Good day, ladies and gentlemen, and welcome to the Third Quarter and Full Year 2018 Casey's General Stores Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Bill Walljasper, Chief Financial Officer. Sir, you may begin.

Good morning, and thank you for joining us to discuss Casey's results for the quarter ended January 31. I'm Bill Walljasper, Chief Financial Officer. Terry Handley, President and Chief Executive Officer, is also here. Before we begin, I'll remind you that certain statements made by us during the 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 or possible or assumed future results of operations, business strategies, growth opportunities and performance improvements 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 our ability to execute on the value creation plan we will describe or realize benefits from the value-creation plan as well as other risks, uncertainties and factors, which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. As you saw this morning from our 2 press releases and the presentation we posted to the Investors section of our website, we have a lot to cover today, including details of our value creation plan and several important updates to our board and governance. Before we get to those, we'll take a few minutes to summarize the results of the third quarter, and then we'll open up for questions at the end. I would now like to turn the call over to Terry to discuss our results.

Thank you, Bill, and good morning, everyone. As Bill said, I will start with a brief overview of the quarter. Diluted earnings per share for the third quarter were $5.08 compared to $0.58 a year ago. The third quarter benefited from a onetime adjustment in our deferred tax liabilities as a result of the Tax Cuts and Jobs Act that became effective January 1. Without this benefit, diluted earnings per share would have been $0.48. We experienced strong fuel gallon increases during the quarter. Unfortunately, this was offset by softer-than-expected results in prepared foods. Year-to-date, diluted earnings per share adjusted for the tax reform were $3.20 compared to $3.72 in the same period last year. In the fuel category, same-store gallons sold continued to outpace miles driven reported by the United States Department of Transportation and our publicly traded peers, with same-store gallons up 3.8%. Total gallons sold for the quarter rose over 8% to nearly $540 million. The average retail price of fuel during this period increased over 13% to $2.40 a gallon compared to $2.12 from the third quarter last year. During the quarter, we experienced an increase in wholesale fuel costs primarily in the back half of the quarter that had an adverse effect on the margin, resulting in average fuel margin of $0.186 per gallon for the quarter. Year-to-date, the fuel margin was $0.192 per gallon. The third quarter margin benefited from the sale of renewable fuel credits commonly known as RINs. During the quarter, we sold 18.2 million RINs for $14.6 million. RINs are currently trading around $0.45. For comparison purposes going forward, last year, in the fourth quarter, the average RIN sold for approximately $0.46. Same-store gallons sold year-to-date were up 2.4%, well above our annual guidance, with total gallons sold for the year…

Thanks, Terry. On the income statement, total revenue in the quarter was up over 16% to $2.1 billion, primarily due to a 13% increase in the retail price of fuel from the third quarter last year, increased sales gains mentioned previously and an increase in the number of stores in operation this quarter compared to the same period a year ago. Depreciation was up 11.5%, which was below our annual guidance, primarily due to a decrease in accelerated depreciation from replacement activity. Year-to-date, total revenue was up 11.3%. The effective tax rate in the quarter was down significantly due to the new tax reform changes as discussed in further detail in our 10-Q filed today with the Securities and Exchange Commission. Under the new tax reform legislation, we expect our new effective tax rate to be around 24% in fiscal 2019. The reform also generated a onetime noncash benefit of approximately $170 million or approximately $4.60 per share related to the resetting of our deferred tax liabilities. Our balance sheet continues to be strong. At January 31, cash and cash equivalents were $138.7 million, up from $76.7 million at the end of the fiscal year, primarily due to the additional debt we secured for future growth, offset by share repurchases. Long-term debt net of current maturities was $1.3 billion. At the 9-month mark, we generated $296 million in cash flow from operations, and capital expenditures were $452.6 million compared to $339.2 million a year ago in the same period. Capital expenditures were up due to an increase in new store construction and acquisition activity. I would now like to turn the call back over to Terry to talk about our store growth programs and importantly, the value creation plan we announced today.

Thank you, Bill. This quarter, we opened 20 new store constructions and completed 6 replacement stores. We acquired 3 stores and have 14 additional acquisition stores under agreement to purchase. We also completed 13 major remodels in the quarter. In addition, we have 66 new stores, 14 replacement stores and 33 major remodels under construction. Currently, we have 140 sites under agreement for future new builds. Our store count at the end of this quarter was 2,020. Next, I would like to share our value-creation plan. You can follow along with the presentation we've posted to the Investor Relations section of the Casey's corporate website accessible at the address included in our earnings press release. In our last earnings call, we mentioned that we would update you on the digital engagement and price optimization programs we have been evaluating. Our initial assessments of these programs were completed on schedule, and so I would like to share with you our long-term value-creation plan, including more detail on these programs. I would like to begin by highlighting our track record over the past 5 years, which you can see on Slide 5 of the presentation. During that time, pizza delivery, 24-hour stores and major remodel growth programs that we've previously implemented have been a significant part of driving same-store sales. Our median same-store sales growth over the past 5 years has been 2.6% in fuel gallons, 7.1% in grocery and other merchandise and 8.6% in prepared foods. The successful implementation of these initiatives led to an average store-level EBITDA growth rate 2x that of the unchanged store average growth rate from fiscal 2011 to fiscal 2017. We have consistently delivered value to our shareholders, including increasing our dividend every year for the past 17 years with a compounded annual growth rate of…

[Operator Instructions] Our first question comes from the line of Shane Higgins of Deutsche Bank.

Just really wanted to drill down first on the prepared foods for the quarter. The Pizza-to-Pump promotion that you guys rolled out in December, just trying to get a sense of how effective that was. I think you guys still -- are still offering that. How did that impact sales during the quarter and profitability? And also, how did that impact the fuel margins?

