Good day ladies and gentlemen and welcome to the Casey’s General Store second quarter fiscal year 2022 earnings conference call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. To ask a question, you will need to press star and then one on your telephone. As a reminder, this call is being recorded. If anyone should require Operator assistance, please press star and then zero. I would now like to turn the call over to Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead.

Good morning and thank you for joining us to discuss the results from our second quarter ended October 31, 2021. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today is Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. 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 relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company’s supply chain, business and integration strategies, plans and synergies, growth opportunities, performance at our stores, and the potential effects of COVID-19. 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 but not limited to the integration of the recent and pending acquisitions, our ability to execute on our strategic plan or realize benefits from the strategic plan, the impact and duration of COVID-19 and related governmental actions, 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. A reconciliation of non-GAAP to GAAP financial measures referenced in this call, as well as a detailed breakdown of the operating expense increase for the second quarter, can be found on our website at www.caseys.com under the Investor Relations link following this call. With that said, I would now like to turn the call over to Darren to discuss our second quarter results. Darren?

Thanks Brian and good morning everyone. We’re looking forward to sharing our results in a moment, but I’d like to start by thanking our 43,000 Casey’s team members for their tireless efforts as we look to overcome the ongoing challenges with COVID-19 and the resulting supply chain issues. Our team members have done an outstanding job navigating this new and difficult situation, and the team’s ability to perform under the circumstances is something I’m especially proud of and grateful for. At Casey’s, our purpose is to make life better for our communities and guests every day. I’m proud to report that we continued to make excellent progress in this regard during the second quarter. This quarter, Casey’s Cash for Classrooms giving campaign raised nearly $1 million to support local schools in our communities through grants, thanks to our generous guests and passionate team members. These grants will provide much needed funds to local schools and the communities where we operate. Then in November, Casey’s held a veterans-focused giving campaign in partnership with PepsiCo to raise funds for organizations providing assistance to veterans and their families. As a veteran myself, I know the great sacrifices these families have made and the challenges they face. This year’s campaign raised nearly $1 million that will help two outstanding organizations: Children of Fallen Patriots, and Hope for the Warriors. These funds will allow the charities to have an even greater impact on the lives of veterans and their loved ones. Thank you to our vendor partners, each Casey’s team member that made the donation ask in our stores, and especially to our guests who truly do good when they shop at Casey’s. Now let’s discuss the quarter’s results. As you’ve seen in the press release, we delivered yet another strong quarter. Diluted earnings per…

Thank you, Darren, and good morning. Total revenue for the quarter was approximately $3.3 billion, an increase of $1 billion or 47% from the prior year. This was primarily due to an increase of retail sales of fuel of $855 million, which was driven by a 15.8% increase of total gallons sold to 669 million gallons, as well as a 48% increase in the average retail price per gallon. The average price of fuel during the period was $3.06 per gallon compared to $2.07 a year ago. Reported fuel revenue results do not include the recently acquired Buchanan Energy wholesale fuel business, which is included in the other revenue category and is responsible for the vast majority of the $60 million increase that we saw in this quarter on that line item. Total inside sales rose 13.1% to $1.1 billion. Grocery and general merchandise sales increased by $111 million to $829 million, an increase of 15.5%. Prepared food and dispensed beverage sales rose by $21 million to $309.5 million, an increase of 7.2%. Please note that the reported figures are favorably impacted by 7.3% more stores that were operated on a year-over-year basis, though the prepared food and dispensed beverage was less favorably impacted due to the timing of kitchen installations and construction at our recent acquisitions. As a reminder, we define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey’s had gross profit of $718 million in the second quarter, which is an increase of $86 million from the prior year. This was driven by higher inside gross profit of $50.8 million or 12%, as well as increase of $27.7 million or 13.6% in fuel gross profit. Fuel gross profit benefited by over $6 million from the sale of RINs. All RINs generated…

