Good day, ladies and gentlemen, and welcome to the Q2 2013 Casey's General Stores Earnings Conference Call. My name is Whitney, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Bill Walljasper, Chief Financial Officer. Please proceed, sir.

Good morning, and thank you for joining us to discuss Casey's results for the quarter ended October 31. I'm Bill Walljasper, Chief Financial Officer. Bob Myers, President and Chief Operating Officer, is also here. Before we 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 in the 2013 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 disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. We'll take a few minutes to summarize the results of the second quarter, and then afterwards open for questions about those results. As all of you have seen, diluted earnings per share in the second quarter were up over 24% to $1.06 compared to $0.85 a year ago. Year-to-date, diluted earnings per share were $2.50 compared to $1.86. The results reflect the strong sales performance across all categories. Before we go over each category to give more detail on what is driving our results, I'll remind everyone that we will release the details of November same-store sales on Monday, December 16. However, same-store sales for all categories in November continued to trend positive. During the second quarter, we experienced a solid fuel margin environment resulting in an average margin of $0.167 per gallon compared to $0.149 per gallon in the same period a year ago. Year-to-date, the fuel margin is $0.194 per gallon, well ahead of our annual goal. Casey's trailing full-year gas margin is $0.154 per gallon. Second quarter margin benefited from an increase in the…

[Operator Instructions] And our first question comes from the line of Karen Short with Bridge Bank.

Deutsche Bank. Just a quick couple of questions. In terms of the Hy-Vee initiative, I know you've given color around the comp and the benefits to the gallon comps, but any way of quantifying what percent of those customers are entering your store and how that's benefiting your Grocery and your Prepared Food comp?

Yes. It's a little bit more difficult to quantify that because as you know, Karen, sometimes we will have customers complete a transaction at the pump and then come in the store and complete a separate transaction. So to tie the 2 together it's a little bit more challenging. To maybe give you a little bit more color on that, when you look at the customer count in stores that are participating in the fuel program, those stores are significantly doing a higher same-store customer count than the stores that are not in the program. We're also starting to see a pickup in certain areas of inside the store for the stores that do participate in that program. So we are optimistic that we are perhaps beginning to see some conversion of those customers into the store. To kind of give you perspective, the same-store customer counts for the Hy-Vee fuel saver stores are almost 5% in relationship to the non-fuel saver stores about 3.5%.

And then I guess just looking at operating expenses, any color on what Obamacare will do going forward in terms of impacting your operating expenses? And then could you just provide us credit card fees in the quarter?

Yes. I'll take -- the second part, credit card fees in the second quarter were about $24.7 million. Those were up about $1.3 million from the same period a year ago. As far as Obamacare, we have looked at that. As you know, it was delayed from implementation to us about a year. We will provide more color on that as we get closer to that timeframe, but as we said in the past, we believe that as the current Act stands now it will be a material impact to operating expenses. It'll be spread all over a couple of fiscal years, obviously. But as that timeframe approaches and as that Act kind of develops, we'll certainly give more color on that.

And then any update on the new DC? I think you said on the last call that you'd give us an update on this.

Yes. We're hopeful that we're able to give more color in this conference call or the upcoming conference call in March. We are still working out the incentive packages offered by the various states and communities, and so we haven't quite finalized the location in that regard. We're hopeful that come the March conference call we'll be able to give information as to the direction as far as the location, cost, when we will start the construction, the timing of the construction and any more details you might have.

Your next question comes from the line of Stephen Grambling with Goldman Sachs.

Just sticking with the OpEx commentary, is there a point at which the initiatives that you've been investing in will kind of hit the hump and start to come down, yet the initiatives should continue to build or how are you thinking about that?

Yes. It really depends on the initiatives that you're talking about. Typically what we see -- and it does fluctuate from initiative to initiative, but typically, we see a ramp-up of the operating expense of those initiatives immediately as you would expect. But the earnings contribution doesn't necessarily coincide with that. We usually see a time period -- again, depend on the acquisition, it could be anywhere from a 6 to a 10-month timeframe before we really start to see the earnings contribution from that particular initiative. And so hopefully, that gives you a little bit of guidance on some of the timing aspects related to those types of initiatives.

