ARKO - NASDAQ

Good day, everyone, and welcome to today's ARKO Corp. Third Quarter 2024 Earnings. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this call is being recorded. I will be standing by, should you need any assistance. It is now my pleasure to turn today's program over to Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets and Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to ARKO's third quarter 2024 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer; and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the third quarter of 2024 as filed with the SEC are available on ARKO's website at www.arkocorp.com. During our call today, unless otherwise stated, management will make -- will compare results to the same period in 2023. Before we begin please note that all third quarter 2024 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our third quarter 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views with respect to future events and ARKO is under no obligation to update or revise forward-looking statements made on this call, whether as a result of new information, future events or otherwise, except as required by law. On this call, management will share operating results on both a GAAP basis and on a non-GAAP basis. Descriptions of these non-GAAP financial measures that we use, such as operating income as adjusted, and adjusted EBITDA, and reconciliations of these measures to our results as reported in accordance with GAAP, are detailed in our earnings release, or in our quarterly report on Form 10-Q for the quarter ended September 30, 2024. Additionally management will share profit measures for our individual business segments along with fuel contribution, which is calculated as fuel revenue, less fuel costs and exclude intercompany charges by our subsidiary GPMP. And now, I would like to turn the call over to Arie.

Thank you, Jordan, and thank you all for joining. In the third quarter, we delivered adjusted EBITDA at the midpoint of our guidance by remaining highly focused on managing our operating expenses, both within retail operations at store level and through advancing our dealerization initiative, which I will cover shortly. We, along with other operators in our industry, are seeing persistent pressure on consumers as they grapple with inflation and increased prices for daily necessities with the cost of goods in fundamental categories like fuel and groceries, up more than 20% since 2020. During the quarter consumer spending remained restrained and strong summer promotion were unable to accelerate soft merchandising trends from earlier in the year. That said, we continue to believe, we are equipped to navigate this environment and as always, continue to offer everyday value to our customers to help them during these challenging times and believe in the resilience of our industry as we look consumer spending in 2025. Looking at our merchandise efforts, we are seeing a shift in purchasing behavior with a growing number of consumers prioritizing discounts and exploring multiple channels to find the best value. Traffic trends remained challenging throughout the quarter and we continue to focus on ways to deliver value to our customers through promotional bundles and loyalty offers coming online as we move into the fourth quarter. As we look ahead to the balance of the year, we have value-oriented promotions coming online. Just to name a couple, we are offering our Tyson Chicken Sandwich value meal with a large fountain drink and chips for only $4.99, enabling our customers to have a full meal at a reasonable price. Additionally, we are offering customers the ability to grab a free Nathan Hotdog with the purchase of any large fountain drink for only $1.99. These are just a couple of examples of the many promotions we are launching to provide much needed value to our customers. These promotion supports our strategies around both enhancing our Foodservice offering and our loyalty program. On Foodservice, in the second quarter, we expanded our Foodservice offering with Nathan's famous Hotdog, which are now available hot and ready in more than 500 of our retail stores across the country. We've seen strong customer response with same-store hotdog sales for the third quarter up more than 30%. We also continue to see positive results in the value-oriented pizza offering that we launched in the first quarter. Same-store non-franchise pizza sales in Q3 increased approximately 11.5% and units sold increased 23.1%. With respect to loyalty, we continue to grow the base of enrolled members in our loyalty program because of the value associated with being a member. Enrolled loyalty members spend an average of $110 per month or 80% more than non-enrolled customers and visit almost eight times per month, or almost twice as often as non-enrolled customers. In focusing our efforts to continue enrollment and provide additional value to our