Good day, ladies and gentlemen and welcome to Casey's General Stores' Second Quarter Fiscal Year 2019 Earnings Conference Call. At this time all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Bill Walljasper, Chief Financial Officer. You may begin.

Good morning, and thank you for joining us to discuss Casey's results for the quarter ended October 31st. I am 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 this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements related to our 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 or to realize benefits from that 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. This morning, Terry will first take a few minutes to summarize the results of the second quarter and then provide an update on the progress with our value creation plan. We will then open for questions about our results. I would now like to turn the call over to Terry.

Thanks, Bill, and good morning, everyone. As most of you have seen in the press release, diluted earnings per share for the first quarter were up over 40% to $1.80, compared to $1.28 a year ago. The results were primarily driven by increased control on operating expenses, margin gains both at the pump and inside the store, as well as operating 94 additional stores from the second quarter last year. We are on schedule with the execution of our value creation plan and very pleased with the continued progress as I will share late in this commentary. I would now like to summarize our results and some of the details in each of these categories. In the Fuel category, we continued to build out our retail fuel team in preparation for the launch of the formal price optimization program following the conclusion of the current 100 store pilot already underway. The fuels team is working closely with store operations to assume a proactive and balanced approach to our retail fuel pricing strategy. We achieved an average margin of $0.20 per gallon for the quarter, and drove a 7.2% increase in gross profit dollars from the fuel category. Same-store gallons sold in the quarter were down 1.1% due to our optimization efforts in the category, as well as softer demand. The average retail price of fuel during the quarter was up $0.40 to $2.73 per gallon from the previous year. We believe the higher retail price environment during the quarter and over the past six months is contributing to the downward trend as vehicle miles traveled during the period. Vehicle miles traveled were down approximately 0.6% in September with preliminary estimates for October being down over 1%. Despite that decline in same-store gallons, total gallons sold for the quarter were up…

Thanks, Terry. On the income statement, total revenue in the quarter was up 17.8% to $2.5 billion, primarily due to rising retail fuel prices, and an increase in the number of stores in operation in this quarter compared to the same period a year ago. Depreciation in the quarter was up 13.3%, primarily due to capital expenditures for growth over the past 12 months. The effective tax rate for the quarter was 26.5%, down from a year ago due to the Federal Tax reform. We continue to expect our effective tax rate for fiscal 2019 to be between 24% and 25%. Our balance sheet continues to be strong. At October 31, cash and cash equivalents were $51.9 million. Long-term debt net of current maturities was $1.3 billion. Our trailing 12 month debt-to-EBITDA ratio dropped to 2.5 times as the recent new store openings and previously mentioned operational improvements at our existing stores contribute to growth in EBITDA. At the six months mark, we generated $304.3 million in cash flow from operations with capital expenditures at $201 million compared to $271.6 million a year-ago in the same period. Adjusted EBITDA grew nearly 15% in the quarter and is up 9.4% year-to-date. We expect capital expenditures to increase in subsequent quarters as new store construction continues. Our capital expenditure estimate remains at $466 million for fiscal 2019. I would now like to turn the call back over to Terry to update you on our unit growth and the progress with our value creation plan.

Thank you, Bill. Our store growth target this fiscal year is to build 60 stores, and acquire at least 20 additional stores. At the six months mark, we had opened 25 new store constructions, acquired three stores, and have 23 additional stores under agreement to purchase. Currently, we have 36 stores under construction with an additional 95 sites in our land bank. We are on track to achieve our unit growth target and believe we are positioned well for future growth. I would now like to provide an update regarding the value creation plan. As a reminder, the multi-year long-term plan is comprised of several key programs and value drives including a new fleet card program, retail price optimization and digital engagement transformation, as well as continued focus on controlling operating expenses and capital allocation. We are confident these key areas of focus will drive accelerated growth and profitability and deliver increased return for shareholders. We have completed several key milestones over the course of the last quarter. I will begin with the new fleet card program. We launched the new program in late October. Although still early in the process, the preliminary results show that we are on target with over 300 new accounts and 300 or excuse me, 3,000 cardholders. We expect to begin to see the benefits from this program in Q3 of fiscal 2019. In addition to the fleet card program, we are busy executing on our fuel product optimization plan. Year-to-date, we have converted 592 stores to biodiesel and 144 stores to premium or diesel. By the end of Q3, we plan to add premium or diesel to a 172 additional stores. Diesel, biodiesel and premium fuel, all carry a higher margin than other fuel products. We believe these will have a positive impact to…

[Operator Instructions] Our first question is from the line of Christopher Mandeville from Jefferies. Your line is open.

