Transcript of conference call conducted by Casey's General Stores, Inc.

EX-99.1 2 dex991.htm TRANSCRIPT OF CONFERENCE CALL CONDUCTED BY CASEY'S GENERAL STORES, INC. Transcript of conference call conducted by Casey's General Stores, Inc.

Exhibit 99.1

FINAL TRANSCRIPT

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Conference Call Transcript

CASY - Q2 2008 Casey’s General Stores Earnings Conference Call

Event Date/Time: Dec. 04. 2008 / 9:30AM CT

CORPORATE PARTICIPANTS

Bill Walljasper

Casey’s General Stores—CFO

CONFERENCE CALL PARTICIPANTS

Megan O’Hara

Friedman, Billings, Ramsey Group, Inc.—Analyst

Alex Bissen

FTN Midwest—Analyst

Ben Brownlow

Morgan Keegan & Co., Inc.—Analyst

Anthony Lebiedzinski

Sidoti & Company—Analyst

Karen Howland

Barclays Capital—Analyst

Mike Smith

Kansas City Capital—Analyst

PRESENTATION

Operator

Good day ladies and gentlemen and welcome to the second quarter 2009 Casey’s General Stores earnings conference call. My name is Francine and I will be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today’s conference, Mr. Bill Walljasper, Chief Financial Officer. Please proceed, sir

Bill Walljasper —Casey’s General Stores—CFO

Thank you, Francine. Good morning and thank you for joining to us discuss Casey’s results for the second quarter of fiscal 2009, ended October 31st. I am Bill Walljasper, Chief Financial Officer. Bob Myers, President and Chief Executive Officer, is also here. I hope all of you have had the time to see a press release. If you haven’t, please let me know and I will be sure a copy is forwarded to you.

Before I begin, I remind you that certain statements may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As discussed in the press release in the 2008 annual report, such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from future results expressed or implied by those statements. 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. I’ll take a few minutes to summarize the quarter, then open for questions.

As most of you have seen, the Company had a solid quarter in spite of a challenging environment with earnings per share from continuing operations of $0.54, compared to $0.55 a year ago. Earnings were driven by a higher than normal gasoline margin, increased sales inside the store, and margin expansion in the grocery and other merchandise category.

For the second straight quarter we experienced a favorable gasoline environment resulting in an average margin of $0.137 per gallon for the quarter, compared to $0.136 a year ago. Gross profit in this category was up slightly to $43.5 million. The average retail price of gasoline in the quarter was $3.25 per gallon, compared to $2.73 a year ago. As a result of the higher retail prices, we did experience some elasticity in demand with same-store gallon up 0.2% in the quarter and up 0.3% year-to-date. However, over the later part of the second quarter gasoline prices dropped significantly which enabled us to achieve a 3.1% same-store gallon increase in October. Lower retail prices continued to benefit same-store gallons in November.

Sales continue to be strong in the grocery and other merchandise category and the overall margin is improving. For the quarter, total sales were up 6% to $265.1 million, with an average margin of 33.9%, up over 80 basis points from the same period a year ago. Same-store sales for the quarter were up 4.9% while gross profit rose 8.5% to nearly $90 million. Every area in this category experienced solid gross profit gains especially in the cooler and from cigarettes. We saw cigarette pack sales rise to over 68% in the second quarter, compared to 66% in the same period a year ago. We are pleased with the gains that we’ve been able achieve in this category, especially in light of the higher retail gasoline environment and a more challenging economy.

Same-store customer count remained solid in the quarter, up nearly 2%. Same-store sales in November continued to be strong.

The prepared food category continues to perform exceptionally well. Total sales were up 11% to $87.8 million for the quarter. Same-store sales in the second quarter were up 9.3% with an average margin of 60.6%, down about 240 basis points from the second quarter last year; primarily due to the higher cost of cheese. The average cost of cheese this quarter was approximately $2.10 per pound, compared to $1.60 a pound last year.

