Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Casey's General Stores Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Bill Walljasper, Chief Financial Officer. Please go ahead, Sir.

Good morning. Thank you for joining us to discuss Casey's results for the fiscal year ended April 30. I'm Bill Walljasper, Chief Financial Officer. Bob Myers, President and Chief Executive Officer, is also here. Before I begin, I'll 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 and the 2011 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 results of the fourth quarter, the year and our outlook for fiscal 2013. Afterwards, we'll open it up for questions about our results and outlook. As all of you have seen, basic earnings per share for the fourth quarter were $0.61 compared to $0.60 for the same quarter a year ago. For the year, basic earnings per share were $3.07 compared to $2.24. The results last year include approximately $27.4 million in costs related to the company's recapitalization plan as well as fees associated with the hostile takeover attempt by Alimentation Couche-Tard. Adjusting for those costs, basic earnings per share last year would have been $2.65. Results reflect strong revenue gains and margin expansion inside the stores from the fourth quarter a year ago. I'll go over each category to give more detail on what is driving these results. Our fuel margin improved each month throughout the quarter as the wholesale cost of fuel declined, resulting in a fuel margin of $0.137 per gallon. Unfortunately, this was still nearly $0.02…

[Operator Instructions] And your first question is from the line of Karen Short with BMO Capital Markets.

Just a couple questions on your OpEx. So, did you give the actual dollar amount of the self-insurance adjustment, just kind of backed in about $3 million but I know you said $0.04 to $0.05?

It was about $2.5 million when combined with 2 non-operational events. [indiscernible] $2.5 million.

Okay. So backing that out, then you're kind of looking at an overall OpEx growth rate in the 15%-ish range?

Yes, that'll be correct.

Okay. So I guess just looking to next year, just to help me model through, is it fair to say that you're probably going to be looking at that kind of level at least in terms of OpEx growth, kind of maybe less lumpy but consistent with that 15%, at least for the first through the third quarter of next year and then kind of falling off in the fourth as you cycle? Or I'm just kind of trying to think about that too.

No, no. I think you're right on point, Karen. Based on the operational initiatives that we outlined, I think a run rate for fiscal 2013 would be a mid-teens percentage increase. Yes, so I think that's correct. Now keep in mind, we also had a hot fuels lawsuit that was settled. It's still pending in the courts, that's running through the fourth as well, even though it's not material. Yes, I think you're right on point.

Okay. Okay, and then I guess looking at Prepared Food, your Prepared Food margin goal for fiscal '11 -- or sorry, for fiscal '12 originally started off at like 61.8. And obviously, you didn't make that goal given the pressures, cost -- or commodity cost pressures. I guess though, looking at 2013, I'm surprised your goal might not be higher just because so many of these costs seem to be coming down quite dramatically.

Well, the 2 big costs -- and that's a good question, Karen. The 2 big costs that will drive that from a commodity perspective, certainly, cheese would be the biggest, followed by coffee, then there's some miscellaneous items as well. When you look at the cheese cost, as I mentioned, right now currently, we're about $1.80 as the current cost. As we look forward in a comparative standpoint, Q1 the average cost of cheese was about $2.11 per pound; in Q2, $2.14; and then it came down in the latter half of fiscal 2012. So it's hard to predict commodity cost increases. But certainly, we anticipate a benefit, which is in part why we have an increase in the margin for next fiscal year. Coffee, we have locked that in, that's $0.70 differential is about 20 to 25 basis points in the Prepared Food margin. So we do have that particular commodity locked in. I just don't see an opportunity yet to lock cheese in, we currently continue to look at that on a very regular basis. But some of the benefit of those 2 commodities in the fourth quarter were offset by increases in several other items within the Prepared Food items such as chicken, beef, icing, cups, doughnut oil, fountain. Anyone of them itself is not a large increase but an aggregate that you start to add up, so.

Okay and that's fair. And then I'm wondering if you could give your -- a range of CapEx for fiscal '13?

Yes, we will wait to give that range until the 10-K comes out. It will come out in a couple of weeks.

Okay. And then the last question I just had is I know there is some analysis done or some concern that maybe the rollout of the pizza initiative might cannibalize some of your existing store sales that don't have a pizza delivery. Can you maybe just give a little color on where that analysis kind of should go?