Well, I guess as a follow-on, what would be a store that has matured initiatives in it? What would be the growth in OpEx kind of credit card fees?

Well, typically what we see is this, Stephen. We see an OpEx lift in those initiatives anywhere from about 15% to 20% depending, again, on the initiative and the location. That's in the first year of its operation. After the first year, we start to see that decline in the tail-end of that year. And then it falls in line with, basically, what I'll call the rest of the store base that does not have an initiative. As we mentioned in the press release, stores that have not had an initiative are averaging about a 4.9% increase in operating expense lift. So it does fall back in line.

Okay. That's helpful. And then I guess, changing gears and thinking about gross margin, in terms of the tobacco impact, when will you be cycling that?

Yes. The majority of the price adjustments we made last fiscal year were done in October and November, actually late October and November. Roughly about 40% to 45% of the price adjustments that we took last year happened in those 2 time periods. So we now have cycled those as we are now heading in December. And so intuitively, we might see is maybe as easy on the same-store sales because of that cycle as we now are cycling against that but also an improvement on the comparison with respect to the margin period-over-period. So, hopefully that's helpful.

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

Looking at the operating expenses year-to-date, they're almost, well, I should say in the most recent quarter, they're almost exactly half of what they were year-to-date, and last year's first half turned out to be just about 50% of the full year. So is that a pretty good way to look at the rest of this year?

Well, yes. It's a good takeaway there, Chuck. I mean, last year when you look at operating expense, we were definitely backloaded with respect to some of the initiatives, I mean, new store construction, replacement activity, acquisitions. And because of that, we might have seen an increase in operating expenses as we go forward. We're going to cycling against that here coming into the latter part of this year. So when you look at operating expenses kind of on a go-forward basis, low to mid-teens type of movement probably is the reasonable movement. Again, I will caveat that to say that it really depends on retail price of fuel and if that starts to move up where that could have an impact on credit card fees.

So you've been seeing the credit card fees come down?

Yes. Well, I would say not actually come down, but not increasing at a rate that they have been increasing. Like for an instance, here in the second quarter, the retail price of fuel was down period-over-period, and we saw credit card fees go up about 7%, and that increase probably is more of a reflection on the increased gallons that we're pumping related to the Hy-Vee fuel saver program.

Are those customers -- are they more likely to use a credit card?

That's what we've seen . In stores that are in the fuel saver program, they have a little bit higher credit card utilization than non-fuel saver.

Then back to the operating expenses, we should maybe see for the full year a dollar amount somewhere around $870 million?

I wouldn't necessarily comment on the dollar amount on the call here, but when you think through to some of the things that are a little bit unusual that ran through -- not -- well, I wouldn't say unusual; but obviously, the bonus and bonus accruals for the year were higher than last year. Last year in the second quarter, we actually let out the bonus accrual for the executive officers, and so there's a disparity there in that regard for this particular period. As we go further into the year, the bonus accrual comparison certainly becomes a little bit easier.

So that would be an element that would tail off and be totally separate from any initiatives?

Yes. That's true. Also, Chuck, I should point out we that we did 94 conversions of 24-hour locations. Roughly about 40 of those were done in the second quarter here, and so that is kind of pushing the OpEx just a little bit here in the second quarter relative to what you might have seen same time period a year ago. We don't plan to do more than probably only 10 more conversions for the remaining of the fiscal year. So that does help in that OpEx side of the equation as well.

Yes. That caught my attention, 94 year-to-date and only 10 in the second half of the year. Is there a reason for that sharp drop-off in extended-hour locations?

Not necessarily. It's not really a drop-off. Coming into the fiscal year, we were clear that we're going to do about 100 24-hour conversions. We just happened to front load those more this year than the back half of the year. As we look forward into the back half of the year, we do have quite a few initiatives underway with replacement stores and construction activity that I alluded to in the call. Also, we'll be starting to look to add kitchens to the acquisitions that we've now acquired. So we certainly wanted to make sure we have enough opportunity and manpower and resources dedicated to those initiatives, so thus the acceleration. So we're really, to answer your question, we're right on pace to what we anticipated for this year. We're starting to work on the next group for next fiscal year ahead already.

