Greetings. Welcome to the Arko's First Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ross Parman, Vice President Investor Relations. You may begin..

Thank you. Good morning and welcome to Arko's first quarter fiscal year 2022 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer; and Don Bassell, Chief Financial Officer.

Our earnings press release quarterly report that was filed with the SEC and earnings presentation are available on Arko's website at arkocorp.com. Before we begin, please note that all first quarter 2022 financial information is unaudited.

During the course of this call, management may make forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words, such as will, may, expect, plan, intend, could, estimate, project in similar references to future periods.

These statements speak only as of today and are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to today's press release our quarterly report on form 10-Q for the quarter ended March 31, 2022.

And our other filings with the SEC, including our annual report on forms 10 K for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please note that on today's call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA and adjusted EBITDA.

While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we are conducting our call today from our respective remote locations, as such, there may be brief delays, crosstalk, or other minor technical issues during this call.

We thank you in advance for your patience and understanding. Now, I would like to turn the call over to Arie..

Thank you, Ross. Good morning, everyone. We are pleased to report strong results for the first quarter of 2022. On today's call, I will briefly review our financial highlights for the quarter ended March 31, 2022. I will also provide an update on our business and key trends.

Don will review our financial results in more detail and he will take your questions. Our first quarter adjusted EBITDA was $50.1 million. This is increase of 18.4% versus the prior year period. We have achieved double-digit adjusted EBITDA growth in each of the five full quarters since we became publicly listed on NASDAQ.

We are comparing these strong results to a banner first quarter in 2021. Both quarters had their challenges but there were much different from a consumer and business perspective. In the first quarter of 2021 COVID vaccine, we're rolling out, consumers had significant spending power, fuel prices were approximately $1 less.

This year, rapid inflation and issues created by the tragic war in Ukraine, led to a completely different market condition and a considerably different consumer environment than in the first quarter of 2021. We believe that we are well-positioned for an economic environment characterized by increased price sensitivity.

For example, we are expanding our offering of lower price, pizza, food and fresh coffee. Even with much higher inflation and rising fuel prices in the first quarter of 2022, we had a very strong quarter. On a two year stock basis, same-store merchandise sales, excluding cigarettes, increased 9.3%.

We see a promising sale trajectory and velocity heading into the second quarter. Merchandise gross margin increased to 29.5% or 210 basis points compared to the prior year quarter. Same-store merchandise gross profit increased by $3.8 million compared to the prior year quarter. We strive to price or fuel competitively.

Retail fuel gallon sold grew by 5.9% compared to the prior year quarter. Retail fuel margin increased to $37.50 per gallon from $32.10 per gallon in the prior year quarter. This resulted in an increase in same-store fuel gross profit of $9.7 million excluding intercompany charges compared to the prior year quarter.

We remain committed to our organic growth initiative. We are announcing our store base with these strategic long-term programs to ensure that our offering is competitive for both our loyal customers and attract new customers. In the quick-serve restaurants, we open two Savara [ph] franchises in Q1 bearing any supply chain difficulties with equipments.

We are on track and expect to open a total of 50 Savara [ph] this year. We believe these partnerships add value to our stores and resonate with price countries' consumers. In the first quarter, we installed bean-to-cup coffee at 75 stores. As of today, we have installed bean-to-cup in more than 270 stores.

These stores are now in the coffee business 24/7. We remain on track to deliver on this initiative and like we said in Q4, we plan to install machines in 525 stores in 2022. This quarter, we also completed one remodel and easy mark in Broken Bow, Oklahoma. As of today, we have completed six remodels in 2022, including one being completed this week.

Turning to raise and rebuild. I want to walk you to early results from a recent raise and rebuild, store 3894 as catch man on interstate 77, close to the border of North and South Carolina. The following number reflect the first quarter of 2022 compared to the same period in 2021. Customer count increased by 50%. Gallon sold increased 112.7%.

Same-store sales increased 66%. Importantly, same-store sales, excluding cigarettes, increased 94%. We are pleased with this result. We are continuing to assess raise and rebuild, remodel and new to industry stores as part of our organic growth strategy. We continue to announce loyalty program.

We are pleased with key matrix of this program which posted nearly 600,000 opt-in members as of the end of the first quarter. This represents a large base of loyalty members consumers before we can directly communicate and provide special offers.