customers just before the holidays, we kicked off yesterday the Fas Million Sweepstakes. For the remainder of the year, Fas Rewards members who purchased any of over 700 qualifying items will receive a scratch card at checkout that has prices or coupons for items that can be redeemed at any of our retail stores. In addition to the instant price portion of the Sweepstakes, enrolled Fas Rewards members will also be entered into a drawing for a grand price scratch card with the chance to win $1 million. Pulling back from near-term operations, I want to spend some time talking about more structural changes to our business that are part of the foundation we are building for the future. These such elements of our merchandising assortment, our channel strategy and NPIs. First on our merchandising assortment it has been some time since we discussed with you all our cigarettes and tobacco offering. We are seeing the strength of our OTP assortment, which has been growing longer term and has a contribution margin rate that is approximately 20 percentage points higher than our cigarettes category. Recognizing the demand-driven mix shift across tobacco products, we have started to install new back bar fixtures, allocating space to our OTP assortment. We expect to roll this new back bar installation to 1,000 stores by the end of the first quarter 2025 to support this growing category and expect OTP growth story to be positive. Given that approximately one out of two of our enrolled loyalty members are cigarettes or OTP consumers, we will be increasing our focus in 2025 on these customers and plan to provide them with additional value. Next, I'd like to share an update on our channel optimization efforts. As part of our transformation plan, we are converting retail stores to dealer sites where we believe that we can realize higher profit from ongoing fuel supply agreements and rental income than from continuing to operate these stores in our retail segment. On our last call, we shared that we expected to convert 40 retail stores to dealer sites by the end of the third quarter and we exceeded this target, converting 51 retail stores to dealer sites. By the end of the fourth quarter, we expect to convert another approximately 100 retail stores. Taken together, we expect this approximately 150 stores will represent an annualized benefit to combined wholesale segment and retail segment operating income of approximately $8.5 million. To provide more detail on the magnitude of the channel optimization we are undergoing at scale taking into account future expected conversion of retail stores, we expect this initiative to cumulatively benefit combined wholesale segment and retail segment operating income by approximately $15 million to $20 million. We expect this conversion will lead to an economic uplift, while allowing us to increase our focus on the jewels of the retail portfolio and to prioritize our future investments in this location. We believe that this will enable us to maximize the potential of all of our segments. We see tremendous opportunity with the work we are doing, which we expect to compound it with reduction of supporting G&A costs as we refine our retail footprint. Moving on, I wanted to touch on another leg of our organic growth for ARKO, our NTIs. We markedly expanded our NTI pipeline with eight new-to-industry stores. In the third quarter we opened one of this a Handy Mart store in Newport, North Carolina, delivering value and high-quality shopping experience to the Newport community. We are pleased with the performance of this store and have seen foodservice sales penetration over 20% at that location for the month it has been opened in Q3. This success further supports the efforts we are putting into developing our foodservice offering. Of the remaining new-to-industry stores in the pipeline, we expect to open three more by the end of the year with the balance over the course of 2025. You will note that this pipeline represents a marked increase to our prior cadence of NTIs, which reflects our efforts to support the long-term organic growth of our business. Further, we expect that our NTI program will play an essential role in our transformation plan. And we look forward to discussing all of this in greater detail at our upcoming Investor Day. Concurrent with these efforts to support organic growth, I wanted to give you an update on our new design pilot for our remodel program as part of our transformation plan. To-date we have finalized store layout and merchandise assortment, including development of system-wide branding for our enhanced Foodservice offering. We anticipate beginning permitting to implement the new design in our seven pilot stores in the fourth quarter and to begin remodeling activity in early 2025. I will now turn the call over to Rob, to review financial results for the third quarter and touch upon our guidance for the fourth quarter and full year.