Thanks Steve. First, I’d like to congratulate the entire Casey’s team for delivering impressive results in the second quarter. We couldn’t have done it without their hard work and dedication, and given the challenges concerning COVID-19, labor shortages and supply chain issues, we’ll continue to need their perseverance to perform at a high level. As you recall, the pillars of our strategic plan to deliver top quintile EBITDA growth are to reinvent the guest experience, create capacities through efficiencies, and to be where the guests is via disciplined unit growth. All of this is going to be driven by an investment in talent to strengthen the team and add capabilities to the business. With the recent large acquisitions completed and another deal pending, let’s start with being where the guest is. We made a commitment to add 345 units over a three-year period by the end of fiscal 2023, which is a 5% CAGR versus the starting point. We are now 18 months into the initiative and have added 195 units thus far, including 150 in fiscal 2022. On the horizon is the pending Pilot acquisition. We see the Knoxville, Tennessee market as a strategic fit within our existing distribution network, and it is an attractive midsized market that we expect our prepared foods to do well in. It also gives us immediate scale in Knoxville and expands our footprint in Tennessee. Overall, we are extremely excited about the potential for these stores. We are also highly confident we will achieve the 345 unit expansion we committed to. Our team has also done a great job integrating the Bucky’s acquisition. We have now completed 28 remodels with 10 remodels in progress. We plan to have all of the stores moved to our supply chain network by the end of the…

[Operator instructions] Our first question comes from the line of Karen Short with Barclays. Your line is now open.

Hi, thanks very much. I just wanted to go to the question that I’ve asked in the past. When you look at your opex growth versus your gross profit dollar growth, and I’m actually doing this on relative to ’19, not relative to last year, you’re definitely continuing to see a deterioration or a widening of that gap, meaning opex growing much faster than gross profit dollars in the store. Can you just talk a little bit about how you think that trajectory will look in the second half, and then I have one quick follow-up.

Yes Karen, thanks. This is Darren. I’ll go ahead and start and let Steve kind of fill in some details here. We still believe that we’ll be able to generate gross profit dollar growth in excess of our opex growth. I think the reality of it is we’ve got some timing issues as we continue to accelerate our store growth and add acquisitions. Those acquisitions come with opex to them, and so that growth starts to look outsized relative to the GP generation in the short term, and part of that is because when we acquire stores, one of the main synergies that we expect to achieve is layering in our prepared foods business, which is the most significant driver of our gross profit. So, in the short term, as we bring those stores on, we don’t have the prepared foods momentum yet as we have to remodel those stores, bring the kitchens in, train the people, and then we start to generate that gross profit. Ultimately, you start to normalize the opex effect of those acquisitions but you accelerate the gross profit generation of those vis-à-vis the prepared foods business, so that’s really how that equation will work. It’s just in the short period--in the short term when you first bring those on, you have a little bit of a mismatch there. I’ll let Steve talk about what our outlook is for the balance of the year.

Yes, I would just add, Karen, that certainly in the very near term in the second half, I do expect gross profit dollar growth is going to outpace operating expense dollar growth. It did not in the second quarter for the reasons that we talked about, and some of that is just the comps around opex growth are going to get a little easier for us here in the second year, so we’re lapping hard closures of operating hours in the prior year and then re-openings, and we have special COVID pay coming on and off in the prior year, which makes it very lumpy in terms of what’s happening with opex, but in the second half of the year as we sit here now, I think we’ve got a pretty good line of sight that gross profit dollars will consistently outperform from a growth standpoint, the operating expense growth.

Okay, that’s helpful. Then just on Pilot, wondering if you could give a little color on what you actually think the synergies will be. Obviously as you just commented on, some of the synergies will be coming from prepared foods, but if there’s any more granularity on that, that’d be great.

Yes, I think that is the true synergy. We do believe that making some investment in those remodels of those stores will help. Our merchandising team will re-merchandise those stores, and that always helps, and we have that experience from the other acquisitions. But clearly the largest synergy we expect to capture with the Pilot acquisition as well as virtually any acquisition we bring, is our prepared foods, and so as Steve mentioned in the opening remarks, they have very low penetration in prepared foods in there; and based on our experience, we know we can go in and significantly elevate that prepared foods experience.