Two matrix I like to share show the value of loyalty program and our customers have made seven more trips per month and these customers have spent about an additional $90 per month, more than non-involved customer. We consider these to be excellent numbers. We believe continued investment in this program is essential.

We remain on track to deliver our announced loyalty app this year. Moving to other business updates. We announce the Quarles Petroleum acquisition in late February. We expect the closing to curate second quarter, early third quarter of 2022.

Arko will then have the following operating segment in addition to GPMP; a retail business, one of the largest convenience stores operator in America, our national Orel operation and Quarles the largest cardlock fuel operation on the East Coast of the United States.

Importantly, day-to-day operations of each operating segment are overseen by highly skilled leadership with decades of diverse experience. This includes employees who are experts in convenience stores, full box multi-unit retailing, merchandising, fuel, environmental, human resources and sales.

We plan to continue to report results of each operating unit and GPMP separately. Our goal is to provide investors visibility into our finances and operation. We believe there are long-term growth opportunities in each operating segment.

Our in-store initiative and merchandising strategy combined with our scale at wholesales are an advantage when pursuing these opportunities. Our priority continues to be the growing capital and attractive returns. We believe our program agreement with Oak Street Real Estate Capital is the unique competitive advantage.

On April 13, we announced an amendment to our agreement with Oak Street, including a one year extension to the agreement and a $1.15 billion real property commitment from Oak Street that they may use during the extended term of the agreement.

This is an addition to approximately $253 million which has already been utilized under the original Oak Street agreement and to the $130 million in real estate, they have agreed to purchase in the Quarles acquisition. We have an aggressive growth strategy.

Working with Oak Street is giving us significant deal-making flexibility and the ability to close deals at highly attractive multiples. As a result of our cash generation ability and our strong financial position, we have continued to return capital to our loyal stockholders.

Our Board of Directors has declared our second quarterly dividend and we continue our publicly announced share purchase program up to an aggregate of $50 million. Our excellent results demonstrate our strength and capabilities. We continue to execute our differentiated strategy.

We believe our liquidity, deal-making ability and other strategic partnership put us in a very good place as deal-making velocity increases in the market. Importantly, we believe that our scale and strategy allow us to succeed while remaining highly competitive, both on fuel and merchandise.

We strive to put our customers first, particularly in uncertain times. I would like now to turn the call over to Don, who will walk you through our financial results..

Thanks, Arie. I look forward to detailing our strong first quarter 2022 results. In an increasing interest rate environment, we believe we acted with foresight when we issued our senior unsecured notes at a competitive rate of 5.125%. As a reminder, this is a private offering of $450 million aggregate principles due in 2029. Our balance sheet strong.

On March 31, total liquidity was approximately $744 million consisting of cash short-term investments of approximately $300 million and approximately $444 million of unused availability under our lines of credit. In total, we believe that we have many methods to continue our growth strategy.

We believe we have flexibility to make acquisitions at an attractive ROI. We plan to continue to invest in our business and we intend to continue to reward stockholders by returning capital as determined by our board of directors. Total revenue, including fuel, was $389.3 million, a 2% increase from the prior year period.

Merchandise margin dollars increased by $9.7 million versus the prior year, while margin percent increased to 29.5% from 27.4%. Retail fuel profitability, excluding into company charges for the quarter, increased $17.3 million or 24%. We saw a strong year-over-year increase in fuel margin to $37.50 per gallon from $32.10 per gallon.

Same-store fuel volume decreased 3.1%. For the first quarter of 2002 wholesale fuel profitability, excluding intercompany charges, increased approximately $5.4 million compared to the prior year period.

Fuel contribution from fuel supply locations increased by $3.3 million compared to the prior year period due to greater prompt pay discounts related to higher costs and greater fuel rebates. Fuel margin sales per gallon for these locations increased to $7.00 per gallon versus $5.01 in the first quarter of 2021.

Fuel contribution from consignment agent locations grew $2.1 million compared to the prior year period. Fuel margin cent per gallon was $0.29 primarily due to greater prompt pay discounts related to higher fuel costs, greater fuel rebates and improved rack to retail margins.

Although volume sold through consignment locations aggregated 17% of the combined total, fuel margin dollars realized accounted for approximately 45% of the total fuel margin dollar contribution from wholesale.

First quarter store offering expenses increased $21.6 million or 14.9% versus the prior year due to incremental expenses as a result of the acquisitions completed in 2021 and increased in expenses at same-stores, including higher personnel costs and credit card fees.