Thank you, Arie. Good afternoon, everyone. Before turning to third quarter 2024 results, I want to reiterate that our reported results for adjusted EBITDA include the non-cash portion of rent expense, consistent with the change in methodology we articulated last quarter. On this basis, adjusted EBITDA was $78.8 million for the quarter, compared to $87.3 million from the year-ago period with the decrease caused primarily by lower retail fuel and merchandise contribution. At the segment level, our Retail segment contributed approximately $71 million in operating income, compared to $81.5 million in the year-ago period. Adjusted operating income for the quarter was $85.1 million, compared to $96.5 million in the year-ago period. Total retail merchandise sales were down approximately 7.3% for the quarter with merchandise contribution down 4.2%, on margin rate expansion of 110 basis points. Total retail fuel contribution was down 3.4% with a 5.9% gallon decline, partially offset by a margin increase of $0.01 per gallon. Same store merchandise sales excluding cigarettes were down 5.7% versus the year-ago period, while total same store merchandise sales were down 7.7%. Same store transactions were down high-single digits for the quarter, reflecting continued external headwinds. The decline in transactions was partially offset by a low single-digit increase in average dollar sale. The impact of the sales decline was partially offset by continued same store margin rate expansion which was up 100 basis points, as compared to the year-ago period. Same store fuel contribution was down approximately 4.3% for the quarter with the decline in gallons partially offset by stronger year-on-year fuel margin per gallon. Same store fuel gallon demand was down 6.6% for the quarter, while fuel margin of $0.414 per gallon was up $0.01 per gallon from the year-ago period. Same store operating expenses were down approximately 1.4% for the quarter. Moving on to our Wholesale segment; operating income was $8.2 million for the quarter compared to $10 million in the year-ago period. Adjusted operating income was $20.3 million for the quarter versus $22.6 million in the year-ago period caused by a decline in gallons and lower fuel margin per gallon which resulted primarily from reduced prompt pay discounts. Fuel margin was $0.096 per gallon versus $0.105 per gallon in the year-ago period. For our Fleet segment operating income was $10.8 million for the quarter compared to $8.8 million in the year-ago period. Adjusted operating income was $12.6 million for the quarter, versus $10.7 million in the year-ago period with total gallons roughly flat to the prior year. Increased segment operating income was driven by strong fuel margin performance which was $0.435 per gallon for the quarter, versus $0.384 per gallon in the year-ago period. Total company general and administrative expense for the quarter was $38.6 million versus $44.1 million in the year-ago period, with favorability driven by lower stock-based compensation expense and changes in year-on-year timing of incentive compensation accruals. Net interest and other financial expenses for the quarter were $23.6 million, compared to $14.6 million in the year-ago period with the change caused primarily by fair value adjustments related to our warrants. Net income for the quarter was $9.7 million, compared to $21.5 million for the year-ago period. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet; excluding lease-related financing liabilities we ended the third quarter with $885 million in long-term debt comprised of our 2029 senior notes, the outstanding balance on our Capital One line and the remainder primarily related to real estate and equipment financing. Our $140 million ABL remains completely undrawn, as we continue to manage working capital needs from operating cash flow. We maintained substantial liquidity of approximately $869 million, including $292 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $29.3 million. Turning to our fourth quarter and full year guidance; we expect our fourth quarter adjusted EBITDA to be in a range of $53 million to $63 million. Supporting assumptions include a low to mid-single-digit decline in same-store sales, a mid-single-digit decline in retail gallon demand and a retail fuel margin of $0.38 per gallon on the lower end and $0.42 per gallon on the higher end of our guidance. Our overall guide reflects expectations for EBITDA growth in our Wholesale and Fleet segments, driven by the accumulating benefit of our retail wholesale channel optimization work and continued strength in fuel margin in our Fleet channel. Our fourth quarter guide translates to a full year 2024 adjusted EBITDA range of $245 million to $255 million. The midpoint of our revised EBITDA outlook is $5 million below our beginning of year guide, reflecting our reduced expectation for fourth quarter same-store merchandise sales. And with that, I'll hand it back to Arie for closing remarks.

Thanks, Rob. As we wrap-up, I want to reiterate our concentration on adapting to the dynamic market landscape. We remain focused on Foodservice strategic store transformation and value-driven initiatives. I want to thank the company's employees for their continued hard work over the quarter and the quarters to come. Thank you for joining today's call. We appreciate your ongoing support and look forward to announcing shareholder value. With that, we will open it up to questions.

[Operator Instructions] Our first question from Bobby Griffin with Raymond James. Your line is now open.

Good afternoon, everybody. Thanks for taking my questions. So Arie, I guess first thing I want to talk about, you talked a little bit about the 7-store pilot that you guys are building out. Can you maybe provide a little bit more detail on the go-to-market strategy there? Like what brands are it going to be under? What some of the other things that this pilot might include? And if it's successful like what's some of the timeline to roll out some of the big initiatives to a larger base of the stores?