You're right. Now, we're not seeing that cannibalization of other stores, and that's primarily because the store that we're targeting for pizza delivery are typically outside of the area of an existing Casey's store to prevent cannibalization. Now we're still pushing this program out, albeit it's in the preliminary stages. As I outlined, we anticipate somewhere around 226 stores delivering pizza by the end of the fiscal year. We certainly believe that number could probably double and that program we're encouraged by and we're certainly going to continue pushing that out.

And within the guidance for the 15 July, 15 October and 15 January, same comment, no cannibalization expected from that store location?

Yes. Yes, and also, we're not seeing any dropoff inside the store, either. That was one of the concerns, that people wouldn't be coming into the store because they were getting the pizza product delivered. In contrast, we are actually seeing an uptick in General Merchandise. So, yes, we are encouraged by that program. We are encouraged by all 3 of those initiatives.

Your next question is from the line of Sam Knezevic with Northcoast Research.

Bill, I just -- I had a quick question about -- I see your depreciation seemed to pick up a bit in the fourth quarter. And I was just curious what drove that year-over-year increase from last year?

Yes, when you look at the year-over-year increase, and you're talking fiscal 2011 to 2012, I'm going to take you back to the unit movement that we experienced in fiscal 2011. As you might recall, we acquired 89 stores in the fiscal 2011 and we built 20 [indiscernible] 80%, over 80% of those stores were done in the back half of fiscal 2011. So you're not going to see the full depreciation for the full year obviously coming through. Also, those 89 stores, most of those stores we went back in fiscal 2012 and added kitchens, and when you do that, we had a fair amount of equipment, and which would accelerate that depreciation. That was the reason you saw a little bit larger depreciation increase at fiscal 2012 over 2011.

Okay. And then another question, you mentioned on your prepared statements that credit card fees were up $20 million? I think a 12.5% increase?

Just to clarify that, they ended up at $20 million. They were up about [indiscernible]. Yes, they were up about $2.3 million.

How did credit card transactions trend during the quarter?

They trended about what they've been trending in the third quarter. When you look at it, they are about 19%, 20% utilization. As far as when you look at the total sales dollars, we've been tracking in that upper 50%, that 56% to 58%. So that's kind of been in that range for a few quarters now.

Your next question is from the line of Chuck Cerankosky with Northcoast Research.

In what can I add the pickup in the depreciation rate and the operating expense rate, Bill, what should we be looking at on the income statement line to see how you're leveraging those higher costs? Do you expect it to show up in better sales and operating profits per business segment?

Yes, I think you're right on point. The increases that we expect in operating expenses and depreciation next year, where we see the pickup is going to be on the revenue side of that equation. Obviously, that equates then into a bottom line number. What we've seen on some of these operational initiatives, they come out as huge strong but it's not near where the potential has been. And we are seeing a nice pickup in those operational initiatives after we've been up and running after 3 to 4 months, especially in the remodel program. The second 6 months of the remodel being up and operational. We're seeing some very nice lifts in revenue compared to the first 6 months of their existence. At the same time, we're seeing operating expenses go down. So that tells me that we are becoming more efficient in running some of these remodeled or larger store formats. And eventually, the earnings contributions will catch up with the OpEx, if OpEx does ramp up almost immediately.

Your next question is from the line of Ben Brownlow with Raymond James.

I guess just on the last comment you made, just what was that again with the pizza delivery on the ramp in sales? Did you say 3 to 4 months?

We simply -- yes, typically, we see a continued improvement in those initiatives after the first 3. But they come out strong. But then after 3 or 4 months, they continue to get stronger. And I think the reference that I was referring to, to Chuck's question was specifically more of the remodels in second 6 months because we do have those up and operational for a full year now. So we do have some data that we can look at whereas pizza delivery is a little bit more preliminary in its rollout.

And with those initiatives, are you still seeing sort of the early stores continue to ramp in sales or are those starting to level out?

No. We are seeing those continue to ramp in sales.

And what is the incremental OpEx or associated with the ramp? Is it purely leveraged from there or is there -- just comments, sort of on the timeline of profitability and how you look at those initiatives.