Year-to-date same-store sales were up 10.8% with an average margin of 60.5%. The sales increase was primarily due to the continued popularity of our menu offerings and strategic price increases taken earlier in the year. The price increases account for about 3% to 4% of the same-store sales increase. The strong same-store sales trend continues in November.

At the six-month mark, operating expenses are up 9.6%. For the quarter, operating expenses rose 10.3%, primarily due to several large health insurance claims that came through late in the quarter, higher diesel fuel expense, and a 22% increase in credit card fees. Without the effect of these three items, expenses would have been up about 7%. The average cost of diesel fuel this quarter was approximately $3.70 per gallon compared to $2.96 a year ago. We should start to have more favorable comparisons as we head into the last half of the year. We did experience a slowing in the rise of credit card fees and transactions in October. Given the lower gasoline price environment, we should see softer fees going forward.

Our balance sheet continues to be strong. At the end of the quarter, cash and cash equivalents were $137.8 million and shareholders equity rose to $698 million, up $50.6 million from the end of the fiscal year. We continue to pay down debt. Long-term debt net of current maturities was down $12.2 million to $169.3 million. At the end of the quarter our average long-term debt, the average total capital ratio including the current portion, was about 26%.

On the income statement, total revenue in the quarter was up 16.8% to $1.4 billion, driven by solid sales increases in the categories I mentioned previously, and a higher retail price of gasoline. The number of basic shares outstanding in the quarter was 50,784,545 and the diluted share count was 50,963,211. We generated $70.4 million of cash flow from operations, and capital expenditures were up over $20 million to $68.1 million due to increased store growth and construction activity from a year ago. We anticipate this to increase in future quarters as we accelerate new store openings and continue to work on additional acquisition opportunities.

This quarter we opened four new store constructions and completed four acquisitions. Year-to-date, we have acquired 11 stores and built four. As indicated in the press release, we are on pace to build approximately 20 new stores by the end of the fiscal year and we remain optimistic about long-term acquisition opportunities. Our store count at the end of this quarter was 1,463 corporate stores and three franchise stores.

That completes my review for the quarter. We’ll go ahead and take your questions now.

QUESTION AND ANSWER

Operator

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Karen Short of FBR. Please proceed.

Megan O’Hara —Friedman, Billings, Ramsey Group, Inc.—Analyst

Hi. This is Megan O’Hara on for Karen Short.

Bill Walljasper —Casey’s General Stores—CFO

Hi Megan.

Megan O’Hara —Friedman, Billings, Ramsey Group, Inc.—Analyst

Hi. I was hoping you could give some comments on what you are seeing for gas margins for first few weeks of three Q and, also, what your outlook is for margins for the remainder of ‘09.

Bill Walljasper —Casey’s General Stores—CFO

Well, it’s hard to give an outlook for the remainder of ‘09 because, as you know Megan, the gas margin certainly has a fair amount of volatility not only on a quarter-to-quarter basis, but certainly even more so on a month-to-month basis. I can certainly speak more accurately to the month of November. I can tell you that the month of November, we are seeing a pull back in the gas margin from what we just reported which was that $0.137 per gallon and we are falling back closer to in-line with historical average. Now keep in mind a caveat that comment by—there is fair amount of volatility month-to-month and in a typical month that could range anywhere from $0.07 up to $0.15 . So, that can change pretty

Megan O’Hara —Friedman, Billings, Ramsey Group, Inc.—Analyst

Okay. Great. And then I was hoping, in terms of operating expenses, they were a little higher than we expected but it looks like there were some one-time items. If you could quantify the various items with the increase in insurance and—

Bill Walljasper —Casey’s General Stores—CFO

Yes, I necessarily wouldn’t call them one-time items, but more probably unusual items that occur. They could occur in the future, but they were a little bit more severe than they normally would be. For instance, the large health insurance claims. We actually had about three health insurance claims that came through in October. The tune of those were about $550,000 to $600,000. The fuel expense differential I mentioned in my narrative, again, that’s another penny on earnings. As we head into the fourth quarter ,you are going to see a much more favorable comparison on the diesel fuel cost. So that should alleviate that issue.