Sure. Yeah, no, its not a problem. So just to be -- to basically to explain it very carefully. This is -- this pilot was very, very crucial for us. In order to make everything right over here, we actually hired a third-party consultant to make sure that not only we do it right, we also went and recruited a large group of people to test our food to make sure that this is what the customer is looking for. We got their feedback. And after we actually finish all of that, we are in a process right now of finalizing the store layout and making sure we have the right merchandise assortment, including the development of system-wide branding for the announced foodservice. We are coming up right now with a brand, a brand name that will be attached to the foodservice. We are not prepared to actually disclose it at this time. We're actually working on that and we'll disclose it immediately after we finish the layout. But the idea is really to start permits in the next couple -- basically, during the Q4, we're going to actually go through permits and the idea is to start implementing and start construction the beginning of Q1 2025. Assuming those seven stores pilot will actually be successful that's what we believe, we're going to start to basically to add more and more stores in the region that we are actually working on, which is basically the stores around the Richmond market.

Okay. And then on the details you gave about the OTP and adding more back bar space, have you guys done that in a subset of stores? I'm just trying to get a sense of like what the contribution of that updated back bar could be. Is there anything you can share there or is it still too early to be able to tell that?

So yes, we started a test in -- I'll call it, in many stores. The test was very successful. At least we see the results. We see that the minute we're actually investing in the back bar, we're basically seeing the uplift. People are actually moving from cigarettes to OTP -- and that's what actually -- that's the reason why we are moving with the new features and we're rolling them out to a 1,000 stores. And the idea is really to finish the installation, like I said by the end of Q1 2025. We don't have -- we cannot provide at the moment results. It's too early, but there is no question that the cigarette consumers are shifting towards OTP. People are not -- basically have not stopped smoking. They're just moving to other tobacco products. And our goal over here is to make sure that we have everything they're looking for in order to basically convert them from cigarettes to other tobacco products. The margin is much higher over there and this is where the industry is going. At the end of the day, we want to make sure that we are there. We want to make sure that our customers -- just for your benefit the -- we check that. And when you're talking about our enrolled members, one out of two customers are actually a tobacco consumer. So you're talking about more than 50% of our customers, are actually either cigarette smokers or consuming other tobacco products. And we see that as a huge opportunity for us given that between cigarettes and OTP, we're talking about almost 40% of our sales.

I will let Rob answer that. But I just want to make sure that, the brands have nothing to do. Its different regions, but it's not about the brand. But Rob, I'll let you take this.

Thank you, Bobby.

Thanks, Bobby

Sure. So as I mentioned at the beginning of the quarter, most of our promotional activity is being funded by the vendors 100%. We had tons of promotional activities in the third quarter. I mentioned it, I believe on our last call. We have tons of promotional activity. Everybody is suffering I mean, including our vendors. Our vendors want to make sure that they're selling more. They had the same issues during Q3. They're all working with us towards Q4. As I mentioned earlier, the Fas Million. Fas Million was a very good success for us a few years ago. And given that we are at the fourth quarter just before the holidays, we felt that we need to push really hard with promotional activity to finish the year. That's why, we launched yesterday, the Fas Million, with a chance to win $1 million. And as I said, we have 700 items and those 700 items are all being supported -- all of those promotions are being supported by our vendor and they're actually funding at 100%. I mean that's there is a big launch just for your benefit given I mentioned OTP and given that at least one out of our two customers are either cigarette customers or OTP customers we are launching a big OTP promotion in December to deliver a significant savings to our customers and of course to drive traffic. We are talking about a promotion that it's entirely funded by the supplier. And we're talking about $1.99 price tag, which basically have saving of over $10 on this promotion. I mean this is something very big. And again we are doing it just before the end of the year because we believe that this is the opportunity to push sales as we conclude the fourth quarter.

I wanted to just also -- if I can fit one more in. I just wanted to ask about the store optimization. Is the message that we should take that it should be largely complete by the end of the fourth quarter or is this something that will be kind of more of an ongoing initiative as we kind of move through the years? And can you help us understand just how you selected the stores and what made them the right candidates for this strategy?

Sure. So, the answer is we're going to be completed with 100 -- approximately 150 stores by the end of the fourth quarter. When we're going to actually be done with those 150 stores, we are talking about a benefit of approximately $8.5 million between the segments. That's the benefit. As I mentioned earlier, we're talking about total benefit of anywhere between $15 million to $20 million prior to G&A savings. We're going to continue with that during basically the first quarter all the way to the second quarter, I believe we're going to finish our -- the majority of them. But the big portion of them, the 150 stores, will be done by the end of the fourth quarter. And just the way to think about that we're basically taking retail stores that we don't believe there is much upside investing in those stores. We don't see the return on capital on those stores and we are shifting them towards the wholesale segment, which means that we're going to have a supply agreement with those operators. We're going to collect rent from those operators. And at the end of the day, it's just going to increase profitability at the wholesale segment and make more money than what those stores were actually making when they were actually in the retail segment. So, that's the thought process behind that. It's all about return on investment at the end of the day and capital allocation.