I may add, I think we’ll find that our ability to merchandise on the grocery side within those stores is going to accrue to our benefit certainly over time, and then from a distribution standpoint, we will definitely get some further absorption of fixed costs within our system. We’ll continue to load the warehouse that’s closest to that part of the country, and then that will make the rest of our distribution network that’s much more efficient as well.

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.

All right, thank you. Good morning everyone. I also had a question on your opex, maybe a little bit of a different question. I’m just thinking about it and the opex per store was quite high in the quarter, again up more than 20%, with the bulk of it driven by new stores and then the higher credit card fees. But I guess I’m trying to understand the component coming from new stores and really what changed, especially since you did not open any new stores in the quarter. I guess Darren, based on what you said, is this just a function of you learning now that the new stores you opened earlier this year are now costing more to operate, and then if so, how should we think about the new Pilot stores that you’re going to be opening in Q3? Are those also going to have elevated opex? Thanks.

Well Bonnie, nothing’s really changed. I mean, what we said in the first quarter, we had a 24% increase in opex versus the prior year, and what we said in that call was that we would see a slight improvement in that opex in the second quarter, and then it would continue to get better, more substantially better in the third and fourth quarter, and that is in fact exactly what has happened. We were up 22% this quarter, which is slightly better than the 24% last quarter, so nothing’s really changed. Now in the current environment, certainly with labor shortages, wages have gone up, and we said our average wage was up 14% roughly. When we look at industry data in the hospitality and leisure and restaurant industries, retail industries, that average wage in the industry has gone up about 13.7%, so we’re right in line with where wages have gone, and so that has certainly put a damper on our opex. But again, with respect to the acquisitions, I think it’s played out exactly like we thought. Now, when we bring on Pilot, that’s another 40 stores that will come with 40 stores’ worth of operating expense with them, so that’s going to go up. We’ll have more fuel volume there, so credit card fees will continue to go up, and that’s going to be a function of the retail price of fuel as well. But because of some of what we’re cycling over from the prior year, we still are confident that those numbers are going to come down on a percentage increase basis versus the prior year. Steve, you want to--?

Yes, just to drill down on the cost of running the new and the acquired stores, in the first quarter when we did that bridge, and we have it on our website - you know, growth in M&A units contributed about 8% of year-over-year increase in total, and you may remember we didn’t close on the actual acquisition of these stores on the very first day of the quarter, it was a couple weeks after the quarter had started, and so now in the second quarter, we have obviously those units for the entire quarter, which is a couple of extra weeks, and we’ve got a 9% contribution to the operating expense increase. From my perspective, other than there’s a couple weeks of extra new unit costs, the second quarter cost of running them was largely the same. The other piece I would just call out is we still--in the case of Buchanan, we still have some synergies to pull out of the system that are in operating expense. That headquarters location, while it’s a lower staffing level than it was before, that’s not completely closed down. The warehouse that we’ve acquired from them will not close until the end of the calendar year, and so you’ve got some redundant costs that will be coming out of the system here quite soon.

Okay, that was helpful. Just maybe to clarify, so on the first half the opex was sort of in line with your expectations, but then you’re taking up your guidance for the full year just primarily because of maybe the Pilot acquisitions, the new store openings, and just the more expensive or inflationary environment. Is that how we should think about it for the full year?

Largely, yes. From my perspective, two things are changing. Pilot, if we close next week as we’re hoping to close, is probably going to bring somewhere in the neighbourhood of $15 million of incremental operating expense in the last five and a half months or so, five months of the year, so that’s an incremental change. Then the other one is for sure credit card fees are higher than we thought they were when we set this guidance out at the beginning, and that’s a function of higher retail, and so we continue to believe, and I think it’s worth stating that part of the reason CPG for the industry is hanging around the level it is, is because operating expenses are higher. There is a correlation between those two things, they just aren’t on the same line item, so for us there’s definitely more credit card fees that we’re going to see while retails hang out a $3 level than we had guided previously.

Thank you. Our next question comes from the line of Kelly Bania with BMO Capital. Your line is now open.