General administrative expenses increased $5.1 million or 19% for the quarter as compared to prior year, primarily due to annual wage increases and share-based compensation expense. Net interest and other financial expenses decreased by $12.6 million to $16 million in the quarter.

This is primarily related to several factors; reduction of $9.9 million for expenses related to fair value adjustments for our public warrants, private warrants and deferred shares.

$4.5 million of additional interest expense recorded in the first quarter of 2021 related to the early redemption of the series C bonds which were partially offset by lower rate debt outstanding in 2021 and a net period-over-period decreased in foreign currency gains recorded of $1.1 million.

Adjusted EBITDA was $50.1 million, an increase of $7.8 million or 18.4% compared to the first quarter of 2021. Our net income was $2.3 million, an improvement of almost $17 million compared to a loss of $14.7 million in Q1 '21. Outstanding debt, excluding capital leases, was approximately $717 million resulting in net debt of $417 million.

For the quarter, net cash provided by operating activities was $30.1 million versus $11.3 million for the first quarter of 2021. Capital expenditures were $20.7 million for the quarter compared to $17.5 million in the prior year.

On April 29th, our board directors declared a quarterly of $0.02 per share of common stock to be paid on June 15 with a record date of May 31, 2022. We continue our publicly announced share repurchase program for up to an aggregate of $50 million of our outstanding shares of common stock.

During a three month ended March 31, 2022, the company repurchased approximately $1.4 million shares of common stock under the repurchase program for approximately $12 million, an average price per share of $8.49 which we believe represented an opportunistic use of capital.

With our current cash flow and operating results, we expect to continue this program while investing appropriately in our business. As of March 31, 2022, there were $123.2 million shares of Arko common stock outstanding. We ended the quarter with 1,396 resale sites and 1,625 wholesale sites.

I am pleased that we have demonstrated our strength and capabilities. We had another quarter of solid financial results. We continue to execute as we navigate through a very turbulent environment. We believe we are well-positioned for long-term success. And with that, I will turn it back over to Arie..

Thank you, Don. We believe we are primed for continued growth. I'd like to thank over 11,000 team members for their continued efforts to exceed our customers' expectations. We believe that we are a unique business and a differentiated market leader. We've made significant progress as our company has grown.

We think, execute, drive growth and increase top all the value over the long term. Thank you for joining the call today and your interest in Arko. I will now turn it over to the operator for questions. Operator..

[Operator Instructions] Our first question is from Bobby Griffin with Raymond James..

Don, I was hoping could you maybe give a little bit more detail on the one remodel that you referenced? Not particularly the list but just what type of remodel was that? Was it a complete tear down to the land and rebuild a store or was it one of the lighter capital ones? How long did it take to do? What type of capital did you have to spend in that remodel for the example? Just anything like that to help us put some context around those impressive results for the store..

Sure, absolutely. This is store 3894, the store that I mentioned. We opened the store just in November of last year. The results that we are actually seeing over here which are absolutely great results, are results that for the first quarter of 2022. That was full raise and rebuild.

Store before was 3,500 square foot store, today it's close to 5,700, 5,600 square foot stores. We added additional diesel canopy at the back. This is the store that you see in our presentation, the full picture in our presentation sitting on 6.4 acres.

From start to finish, it took us a little bit less than a year and that was just because we had to basically work on major plans over here given the size of the store and given where the store is located. As I mentioned, you see the results over here. The results are just absolutely great.

The sales in the stores, ex cigarettes, almost exceed a hundred percent from the prior year..

Is that a remodel that's over and above compared to what we're going to target? The second part of the question is, when do we get into a time period where we'll have the pace of remodels being a little bit more faster than they are now? Given those results, investors would like to see more remodels happen, obviously, because the list is pretty impressive..

Sure, absolutely. I just want to go back to what I said takeovers for the quarter. As you remember, we state that we are going to do 10 stores. We basically completed two first stores last year that was basically putting a prototype together.

Since then, we finish our first raise and rebuild at the end of November and this quarter we completed five stores. As we sit over here, when I said this quarter I mean Q2, we completed five stores of remodel and we are just completing number six this week. We're going to have a total of nine stores altogether.

So far, from early results and early remodel, as you can see over here and appreciate, we see that the best results are coming from raise and rebuild and this is something that we are concentrating at the moment while we are learning from the others.