Hey, good morning. Thanks for taking my questions. Bill, just starting on the OpEx growth for the quarter itself, 6.6%, really impressive results. What if you could just dig into that a little bit further, I appreciate the decline of 4.4% on a same-store sales basis for labor hours, but was there anything to the total number that would be classified as maybe a one-off or simply related to timing? And then, I suppose, you didn’t necessarily adjust your full year guidance of 8.5% to 10.5% for OpEx growth? Can you help us think about the back half of the year and any reason to believe or to think that OpEx growth will actually accelerate meaningfully beyond just the simple addition of new units?

Yes, I will see if I can grab all those questions in there, Chris. Yes, you are exactly right. 6.6% for the quarter is really combined. The majority of that roughly about, about 4.5% to 5% that has to do with new store units coming online. The remaining part of that has to do with the same-store and the driver of that reduction was that 4.4% reduction in store labor hours. Now keep in mind, part of that also, Chris, was the changes that we undertook back in the fourth quarter with respect to 24 hour reductions in pizza delivery reductions. So if you actually exclude those out of that 4.4% same-store hours excluding those 24 hours pizza delivered were about 2.8%. So, to answer the second part of your question there, so we will be cycling over that in the fourth quarter. And so, that benefit that we are seeing on the operating expense side because of that, again we’ll cycle over in Q4. So, we do anticipate coming up from that 6.6% in relation to that. Outside of any one-time events, there are really no other one-time events that ran through there. Insurance within operating expenses for the quarter were I would say, normalized. You might recall, we called that out in Q1 at somewhat of an anomaly. So that was back to a more normalized basis. Again, that can ebb and flow. That’s a little bit harder to predict as we move forward. But that’s some highlights for operating expenses.

Okay. And then, I guess, a follow-up to that would be just where credit card fees fell out on the quarter?

Yes, credit card fees from a dollar perspective were 37.3%. Excuse me, $37.3 million, they were up about a mid-teens from a percentage. They actually moderated towards the back half of this particular quarter as retail fuel price started pulling back roughly about mid-October. So that could be a – yes, if retail fuel price continues to moderate, certainly we will see some benefit in the moderation of that particular line item in the operating expense.

Okay. And then, just thinking about the in-store dynamics here, year-to-date, both in grocery and in previous margins, either at the high-end or above your actual guidance range and with where cheese prices are standing today at, it looks like about a $1.65 per pound. How should we think about the back half of the year and your ability to lock in more favorable pricing? And anything that we should be mindful of in terms of anniversaries in in-store, as well?

Yes, I mean, that’s a good point. Right now we didn’t call out. Terry called out some commodity prices. Right now, as you know, we are locked in our cheese through the end of this month. Cheese pricing on the market right now is favorable. We are currently looking at opportunities to extend lots of our cheese. Have nothing to report at this point. We will continue to monitor that. The other commodity prices are more favorable, more secondary in nature. But definitely were a contributor to the margin side of that. I will say, there is seasonality inside the store from our margins. So, if you look back at Q3 and Q4, we typically had a lower margin in Grocery and General Merchandize and prepared food because of that factor, which is one of the reasons why we didn’t pull down the margin guidance in those two respective categories.

Sure. That makes sense. Last one from me. Just with respect to fuel margins and how robust they were in the quarter and now they’ve even strengthened quarter-to-date. Have you seen anything in terms of within the market competition becoming a little bit more aggressive on discounts of, say $0.05 to $0.10 off type of promos to drive traffic? Or is everyone been largely pretty rational?

I would say the latter is probably correct, there, Chris. It’s little bit more of a rational pricing environment. There continues to be pressure in the industry and typically the fuel area is where some of the smaller operators or other operators in general will offset that pressure. So, we haven’t seen any marked change in a response to some of the actions that we are taking at this point. But that’s something that we are going to continue to monitor going forward. And as Terry did mentioned, certainly, in November, the fuel margin certainly is, I would say substantially above our current guidance.