With respect to credit card fees, we have seen a slowing in the rise of credit card fees, Megan, and I think that’s in part due to the lower retail prices that dropped significantly primarily in the month of October. What we see in the quarter—if you go back and dissect the quarter a little bit, August compared to last August, September compared to last September, and October compared to last October, we are seeing a gradual decrease in the actual fees paid in those months, in every particular month. So, we certainly—we anticipate with the lower retail environment we should see a little softer environment with credit card fees as we head into the latter part of the year.

Megan O’Hara —Friedman, Billings, Ramsey Group, Inc.—Analyst

Okay. Great. Thanks. And then just lastly in terms of dairy prices, I guess with dairy prices coming down, what are your intentions as far as entering a hedge going forward?

Bill Walljasper —Casey’s General Stores—CFO

Yes. That’s a great question. We are constantly looking at the opportunity. As you know, that $1.60 per pound that I mentioned in the narrative that we had last year in the second quarter, we were in a forward-buy of cheese at that time. Now that forward-buy of cheese will actually cycle that come January 1st. So we are going to see a little bit more favorable comparison after we get through the third quarter with respect to cheese costs. It has come down subsequent to the end of the second quarter. It’s still not at a level that we feel that we are comfortable locking in on a forward-buy.

Megan O’Hara —Friedman, Billings, Ramsey Group, Inc.—Analyst

Okay. Thanks.

Bill Walljasper —Casey’s General Stores—CFO

You bet.

Operator

Our next question comes from the line of Alex [Resdon] of FTN Midwest. Please proceed.

Alex Bissen —FTN Midwest—Analyst

Good morning, how are you doing today?

Bill Walljasper —Casey’s General Stores—CFO

Great, how are you doing?

Alex Bissen —FTN Midwest—Analyst

I’m doing pretty well. Bill, in the press release there were comments that the acquisition environment may be a little bit more favorable going forward. I was curious, what gives you confidence in that? Maybe what is the impact of lower gas prices due to that environment and credit as well?

Bill Walljasper —Casey’s General Stores—CFO

Well, we certainly think on a longer term perspective, acquisitions is a viable strategy for us with respect to unit growth. And unfortunately those comes in lumps. And you can’t always predict those. So it’s going to be a blend going forward.

First of all, unit growth—the combination of new store constructions probably somewhere in the neighborhood of 20, 25 a year and the remaining part of unit growth will be through acquisitions. What gives us the idea that it’s we are going to be a little bit more optimistic is the fact that our market area happens to be very fragmented. Over two-thirds of the store operators in our nine-state marketing areas are operators of ten stores or less and there is still pressure in the C-store industry.

You mentioned one of the factors that I think will push maybe perhaps some of the smaller operator to look to have an exit strategy that would be the credit crisis. It’s very difficult right now to go out and secure credit. Some of the credit lines are being pulled back. We are fortunate that we do have some flexibility and we do have some financial strength in that regard. So, I think that might bring about some opportunities as well. We are seeing the multiples come in line a little bit more than what they have in the recent past, another indication that perhaps that it might be a little more favorable environment.

Alex Bissen —FTN Midwest—Analyst

Okay. Bill, just following up on that, do you have there’s any potential or hope for a larger deal, a bigger block of stores that you may be able to acquire and are you confident that you could get the financing for it?

Bill Walljasper —Casey’s General Stores—CFO

Well, that’s a two-fold question. First of all, there’s always opportunities of a larger scale and we are always looking for opportunities of a larger scale, but we are also looking for those smaller units as well. We are not going to discard those in lieu of a larger opportunity. So, yes, if it’s out there we are certainly going to track it down and approach it very aggressively.