Got it. And just one last one for me. I think you mentioned same-store operating expenses down 1.4%. Can you just talk about how you achieved that? And if that's something that we can where we can see some sustainable declines in terms of operating expenses or was there any factors impacting that for this quarter?

Yes, I think Kelly some of the same trends that are in place as we have softer sales. Certainly, we're rightsizing the labor in the stores so that we're not overinvesting there. So, again, it's a savings but it's we'd rather have the sales to go with that, but that's just conscious management of labor hours in the stores to flex down. You'd also have some benefits from the credit card fees on the lower sales and the lower gallons that's also helping that. So, again, it's diligent labor management in the stores and the combination of the credit card that's primarily driving that down. And for the fourth quarter guide you should kind of expect that type of a trend to continue.

Thank you.

You're welcome.

Thank you. And we'll take our next question from Anthony Bonadio with Wells Fargo. Your line is open.

Yes, hey guys. Thanks for taking our questions. So, I wanted to ask about the NTIs. I know you guys are sort of expanding that pipeline a bit with the eight new boxes. It seems like you're hitting the gas a bit on growth, but I would think it takes some time to sort of build that muscle internally. I guess how quickly do you think that sort of organic unit growth could ramp? How high could that growth go over time?

Yes, Anthony, you're right. We're actually starting with no NTI or very little NTI in the past. We're going all the way to eight NTI in a very short order. Those eight NTI we have one that just opened. We have another three that will open between now and the end of the year and we have another four that we're going to complete during 2025. While we are working on those eight NTI, as you can imagine, we already start working on the pipeline. So, if we went from zero to 100 from zero to almost eight in a very short order, the idea will be that in the future, we're going to start to ramp this up. I don't know the quantity at the moment. I can't provide you a quantity at the moment, but I can tell you that this is an area that we feel it's an opportunity for us given our liquidity, given our footprint in the marketplace and economy of scale of course we believe we're going to be able to ramp it up at least finishing what we have in the pipeline right now between now and the end of 2025 and then ramp up during 2026.

Got it. That's helpful. And then, I guess, just thinking back historically you guys have been pretty acquisitive. How do you think about the return on capital doing it that way and opening organic boxes versus sort of going out and acquiring more like you used to?

I think it's just another opportunity, just another way to allocate capital. I mean given our -- given what we have cash on hand and given our balance sheet right now we will actually continue both. I mean we are not stopping with acquisition at the moment. We're just looking on what's the best way to basically to allocate our capital and what's the best return on investment for us in the short-term and in the long-term. NTIs, of course, require a lot of capital more than probably what we actually spend in acquisition. But at the end of the day we are investing in areas that we see the opportunity for additional growth from a population standpoint and from the economy.

Got it. And just to squeeze one more in. I know you guys aren't giving guidance yet on 2025 but just any early thoughts there high-level puts and takes how you're thinking about the backdrop and sort of idiosyncratic drivers in the business as we're starting to model that?

Look I think – yeah, look Anthony, we're not going to share anything exclusively here today. But as you think about when we talk to you in Investor Day we'll have more context over a multiyear period. But some of the larger themes that are in place I mean we've talked to you about the food penetration the initiative on that front. That's an accretive area. We've had a track record of multiple years of margin rate accretion on the merchandising side. I think that's likely a trend that would continue over time. Fuel gallons is probably a bit more of a macro that again we're hopeful as we mentioned that Q3 was a bottom. And hopefully next year this industry starts to pick up and we get into that secular growth pattern again. But it's -- we've had a pattern there. And again some of the macro factors I think would be a driver on that front. And we'll continue to price on the fuel side to optimize for fuel contribution. I mean that's important to us. It's a trend. And again you should probably expect to see that sort of thing continue. So hopefully a little color there. And again we'll share more in the multiyear view when we're together at Investor Day.