Well, typically, what we see from an operating expense perspective of those initiatives, we see about a 15% to 20% lift in OpEx because you are adding and it's primarily due to wages, Ben, because we are adding staff and all of those initiatives. And the revenue lift during that same preliminary time period, we typically see anywhere from 20% to 30% lift in revenue. And pizza delivery is more geared towards prepared food. So we see lift towards the higher end of that range in the delivery initiative. Now inside sales, in total, we see about 20% to 30% lift on the remodel for 24 hours. And then we are continuing to see a lift in that level. At the same time, we are seeing OpEx decline.

And those kitchens on the 24-hour locations, those are open as well during that full period?

Yes. We start them that way. We may stop doing that, but when we convert a store to 24 hours, we do put the kitchen open during the early hours of the morning.

Mostly, the 24-hour locations at this point and the planned locations are going to be kitchen open as well?

Yes.

Okay. Are there any discussions about closing some of those kitchens during certain time periods or during the later [ph] seasonal?

Absolutely. We always are evaluating. That's one of the nice things about the 24-hour initiative and the pizza delivery initiative. There is really not capital invested for those initiatives. And as we monitor those, if we see sales -- I mean, expectations during certain hours, we will curtail that back to maybe a different hour format or we'll do something different with the kitchen hours within that 24-hour format. So we're always looking at that.

Your next question is from the line of Anthony Lebiedzinski with Sidoti & Company.

It's just a few questions here. Now, could you just give us an update as to how many stores are in your new store format, given all of the remodels and new store openings? I just wanted to get a better sense as to what's that number of stores that are in the updated format now as we speak.

Well, the updated format takes on -- I mean, you got to look at new store constructions, acquisitions converted. So when we convert an acquisition, we do have the sub sandwich and all the other prepared food operations and replacements, we're probably looking somewhere in that 25% of our store base has the aspects of the new store design. And going forward, Anthony, as you may know, basically anything we touch, we look to convert to that type of format. So on acquisitions, when we're looking at acquisition and model those, we are modeling in a kitchen renovation, which would include not only the pizza and doughnut aspects but also the subs sandwich aspect and the coffee bar. So I think, we have a lot of ways to go with these initiatives.

Okay. And I noticed that in the press release, there was no mention of any written agreements for acquisitions. Now, I was just wondering as to what kind of multiples are you seeing as far as people asking for stores?

Well, the multiples are in that 5x to 7x trailing EBITDA range. We are certainly disciplined in our approach to acquisitions. With respect to the unit growth goal, that 4% to 6%, when you kind of break that down, we're looking to add new store construction to somewhere around 35 new stores. The remaining balance of that is going to come through acquisitions. And certainly, we are encouraged by the pipeline that we're looking at even though we don't have any written agreements to announce that this point in time, we're looking at a number of stores right now that either are in negotiation, trying to get a written contract or remodeling. They've agreed to give us their finances. So we're certainly are optimistic of completing that -- retaining that goal. So, I'm encouraged by what I see.

Okay, that's helpful. And as far as your guidance for operating expenses, you mentioned you expect mid-teen percentage roughly. So does that assume that the gas prices will remain kind of where they are or like, because obviously that has an impact on your credit card fees? So how should we think about that in light of potential gas price movements?

I would say that for the year, gas prices where they are currently at, yes, that's about -- that's exactly right. So obviously, the retail price of gas skyrocketed to $4 a gallon. That could sway that a little bit. But we'll talk about that every quarter and kind of make sure everybody is aware of that.

Okay. And lastly, can you comment on your trends on your cigarette sales and margins in that category?

Well, cigarette sales, they, for the last couple months, have been relatively flat to slightly down. From a margin perspective, as you may recall, they somewhat stabilized after that second and third quarter, when we started cycling some of that competitive landscape from a year ago. We don't give margins out for the cigarettes, as you know, but we certainly are evaluating opportunities there. Illinois did just have a recent passage of a dollar tax increase. We typically see a benefit from that when that occurs, that will go into effect the first of July.

[Operator Instructions] And your next question is from the line of Stan Fiberg [ph] with Western White [ph].

My question, Bill, is a follow-up to earlier questions. On the credit card fees, I think you said they were about $20 million for the fourth quarter, which was about 12% increase, and for the right, the third quarter, I believe that was around a 14% or 15% increase? What can be done or what are you looking at to possibly reduce those costs?