All right. Well, much appreciated. Congrats and best of luck in the back half of the year.

Thanks, Chris.

Thank you. The next question is from the line of Kelly Bania of BMO Capital Markets. Your line is open.

Hi, this is David Lantz on for Kelly Bania. Thanks for taking our questions.

You bet, David.

So, with another quarter of really solid fuel margins, I was wondering if you guys could give a little bit more color on kind of the trade-off between fuel margins and gallon comps. And maybe if you could explain little bit on some of the fuel margin initiatives that you’ve talked about in the past and how they play into that relationship?

Yes, great question, Dave. So this is that a dynamic that sometimes gets lost when we look at the fuel category. And so, as you know, from the press release, we did reduce our same-store gallon guidance, but we did increase our margin guidance. And so, I think what you are to is this, for us, to gain one penny in fuel margin, we actually could give up roughly 4% to 5% in same-store fuel volume to breakeven. So, right now, we are undergoing through this pilot program that Terry mentioned trying to find that optimal balance. One thing I will point out is even though we’ve had a little bit softer same-store gallon movement here in this quarter and really quite honestly in Q1 relative to maybe some previous quarters back in fiscal 2018, inside same-store traffic continues to be roughly the same. So, we are monitoring that. So we certainly don’t want any degradation inside of our stores and certainly we haven’t seen any seeming pullback in same-store movement in that regard. So, that’s what we are trying to achieve in the fuel category. Hopefully that answers your question.

Yes, that’s great. Thank you. And just on another – I know you’ve said kind of the conversion of stores to biodiesel, I think you said 592 so far and 144 to premium or diesel with another 172 to come this quarter. Could you help us think about kind of quantifying that benefit to margins and how some of the stores are – like specifically performing versus the stores that have not been converted?

Well, I may not be able to give you the specific information on a store-by-store basis. But coming into the fiscal year, this product optimization initiative with respect to the comments that Terry mentioned, we anticipate the result of those in fiscal 2019 driving roughly about 20 basis points of margin improvement.

Okay, thank you very much.

You are welcome.

Thank you. And our next question is from the line of Karen Short of Barclays. Your line is open.

Hey, thanks for taking my question. Just a quick clarification. What is your inside traffic today running at?

Inside traffic is flat to slightly down.

Okay.

Now that – to clarify that, that excludes, Karen, that excludes commission sales and excludes fuel sales. Overall same-store customer traffic is slightly up.

Okay, okay. That makes sense. So, I guess, I wanted to focus a little bit on fuel for a second. So, any early read on the fleet card? You obviously gave us new accounts in cardholders, but any color on lift to the in-store comp with these users? And then, on fuel, the second which I had is, any read on the potential benefit to gas margins from the rollout of biodiesel and premium?

Yes, so the first part of that, we started our new – the launch of the new fleet card program in October, roughly October 20. So, obviously, the benefits were not being in the second quarter of this fiscal year. As Terry mentioned, we just start seeing some of those benefits rolling into the Q3 and beyond. Coming into the fleet card program over a 12 month period, so basically Q3 to Q3 of next year, we planned on that program having lifting gallons roughly about 200 basis points. Now keep in mind that if the underlying macro demand continues to be softer, that will be a harder one to see. It’s worth to call that out as we move forward. I will tell you and just to reiterate to Terry’s comments, those 300 plus accounts that we have signed up in over 3,000 cardholders are certainly on track to what we expect to achieve that number I just mentioned.

But what about the in-store lift is actually what I am asking about, because obviously, I think you’ve given some metrics that typically that would result in a 2% to 3% in-store lift with competitors that don’t offer prepared food was I think a metric.

Yes, there is nothing right now that would give us pause, so that we are not going to see an inside lift as we get more traction in that program. But, right now, only being in roughly - in the program, roughly a month we can’t really call out anything at this point. Real too early.

Okay. And I guess…

But I would say this, Karen, expect us to have more commentary on that at the next conference call.