Hi, good morning. Thanks for taking our questions. I’m going to try ask a similar question, kin of in a different way here. I guess in terms of the operating expense outlook, so higher credit card fees, the Pilot stores rolling in, I guess just want to understand the underlying kind of core operating expense and that wage rate increase of around 14%, how is that tracking to your plan for the year and your underlying expectations, because to your point, I guess on the opex and the impact this is having on CPGs, trying to just understand how you feel about your total outlook for earnings or EBITDA this year and how that has changed, given these developments.

Yes, hey Kelly, good morning. This is Steve, I’ll start with that. Relative to how the cadence is going to work going forward with what I would call same store wage rate, is how I’ll answer that. Our expectation of that has not changed. I think we had a pretty good view, certainly three months ago, of what the wage pressure was in the market. I think we were saying similar wage pressures to what we are today. The biggest driver of the headline number for us is just the comp from last year, so if you think of what was happening in the prior year, at various points in time we had special COVID pay that was happening in the first quarter. We took that COVID pay off in the second quarter, and so when we have a wage rate that we’re paying today, it actually was a smaller delta in the first quarter because the prior year number was inflated because of that special pay. Even though the headline number we’re paying this number has not changed, the lower number from prior year is giving us a higher percentage. Then, we started to implement extra COVID-related pay in the second half of last year, and so again we’re not going to pay a higher wage rate necessarily in the second half of this year but the comp will get easier, and so the 14% wage rate that we referenced earlier, the dollars won’t change but that percentage will go down because we had a higher base in the second half of the prior year. So as a result--so the second part of your question, we haven’t guided for EBITDA for the year and we’re not going to do that, but our expectations haven’t changed. I’ll go back to the end of the question that Bonnie posed, is to the extent operating expenses are higher as an industry because of either wages or credit card fees, we believe that’s contributing to more sustained, higher fuel profitability for the industry, and to a large extent thus far, those two have kind of washed out by the time you get to the bottom line. I don’t have any evidence right now that that relationship is going to change in the near term.

Okay, that makes a lot of sense, very helpful. Then can you just also maybe elaborate on the price increases that you took? When were those, which categories are you seeing competitors also move in that direction, and do you have any plans for more?

Yes Kelly, this is Darren. Primarily on the grocery side of the business, the price changes have been taken in tobacco as we’ve had cost increases there. We’ve had some modest cost increases passed on in some other categories where we’ve done some fine-tuning from a pricing standpoint, and that’s in large part because we had already negotiated cost of goods through the balance of this calendar year, so we’re in the process now of finalizing cost of goods negotiations for the next calendar year. That’s on the grocery and general merch side. But as you’ve seen with our same store sales results relative to peers and others in the industry, we believe we are taking share and we’ve kind of confirmed that through some independent industry data that we’ve been able to look at, so we like our pricing position now and we certainly have the ability to take more price as needed. On the prepared foods side, we did take some pricing in the second quarter, late in the second quarter, and that was across a number of categories because we were facing some more inflationary pressures there, primarily on ingredient costs. As Steve highlighted with cheese costs, we had some--we had a little bit of favorability on the cheese cost side which offset the margin impact in the second quarter, but we went ahead and took the pricing anyway because we had the opportunity to do it from a competitive standpoint, and we’ve not seen any erosion in volume as a result of that.

Thank you. Our next question comes from the line of Ben Bienvenu with Stephens. Your line is now open.

Hey, thanks. Good morning.

Good morning, Ben.

I want to ask about prepared food per store volumes across the entire business kind of having moved lower as a result of these newly acquired stores - that was one piece of variance from our model. Darren, I think you were talking about kind of the remodel pipeline on the Buchanan stores. I assume you’ll pursue remodels and put the Casey’s prepared food offer in the Pilot stores as well. But can you give us a sense of the timeline over which you expect to make those investments in those remodels, and how long before you think you can get that per-store sales and margin from the prepared food category back to parity with the core legacy chain?