Well, obviously we try -- there's a number of things. I mean, certainly, it's to get the selling, trying to get people to utilize debit cards more than credit cards is always a popular way to try to alleviate that. One of the things, the biggest things, Stan, that really fluctuates that is the retail price of gasoline. And typically, what we've experienced from a historical perspective is that as retail prices decline relative to what they were a year ago, we typically see a slowing down of credit card fee increases. And then if you just -- just contrasting that, if we see the retail price increase relative to what it was a year ago, we typically see an acceleration. But that does ebb and flow there. So some of that is somewhat out of our control. We need to accept credit cards, otherwise we'd be at a competitive disadvantage, obviously. But we've looked at utilizing our own credit cards. That's something that probably is not in the future for us. Certainly don't want to have that credit risk. But that's about the extent of it right now, Stan.

Your next question is a follow-up from the line of Karen Short with BMO Capital Markets.

Just a question actually on Illinois. Illinois is not a fair trade state, correct?

Yes, you're correct. That's one of the 3.

So I guess, just wondering -- 2 questions on the tax increase. I guess the first thing is are you guys kind of seeing any stockpiling on tobacco ahead of it and did have any impact on your comp in May? I mean, because then, I guess there was kind of an article that stores were running out of supplies.

It's a very good question. In May, I don't believe we saw any of that. However, recently you are seeing some consumers drift to, I would say a little bit more excessive purchasing than probably what they normally do, that you guys, as you call it, stockpiling, load up the pantry. So we sort of expected that.

Okay. When the increase goes into effect in July, how will that impact your margins in that state? And I guess will that have -- will that be noticeable on your Grocery segment on a margin basis?

If it is noticeable, we will call that out going forward so everybody understands that. But typically, what happens -- again, this is what we've seen in past cigarette tax increases. People will tend to migrate to more pack purchasing than they do carton purchasing, but they don't curtail their smoking habits. So consequently, the cigarette packs are a higher margin than the cartons. And eventually, what we see is typically a little bit bump in the margin and a little bit bump in the gross profit dollars.

Your next question is from the line of Kelly Bania with Bank of America.

This is Kelly. I was wondering if you could address your plans to reaccelerate the remodels? I believe you've talked in the past about focusing those on some areas where they're in larger communities, where there is more opportunities for market share gains. So I was wondering if you could just talk about that and if there's any other tweaks you're making to that program as you focus on profitability of those remodels.

Sure. As you know, we currently have about 130 stores that we have remodeled. As we outlined, we plan on -- we've identified another 75 locations to roll out this fiscal year. So that brings us to just a little bit over 200 stores. Coming into that remodel program, the design was specifically created to identify what we call our ENG-style stores. We have about 600 of those in our chain. I'm not saying all of those will be applicable for remodels. But we certainly believe a good chunk of those would be candidates for the remodel program. So we certainly have a long way to go in that remodel program. So this is not just a fiscal 2013 initiative, this will carry over to the next fiscal year, for sure. And what we are seeing, we're very encouraged by the ramp up of the performance in these particular initiatives. I think we have a little bit over a year of history now with those 130 stores. We see a nice gain in the second 6 months relative to the first 6 months. We also see a nice moderation or decline in operating expenses in the second 6 months versus the first 6 months. So we are encouraged by the direction those are going. And obviously, we'll continue to report on those as we roll those out.

Great. And then just one more. A lot of discussions on the sales lift and operating expense impact of all the different initiative you're doing. I was wondering if you could maybe just summarize and talk about maybe how accretive each of those were to earnings for this year, so we can get a sense to kind of what to model in for next year?

Well, I probably fell short of mentioning how accretive these different initiatives are, because some are very preliminary. And also, many of these are, I would say, have cross initiatives. In other words, those 130 major remodels that we did, we have also converted some of those now to 24 hours, and we have also implemented pizza delivery, so we have a lot of cross initiatives. So we probably have to lump all of them together to give a number there in that regard. However, we think the initiatives in total will certainly be in line with the new store construction and acquisition returns. Those returns typically are high single-digit, after-tax cash flow first year and then ramping thereafter shortly in the next year or 2 and into the double digits.

And there's no other questions at this time. So I'd like to turn it back to Mr. Walljasper for some closing remarks.

Thank you. I appreciate that. I appreciate everybody joining us this morning. Have a good rest of the day and the rest of the week. Thank you.

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us. And you may now disconnect. Everyone, have a great day.