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

I just have a couple of quick questions. My first is on the expansion of your pizza-only stores. Could you tell us where these are located relative to your existing Casey's stores? And then do you expect any cannibalization or will they be fully incremental? And then what is your plan for these stores? Is a broader expansion expected?

I think you're referring to the pizza express location, the takeout and delivery only. Is that what I'm -- I think that's what your question was?

Yes. It is. Yes.

Yes. And just to clear, we only have 1 of those stores currently up and operational. We only have about 4 months of data. The expansion -- I wouldn't necessarily call an expansion. It's more of an expansion of the testing of that particular initiative. The results right now are a little bit too hard to tell at this point, but we felt in order to give it a full research and development process, we need more types, more of those stores in different areas. The areas that we're going to focus here and have identified are here in the metro area, I mean, in the Des Moines metro area. So we don't have a time period set up for those yet. But once those are up and running, we'll monitor those to see whether this is a program that has legs and it can continue beyond that. So it's very premature at this point, but we're excited about the opportunities, and we're certainly going to try to service customers the best way we can. To answer your question about cannibalization, that's really more enhancing. It's -- we're looking to identify areas that probably are underserved by our pizza program and looking to better serve the customers in those particular areas. So there maybe some cannibalization, but I think overall, there will be an announcement of the combined efforts.

That's helpful. And then just a quick question on coffee costs. Given the drop that we've seen in costs here, have you been able to leverage these lower costs to run any special promos, essentially steal share maybe from coffee sold in QSRs?

We haven't done any promotional activity. Now coffee is one of those, what I'll call, key items that we do survey on price adjustments to make sure we are competitive on our pricing. You're exactly right. Coffee costs have come down. I mean, we are locked in on a forward buy of our coffee through July. We are currently looking for opportunities perhaps to even extend that lock beyond that. Don't have anything to report in that regard at this point, but have not done anything from a large scale on promotional side yet.

And then just maybe the final question on just the acquisition environment in your view, what are you seeing and what types of multiples or deals being done at? And then what would your ideal acquisition look like in terms of maybe the number of units, store size, that type of thing?

Well, the multiple, the trailing EBITDA multiple is about 5x to 7x. That's what we've been experiencing. We do pay outside of that on both sides of it depending on the asset quality. But as far as the pipeline, it's probably as full -- the funnel -- it's probably as full as I've seen it in my 24 years with the company. We are optimistic about opportunities going forward in that regard. As far as the ideal acquisition, that's kind of hard to say. I would say that probably the answer to that question would be most of the acquisitions that we come across are smaller chains, perhaps, even mom and pops, one-offs. Those tend to be very good acquisitions for us. They tend to be in on our sweet spot as far as the small town business model. In many cases, we're the only one suitor for that particular target; and consequently, we tend to buy those rights. So, I'm not sure that's an ideal one, but that seems to be the common place based on our geography. But having said that, Bonnie, that doesn't mean that we would shy away from a large acquisition. We're constantly looking for acquisition of all sizes that makes financial sense for us.

[Operator Instructions] Your next question comes from the line of Benj Brownlow with Raymond James. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: Just a followup on Bonnie's question. Are the -- when you look at the acquisition pipeline that you have now, is it mostly in new regions or existing markets or is it a split between those?

I would say it's both. Going into new states certainly does afford us an opportunity to look and extend our look into geography, but it'll be a combination of both, probably split pretty equal at this point. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: 0nd just one question on the margins. When you look at -- it seems like most of the commodities are trending, I guess, favorable between your coffee or cheese, but excluding beef. Are there thoughts -- how do you feel that -- how much room do you feel there is with the consumer to increase prices to help overcome whether it's, I guess, primarily the higher beef costs? Do you feel there's room there because you because you obviously haven't seen any sort pushback from the customer in the past when you've raised prices? And the second part, if you have the breakout on what the margin impacts from cigarettes were?