Yes. Shane, I'll take -- this is Bill. I'll go and take that one. Certainly, we -- yes, first of all, yes, we are currently continuing to run the Pizza-to-Pump promotion. We kicked that off in December. So we just have a few months under our belt. Certainly, from a sales perspective, when it comes to whole pies, it didn't quite meet our expectations at this point. I would say though, the last time we ran that promotion back in 2014, we did see a slower ramp-up in the first several months before it really started to catch strides. We'll continue to monitor that over the course of March here. With respect to some secondary benefits that we saw from that, first of all, you probably noticed our same-store gallon movement of 3.8%, a sequential movement upward. A good part of that reason is the fact the Pizza-to-Pump promotion certainly put more focus on that category. Our average gallons per transaction have ticked up from what it has been trending. And certainly, that's at least in part a result of the Pizza-to-Pump promotion. There's been a small movement downward in our fuel margin relative to that because of the coupon will go against the cost of goods sold in the gasoline category. So we'll continue to monitor that. As we -- as Terry indicated in the call, one of the things that we experienced as we started kicking off this program, definitely, we saw an increased promotional pricing activity within our market area, and certainly, that may have been a cause to maybe some of the slower start for that program.

Did you see competitors respond to this promotion? Or was it just general kind of continuation of the promotional environment?

Yes -- both. One, we did see a continuation of the environment with the number the QSR peers becoming more aggressive with their promotion activity and pricing, but we also saw some peers in our market area replicate that program.

Okay. Great. And just a question on tax reform. You guys indicated that the rate is going to be around 24%. I think's that's going to -- that should boost your cash flow by maybe $30 million to $40 million, my rough math. Where are you guys looking to maybe reinvest some of that savings? Are you thinking about wages, maybe price investments? I know obviously, you guys have your initiatives. Any color there would be great.

Yes. From a wage perspective, we're always focused on making sure we're competitive from a wage and benefit standpoint. I would remind everybody, about a year ago or so, we did increase the wages significantly for store managers with that Department of Labor issue. So right now, as Terry alluded to, we plan on taking the increased cash flow and reinvesting that into opportunities that we feel will be quicker returning items and high returning items. And a couple of examples of those, Shane, would be, obviously, this digital engagement program that Terry talked about and the price optimization program. But in addition to that, we're going to look for opportunities to drive shareholder value, and that's one of the things that we talked about on the share repurchase authorization. We feel very confident about these programs going forward. And as a result of that, that's why the board authorized the share repurchase.

Our next question comes from the line of Ben Bienvenu of Stephens.

Bill, I want to ask about the $200 million in cumulative OpEx savings. You mentioned in the slide and prepared remarks that you're expecting to reinvest these savings into future initiatives. That's a big number of reinvestment. I'm just -- I want to get a sense of how much of that $200 million you're expecting to reinvest over the next 3-year time frame. And then to what extent are your same-store sales goals that you've provided for 2021 predicated on a reinvestment of the $200 million of savings?

Yes. Good questions, Ben. So first of all, to clarify the $200 million, that's a cumulative savings over the course of the next 5 years. So it's not just coming from the programs that are listed on Page 11 of the slide deck. But there's a couple of new programs that were on there, and we continue to be focused on this. You might recall roughly about a year ago, for lack of better terms, Ben, we kind of create a task force to center around placing more folks with emphasis on this. We're only through the first year of that 2-year phase approach. So we feel pretty good about the opportunities of that. As far as how much of that [ $2 million ] will be reinvested, I guess, it will depend on the opportunities that present themselves over the course of the next 5 years. Things can change obviously in the latter years, but in the more immediate future here, we're looking to reinvest these into, again, those higher-returning items that will give a quicker earnings contribution. Ben, the second part of your question, as far as the same-store sales expectations, maybe kind of just a little bit of color around that. We -- when we're looking at these programs, obviously, the digital, the price optimization, fleet card, we look to generate at least realistic expectations. It's -- certainly, we have missed expectations in part of our business here this fiscal year and certainly don't want to have that situation again. So we feel that the levers that we pull today, we'll be able to generate those returns. The consultants that we have brought onboard have a tremendous amount of experience. We've leveraged their experience in setting up similar programs. They have a range. We certainly are putting to low end of the range where those target levels are, and so we feel pretty confident about the opportunities we can generate.

That's helpful. And then you've provided a time line for your initiatives around price optimization, fleet card and your digital enhanced -- digitally enhanced strategy. At what point do you -- one, as you look to that 2021 goal of higher same-store sales growth, what is the glide path or trajectory of comps to get there? Is it smooth or is it a step function? And then at what point along that journey are you able to make a determination of whether or not these initiatives have been successful or not? And then I have one quick follow-up on the initiatives, and I'll get back in the queue.

Well, I'll try to remember all those questions here. If I forget one, Ben, please circle back with me. But maybe here's a way to kind of frame up that glide path a little bit. I don't think it'll be necessarily a smooth year-over-year transition because as you see in the investor value-creation deck, the digital engagement is weighted towards the back half of that 3-year window. So maybe here's a way to kind of frame up and think about it. Look at the fleet card program first of all. That is one that will kick off here in early fiscal '19. We expect benefits to be seen on the back half of fiscal '19, not only in the fuel category but also in store, as Terry mentioned. So both on the grocery and general merchandise, prepared foods as well as the fuel. The fuel will be the bigger one in fiscal '19. And as we get into fiscal '20, we'll continue to increase on that going forward. At the same time, you see price optimization. Price optimization will be a back half fiscal '19. That will affect every category that we have right now. So again, that will come into play in the back half of '19 and really take stride in 2020. On the digital side, as you probably gathered from the slide deck, fiscal '19 will be a time frame that we are setting up a lot of things to put in place, not only from a redesign of the mobile app, redesign of the web, putting to place a loyalty program, testing that program and then kicking that off roughly about beginning of fiscal 2020. And so that's when you'll start seeing some of those initiatives take place. But I think our intent here, Ben, is to update everybody on a quarterly basis to the degree that we can at the progress of every one of these particular programs. Did I get every one of those, Ben?

That's great. And then one little clarifier on the prior initiatives that you've had in place, pizza delivery and 24 hour, most notably. In your OpEx time line that you laid out on Slide 11, you seem to imply that you've completed your pizza delivery program. And looking to 4Q, you might either moderate or actually reduce the number of stores that are operating under a 24-hour format. Can you help us think about sort of your thought process around that existing initiative set? And then what, as a contributing factor, with those adjustments to those initiatives, contribute to the total OpEx savings that you're looking to target?