Okay. And then, I guess, just looking at fuel overall, I mean, obviously, maybe you are getting more metrics in terms of the customer that is coming to your store exclusively for in-store purchase versus the fuel, but I guess the concern would be, is that you are managing fuel margins more than managing fuel comps and in the past, you’ve relied pretty heavily on the conversion from the pump into the store. So, I guess, my question is that, that seems to be less of a concern for you today than it has been in the past. So, maybe can you give a little context on that? And then, I guess, bigger picture, can you really make the rest of your goals in terms of general merchandize comps and prepared food comps, if you don’t achieve your 4% fuel comp goal for 2021?

Yes, so, I think, coming into the guidance that we gave for the value creation plan, it was one of those items that we weren’t quite sure what product optimization would bring. Whether that would bring more same-store movement or whether it will bring more margin enhancement. And so, as we get further along in the piling of the both the fuel price optimization and optimization of the size, we began to realize that there is probably more opportunity on the margin side to drive gross profit dollars. So, right now, the key for us is to have the balance of managing the gross profit dollars within the fuel category not to degregate inside the store. And so that’s what we are looking to over the next several quarters to find that right balance. The two will play-off each other quite nicely in our opinion.

Okay. That’s helpful. Thanks.

Thank you.

Thank you. And our next question is from the line of Bonnie Herzog of Wells Fargo. Your line is open.

All right. Thank you. Good morning.

Hi, Bonnie.

Hi. I had a question also on your lower fuel gallons in the quarter and then maybe the outlook. First, I think you mentioned, much of the softness was due to your fuel optimization as well as some weak consumer demand. So I just wanted to see if I could hear from you guys, what had the bigger impact on the lower fuel gallons? And then, you mentioned you still expect your new fleet card program to have the same impact as before. So I guess, I am just trying to understand how you reconcile this with, maybe what you are seeing in terms of the lower consumer demand?

Yes, so, I’ll try to – I’ll try to pull all that together, Bonnie and probably even a follow-up to Karen’s earlier question. So, when you look at the same-store gallon movement downward, one of the things that I do want to reiterate is, the move that we made back in Q4 with the reduction of 24 hour stores to pizza delivery stores. And so, when I look my fast-forward and look at the 1.1% decline in same-store gallons of Q1 – excuse me, Q2, roughly half of that has to do with the 24 hour reduction. And so the remaining piece that is split relatively equal between the two dynamics you mentioned both the price optimization and softer demand. And taken that even a step further to your question and Karen’s question on same-store sales cadence moving forward, roughly about 1.5% of the downward movement in grocery and other merchandize comp and prepared food comp has to do with those 24 hour pizza delivery movement that we made a year ago, or roughly almost a six months ago, I guess. So, the reason I bring that up is, so, when you get into Q4, we are going to cycle over that and so, even that obviously we are getting a benefit on operating expenses now for that, you will see a flip in operating expense as well as the flip in the back half of the year with that rollover.

Okay. Now, that’s a helpful color. And then, curious to hear from you, have you seen any change in traffic, consumer trends as gas prices have been coming down recently?

It’s pretty early, because that change and as you know just happened in the latter part of October and into November. But I will say gallons per transaction, we are definitely seeing an upwards movement towards the back half of November here and so we will continue to monitor that. So there definitely could be an upside potential with respect to same-store gallons as we head into the back half of the year.

Okay. And then, I guess, my final question would be on some recent regulations by our FDA on restricting e-cigs flavors. So, I’d be curious to hear from you guys how you see this potentially impacting traffic and/or basket size in your stores as that gets implemented?

Yes, yes, couple good questions there. I think you are referring to Juul’s product and then also some potential commentary around menthol. But Juul I think is the main question you are asking, so.

Yes.

Juul has certainly been a category in our other tobacco product line that has gained quite a bit of traction over this fiscal year. I would say, overall, it’s not a material amount when you roll that up with respect to an annual number. However, it’s certainly is a piece of some of the gains that we are seeing on the comp side of that. So, as we move into this end of this year, we will certainly update our guidance to reflect that and we have updated some of the guidance with respect to some of the flavor profiles and Juul in the back half with our expectations. On the menthol side, that’s one of those things I think, right now, it’s going to impact us in fiscal 2019 and as we look at our fiscal 2020 operating plan, we will incorporate any changes that particular product might have in the next fiscal year. But that particular one may take quite a while if at all coming to fruition.