Yes, sure Ben. With respect to the Buchanan Energy transaction, we’ve got 28 stores already remodeled at this point and we have 10 more being remodeled as we speak, so really our goal is to get those things remodeled as fast as we can and get our kitchens put in there and teams trained up, and get that synergy. It’s largely dependent on a permitting timeline and how quickly we’re able to move from that standpoint, but our construction team has really developed a nice cadence around that, so by the end of this calendar year - remember, we just closed on Buchanan in May and we’ll have 40 stores roughly remodeled by the end of the calendar year, so pretty quick work. Now, so far what we’ve seen, and Buchanan had a little bit of a prepared foods offering developed, much more so than the Pilot stores, and I’ll tell you what we’ve seen early on is anywhere from a 70% to 80% lift in prepared food sales in those stores in the first month to two months post-remodel, so we’re well on our way. I don’t have any concerns about the ramp there and getting to a more system-wide average. Now with respect to Pilot, that’s in Knoxville, Tennessee, and that’s much newer territory for us, so we tend to find that in new geographies where our brand is not as well known, that that prepared foods ramp takes a little bit longer than in our core markets where, once we hang the sign, people know who we are and they come. Now that being said, one of the things we found attractive about this deal was 40 stores all concentrated in the Knoxville area, which allows us to get immediate scale. We can do some advertising there. We can really accelerate the ramp period in that market because of the scale. That’s something we can’t normally do when we do one store in a small town at a time that takes a little bit longer to do, so we feel really good about our prospects on the Pilot acquisition as well.

Okay, great. I’m going to ask another question about opex. It’s a two-parter, one is more housekeeping and then the other one is kind of longer term trajectory. On the housekeeping, Steve, I think we’ve got year-to-date about $11 million of deal-related, kind of non-recurring, non-GAAP costs in the opex line, so call it 1.5% incremental opex year-to-date from deal costs. The first part of the question is will there be residual deal costs from Buchanan going into the back half of the year? Will there be incremental, kind of non-GAAP deal costs from Pilot in the back half of the year that’s incorporated in the guidance? That’s part one. Then question two is as you look out to fiscal ’23, I think you guys had historically talked about the belief that you can settle into a high single digit operating expense growth range. Do you still believe that to be true as you start to think out beyond some of the noise that’s in the numbers right now?

Hey Ben, thanks for the question. I’ll do the first one. I think we’ll have--we don’t have any more deal-related costs in terms of legal fees or banking fees per se. I think we’ll spend--we’ll still have several million dollars of integration related costs, right, where we’re extra training, etc., which was all part of--you know, when we gave the expectation earlier this year, I think it’s about $45 million of EBITDA contribution from Buchanan, that would have been inclusive of all of those costs, so I do think we’ll spend several million dollars more for, frankly, all three acquisitions - Circle K, Buchanan and Pilot, in the second half of the year, and they will be integration and consistent with the overall accretion expectation of EBITDA. Transitioning to the second question, as we enter into next year, it’s a little early for us to be specific on it, but nothing has changed in our expectation that in the medium term, our algorithm is that we need to manage operating expense growth at a slower clip than what we’re getting, right, EBITDA-related growth, and I don’t see any reason that we can’t do that. The lumpiness of the prior year will be much better next year because this year will be much flatter. I think we’re not going to be out of the woods, nor is anybody in retail, around just there’s definitely more wage pressure as a general matter in the system, and I don’t see any reason to think that’s going to change in the near term. But our ability to manage same store opex to a lower rate in the medium term than what we’re growing EBITDA, we feel very good about our ability to do that.

Yes, and Ben, the only thing I’d add to that is the largest element of our operating expenses is stores and the labor and team members in those stores, and what we highlighted a little bit earlier today was that in spite of growing our two-year same store comps roughly 10%, we had a 3.5% reduction in hours, so I think our operations team is acutely aware of the need to operate our stores efficiently, and we’ve been able to take labor hours out of the stores while still accelerating the store growth on a more comparable basis. To Steve’s point, I think as we go into next year, the lumpiness of cycling shutdowns and restarts and everything else kind of goes away, will be a little more normalized, and so we’re not prepared to give that guidance now, but as we get towards the end of the fiscal year, we’ll have a much clearer line of sight on how that should play out for the next fiscal year.

Thank you. Our next question comes from the line of Irene Nattel with RBC. Your line is now open.

Thanks and good morning everyone. Just to change topics a little bit, how would you describe your traffic and your prepared food sales during the morning depart relative to pre-COVID levels?

