepared Foods as a relative value proposition. So we think as we look forward to the balance of the year, we still feel really good about the resilience of the consumers in our geography.

Our next question comes from the line of Bobby Griffin with Raymond James.

I guess the first question for me is, is it possible to size what the tobacco drag was on the grocery segment, just so we can get a little bit of a better flavor of how the business performed ex tobacco?

Yes, Bobby, we would have been about 100 basis points higher top-line growth excluding tobacco in grocery.

Perfect. That's very helpful. And then, I guess, secondly for me is just on the labor hours reduction and other great performance this quarter. Is the team finding new tasks and opportunities inside the store, and those are kind of the reductions? Or is this a function of kind of the lower overtime that we've discussed in the past, given that turnover continues to move in the right direction as well? Or is it a combo of both, I guess?

Yes, Bob, I'd say it's a combination of both really. It's primarily driven, though, by the continuous improvement team identifying non-value-added work that we can take out of the stores. That would be the primary impact. So that's a 2% reduction in labor hours. The overtime and training year-over-year has actually flattened out in terms of dollars, but we're using fewer hours when you factor in the wage rate. So if you think about flat dollars, but our average wage year-over-year is up about 3.5%. So that overtime came down a bit, training was about flat. So we think it is a combination, not as dramatic as it was last year when we were really taking big swaths of overtime and training out with the reduced turnover. The turnover continues to reduce, but just not at the same rate as it was last year.

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

Everyone. Great quarter. I've got another question about the labor hours. What are you still able to do around fine-tuning the store hours and the number of stores that are doing pizza delivery and the number of days they're doing pizza delivery? How much of that is still available to help the store labor hour calculation?

Yes, Chuck. I would say that there's probably limited upside on that front as we sit here today. Our team constantly evaluates operating hours overall to determine whether we need to make adjustments there. But I would say that that process is pretty dialed in at this point. So to be just fine-tuning here and there. In terms of labor relative to delivery, we have a small number of stores that are still doing delivery. I think it's a couple of hundred at this point. Yes, about 10%, so call it 250 stores. They're delivering ourselves. And the rest of it is through third parties. So that's not a labor impact for us. It is a margin impact when we have that delivery. But because we only pay per delivery, we don't have a delivery driver at the store waiting for another delivery order to come in. It's a far more efficient way for us to do delivery. So that's probably running for us as well.

Okay. And then private label products, where are you at on the number of SKUs? And where is your goal on that?

Yes. We've got 310 SKUs in the assortment right now, and that's a result of adding a number of SKUs in the last quarter and then taking some out that just weren't performing as well as we expected them to. So still, it's the highest SKU count that we've had on private label since we've started. There's still plenty of runway there. The team's got a pipeline of products that we'll be introducing over the next several quarters. And then we're also starting to evaluate different tiers of private label. So think of premium products that would still be a significant value versus national brand but elevated quality and uniqueness. So still a lot of way to go there.

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

This is Ben Wood on for Kelly. So for the past 3 quarters, you've had flat gallons, which seems to be outpacing public peers down low single digit and outpacing the broader industry where you compete in where your commentary seems to be pointing towards down mid-single digit for that period, implying pretty solid market share gains. So first, can you provide any color on what you guys think is driving those market share gains? Is it loyalty or the value proposition inside the store? Or are you investing in some fuel margin to get the bargain hunting customer?