Understood.

And just to finish Antony, just you can take into account as I mentioned around $8.5 million just from the project the 150 stores that we're talking over here. This is something that we feel very, very comfortable with that. And as I mentioned earlier moving into 2025 we see this all transformation moving stores from retail to wholesale. And as I said you can see over there between $15 million to $20 million going into 2025. I think those are really the two things that we feel very, very comfortable because it's really shifting between one segment to another segment. And as I said the volatility over there it's much, much lower than concentrating on same-store sales.

Thank you.

Thank you.

Thank you. We'll take our next question from Connor Introna [ph] with Stifel. Your line is open.

Hi, guys. Good afternoon. Thank you for taking my questions. First I want to better understand trends in current customer traffic with the declining gas prices are you seeing any more noticeable pickup in foot traffic into stores? Just trying to get a better understanding of the current conversion rate and if there's any particular character – categories, excuse me, like energy drinks. I know you mentioned tobacco, pizza, hotdogs that are driving outperformance?

I'll start with from a transaction standpoint. So as we mentioned in the prepared remarks transactions were down high single-digit for the third quarter. October was a couple of points better than that. And again I think again that's why we talked about earlier our same-store sales are positioned where they were versus how we came out of the third quarter so seeing some improvement. Again it's just one month in. We've got two months to go, but we have seen a little bit of a pickup on that front. From an assortment standpoint, I don't think there's any specific call out other than we have had -- OTP was a very strong performer for the quarter. I mean on a high single-digit decline in transactions the OTP was almost flat. And on the other side cigarettes was a bit more challenging down double digits but the rest of the assortment was sort of in a relative range of itself in that mid single-digit decline.

Got you. Okay. That's helpful. Just a quick follow-up to that. So I noticed that, sort of, dealerization the expectations I guess the total amount of stores expected with a higher amount. Can you kind of outline the longer-term strategic rationale and highlight how this figures into the vision for the business? I mean you are targeting 150 dealerized locations by the end of the year. You're throwing out all these figures in terms of benefits to the business. But can you just kind of highlight a little bit more of the motivation and how this figures into the sort of long-term vision for Arko?

Sure. So number one motivation, of course, is to concentrate as I mentioned on the jewel assets to make sure that we are concentrating on areas that we see growth opportunities. We are today in approximately 30 different states between the wholesale and the retail segment. There is some areas that we feel that there is not a lot of opportunities for us to grow. There is not a lot of opportunities for us from a capital standpoint to invest money in some of those stores. We just don't see the return on investment, and because of that we feel that some of those locations will be converted to an wholesale location. Remember, at the end of the day, we're not selling the location. We're just leasing the location to a third-party to an operator that is much smaller than us that may have some stores in the areas that we do business or in the area that those store are located. And he's going to pick up those stores. He's going to pay us rent and they're going to purchase fuel from us moving forward. And with that being said, the transition between retail to wholesale is going to benefit us making more money moving those stores to just a different segment. So, I think that's purely from a profit standpoint. We just modeled that and we just felt that areas that we just don't see the return on investment in the future. We just -- so there's no need for us to invest in those stores. Let's just translate them to wholesale segment and make more money on those stores. That's number one. Related to the rest of the business, which is over 1,000 plus stores, we just feel that those are the best stores in the best market with the best population. We see a lot of future in those stores at the end of the day, investing in foodservice. As I said, foodservice, it's a huge opportunity for us in the future. And we just figure out we better off concentrate and spend money and invest money in the best stores of the portfolio. And that's what we are doing as simple as that. It's purely -- it's operation 1-0-1, really operation 1-0-1. You just -- it's not about the quantity of the stores, it's really about the quality. We concentrate on the quality. We concentrate on stores that we believe got tremendous amount of upside and opportunity and that's what we want to lend as simple as that and make more money for our shareholders.

Got you. That's helpful. I mean just one final question. It sounds like that if you change your expectations for return on investment, you would be leaning further into dealerization. Is there really -- I mean, if you consider the performance of some of these better performing stores, if they're going to be underperforming in the future, would you anticipate that the dealerization could be ramped up in future periods?