Yes. So with respect to delivery and 24 hours, we are towards that tail end, but they will continue to be opportunities for pizza delivery and 24 hours. That's going to be kind of on a year-by-year assessment because we have certainly put in play over the last probably 3, 4 years a lot of new stores that, just quite frankly, we haven't put pizza delivery in yet. And so as they gain traction, especially with these new programs, you may see those be added back. So I wouldn't say we're completely done with any of those programs, but they're definitely towards the tail end. And the inference on Page 11 is intended to be a step back and reevaluate the existing base of pizza delivery stores and 24-hour stores to make sure that they are profitable at all times of the day. And so as part of that action, we have pulled back and plan to pull back several 24-hour pizza delivery stores to optimize, not only the operating expense, but really the bottom line. I don't have a number for you as to what that would be at this point. But certainly, that would be a benefit that you will see and we'll call out in future quarters because we just took those actions here in Q3.

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

Bill, when we look at the digital product categories you're talking about in the digital engagement section of the new strategy, can you give us some examples of what that might be because I'm thinking it's going go well beyond online pizza ordering?

Yes, Terry.

Chuck, I'll try to dive into that for you. There are several benefit opportunities here. One is, and that's the most immediate that we're working on right now, is streamlining the digital order process, trying to make that smooth conversion rate. If you're online via the website or the mobile app, that you don't run into, I'll call them roadblocks, during the process, trying to eliminate the number of steps you have to take an order to complete your order. So that's primary, #1. That's a quick win that we're already in process working with the Deloitte team and our providers. The other -- another area, we call it the single view of the customer, and that's really to provide a personalized content and offering and promotion to each of the consumers on an individualized basis, whether it's Bill Walljasper or Chuck Cerankosky, we're going to know who you are. We're going to know what you want. We're going to know what your habits are, and we're going to make an offer specifically to you as individuals. The other piece of this is also going to be a loyalty program. We need to have that branded loyalty program. And the opportunity there is to increase visits by enticing customers with these earn and spend rewards and to reach out to them and get them to come back maybe more than once a week or twice a week, whatever their current habits are but to increase those opportunities. And then also we just got to make sure that we're driving the acquisition opportunity here within the digital space. So we have to build a campaign around this to reach out to not only our existing customers, but those who may not know about the digital opportunity. So we need to be very deliberate about that to promote the opportunity, promote the offer. And then as we create new opportunities within the store, look at our product mix and where is it that we can increase digital engagement opportunities with regards to new product mix that may be coming in, whether they're fresh products, how does that work in totality with our delivery program? And maybe we begin to engage additional items as part of the delivery aspect. And then the very last piece here maybe on a smaller scale of the test is launching into some digital kiosk opportunities and high-volume stores surrounding our food service program. So you can utilize digital kiosks to make orders at lunchtime and the evening and so forth. So that's really kind of the primary focus -- focal points here going forward.

Our next question is from the line of Chris Mandeville of Jefferies.

You've largely addressed my questions as it relates to 2021. But Bill, if we could just get some better understanding around what transpired in store throughout the quarter. Can you speak to the actual trends in December and January and if there was any notable callouts? And then on the margin for both grocery and pet food, what were the predominant drivers there?

Yes. Absolutely. So you might recall, Chris, at the earnings call back in December, we gave a little bit of directional guidance on the comps, where they were at that point in relationship to the second quarter. The commentary is at that point in time, the same-store sales were in line with the second quarter results. And so what we experienced in the back half of the quarter, predominantly in the prepared food category was a deceleration, and that's probably a reflection of some of the things I talked about kind of an entry promotional activity and pricing environment that we saw in our competitive landscape. That was the real theme there. On the margin side of that, that 120 basis point pullback, Terry talked about that a little bit, but to kind of give you a breakdown, roughly about half of that -- or probably the majority of it actually had to do with stales and the remaining pieces were split relatively evenly due to some promotional activity we did in the prepared food category as well as some increased input costs. And when I say input costs, that's supplies, not commodity driven. On the grocery and general merchandise, that performed, quite frankly, as expected throughout the quarter. You can see that the margin was up. The margin was up. Actually, most items in the category had a margin increase, except for cigarettes with -- at a slight -- flat to slightly down. But it really comes down to really an inventory valuation with cigarettes. There's a LIFO adjustment that's in there relative to the same period a year ago. That's kind of a timing issue there. So I mean, I think grocery and general merchandise performed quite frankly as expected. Now on the fuel side, we definitely gained traction on the fuel side in the back half. I talked a little bit about that related to the Pizza-to-Pump promotion that put greater focus on the fuel. We did see a rising fuel cost environment, a retail environment. I think that helped people become more cognizant of the value proposition with the Pizza-to-Pump program. So that's part of it there. On the margin side, I know some of the sell-side analysts follow [ Opus data ]. Those that follow [ Opus data ] probably saw the month of January was a very challenging margin month across the nation. And so for those people that do follow that, they did pull their margins down. But unfortunately, from the consensus standpoint, the margin was 19.5%, I think it was, and so that part of the disconnect of missing the guidance. So hopefully, that helps out, Chris.

It does. It does. And then I guess, I'm just kind of curious. Was there any particular weakness in any one daypart? Or is it kind of broad throughout the day?

Yes. I would say when you look at the daypart, probably more the evening daypart than any other category. But kind of along that lines, when we talk about -- and Terry mentioned this, when we talk about increasing our focus on pricing and promotional activity to add more value proposition to the customers, we are going forward with a wide variety of daypart promotions over the next several quarters, different pricing structures. So we think we have a very solid plan to kind of combat the environment that we're currently in.

Okay. And maybe the last one for me, and I'll hop back in the queue. Just as it relates to the $200 million in savings over the next several years, did you note that actually, there's incremental upside from distribution? And if that's the case, is there any early color you can provide in terms of that potential upside?