Correct. Yes, exactly. And then, I guess, just finally, maybe drill down on some of your key merchandize categories. You did call out that both packaged beverages and I believe tobacco performed quite well for you in the quarter. Any other color specifically on what really performed well?

Yes, yes, yes, certainly couple colors. On the packaged beverage side, when we look at in energy drinks, sports drinks and the tea, all of these were up on a same-store sales basis mid to high-single-digits in the quarter. Those two carry significantly higher margin in the category as a whole which is to that commentary that Terry mentioned about product getting shift to the margin. As part of that, Juul will be also be part of that product mix shift as well. Just that commentary, excluding cigarettes, if you look at same-store sales, excluding cigarettes, we would have been up about 4.5% in the second quarter.

Okay. All right. Thank you very much.

Yes, you bet.

Thank you. And our next question comes from the line of Paul Trussell of Deutsche Bank. Your line is open.

Hey, good morning. I wanted to circle up on some of the comments you made I think in grocery around more favorable margins with product mix and with promotion optimization helping you guys out and also if you could touch on, what you are seeing from some of the strategic price increases you made earlier in the year in prepared foods and other areas?

Okay. Yes, on the grocery and general merchandize that the product mix shift we are talking about really comes from two areas. One would be some of the products that we just mentioned in the packaged beverage area, the sports drinks, energy drinks and the tea certainly have seen a movement – a strong movement in those areas over the last quarter. Also, the product called Juul in the other tobacco area for our business certainly has gained some popularity over this last six months, as well as the last three months. And so, certainly those two combined, probably the primary reasons that we talked about in the product mix shift. On the promotion optimization, these are things that we are doing ahead of the formal price optimization with Dunnhumby inside the store for grocery and general merchandize. These are things that just looking at some of our promotion activity like the buy two, get one free type promotions and seeing whether or not these really driving any type of gross profit dollar movement. And so, we are doing a little bit better job of managing those and because of that, we are seeing less margin degradation from prior periods. As far as the strategic price increases, those are specifically to the prepared food category. We’ve taken two of those in this fiscal year. One we took in May and the main piece was on pizza slices. That was the main one there. And then the one that we took in July was on donuts. We actually increased the size of our donuts at the same time, we elevated the price to have a value proposition to our consumer. And so, right now, we haven’t seen any type of elasticity with those price increases. But we’ll continue to monitor that.

Helpful. And you obviously are rolling out the redesigned App and will roll out the loyalty program. Just curious if you can give a little bit more color on that loyalty program and what your expectations are, once it’s fully rolled out?

Well, the digital transformation certainly is the key area for us when it comes to value creation plan. And the future lifts in revenue and if you look into the back half of fiscal 2020 and then into fiscal 2021. And so from a loyalty program, Paul, I'll take a step back, probably five, six years – roughly thereabouts when we rolled out the fuel saver program in partnership with a local grocery store chain. We saw how that type of loyalty program resonated with our consumers, and felt like we could have a similar type of loyalty program inside the store in other products. We currently do not have a loyalty program and we feel very excited about the opportunity that that will bring. And I would say, one of the unique areas that I think we have to offer from a loyalty program relative to some of our peers are the fact that we really have three main areas to play-off. We have the fuel category to play-off of. We have grocery and general merchandize and we have a prepared food offering, which is a little bit different when it comes to maybe a fast-food chain or a fast casual chain that just relies on one dynamic, that being their food program. So we are excited about that. We want to make sure we get it right. And that’s why we are taking the time in the pilot in the back half of this year to be prepared for fiscal rollout in Q1.

Great. Thanks. Best of luck.

Thanks, Paul.

Thank you. And our next question comes from the line of Ben Bienvenu of Stephens. Your line is open.

Hey, good morning guys.

Hey, Ben. How are you?

Pretty good. I wanted to ask a follow-up question on Chris’ question about cheese cost. So, in the event that you are successful in locking cheese in a more advantageous price, would your inclination be to let that margin benefit flows through? Or put some of those margin dollars into promotion to drive comps? Maybe some color there on how you think tactically about deployment of margin benefits?