Yes, thanks Irene. Traffic has started to improve in the morning depart. I think it was hampered a little bit by the fact that a lot of business re-openings that were scheduled to take place after Labor Day kind of got pushed back to after the first of the year, given the delta variant resurgence, but in spite of that, we definitely saw our best traffic growth during the quarter in the morning depart. Then with respect to the breakfast launch, we’ve really been pleased with how that’s gone so far. Most of the new products we introduced were in the breakfast sandwich category, and that category is up somewhere between 40% and 50% on any given day. Our guests have really responded well to the new breakfast program, and so we feel good about how that category has rebounded versus where we were just a couple of months ago.

That’s great, thank you. What are you seeing in terms of the balance of the day, and where do you think you are relative to pre-COVID levels?

With respect to the rest of the day, we still see some momentum in the lunch depart - that’s still growing. The evening depart has pulled back a little bit, and if you recall, last year when people were more locked down, our whole pie business really took off and we were up 25%, 30% in whole pies. We’ve certainly given a little bit of that back, but on a two-year stacked basis we’re up double digits in whole pies, so we feel really good that while we’ve certainly pulled back from a lockdown-type scenario, we’re certainly growing that business on a two-year stacked basis very favorably. Overall, we feel pretty good about the prepared foods. I think the other thing that I would comment while we’re talking about prepared foods is we posted a 4.1% increase in comps over the quarter, but I think as I alluded to in my narrative, that we were impacted by some supply chain issues. To get a little more specific, when we look at our prepared foods, we have three categories, sub-categories. It’s hot and cold food, which is what I think you would normally associate with our business - that’s where all the pizza goes in, our hot food, our sandwiches, wraps, salads, all of the main core of the menu, then there’s the bakery category and then there’s the beverage category. In the hot and cold food, which is three-quarters of the business, we’re up 8.3% in the quarter, so really strong results over the quarter in that category. That was offset by bakery and dispensed beverages, and that was strictly due to supply chain issues. We had some suppliers with donuts in particular that weren’t able to meet our needs, and so we were out of stock on some key…

Thank you. Our next question comes from the line of Bobby Griffin with Raymond James. Your line is now open.

Good morning everybody. Thanks for taking my question.

Good morning Bobby.

First, I wanted to switch back to M&A. You guys are off to a great start on trying to hit your multi-year store targets. Given the number of stores you’ve acquired or announced to acquire with Pilot here recently, are we more in a digestion type phase going forward, or is there still a good appetite for incremental M&A if it was to become available in the next couple quarters?

Yes Bobby, we certainly are going to be opportunistic with respect to the M&A, and as you can probably appreciate, M&A isn’t just a ratable thing where you just decide you’re going to do it or you decide you’re not going to do it. A lot of that depends on the sellers in the world, who’s for sale and where they’re for sale, and what looks attractive, so we have to be opportunistic. From a balance sheet perspective, we’re in great shape. We’re only 2.4 times leverage, we have plenty of liquidity, and plenty of capability to add more, so the way I would characterize it is we’re certainly digesting everything we have now and we’re focused on that, but we also have our M&A team actively talking to other prospective sellers and when we find the right deal and we still have the capacity to do it, we’ll take advantage of those opportunities.

Yes, and I think I’d just follow up on that, Bobby, the beauty of our model is our ability to go back and forth between building new units and buying units, and so to the extent there is digestion, I guess you saw it a little bit in the decisions we’ve made, so we’ve reduced our capital spending expectation this year because we’re going to build fewer number of units than we had thought at the start of the year, and some of that is supply chain related but primarily it’s a function of we’re able to buy more than we would have expected at the beginning of the year. We will kind of titrate both of those numbers and balance them to make sure the operation can absorb all of the new units that are coming in, and those new units happen to be acquired units at the moment more than historically they would have been units that we were standing up de novo.