Yes, let me take the first part first. The flat gallons and now we're driving it. If I step back, our stated strategy, which has not changed since I've been here in the 4.5 years I've been here, for our fuel team is to drive gross profit dollars in fuel and to maximize gross profit dollars in fuel. That's going to be a combination of balancing gallon growth and fuel margin. And so we don't look at a fuel margin number and try to achieve that number in any given quarter. Our goal is to balance those two to maximize gross profit dollars. And so I think this was a great example in this quarter of doing that. We maintained flat gallons, and like you said, over the last several quarters, we've maintained those flat gallons, and we were north of $0.40 a gallon on margin. Now, if you were to look at the OPUS numbers, and I think this is reflective of what's going on in the industry right now, OPUS would say that fuel margin in our geography was about $0.48 a gallon. So that was higher than where we were clearly. It also said that gallons were down 5.2% in the quarter, significantly below where we are. To your second question, that is not sustainable for them. It clearly isn't. But what it is, is it's a reflection of the challenges that smaller and midsized operators are facing with inflation and in particular, the impact that the tobacco category has on them. If you look at what their mix is, their mix is probably 40% to 50% cigarettes. And so when that category underperforms like it has in the last quarter or two, that's going to have a material impact on their P&L. They don't have a choice. They're operating in survival mode right now. And so they're taking that higher margin and willing to sacrifice those gallons to get it. And that's, in the short term, that can work if you're trying to survive, but in the long term it's not sustainable. For us, we're not in that position. We're not as exposed to the tobacco categories as the others. And we benefit from keeping that traffic in the store because we have high-margin Prepared Foods to sell people and high-margin private label to sell people that a lot of those others don't have. So it's important for us to keep that balance to keep that traffic. And you can see in the EBITDA results where most are going backwards in EBITDA, we had double-digit growth in EBITDA. So that is not just one metric or the other. It's a combination of all of these things working together that really makes our algorithm work for us.

I would like to emphasize that this trend is pushing smaller operators out of the industry over time. It is becoming increasingly challenging for small independent operators to compete not only with us but also with anyone who has a reasonable level of scale. We believe this ongoing consolidation in the industry is largely due to the difficulties smaller operators face in conducting their business. We do not anticipate this trend changing in the near future, especially considering all the factors we've just discussed.

Okay. Great. And then I know, so I know we're only two quarters in, but with the guidance update, you're now expecting EBITDA growth within the long-term plan compared to kind of originally pointing us towards flat. And one of the discussion points at your Analyst Day was that your original plan seemed to imply an acceleration in EBITDA growth, we calculated to kind of the 12% to 15% range in year 2 and year 3. Have expectations for the cadence changed? Or is some acceleration in the EBITDA growth and eventually getting above that 8% to 10% long-term plan still the right way to think about it?

I'll take a crack at that. I would not divine anything into our updating here midstream in the first year around what we're saying in the out years of year 2 and 3. We're committed to an 8% to 10% CAGR over that 3-year period of time. The reality is that the year has clearly started off stronger than we anticipated that it would be. And some of that's clearly fuel margin related, and some of that's just really good performance across the operations. And so we'll take a stronger start than we anticipated every day of the week, and we still feel equally good about all of our longer- medium- and long-term prospects for driving growth as we did when we had the Investor Day.

Our next question comes from the line of Krisztina Katai with Deutsche Bank.

On private label, which has been very successful for you, I was just curious to get an update on how your joint planning is going for the new calendar year with your national brand partners? Are they noticing or potentially responding to Casey's taking unit share in grocery? And anything you can share on expectations around pricing starting in January? And if you think that there's any possibility that maybe prices are going to start to roll back?

Yes, Krisztina, we are currently finalizing our joint planning, and so far, the planning sessions have been quite productive. We have successfully collaborated with our primary CPG partners over the past few years, contributing to mutual growth. We approach all discussions with this collaborative spirit and are in the final stages of developing some strong plans. Regarding private label, the specifics depend on the category and the manufacturers involved. Our consistent goal, which we convey to our partners, is not to take market share from national brands, but rather to expand the overall category, including both national brands and private label products. For instance, in the last quarter, our chips category performed strongly, with national brands seeing a 10% growth and 2% positive unit growth, which is encouraging. Meanwhile, our private label chips experienced a significant 38% growth and 33% in units this past quarter. This demonstrates that it is indeed possible to succeed in both areas, which is what we aim to achieve. Additionally, some of our national brand manufacturers also produce their own private label products, leading to varying levels of integration. As for pricing, I'm not ready to discuss that yet as the conversations are ongoing, but we expect some low single-digit inflation to be reflected around the beginning of the calendar year.