That’s a great question, Ben. And certainly it’s a favorable cheese environment right now even if we did not lock in and just went up on a spot market is favorable for us. We are likely to not – I would say this, traditionally we have let that flow through to the margin. Now, we do have a new chief marketing officer and he may want to utilize some of that for his promotion activity in the back half. If we do that, certainly, we will let everybody know that’s the direction we are heading. But, as of right now, in this past quarter, we have not seen any increased promotional activity from a competitive landscape. It’s still competitive, but there has not been a dramatic change. And so my hunch is, we will let that pass through the margin.

Understood. And then, another follow-up on biodiesel and premium. You gave us the – you gave us the number of stores that you’ve added those offerings to. What’s the total opportunity across the store chain? And then just broadly, what are the counts in entirety across the store chain?

Yes, so once we get through the third quarter with the numbers that Terry mentioned on the – I mean, right now, the biodiesel is really only for Iowa and Illinois. So, we are pretty much where we are at. There we will add a few stores through, but I don’t think they will be meaningful going forward. With respect to the premium or diesel conversions, once we get through Q3, I think we will be at a good position and then, from that point on, it will be just be kind of an as-needed basis as we get information from the field to make those decisions to pivot two different products. Now new stores going forward, we will have those products. But I think it will be in a good spot to kind of stabilize at the end of the third quarter.

Okay, great. And then, with respect to EMV, what dollar amount of your CapEx have you earmarked for that spend and upgrade? And then, kind of, over what timeframe do you expect to implement EMV at the pump?

Yes, so, EMV will, I think that, at October of 2020, if I remember correctly, is when that switch flipped and really it’s not a mandate as you know, Ben, it’s just where the liability assumption shifts and so, most of the EMV CapEx will be in fiscal 2020 and beyond. Right now, we are trying to make a determination whether or not all of our stores need to have that at the pump or whether we just select one that we feel are probably more appropriate given the risk profile.

Okay, thanks. Congrats, good luck.

You bet. Thank you.

Thank you. Our next question is from the line of Damian Witkowski of G. Research. Your line is open.

Hi, Damian.

Hi. How are you? Could you remind me, e-cigarettes as Juul or whatever other brand, how big of a part of your inside store sales of cigarettes or tobacco sales overall? What is it these days?

Are you specifically asking about the Juul product or just?

I guess, just the e-cigarette products, I mean, how big of a percentage?

Yes, it would be a low-single-digit contributor to the overall category. So, that’s why – it’s not very material amount at this point. But gaining traction.

And then, Dunnhumby, is that, how long that you’ve been working with them?

We just came on an agreement with Dunnhumby within this last six months period.

Okay.

And so, it’s relatively new. And so, we are excited about they were the leaders in this particular area. So we are excited to partner with them and move forward the testing on price optimization inside the store in the back half of the year.

Is there any exclusivity in the convenient store channel that comes along with that or?

Well, I am not sure about exclusivity. I mean, obviously we’ve signed agreements. So, we are partnered with them for this particular piece of the value creation plan.

Okay. And then, just lastly, the fuel optimization, what is the, what do you think the response will be from new competition? I mean, you can sort of draw up a scenario where it could be a positive and where if they are looking to you as the market leader to do their own pricing as your price moves up in certain markets. Do you think they will try to move their price along with you or do you think they will go lower it than try to lose share?

I would say, for the most part, at some point in time, they will make the adjustment upward. But keep in mind, price optimization in the fuel category sometimes moving price up, sometimes it’s moving it down and so the dynamic of how they will react maybe little bit different in a market-to-market area. But I would venture to guess that some point they will make that move upwards. And I would say this, Damian, one of the – I think one of the advantages from a strategic perspective that we would have over some of the smaller operators and keep in mind, about two-thirds of the operators have C stores in our market area are operators of ten stores or less. They would not have the sophistication of price advantage from an optimization standpoint and that’s where I think we have an advantage moving forward.

Okay. Thank you. Congratulations.

Thanks, Damian.

Thank you. And our next question is from the line of Irene Nattel of RBC Capital Markets. Your line is open.

Thanks and good morning, everyone. Couple of questions if I may.

Hi, Irene.

Good morning, Bill. Good morning, Terry. Just, looking at the performance, obviously, challenges from a macro perspective with foreign income. Any differential in performance or what you are seeing in your more established markets, versus some of the newer markets that you are going into?