The other six that just opened in the last, I'll call it anywhere from 30 days to this week, we are going to continue to carry information to learn from those results. Again, those are much smaller remodels. This is around $650,000 remodel. Based on the information that we learned so far, as I said, we are going to continue to increase our pace.

I would say we'll probably take us another quarter to learn a little bit more and then we're going to make a decision. As I said so far, it took like concentration going the raise and rebuild that we just completed and see those high double-digit increases.

One more thing I just want to say Bobby, while we waiting for those results, as you can imagine, we're not stopping. I don't need to tell you that price increase given what is happening in the marketplace from the construction standpoint. While we are waiting for those results, we are doing other things in between not to just wait for a full remodel.

For example, the 50th remodel that we have decided to open this year was while we actually waiting for those results, we want to make sure that we are not waiting and stopping, we're actually moving forward. As I said, we open three Savara [ph] already. A number, basically four, actually opened this month.

We have another five in the pipeline that are already in process, are in the work and we do some other initiative, for example, that's the reason we decided not to wait for the bean-to-cup. Usually, we put bean-to-cup only in remodel stores.

We have decided not to wait and put 525 stores bean-to-cup coffee machine to make sure that we actually avoid the delay over here while we're learning and getting more information over here..

That's exactly what I was about to add in but exactly what already said that there's many features of these remodels we don't want to wait in. Arie just said it. We want to take the low-hanging fruit and take advantage of those opportunities without waiting for remodels to happen..

Just last comment on that, Bobby, because you asked the question and I understand the question, about keeping the pace or actually increasing the pace. That's exactly the reason why we've actually put those initiatives in place.

While we are waiting for results, we are basically getting the other initiative in place which of course, all of those initiatives that I mentioned, as you can imagine, will continue to increase store profitability while we actually learning from the ones that we just completed..

Okay. Understand.

Second question for me and I'll jump back in is just we get a lot of questions over rising gas prices and any change in customer behavior in terms of trips or amount of items they're buying in the store, basket size, so maybe just curious throughout the quarter, when you saw prices move up, did you notice any changes in your customers around any of those metrics that would be helpful in us knowing and understanding?.

Sure. First of all, this is something that we see almost every time, every few years when we actually see a huge price increase going from $60, $70 last year to over a hundred, 120 at some point in the queue you always see that people have less disposable income in their pocket.

Because of that, of course, we see customers coming in more often to fill gas. If last year in order to fill your car it took $30, $40, we might see once a week and up, given that people are not driving as they used to drive the past. Right now, all of the sudden with $80, $90, people coming more often.

We see people coming more often to fill their cars. There are actually, of course, there is more trips. At the same time, as I kept, mentioning before we are in such different markets, we are in rule and secondary market, such the coalition between people coming for gas or keep people coming inside the stores are very, very little.

There is no question that you see an increase in customers coming actually to fill their car versus what we saw last year. No question about that..

Our next question is from Kelly Bania with BMO Capital..

Wanted to just start with gallons and curious how gallons are tracking relative to your expectation, both within wholesale and retail? If you can maybe help us understand where retail and wholesale gallons are on a same-store basis or same-site basis, I guess, relative to 2019..

Not a problem.

Don, would you like to take it?.

Yes. As far as same-store, we were down 3.5%. In terms of wholesale, we actually don't have the same store record. We have not tracked it against 2019 but we're obviously not back to 2019 levels, nor do we project any time soon that we're coming back to 2019 levels.

This is one of the reasons, Kelly, I think we've talked about before, why we're seeing some of the expanded margin in the market. With a lot of businesses doing the hybrid work from home, we don't expect that to happen.

The philosophy is that we basically go after is that we're going to be competitive out there in the marketplace and do the best we can to optimize fuel margin dollars. Yes, fuel gallons are important and we keep adding fuel gallons for our acquisitions but at least our belief is we don't think we'll see a real return to 2019 levels..

Okay, that's helpful.

Can you just help us understand a little bit on the expense line where same-store wages are tracking any color on what that is looking like, how that compares to your expectation and just any color on what you're seeing from credit card fees and how that impacted the quarter?.

I can give you a number on same-store credit cards. It's about $3 million higher than what we had in Q1. That number I have. On personnel, we expected it to be higher. We're running a little bit under our expectations for the quarter but we'd already planned for this to be higher so it's not a surprise to us.

Obviously, the surprise for the quarter was the credit card piece but obviously somewhat offset by two things. Number one, prompt pay and also by higher fuel margin but we absolutely expected the personnel expense to be higher but it not as high as what our expectations were..