Yes. The commentary around distribution was this. As we look forward, obviously, we have a high expectation of driving same-store sales. So regardless of any growth in units, just the same-store sales growth alone is going to bring about pressures on the distribution and transportation side that we are looking to evaluate, not -- and some of the things that we are currently going to be evaluating is multi-week deliveries, for instance. We're currently looking at the opportunity of a third distribution center, but maybe it's going to be a third-party distribution alternative for parts of that. So we are looking at all opportunities from a distribution and transportation standpoint to be the most effective to meet the expectation that we just rolled out.

Our next question is from the line of Ryan Gilligan of Barclays.

Just following up on the digital engagement initiative, without giving away any competitive secrets, how will it compare to some of your conventional pizza competitors? And maybe said another way, why will this help you gain share when the rollout is still over 2 years away?

Well, Ryan, I'll try to answer that question without giving away trade secrets. But I think the whole digital engagement landscape continues to evolve and develop. To say that it has matured would be a mistake. And we certainly have a lot of competitors such as Pizza Hut, who just came out with their program here this past fall. Obviously, Domino's does a very, very nice job in terms of the prepared food category. Within the c-store space, again, I think it's an area of opportunity and continued evolvement. So I think for us, our intention here was to be very deliberate about what we were going to do. We certainly just didn't want to create a loyalty program and call it good because this has to be a scalable opportunity. The digital engagement with our customers is going to continue to evolve. It has to be scalable. And in this changing world, as it is right now, new opportunities are going to be forthcoming for everyone. And everyone's going to be looking for an edge. We need to make sure that we're being as proactive as possible, but you've got to set a good foundation. And simply having a program that is static doesn't have the ability to be agile and scalable, would certainly not do us any good going forward. So that's why we were as deliberate as we were in this process. We believe that we partnered with a great team from Deloitte and also the team from Impact 21 with regards to price optimization. So yes, it's going to take a little time to find our feet here. But we are moving as quickly as we can because we feel that this is a wonderful opportunity going forward and believe that it'll have great dividends for our shareholders in the long term.

That's helpful. And then, I guess, just on the price optimization work. Can you give us some examples on how the strategy will change? And on average, do you anticipate prices moving up or down as a result of this work?

Well, I would tell you in terms of the way the strategy would change, Ryan, we'll talk about fuel in particular. Right now, we have a fuel pricing policy that is basically managed at field level. We follow the competition. We're not going to be undersold. We want to be competitive. But what we're finding in a lot of cases is we're probably competing against ourselves as markets evolve and change and develop. But also, we need to make sure that we are providing all the optimum opportunities of information, data collection, analysis to our field people. And so through our BI platform, we are doing a great job of getting that information to them in a more measured basis, but utilizing price optimization just takes it another level. And now we begin to take a look through algorithms as how we can maximize not only margin, but volume at the same time. And when we think about items inside the store, we've been doing this for a long time in terms of competitive mindset on an individual market basis with cigarettes, with beer, with packaged, pop and other beverages. And this really kind of brings it all centralized, brings it in-house. So again, so we can provide that data collection and information that will allow us to make better decisions to not only drive sales opportunities, but profit opportunities, so we can find the balance. And we'll do a lot of testing in the beginning to make sure that we find the boundaries here and what works best. And also, when we think about the digital side of this, there's going to be segmentation opportunities. So markets will be managed differently. And so one price optimization footprint will look differently than maybe in another segment, whether it be rural or metro, interstate locations and such. So that's the work that's being done right now to set that landscape. So we really believe that the digital engagement and the price optimization working together will provide great benefit in the go-forward.

That's really helpful. And then, I guess, just last question on CapEx. How should we expect that to trend over the next few years?

Relative to the fiscal 2018, you should see fiscal 2019 trend downward. We'll put more color on that the next conference call.

Our next question is from the line of Anthony Lebiedzinski of Sidoti.

I apologize, I did miss some of the conference call, so some of this may have been answered. But I was just wondering if you've had a dialogue with JCP Investment, the activist investors that obviously triggered some of the value-creation plan. So maybe just start with that, please.

Well, Anthony, we don't typically comment about those type of discussions as a practice. So I guess, I'll let that question go for now.

Yes. Just to follow-up on that. If you're asking a question that we consult with JCP on the value-creation plan, the answer would be no.

Okay. No. No. Well -- and so my other question was basically have you -- was there any sort of dialogue since about -- I guess, I'll take Terry's answer. That's fair. I mean, I just wanted to check in, in regards to that. And also, as far as the -- I guess, looking at the same-store gallons, obviously nice movement there upwards, but not seeing those customers necessarily come into the store, especially for the pizza. So is it -- does it really boil down to a more competitive environment?

Yes. I would -- Anthony, I'll -- this is Terry. I'll try to answer that. In terms of the prepared food, I would certainly tell you, and I think many of us see it and we've talked about in the past, that in the QSR and prepared food pizza space, you're seeing much more aggressive promotional activity, whether it's McDonald's Dollar Menus or Domino's 2 pizza for a price promotions. Everyone's struggling for market share. Everyone's in a fight and a battle. And so we need to make sure that we're finding the right balance to maintain and grow market share, but that we're also maximizing the opportunity in generating gross profit. So again, that's an opportunity that we feel the price optimization tool will assist us in going forward. But in the meantime, in that bridge, we need to make sure that we are responding not only to what the competition is doing, but we need to be aware of what the customer is feeling. And quite frankly, there are -- remain challenges in this economy here in the Midwest, and so people are looking for value. And we certainly feel a responsibility to our customers, especially in our smaller markets, that we provide that value. And so we are going to be extremely active in that regard. We have already started that, and have here, recently, in terms of value deals over the lunch hour and breakfast. But now we're going to start targeting the whole pie pizzas as well. We certainly had anticipation from the Pizza-to-Pump that it would do more for us immediately. As Bill noted, it was slow to take off, which historically it's been that way when we've done it in the past. So we still feel that that's an opportunity for us going forward. But we need to be reactive to the demands within the market and remain competitive. And that's what we're going to do, we're going to be proactive.

Okay. That all makes sense. And again, I may have missed this, but as far as the same store sales expectations for fiscal '21, how should we think about margins as well? I mean, given what you just said as far as being promotional, being cognizant of what's going on within your economies, should we expect that the margins will be less than what we've seen here as of late, or the same? Or will there be benefits from price optimization? How should we think about that?