Yes. I would say, one of the call outs that I would bring is this, some of the newer markets that we are seeing, I mean, you probably noticed that the overall total volumes across the categories were certainly strong relative to the same-stores that we reported. That’s a function of the newer stores that are primarily in some of the outer – I guess, the outer rim of our territory, if you will have been performing from an economic perspective ahead above our expectations. That leads us to believe that our brand recognition is becoming stronger and stronger as we continue to penetrate some of that – some of those outer territories. And so, that was very encouraging for us.

That’s really helpful. Thank you. And, what kind of conversion are you seeing from forecourt to backcourt in some of those newer markets?

It’s a little bit hard for us to tell at this point. We probably don’t have a very concrete answer, Irene until we get the digital transformation up and running. And the reason I say that is, it’s really challenging for us to identify customer that clears that transaction at the pump with their credit card and then comes in and pays cash for an item. Right now, we can’t connect those. But with the continued traction and roll out of the fleet card program, and in the roll out of the loyalty and digital program, we will be in a much better position to answer that moving forward and then play upon that particular dynamic.

That’s really helpful. Thank you.

You are welcome.

And then coming back to Dunnhumby, lot of things that Dunnhumby does really, really well is around basket analytics and through really classifying customers and enabling you to get more effectively both within the context of the specific loyalty program, but also without. Are you going to be doing all of that kind of work with Dunnhumby, as well?

Absolutely. Actually, at the end of the day, that’s the information that we are looking to gain. So we can take the targeted marketing to customers to a new level and be able to really play upon customers’ preferences and demands to drive incremental traffic.

That’s great. That’s very, very helpful. And just one final question if I may. Within the other tobacco products category, excluding e-cigarettes, what are you are seeing on the smokeless side?

I don’t have a specific number right now. But, certainly it is gaining traction well above cigarettes as a whole. And so, when you look at the other tobacco category, which is obviously the e-cigarette, cigars, as well as some of the other, like Juul for instance, all three of those are performing very well.

That is great. Thank you.

You are welcome.

Thank you. And our next question is from the line of Chuck Cerankosky of Northcoast Research. Your line is open.

Good morning, everyone. Nice quarter. Congratulations.

Thank you.

Bill and Terry, when you are using the gas price optimization program right now in this stage, how sensitive or good are the controls? For instance, were you aiming for, say, a half percent decrease in comp gallons and got 1.1% and better margin or is it more sensitive to that? Can you give me an idea of what you are able to aim for at this point?

So, that’s part of that 100 store pilot that Terry addressed in the commentary. So, that pilot is enabling us to get that very sensitivity. I can tell you, right now, some of the things that we are seeing preliminarily from the results is, every quarter we are going to have ups and downs with respect to margins. And so, as we make more and more price adjustments, this last quarter relative to Q2 of last year for instance, we are mitigating the valleys or the downward movements of that margin. And so, we see that very clearly as we look at the pilot. But to get to the dynamics that you are talking about, again, that will be over the course of this particular program to identify the targets for each particular store.

Bill, are you extending this effort beyond the pilot stores, so that you are trying to glean some relationships from it in a 100 stores. But at this point applied some of it to the remaining fleet?

The answer is – the short answer is yes. And so that 100 store pilot, we are certainly trying to identify outliers there. We have that pilot in a number of different areas or regionalities around our network to try to identify where the better opportunities might be to help us to target that moving forward. And so, we will continue to refine that over the next, probably, two three months. And then as we talked about, start that roll out towards the back half of the fiscal year.

And I would conclude, at the same time you have your eye on how it’s affecting in-store traffic.

Yes, absolutely. That’s a sensitivity for us. So, obviously, we don’t want to have any degradation of volume inside the store. And so, you probably have noticed, Chuck, if you go back and look at Q3 and Q4 of last fiscal year, we had relatively robust same-store gallon movement and you fast-forward to last few quarters, where we are actually a little bit softer. And you look at the inside sales movement, it’s pretty comparable. So, we are not seeing necessarily anything that would give us pause at this point.

All right. Thank you very much.

Thanks, Chuck.

Thank you. [Operator Instructions] Our next question is from the line of Anthony Lebiedzinski of Sidoti and Company. Your line is open.

Good morning and thank you for taking the questions.

You bet, Anthony. How are you?

Good, and yourself?

Very good. Thanks.