Yes. To answer the first part, I mean, we always look, as you know, Ben, at competitive price adjustments. We do pricing surveys of key items. Obviously, our Prepared Food category is definitely a key area for us. And so to the extent as far as being able to pass on some of these cost adjustments to us, we're always looking for that opportunity. In many cases though, it's dictated by the competitive landscape and certainly don't want to price ourselves out of the competition by taking a price increase. So we constantly look at that. We are currently looking at that for opportunities. We've done a very good job in my opinion over the last 3 to 4 fiscal years on taking price adjustments in certain areas of our Prepared Food category, and we'll continue to look at opportunities. Now in this particular quarter, we did have, as we alluded to, some supply costs and some meat costs increases. And so that was to the tune of about $1.6 million. You roll that up, that's about 90 basis points on the margin in the quarter. So you're right. Some of the commodities, cheese is heading in a favorable direction. Certainly coffee is heading in a favorable direction. So we're always looking at those for opportunities to lock those in to certainly to maintain our cost structure. The second part, you asked about cigarettes, the impacts. The cigarette margin for this particular quarter was down about 180 basis points relative to the second quarter a year ago. Now as you might recall from Q1 and Q4, we were trending anywhere from 250 to 300 basis points down in the cigarette margin. So this is a function of us cycling over some of the October price adjustments we made last year. We will cycle over the remaining part of that here and have cycled over that in November, and so that margin differential period-over-period should certainly ease. But we continue to see some very solid unit movement with cigarettes.

Your next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Had a question as related to your beer margins. I know you've been opening more stores with beer caves and just wondering if you could just discuss what impact you're seeing within the beer programs?

Yes. It's a good question, Anthony, and you're exactly right. As we open these new stores and replacement stores, nearly all of these have beer caves or beer vaults. And as a result, we do see a shift into larger pack purchasing, which does have a lower margin than your smaller pack or single serves. And so the beer margin was off in the second quarter, and that certainly was contributing in some part to the drop in Grocery and General Merchandise. But having said that, even in the beer category, gross profit dollars in the beer category was up in the mid-teens. So at the end of the day, that's what we strive to accomplish is the gross profit movement so. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Can you quantify the impact of the beer margins?

Meaning the drop? Anthony C. Lebiedzinski - Sidoti & Company, LLC: Yes.

Beer margin drop was about 15 to 20 basis points from the second quarter a year ago. Anthony C. Lebiedzinski - Sidoti & Company, LLC: And just a couple of housekeeping items. Can you just say how many stores are now operating on a 24-hour basis? And also how many of your stores deliver pizza?

24-hour is about 650 or so. The pizza delivery is about 325. Anthony C. Lebiedzinski - Sidoti & Company, LLC: And lastly, I came across somewhere that you're now offering or maybe just testing a flatbread pizza. Can you just comment on that initiatives?

Yes. We are testing that. That's actually scheduled to rollout in January to all of our stores, and it's one of those items where it -- the flatbread crust has become a very popular item. We've taken notice of that, have been working on trying to pull together a flatbread crust that would meet our quality standards. And we think we've found a product, and we're excited about the rollout from January. So if you're in the neighborhood, Anthony, grab a flatbread pizza.

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

Follow-up, Bill. Yes, Bill, just thinking about the commodity cost coming down in your generally Midwest slice [ph] of the country where you operate, how do you think that will affect the communities and customer behavior where you operate?

Well, typically when we see commodities decrease in our agricultural economy, that's always a plus. I can't necessarily tell you that, that's going to equate into more donut sales or pizza sales necessarily. But consumer confidence, I think, usually tends to be pretty strong. But quite honestly, Chuck, consumer confidence has been pretty good over the last several fiscal years here in the Midwest. Anthony C. Lebiedzinski - Sidoti & Company, LLC: So actually you don't see an offset to farm incomes and then that filters through to other parts, say the Iowa economy, et cetera?

I wouldn't say there is any direct correlation in that regard. We haven't been able to ascertain that yet.

There are no further questions in the queue at this time. I would now like to turn the conference back over to Mr. Bill Walljasper. Please proceed, sir.

Well, I'd like to thank everybody for joining us this morning. Again a reminder that same-store sales will release Monday, December 16th, and hope everybody has a happy holiday. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.