Yes. This is Bill. I mean, I think there's opportunities for some margin expansion in certain areas. But think about it from this perspective. This really is a gross profit dollar-generation proposition. That's what we managed to, and so we're trying to strike that balance between the appropriate pricing of a product in different market areas as well as promotional activity to drive sales. Obviously, when you do that, there could be some margin impact. But like I mentioned earlier, as we head through this journey on a quarterly basis, we'll update everyone as to progress on these. But again, I would circle back to say that's a gross profit dollar-generation proposition.

Our next question is from the line of Bonnie Herzog of Wells Fargo.

I just -- I had a big-picture question on all the initiatives that you're implementing. All of them are in very early stages, but critical drivers to achieving the aggressive FY '21 targets you guys laid out this morning. So I guess, I wanted to hear from you more on how or why you have the confidence you're going to be able to hit these targets. And could you touch on or be specific if you've actually tested some of these initiatives at your stores that you could maybe give us some concrete examples of possible increased traffic and/or increased attachments? I guess, I'm just trying to reconcile how much these initiatives are maybe just in concept mode versus proven results.

Yes. Bonnie, this is Bill. I'll start off, and Terry will kick in as well. But let's take the fleet card program first. That's the one that's the most immediate of impacts. You might recall, in the last call or at least 1 of the last 2 calls, we mentioned that we hired a young man to come in, in the Director of Fuel position. He will be leading that team on the fleet card side of it. He's got experience in that with fleet card programs. One of the things he identified very early on in his time with our company was our fleet card activity just had not put a tremendous amount of energy and focus around that. For a company that has 2,000-plus stores, he was very surprised about the fleet card fuel volume in relationship to our peers who have considerably less amount of our stores that will do double and triple volumes on their fleet card program. He's very excited about the opportunity to start this program and to add more focus on it simply because of that. So we have not tested that. I mean, we do have a fleet card program out there. But certainly, he has tremendous experience in that area and has industry data that would support the numbers that we put out with respect to the volume anticipated from the fleet card program. On the other 2 programs, we do have consultants in on both of those. And so either one of those, we have not really tested those programs, that's absolutely correct. And so we will look at the programs that they have stood up and their history that are similar to these programs. They obviously have a range of success with those programs. And I can tell you, we put our expectations on the low end of those range and then a step further down from that. So there is definitely some opportunities for upside even from the expectations that we put out there. And so that's one of those things that I think will be critical for us to update [indiscernible].

Just to tag on to what Bill said with regards to the fleet card program. The number of gallons that we're doing compared to our peers with the landscape that we cover, especially in these small communities where other opportunities may not be quite so available, I think it's a great opportunity for us, a great leverage point. When we think about the price optimization, in terms of a totality program, this will be the first time that we have something along that line, but that doesn't mean that we haven't been doing price optimization to some degree over time. And certainly, the use of our BI tool for micro strategy has provided some great clarity for us in terms of our pricing strategy and our profit -- maximizing profits in certain markets. And so this is just another step forward. And then, also, to roll in fuel. That's an area again, as I mentioned earlier in an earlier question, it's been a decentralized management process. And we're going to provide that more in a centralized process going forward and provide the support and guidance to the field in terms of pricing strategies that will, we believe, will drive gallons and margin as well. And then when we think about the digital, I would refer back to our mobile app and the progress we've had with the mobile app to date, but that's only one piece of the puzzle. And certainly, again, we wanted to be deliberate in the rollout of this digital engagement because this is an important step for the long term for us. And if we're going to do it, we're going to do it right. And I think that's something that we've tried to do in the past. Maybe sometimes we're criticized for that being a little deliberate, but we always want to make sure that we're making the right steps for the long term. We're not a short-term proposition, we're a long-term value company. And this is the long term that we see is best for us, for our shareholders and for our consumers.

Okay. That all makes a lot of sense and very helpful color. And then I just have one final question. I guess, I was hoping you could talk a bit about the current M&A environment and how aggressively you're still looking. Also would love to hear from you about Kroger stores and your involvement in that sale process. Curious if you guys felt the multiple was too high? Or were there other reasons you ultimately did not acquire the stores? Anything you can share with us on that would be helpful.

Yes, Bonnie. This is Bill. I'll start that one. As far as the M&A activity, one of the things that we had definitely noticed here in the calendar -- well, the first 2 to 3 quarters is definitely an uptick in opportunities of people willing to talk to us about selling their business. Obviously, thus far, with respect to the acquisition announcements that we have had this year, it's really an uptick from the prior 2 years. It'll be interesting to see how that goes forward, Bonnie, because with the tax reform, it feels like there might be a pause out there as some of the potential sellers are trying to evaluate what that means to them. We will continue to push forward on acquisition opportunities and certainly make those decisions as we move forward. With respect to acquisitions, typically in every acquisition, whether it's 1 store, 10 stores, 100 or whatever it is, we do sign nondisclosure agreements that would prohibit us from even indicating whether or not we're involved in an acquisition. So I can't give a lot of color on any acquisition because of that typically. As far as the Euro Garages purchasing, I mean, the Kroger assets, I don't know what the multiple is on that.

Our next question is from the line of Irene Nattel of RBC Capital Markets.

Just one of the interesting comments you made around capital allocation is focus -- is that you want to focus on higher-return initiative. So I was wondering if that was sort of a comment on how satisfied you are with the returns of some of the initiatives you've been implementing? Or really, is it just about how you see the return on a go-forward basis on these incremental investments?

Yes. No. Great question, Bonnie. And so here's kind of the way that I would characterize that. So the reallocation of capital and some of the items that we mentioned have a much more immediate earnings contribution and return. And the return, I will say, is spread out over the entire chain. Terry made some comments about scalability. Obviously, a digital program, price optimization program and fleet card program are scalable across the entire chain to help lift, not only new stores that come online, but also our existing store base. And really, quite frankly, that's the biggest piece of what we have right now. And so as far as the returns on like new store constructions, of replacements, remodels, those have been performing very similar to what we have experienced in the past 3 to 5 years. So it's not necessarily that there's a return dynamic shift in those, but we see an opportunity to reallocate over to areas that will be much more immediate because, obviously, a new store takes time to hit its full stride in the maturation cycle. And some of these opportunities would have returns that would be obviously higher than what we see.