I think we -- this process, it's not something that came up yesterday. I mean, this process, it was a long-term process. We started this process at the beginning of the year. Since January, we brought an outside consulting firm to help us to evaluate those three segments that we have out there, and we landed at the end of the day on what are the criteria that should work for us for the future. Obviously, the benefit of having an wholesale -- we call it wholesale, but it's really -- we are just supplying fuel and making margin in between. But the good thing about having those different segments is that at the end of the day, the stores that we just don't see the upside of investing in those stores, we can just convert them to the Wholesale segment and just make more money. That's basically the way to look on that. I don't anticipate converting -- as soon as we finish with this transformation plan over here, moving the stores that we already allocated to basically to the dealer stores and move them to the Wholesale segment, I don't anticipate much more to come. It's always an opportunity if something change. But I think the concentration will be basically how do we generate more dollars from the retail stores that we have decided to keep. But as I said, that is -- those decisions were made after months and months and months of basically of evaluation to be clear.

Got it. Thank you so much. That's very helpful color.

Thank you.

Thank you. We'll take our next question from Hale Holden with Barclays. Your line is now open.

Hi. Good afternoon. I just had two clarifications, I guess. Arie, the $8.5 million is the 4Q run rate benefit by the end of the quarter from the dealerizations, but there probably isn't a lot of that baked into the 4Q EBITDA number or am I not thinking about this correctly?

You are correct. I mean the $8.5 million is in a full -- it's basically on a run rate. It's on a full year run rate. Given that we're talking about -- we just converted 51 locations between Q3 all the way up to the beginning of October. We just completed out of the additional 100 that I mentioned as of today, we just completed an additional 48 stores. So we have another couple of months to go with another 50 stores. I don't think it's going to be meaningful for Q4. But the way to think about it that on a full year run rate you're talking about an $8.5 million. That's the way to think about that.

Right. And so then I had -- I got lost in one of the ways you answered an earlier question. So that's $8.5 million as the full year run rate or was it annualized at $15 million to $20 million for 2025?

$8.5 million it's only on the 150 basically conversion. We're talking about 150 conversion that will be done by the end of the year. So you need to take into account that starting January 1, 2025, on a full year just from those 150 stores, you have $8.5 million benefit just from them. In addition to basically to that, we have additional stores that actually will come -- we'll have additional conversion going into Q1 and Q2, 2025. And when we're going to finish those conversion on a full year run rate, it's going to be between $15 million to $20 million.

Great. Thank you very much. That was very clear. And the second question I had was, you guys kind of implied that we were at or very close to the trough in fuel volume declines. And I was wondering what was giving you confidence in that?

I don't think we were suggesting that. We were pleased with what we saw in October and we were hoping that the Q3 was a trough. I don't think there was a strong statement about the fuel gallon demand. I mean, we're certainly -- we're guiding down mid-single for the fourth quarter right, which is in line with trends. I'll throw that to Arie for larger thinking on that longer term.

I just think listen, there is -- we all know at the moment that the economy was suffering in Q3, suffering more than basically Q3, 2023. As I said, we see some relief in Q4. We see some relief in Q4. And like I said I think the whole country is bullish on 2025. And we're just working towards what everybody expects to happen in 2025. As I said I mean, Q3 was a rough quarter across every industry. And given that we see some relief -- this industry it's a very resilient industry. You have -- you are familiar with that. And I really, really think that we are getting to the bottom of it. I think we are at the bottom. Maybe there is a little way to go, but I really think that we're touching the bottom right now. And from here with expectation towards a better economy and things will change over here hopefully price of fuel will basically stay at I'll call it with a $2 range versus the $3. We believe that the minute the price of fuel will stick to the $2 price -- headline price, I believe that people are going to start to drive more. But that's always something that happen. Again, this is of course subject to nothing bad happened over here that all of a sudden price of oil goes to $100 that's of course going to change my expectation over here, but assuming that the economy will basically get a little bit better interest rate already down 50 basis points last month. And I mean today, another 25 basis points. I mean, I'm very, very bullish towards 2025 because of that.

Great. Thank you so much. I appreciate it.

Thank you so much.

Thank you. We have no further questions in the queue. I'll turn the program back over to Arie Kotler for any additional or closing remarks.

Thank you very much Brittany and thank you everybody for joining us this afternoon, almost evening. Have a great evening and have a great holiday season coming.