Okay. Very good. So, as far as prepared foods, I just wanted to ask if you are planning to do any additional price increases.

Currently, we don’t have any plan for the back half of the year. I think that decision will probably come about if we see opportunities. But right now, there is nothing planned.

Got it. Okay. So, you guys mentioned earlier that, you have signed up so far 3,000 new fleet cardholders. I was just wondering if you know or have the ability to know how many of these are incremental new customers to Casey’s.

Yes, so, just to clarify, we have over 300 accounts which represent roughly over 3,000 cardholders. And so, to answer your question, we don’t have exact information on that. However, during the application process, we do ask for information as to whether or they are a current customer of Casey's General Stores. So, as we get further along with the roll out of this, we will roll up that detail and report on that at the next earnings call. But, to your point, it’s well taken that, we certainly expect to have some incremental – most of it’s going to be incremental. But we do expect some that are current customers transitioning over to this fleet card.

Got it. Okay. So, you are capturing that data, okay. So, perfect. Okay. Also, I was just wondering, in October, if there was any notable impact on traffic because of the big Powerball and Mega Millions jackpots to your stores? I know one of your stores actually was the sold these - the lucky ticket. So, just wanted to ask about that as well.

You are correct. Yes, we did had some pretty large jackpots. We actually called it out in a 10-Q there. The answer to your question is, yes. Anytime you see a jackpot that gets to that level, we are going to have more foot traffic coming into the store. Many times though, they are just there for one reason as to buy those tickets. And so, definitely did have foot traffic in there. And so, if you look at the other category, you probably noticed that that was up Q2-over-Q2 and that’s related to the increased commission sales on lottery tickets.

Got it. Okay. And so, as you guys continue to expand your store count, how are you able to find qualified store managers in the tight labor market that we are in right now?

No, that’s all has been – I’ve been around 29 years and I’ve spent some time in human resource and that’s always been a challenge for us no matter what the market conditions are as to find quality store managers and then quality entry-level type people at the stores. And so, it’s always a challenge. We do have a much more robust training initiative to help that transition. We have recruitment team now dedicated in that area as well. Lot of times we look at inside our current stores that are close by looking at the system manager pool, as well and to try to do that. But we continue to move forward and that will always be a focus for us.

Got it. And lastly, how should we think about share buybacks. You did not purchase any shares in this just reported quarter. Do you expect to be active in the back half of fiscal 2019?

So, you are correct. We did not purchased any shares in Q3. Currently, we are in Q2 – excuse me. In Q3, currently we are not anticipating to have any additional share buybacks as we continue to roll out and gain traction. Several of the analysts noted that certainly free cash flow is moving upward. That’s one of the areas of focus that we have, also the 12 months trailing return on invested capital is rising as well. So, these are areas of focus we like to continue that trajectory. But we still have other authorization out there and as a reminder that was a two-year authorization.

Okay. Well, thank you and best of luck.

Thank you, Anthony.

Thank you. And our next question is from the line of Ben Brownlow of Raymond James. Your line is open.

Hey, good morning and thanks for taking the question. You previously mentioned the healthcare plan and reevaluating that plan as we approach calendar year 2019. Any anticipated benefits there or change to the program?

Yes. So, our healthcare plan rolls on a calendar year. We are just rolling up the enrollment for the next calendar period. So once we get that up, we will make a – we will certainly maybe report on that in the next call. We did make some significant changes to the dynamics of the plan that could have some upside potential for us as we move into the back half of this year, primarily more for next fiscal year.

Okay, great. And just want to confirm one number. I think you said previously the cut to labor hours is 4.4% and excluding the 24 hour and delivery cuts, it was down 2.8%, is that correct?

Yes, that’s correct, yes.

Great. Thanks for that. Thank you.

Yes, you bet.

Thank you. And that does conclude our question and answer session today. I would like to turn the call back over to Mr. Terry Handley, CEO for any closing remarks.

Yes, thank you. I would like to thank everyone for joining us this morning and would like to close the call by reiterating our key initiatives, our design to position Casey’s for accelerated revenue growth, and improved profitability through our long-term value creation plan. This will be done through a disciplined capital allocation strategy that focuses on prioritizing high return growth and profitable initiatives. We strongly believe the combination of these actions will continue our long-term track record of driving shareholder value. Thank you.

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