That's really helpful. And just as you think about sort of the, I guess, F '19, F '20, certainly at this point, it seems as though your customer base is going to continue to be constrained. So how do you kind of find -- I mean, you mentioned the value proposition on prepared foods. But as you think about price optimization, how do you put all that together in terms of maximizing gross profit dollars against that backdrop of a limited consumer ability to spend?

Yes. It's a good question, Irene. I mean, you followed our stock for a long time. We're in a period right now that we do have some items like farm income, food away, food at home that are cyclical. We were in the same period about 2009, we're about the same level. So we will eventually cycle out of this, just don't know exactly when that will happen. But from a market share perspective, I mean, I'll guide you back to 2013, we were out of the market with respect -- not competitive on pricing and promotions with respect to our cigarette category, we made a change there. And subsequent to that, you saw in fiscal '14, '15 and '16, a significant move in grocery and general merchandise comps and gross profit dollar movement. That was led by cigarettes. I think an opportunity right now, as Terry mentioned, this is a market share battle. And you lose a customer for one of your key items, you probably lose a customer from another item as well. And so we certainly want to make sure we meet the needs of our customers at the time that they need that, and so therein lies the premise of coming in with some additional promotional and pricing opportunities to be more competitive to make sure that customers' needs are being met. And so then after that, we've been in some of these programs, like the digital loyalty program, for instance. We think it's a nice blend and kind of a nice road map to kind of meet those customer needs.

Absolutely. Yes. And -- yes, Terry?

Irene, this is Terry. I want to kind of jump on that in terms of value creation for the consumer. Because they are in difficult economic times in our market area, maybe not so much in metropolitan locations, but certainly in the rural markets, and we certainly believe this technology there. We do not want to underestimate our rural consumer base. They are very tech-savvy. They do everything from their mobile phone, and we want to make sure that we are offering those values to them through this digital platform. And so to have the value is one thing, but to reach out to them is going to be very much essential, and this is a great opportunity to do that. And I think we have a wonderful opportunity to leverage this technology to bring those value proposition to our consumers. And I'd like to kind of circle back on your original question with regards to the remodels and the replacements. And I would tell you that this is not coming to an end. This is actually in a transition because we need to start looking at this in terms of a total market assessment, if you will. A lot of our communities -- we have small towns where we have smaller footprint, smaller stores, maybe the lots are smaller, to do this remodel program wouldn't necessarily be physically capable. And so we're taking a more strategic look in terms of the total market itself. Has the highway moved? Who's the competition? Are they in a better location? And how do we find the best opportunity in that particular community? So this is a deliberate process that we're going to use, we have been using actually going forward. We're going to continue to do that. And the other piece I want to speak to is innovation, and I think this is just the first step of a continued plan of innovation that we have been discussing internally. Certainly, these levers that we're talking about with price optimization and digital are 2 big elements of that innovation. But also, as we take a look at product offering and selection going forward, we want to make sure that we are being innovative when it comes in terms of equipment and product and utilize the information that we will receive from the segmentation portfolio out of the digital engagement to understand where do we best serve our customers with the different elements of this innovation. So there's a lot of information that we can glean from a digital engagement perspective, and we're certainly going to leverage that on the go-forward in terms of increasing sales and profitability.

I mean, presumably, all of these -- these different initiatives work sort of hand-in-hand with one another. And as you get more individual customer data and can gauge their responsiveness to price optimization, it can help you on the innovation and the in-store offering front. Is that a fair statement?

Yes. Irene, can you please repeat that for me?

Okay. What I said was these work hand in hand, Bill. So...

Yes.

So as you write, you can -- as you get more ability to analyze individual customer behavior and their responsiveness to your price optimization, you can also refine your in-store offering and what you price where.

Yes. Absolutely. Absolutely. That would be the case. It's kind of a learning process there, and so we're excited about maybe some -- and I mentioned earlier about looking at multiweek deliveries. Many of our peers do multiweek deliveries, which may bring about additional opportunities for product selection as well. So I'm excited about the future.

Okay. But again, presumably, that sort of is more of an F '21 -- these are sort of -- takes longer because you need that -- you need a lot of data to analyze and that takes time?

Correct. Yes.

Our next question is from the line of Ryan Domyancic of William Blair.

So first, on prepared food, is there any notable differences in the comp between slices and whole pies?

Yes. Whole pies certainly -- typically, just kind of by way of reference, those are about 50-50 contribution when it comes to pizza. Whole pies have taken a downward movement more so than pizza slices. And really, it comes back to the comments we made on promotional and pricing activity accelerated in our market area. Pizza slices tend to be one of those more impulse items as they come into the store.

Okay. So then when we look at the stronger gallon growth going on with the weaker prepared food comp, it's not necessarily totally fair to say there's a bigger conversion issue going on from a few quarters ago?

No. I think that's a fair statement.

Okay. Okay. That's helpful. And then on the run rate of expenses, you had 2.9% for the unchained store base this quarter. You've got more to do on the OpEx side of things, but where do you think that will go in the next quarter given, on the positive side, you've got more to do and more ways to save costs, but the offset to that could be continued wage pressure?

Yes. I'm glad you brought up wage pressure because, I mean, we certainly are in a very competitive labor environment, not only from a wage rate perspective but from benefits, and so we're always trying to attract key talent at all levels of the business. And so that continues to be a challenge, so that may be a pressure. So it's really hard to say going forward into future quarters. But generally speaking, though, in past years, we've been able to run in that 2% to 3%, 2% to 4% range. The fluctuation piece there you probably picked up on is credit card fees. As the retail fuel price increases, credit card fees for us at least, we push those down to the store level. Some of our peers exclude credit card fees, and some may allocate different things down the level. To kind of put it maybe something in perspective for you, Ryan, that 2.9%, if you were to exclude credit card fees from that, that would be about 2.2%. If you actually exclude health insurance that gets allocated currently down to the store level, that goes to 0.5%. So that's why it becomes a little challenging to compare our unchained store expense to some other peer that puts something out. You just don't know what's allocated downward.