And then just a quick follow-up on some of your comments around the low-end consumer trading down, do you think that you're attracting a new customer in your Prepared Foods business as part of the trade down? Or is the acceleration that you saw in the second quarter all organic? So how do you think about opportunities for customer acquisition in this environment? And essentially walking them into our loyalty program to make sure that they stay with you.

Yes. I like our opportunity here in this sort of economic environment. Our Prepared Foods business really does represent a tremendous value for consumers. You can get a whole pie and two sides for far less money than it would cost to take the family out to the QSR, as an example. And so we have the opportunity to attract new guests to our stores based on the fact that it's just at our normal pricing, it's a strong value. And then again, like I said, what we're starting to see with our lower-income consumers is that they're making a choice about what food to buy and they're gravitating more towards prepared foods as opposed to packaged foods because the prepared foods offer incremental value there. So we see the ability to grow that business on both sides, which is great for us because it's the highest margin category that we operate in.

Our final question comes from the line of John Royall with JPMorgan.

So could you dig in a little on some of the ingredient costs tailwinds in Prepared Foods? And what are your expectations for the second half of the year for ingredient costs? It looks like you're tracking at the top end of your guidance range for inside margin. And you made some adjustments to guidance, but you didn't adjust that one. So should we assume that margin may come in a little in 2H? And just anything there on what looks like maybe a conservative second half guide on the inside margin.

This is Steve. I'll begin with cheese, as it is our largest input cost and the main focus. We are approximately 80% hedged for cheese costs for the latter half of the year. Therefore, I anticipate a modestly favorable outcome at current spot prices compared to last year, similar to what we observed in the second quarter. It should be between 5% and 10% favorable based on the current cheese prices for the remainder of the year. Most other input costs in the Prepared Foods segment are not fixed, as they involve various commodities like proteins. At this time, we don't foresee any significant changes in protein costs for the second half compared to the first half, which has shown a gradual improvement year-over-year. This trend is evident in the LIFO charge, reflecting our experience in the first half, particularly in Prepared Foods. While there is still LIFO expense, it is lower year-over-year, primarily due to the overall inflationary pressures in that business.

Great. And then my next question is on the buyback guide, $100 million on the year. You used the word opportunistic, but putting on a guide for the year, I think, suggests that maybe it's becoming a little more entrenched maybe in your capital allocation framework. Can you just talk about how we should think about the buyback as part of the framework going forward?

Yes, I appreciate your point. Clearly, we haven't been active in share repurchase over the last few years. We attempted to communicate during Investor Day that as the company grows and generates more operating cash flow, which may exceed our short-term allocation capabilities, our primary focus will remain on growth. Prioritizing the enhancement of EBITDA and ROIC in an accretive manner is where we'll invest our resources. This situation provides us greater flexibility in capital allocation. As our leverage gradually decreases, I question whether it's beneficial to let it drop too low since it increases our cost of capital. We currently possess ample flexibility, making share repurchase a logical next step. We have maintained a disciplined approach to our dividend, with a payout ratio of around 15% to 20%, aligning with EBITDA growth over the medium term, a trend we have no intention of reversing. We've proudly raised our dividend for 24 consecutive years. However, we now have more cash available, and share repurchase appears to be a sensible aspect of our capital allocation strategy as we consider our balance sheet and cash flow generation. While it won't be nearly as significant as our reinvestment in growth, I believe it will play a more meaningful role than it has over the past couple of years.

Thank you. I would now like to turn the conference back to Mr. Darren Rebelez for closing remarks.

All right. Thank you, and thanks for taking the time today to join us on the call. Before we sign off, I want to thank our team members for all their hard work this quarter and wish everyone a happy holiday season and a new year.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.