Okay, that’s helpful, I appreciate it. I guess lastly, it’s kind of a two-part question on opex. If you go back two years, it seems like wages, of course, are the biggest driver of the growth versus two years, the quote-unquote normal period, and I guess part one is, is that true or is there something else in the opex that we’re not aware of, that we should be aware of that’s caused the inflation? Then the second part is do you see opportunities elsewhere in the P&L, whether it’s grocery or prepared foods, to pass through price, or is fuel margins really going to be the sole area that you can try to offset this opex growth that the industry is facing?

I’ll take the first one of those, Bobby. Listen - wages clearly is driving, if you’re looking back on a two-year basis, right? I mean, we referenced before hours are down, so on a same store basis, it’s not hours because we’re more efficient, to the credit of the operations, than we were before. If you’re looking including or excluding credit card fees, credit card fees are higher for sure, but I’ll exclude that for a second, so same store opex excluding the credit card, it is primarily a wage story, right, and so there is no doubt that last year, there were quite a bit of minimum wage increases across our footprint, and then as COVID continued to be more of a significant issue, we obviously then started to deal with broad-based industry wage pressure, and so yes, it’s much more of a wage pressure dynamic in terms of what’s driving the two-year same store opex number for us.

Yes, and Bobby, I’ll take your second one on pricing. To answer your question, no, we don’t think prepared foods is the only category that we have the opportunity to take price in. Our merchandising team is certainly evaluating all those opportunities as we speak. Like I said before, because we had cost of goods largely locked in across categories through the balance of the calendar year, we saw it as an opportunity to maintain margins and take some share, and like I said before, we have done that, and now as we move into the new calendar year, we think there’s going to be a lot of folks under increasing cost pressure, and that’s going to drive retails up, and we’ll be able to take retail price along with them and at the same time maintain a competitive delta and still be able to grow share.

Thank you. Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is now open.

Good morning everyone. Going back to the out of stocks, you talked about how customers were ready to substitute and purchase other products. How did that impact the in-store margins?

Well Chuck, I think it certainly impacted it a little bit. Those categories that I referenced, the bakery and dispensed beverages, run at 10% to 20% higher margin than the comparable categories in the grocery, so it would have impacted that margin some. Now, the balance there in terms of mix is that that created a higher mix of that hot food category, which is the highest margin sub-category within prepared foods, so I think it ultimately netted out that the prepared foods margin ultimately moved up a little bit, but we were able to maintain the margin on the grocery side, so overall we had some margin benefit through the quarter.

How do those out-of-stock situations look to you as we start the second half of the year?

As we sit here today, we still--from a supply chain standpoint, the cups are still an issue from our primary supplier, but like I said, we’ve been able to get creative and come up with some alternatives, so I think on the cup side we’re in decent shape. The bakery side is a little bit hit and miss. It’s more difficult on the alternate supplier side with spec products that we get from a supplier, so that part is not as easily replicable, so I would expect that we would still see some of that challenge, and that’s been on and off again. A lot of that is dependent on our supplier and their labor situation at the time. We have had periods where we’ve been back in stock and they’ve been able to satisfy our orders, and then they run into a labor challenge again and then they can’t fulfill them, so it’s a little bit variable in that category. But like I said, I think on the beverage side, we’ve got it largely contained. It will be more the bakery category as we move forward.

Thank you. Our next question comes from the line of Krisztina Katai with Deutsche Bank. Your line is now open.

Hey guys, good morning. I just wanted to touch base, you said that the breakfast depart has improved the most, in part driven by good performance obviously in the new breakfast handheld, so how should we think about some of the next catalysts when it come to your menu innovation journey? How is the supply chain impacting that potentially? And then overall, just thinking about the timeline, I believe you guys have said it’s roughly 18 months from idea generation to launching in stores. How can the process be shortened, given how dynamic the landscape is - you know, changing consumer tastes and behaviors?