Yes. Those metrics are helpful. And then finally, and I know you touched on this with the last question. But when you looked at the strategic plan and looked at your store growth in terms of number of new units going up, did you consider slowing that at all and repurposing capital towards share repurchases? Or the fact that the ROICs kind of been similar the past 3 or 5 years make you think that continuing to grow the store base at 4% to 6% a year is the right way to go?

Yes. A couple of thoughts there. First of all, the returns continued to be very similar in the past 3 to 5 years, so it's not really a turn -- a return pullback in that particular program. As far as looking at slowing down, if you were to look at the number of stores that we have under agreement, I think it's 140 that we have in the press release. Certainly, the intent next fiscal year was to have a higher number, but we are pulling back from our planned intent on new store construction and taking that and reallocating that to some of these programs that we discussed previously.

Our next question is from the line of Kelly Bania of BMO Capital.

It's Kelly Bania. Just a couple of questions. On -- first, on the QSR and the comments about the competitiveness in the pizza category, it sounds like the whole pies more. Can you just maybe help us understand the percent of your stores that you think are directly geographically in competition with a chain like a Domino's or a Pizza Hut that are doing these promotions and if whether or not that's increasing? Are you seeing some more unit growth from some of those? Or is that steady and you're just seeing the promotions increase?

Yes. So, yes, so we have actually done quite a bit of work on some geo-fencing here in the last 3 to 4 months with respect to -- it's not just the pizza operators. It's really, quite frankly, anybody that is in the QSR industry that has either put out value propositions or has had some pricing promotions, or it might be even more aggressive from just more units in our area. So that would include obviously Dollar General as well. And so with respect to the pizza side, Pizza Hut would be what we find is the one that we're probably coming up against the most in roughly about 1,000 stores. Domino's, maybe 600 stores. And like McDonald's, for instance, it's about another 1,000 stores. But so, yes, we've done a lot of work around that. We've overlaid kind of our promotions over the past 3 or 4 months with respect to what their promotions were. And certainly, one of the things that we identified was they are definitely on a pricing standpoint, very competitive, maybe more so than we have been. And so we feel that there's an opportunity to get back in the game and compete at a pricing perspective and promotion perspective. At the end of the day, Kelly, it's really to offer a value proposition to the consumer at time that's, quite honestly in the Midwest, a challenging economic backdrop. I don't know if you follow the USDA report, but the most recent one that came out in February projected a slight decline in farm income in calendar 2018. So we're in this environment, and we certainly want to offer opportunities to our consumers.

I guess on that note, what -- in terms of your plan for 2021, I mean, what are you kind of assuming for the economic backdrop? Do these plans kind of put you on a path to meet those objective irrespective of the backdrop? Or can you -- I guess, can you achieve these if this kind of backdrop continues?

No. It's irrespective of that backdrop. We did not contemplate when we set these expectations out that we had to have economic backdrop in a certain trajectory. It will eventually turn. It's hard for us to make that determination, but it was certainly a separate decision.

And I guess, with this plan, I may have missed this, but can you talk about unit growth? Are you still on track for your prior unit growth expectations? And can you be a little bit more specific on expectation for remodels and replacements in fiscal '19 and beyond?

As far as -- I'll start with fiscal '18. As far as fiscal '18, we are certainly on pace to, as you probably gather from the press release, to hit our expectations with respect to replacements, remodels and new store construction. I'll defer the question on fiscal '19. We haven't put that guidance out there as to what that shapes up. We'll do that in the next conference call. But certainly, it all rolls up into this particular plan.

Okay. And in terms of the share repurchase and just free cash flow expectations, you'd noted the $150 million, I guess, in capital relative to fiscal '18 next year. But I mean, just how do you expect free cash flow over the next couple of years? And what will fund the share repurchase, the new $300 million?

Yes. It'll be existing cash, cash flow from operations and, to some degree, depending on how these programs ramp up, there might be additional debt associated with that as well. But from a cash flow perspective, when we start looking through cash flow expectations over the course of the next 3 years, certainly we have an expectation to generate free cash flow as these programs become -- come online and take traction.

Okay. And then just last one for me. In terms of the OpEx, the $200 million, I think that was over 3 years or maybe it's at 5 years. But just can you clarify what the specific areas are there that can get to $200 million? And what kind of cadence we can expect over the next couple of years? And am I hearing it right that, that $200 million will be directly reinvested into all these initiatives?

Yes. And keep in mind, just to clarify, that's a cumulative savings over the course of the time. It goes through 2021. So basically, it's going to be a combination of continued -- looking at those cost reduction measures on Page 11 of the slide deck, you continue to look at some of those gaining traction. There are several ones that, quite frankly, we have not -- we just initiated in the third quarter. That really have not been reflected in any type of movement in the unchanged operating expense that we had. And so that's really -- there's a couple there, actually, so the new fleet management program and the optimization of the warehouse. There's a wide variety. And again, we'll keep you continually updated on a quarterly basis to the progress of those, as well as anything new we might roll out.

Okay. Sorry. And then I forgot I had one more. In terms of the distribution you may be -- you mentioned maybe potentially thinking about a third-party distribution option, and that was news to me. I recall you were testing maybe some more frequent deliveries. But as part of this plan, I guess, can you talk about any thoughts or if you guys evaluated anything in terms of menu innovation or fresh or more higher-quality ingredients as part of this plan?

Well, as far as the distribution side of that, we're in the early stages of evaluating that. But as we start to think about them, maybe here's a way to characterize that, Kelly, is we certainly believe that we are going to have a significant uptick in same-store sales across our -- inside of our store, but that puts pressure on distribution and transportation. At the same time, we're underway looking at healthier-for-you options within our stores and, obviously, become prevalent with our consumer. Again, many of those tend to be products that are time-sensitive, and we need to make sure that we get those products there. And so because of all of that, we are looking at multiweek deliveries. We're currently testing multiweek deliveries in our stores with our current distribution structure. But it dawned on us that we should also expand that to look at other opportunities, perhaps to augment what we currently have. That may be some third-party distribution alternatives at least in part for some of these initiatives. So that's the evaluation process we're looking at right now, and so we should have that wrapped up probably the next several quarters.