Now with respect to financing, I don’t have a concern in that regard. I don’t see financing being an obstacle for growth going forward. As I indicated we have about $137 million in cash and cash equivalents on our balance sheet. We do have a $50 million line of credit. Also, I do meet periodically with the investment bankers both that are still in operation and certainly have my fingers in the capital markets and have an understanding of where we could go in the private market to secure. I do have some of our current noteholders approaching me wanting to offer us more money. So, I don’t see that as a concern going forward.

Alex Bissen —FTN Midwest—Analyst

Switching gears a little bit, there’s some positive commentary in the press release on commodity costs and I guess I’m really talking about ingredient costs coming down. How do you guys look at that? Is that opportunity to rebuild margins? Do you think you’ll have to give some of that back to consumers terms of lower shelf prices? How do you think about commodity costs going forward?

Bill Walljasper —Casey’s General Stores—CFO

Yes. That’s a great question. And certainly commodity cost, in general, have softened a little bit subsequent to the quarter. As far as your question goes, whether we go to—and I think I understand your question—is whether we would lower retail prices in response to dropping commodity costs. I think the only way that we would do that if our competition in those areas began to drop their retail prices, we would have to make some response not to lose market share. I don’t anticipate that happening, however, we are not going to go out and actively drop our retail prices unless that does occur.

And certainly, we are revisiting with our suppliers the very fact that commodity costs have dropped, in particular the cost of fuel. And diesel fuel has dropped subsequent to the quarter. And maybe looking for some relief in regards to some of the up charges that we have experienced over the past 12 months. To answer your question, I think there might be some opportunity for some margin expansion in light of the dropping commodity costs.

Alex Bissen —FTN Midwest—Analyst

Good deal. I’m sorry. I think I missed it, did you say what traffic was in the quarter?

Bill Walljasper —Casey’s General Stores—CFO

About 2% on the same-store basis.

Alex Bissen —FTN Midwest—Analyst

And thinking about traffic in the lower cost of gasoline, I guess specifically thinking about the lower cost of gasoline, have you seen consumers change their behavior at all? Certainly, you’re selling some more gallons, but are you seeing increases in gallons per trip?

Bill Walljasper —Casey’s General Stores—CFO

Absolutely. Without question, we are seeing increased gallon per transaction move up with the lower retails.

Alex Bissen —FTN Midwest—Analyst

But I guess that’s not impacting your in-store traffic, that’s still staying pretty robust?

Bill Walljasper—Casey’s General Stores—CFO

Yes, well, certainly it does—if you look at it from this perspective, we had a situation not too long ago about three, four months ago, where people were filling up less gallons and coming back to the store more often, now we have a situation where they are filling more gallons so the need to come back for gasoline maybe a little less than it was in prior months. So, customer count may be impacted in that regard. However, from a same-store sales perspective inside the store, my comments, I think, were pretty optimistic that we are still seeing very strong same-store movement inside the store. The take away from that, the buying habits certainly haven’t changed dramatically outside of more gas consumption on a per transaction basis.

Alex Bissen—FTN Midwest—Analyst

That’s certainly good news.

Bill Walljasper—Casey’s General Stores—CFO

Yes, it is.

Alex Bissen—FTN Midwest—Analyst

And just one final question, obviously the cost of gasoline has come down quite a bit. Will that have any impact on your working capital needs?

Bill Walljasper—Casey’s General Stores—CFO

The only thing I think would have an impact is if our credit terms change for gasoline. Right now we have ten days to pay for our gasoline, we turn that product over about every three days. So, really, we are on a negative working capital situation. I don’t see a change in that regard?

Alex Bissen—FTN Midwest—Analyst

Good, thank you very much.

Bill Walljasper—Casey’s General Stores—CFO

You bet.

Operator

Our next question comes from the line of Ben Brownlow of Morgan Keegan. Please proceed.

Ben Brownlow—Morgan Keegan & Co., Inc.—Analyst

Hi, good morning. Can you give us a little color on your fuel pricing strategy? I was a little surprised. It was a very healthy fuel margins relative to annual goals. But just a little surprised to see it down sequentially given the cost environment. If you could just give a little color on that.