Yes Krisztina, I think--let me just talk about some of the innovation in other parts of the menu. I will say the supply chain is having an impact on some of that, and I don’t want to get into a lot of detail, but I would say we spent some time developing a new product platform that we were prepared to launch, and then our primary supplier for that product was unable to meet our needs because of their own labor challenges in their manufacturing facility, so we have had to postpone that launch. Now I guess if there’s any good news inside of that, it’s that we have that sitting on the shelf in the pantry ready to go whenever we can resolve the supply chain issues, so we have that in terms of innovation, and we continue to innovate. Our culinary team is starting to focus more on the areas where we are not experiencing supply chain challenges, so we’re working towards that as well. In terms of shortening the timeline, we’re always looking at ways of being more efficient and effective with any of our processes. With product development, I think it is very important to stay disciplined in that and be very guest-centric and very guest-focused. When I think about how our breakfast products are performing with a 40% to 50% increase in units, and that was on top of a 10% increase already in that trend, it goes to show you that when you follow the process and do it right, that you get the results that you hope to expect. Again, I think we look at being efficient and effective in it. I’m reticent to deviate too far from that process because that process works, and it helps us ultimately to avoid big and expensive mistakes as we launch new products and platforms.

Got it, that’s helpful. My follow-up will be on the private label. I don’t know if you said where you ended the quarter in terms of penetration, but you said that you’re on track for 5%. I’m just curious how it’s performing relative to your internal expectations, and are you finding more success with the private label program in the current environment as inflation is hitting consumers in a lot of ways, so if you could just talk about how you can capitalize on that, and just remind us of the margin implications.

Yes, the private label program is still trending right on track. We ended the quarter at about 4.2% penetration. We have a little over 200 items, we’ve rolled out 28 during the quarter, we have another 35 items that we’ll be rolling out in the third quarter, and so we have clear line of sight to that 5%. Now, the thing I would tell you about it is 5% is 5% of the sales penetration. Today, we are already at about 7.5% of gross profit dollar penetration, so the items are running at a much higher margin rate. Our average margin rate for private label is in the high 50s versus what you see in the rest of the business in the low 30s, so it’s certainly accretive from a margin standpoint. That’s why we’re so focused on growing that part of the business.

Thank you. Our last question comes from the line of Brian McNamara with Berenberg Capital. Your line is now open.

Hey, good morning. Thanks for taking the question. Krisztina got my question on private label, but just on opex, I know we’re beating a dead horse here, but I remember when you gave the mid-teens guidance preliminarily, or the initial guidance, you kind of mentioned it was a 50/50 split in terms of same store and acquired opex. Can you kind of give us an idea where that sits given your revised expectations?

Yes, this is Steve. It’s not going to be significantly different because the credit card--the two things that are driving it, there’s more units for sure coming in with Pilot, credit card fees are higher both at the acquired stores, frankly, but there’s a lot more stores in the mother ship, so I think by the time we get to the end of the year, it’s not going to be significantly different than a 50/50 split, probably a little more weighted to same store just as you think about the overall number of units and the fact that, again, most of our integration-related spending has already been completed, and so that is going to drop out of the reconciliation to a large extent for new units, so modestly over-weighted to same stores by the time we get to the end of the year.

And then just a follow-up on M&A, just curious how the current environment is relative to when we spoke last three months ago, in terms of these smaller operators’ willingness to sell in the current environment, just given where fuel margins continue to be pretty high.

Yes Brian, we still see a really strong environment out there right now, and remember like Steve was saying, there’s definitely a correlation between the fuel margin resilience and the rising opex environment, and so I think with the smaller operators, it’s getting more and more challenging just to keep store staff and keep people on and to operate in this environment. We see more deal flow coming through, and because of that, we have the ability to be selective and pick our spots, but we like the environment right now and, like I mentioned before, we’ll continue to stay opportunistic with respect to that.

Thank you. There are no further questions. I will now turn the call back to Darren Rebelez, CEO for closing remarks.

Okay, thank you, and thanks for taking the time today to join us on the call. I’d also like to thank our team members once again for their efforts this quarter. We’ve had a great first half of fiscal ’22 despite the challenges related to COVID-19, labor shortages and the supply chain. Fortunately, we’ve demonstrated our ability to deliver results on our long term strategic plan and fiscal year outlook in both normal times and during a global pandemic, and I’m confident we’ll continue to drive shareholder value. Our second quarter was our most challenging comparison for the fiscal year, and we’re looking forward to delivering great results for the back half of the year. Our team here at Casey’s wishes everybody a happy holiday season.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.