Our next question is from the line of Bob Summers of Macquarie.

I just want to build on some prior questions. So the digital transformation, how is it going to impact how you look at acquisitions over the short or intermediate term? Then second, this whole transformation is not a riskless endeavor. So how are you handicapping execution risk, particularly I guess, throughout the process, but then more importantly, the ERP piece? And have you picked a provider yet? And then taking a bigger step back, the formulation of the plan is clearly very important here. The Deloitte Digital team is not really known to me. You've talked about their depth, but either the specific team that you're using or the consulting practice in general, I mean, can you cite some strong examples of market success for us?

All right. So there's a lot of questions there, Bob, so I may not get all of them here. So I'll do my best. If I don't answer one of them or one of us doesn't answer, please circle back on that. So with respect to the digital side of that equation. So I mean, we went through an RFP process to look at who might be the best provider that has the most experience in a QSR arena. Quite honestly, I don't know the sources you have, but Deloitte came -- resonated at the top. There were several others that were there, but we felt this was a better fit there. So with respect to the handicap of the execution, well, I'll come back to the M&A question first. I can tell you that the rollout of these programs, it is not our intent to pull back acquisitions. Again, acquisitions will all be a value proposition. If there's an acquisition out there that we think makes sense to the shareholder, we're going to take action on that. To the degree that we have a lot of acquisition activity, certainly we will pull back on the share repurchase that was announced to allocate those funds to something of that nature. So I don't want to certainly mislead anybody that we're going to pull back acquisitions because I think there's going to be continued opportunities that we'll have in this next 3 years. So as far as the -- I guess, you call it the handicapping of the digital program, we kind of touched a little bit about this going forward. And so we looked at all of the experiences that were presented to us, not only from Deloitte, but some of the other people that we actually had in the…

Yes. I mean, I guess, what I'm trying to get at is that I think a lot of us on the call have seen retailers that have tried to do technology transformations only to learn that the intended systems didn't achieve or do what they wanted, and this was only figured out midstream. And so I guess, I'm also trying to gauge your confidence level and that the things that you're looking to do will actually do what they say, that there's a high level of confidence behind that.

Yes. So there are several pieces to that. First of all, from the financial systems upgrade that we talked about, I mean, obviously, we have a system integrator there that does these very, very frequently. Deloitte happens to be the system integrator for that. We've actually even hired a third party over the top of that as a third-party oversight for the implementation of the financial systems upgrade, just as another check and balance to make sure that we are hitting strides, we're not having to change orders, and it meets the expectations and milestones that was set out to meet at the beginning of that particular venture. And so the other ones, I guess, I'm not sure I can add any more color with respect to how we came up with the expectations from those programs. I think we've kind of touched on that. But Terry, you want to add anything?

No. I think, Bob, that Bill touched on that in terms of our work with the digital team. We looked at some top companies, consultants in this field. We just felt that the digital team from Deloitte understood where we were trying to go with this program, understood that it was separate from this ERP project, financial systems. And it's an opportunity of innovation for our consumer, and we feel very confident in their history and their success with other clients. And to Bill's point, we took a look at their past ranges of success and took it down a notch. And so we want to make sure that we're being very conservative about that, but we're going to have our foot on the gas, and we have high expectations, and we will continue to drive towards that high expectation.

So our last question comes from the line of Damian Witkowski of Gabelli.

The value-creation plan, you obviously spend a lot of time on it. Just wondering if you looked at real estate and perhaps monetizing it somehow in order to, A, roll out these initiatives even faster; and, frankly, buy back some stock considering it's sort of at the lower end in terms of where it's trading multiple wise.

Yes. Damian, I'll answer that question. Yes. First of all, from a real estate perspective, we do own most -- all of our assets as you know. On an annual basis, we look at real estate -- different alternatives of what might -- we might be able to do with that to create shareholder value. So not only do it on an annual basis, we've gone out to 3 separate companies to do that evaluation. So having said that, however, with the new tax reform in play, that will be a program that we will look at again over the course of probably the next quarter here, by the next couple of months, and have that evaluation. So yes, the answer to your question is, yes, we are looking at that. But that was not contemplated, however, in the analysis on the value-creation plan.

Okay. And then this prepared food, a few key different answers that you gave. But I mean, is there a way to generalize? Is it the weakness in the consumer, specifically the farm-related consumer? Or is it really that the areas that you're competing are overbuilt in terms of QSR units?

Well, I'm not sure I would characterize an overbuilt. Keep in mind, most of our stores are rural communities throughout the Midwest. So I would say there are definitely communities where there is might be a -- arguably an oversaturation of QSRs. That could definitely be the case. I'll point you to an article here recently in The Wall Street Journal. It was about a week ago, front page, maybe you've read it. There's a very large article about how farmers here in the Midwest are having to take second and third jobs just to stay on the farm. I encourage all of you to read that. When you see those farmers making quotes, we had stores in every one of those communities. [indiscernible]

And then you saw this same thing back in 2009, I think you said. I mean, what turned it? Was it the farmer coming back that really [indiscernible]?

Yes. I'd have to go back specifically with all the aspects on that. When you think about what happened back in 2009, that almost coincided with the economic downturn of the company. Inflation came into play, commodity prices started to rise and, therefore, the farmer became a little healthier. So...

And that does conclude today's Q&A session. I'd like to turn the conference back over to Terry Handley for the closing remarks.

Thank you, and I would like to thank everyone for joining us this morning and close the call by reiterating our key initiatives to drive shareholder value. Number one, positioning Casey's for accelerated growth and improved profitability through our enhanced store performance plan. Number two, continuing our strong track record of delivering value to shareholders through our disciplined capital allocation strategy by prioritizing high-return growth and profitability initiatives. And finally, number three, the employment of our 3 new independent directors to our board, coupled with significant enhancements to our corporate governance profile and shareholder rights' practices. We strongly believe the combination of these actions will unlock significant value for our shareholders. This concludes our call for today. We look forward to continuing our dialogue with our shareholders and updating you on our progress. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a good day.