Is it stabilizing or is it accelerating? Just any color on the direction you're seeing in terms of labor and wages?.

I think 2021 was a really volatile of the year for wages. We see it stabilizing. We see open positions lowering and we see it's like setting to a new level. It's not as volatile as it was in 2021.

It's definitely not what was back to pre-pandemic and we all know that's a new level we're set at but as I said before, I don't believe we're going to see wages take the same pace up that we saw in 2021, although we will in certain pockets as everybody's competing for labor.

Again, our expectations that we set for ourselves that it's running slightly below and quite frankly, I'd like to see that number come up because that means while we're much better off from a staffing perspective, like every other retail business, we still have open positions and open positions while they save money on labor costs, we would do better to have the stores fully staffed.

With that said, our stores are open, they're staffed but obviously the more staffing you can have and the more customer labor you can have, the better it is for us..

Kelly, I would like to jump just with your prior questions regarding to gallons between retail and wholesale. I want to point to something that I think is very, very important for you to pay attention and for everybody, of course.

If you remember, we mentioned of course that profit dollars is very, very important to us when it's come to fuel and you saw this quarter $9.7 million above prior year. Something very importantly to take a note over here is historically on wholesale, our average was $0.05 per gallon.

That was what we actually kept talking about stores wholesale business it was a $0.05. What happened is that since we actually bought Empire and continue to renegotiate contract, with contract renegotiation, with prices of fuel at such level, we receive actually a greater prompt pay discount related to higher fuel cost. We are today at around $0.07.

Again, given those two things that I just mentioned, we believe that $0.05 actually will stick right now at $0.07 during this period. I think this is something very important to note from that..

Perfect. That's very helpful.

Don, just, just to follow up on the labor, where are you from a staffing perspective? How much more do you need to get to where you would like to be in terms of fully staffed position?.

I don't have that exact number of where it is from a percentage basis. I will tell you it's better. I know we are planning on and we've done a lot of initiatives from a hiring spree. Our focus has been on making sure that the key positions like managers, district managers and things like that and we've done a great job on closing that gap.

As you know, the hourly retail employee is a very tough employee to get. Turnover since we launched a lot of our programs like we did a lot of the $500 for 500 hours and we've tracked them and we've seen their turnover is much less.

I know Arie is considering several programs to do coming out and there'll be more information brought out that in the future but that's obviously one of the key things on our number.

The numbers are better and obviously, the other thing that's better is with Omicron which really hit us really hard in January, because once somebody has this, it's not just the person that's out but it's the crew that had it as well. Omicron really hit us hard in January with a lot of openings. Now we're down to zero and three cases a week.

That's been a real help in helping our staffing. I know those are initiatives that Arie will be talking about in the future about things that we're doing not only to bring on staffing but also to retentions for our existing staffing too..

I want to mention something just to add one more comment on this one. We are no different than any other retailers, let's put it this way. Everybody is competing on the hourly associates. I can tell you, Kelly, that where we are today versus where we were in 2021, it's an absolutely different basically world if you compare it to last year.

As Don mentioned, Q1 was tough beginning of January, that what takes actually tough for everybody with Omicron. Don't forget, last year, people had more money to spend. People received a lot of it from the government, so the labor market was a little bit more tougher. I think we're very, very pleased with where we stand today.

We have very little amount of stores that we had to change hours basically in Q1. Again, most of it was really because of COVID nothing related to labor. Just to give you maybe just one more point for reference is since we launched the $500 for 500 hours, I can tell you that the turnover decreased by almost 50%.

Again, we have a lot of more initiatives like this coming in especially now adding towards the summer, we are starting a big hiring campaign to hire up to 5,000 employees during the summer. Of course all of those initiatives helping every retailer in the marketplace..

Okay. This is very helpful. Thank you. Just one last one for me and then I'll pass it on.

Just the comment that you made about increasingly or being positioned for an increasingly price-sensitive consumer environment, can you just elaborate a little bit more on what you are seeing, when did it start inside the store at the pump and do you anticipate making any adjustments to your strategy in terms of pricing or otherwise as a result of what sounds like a changing environment?.

I don't think anything changed since last year. Price increase is taking place, especially now when most of the issues that you see with a lot of shipments is that, a, you don't have driver and if you have finally drivers, the price of shipping actually increased dramatically.

What we're trying to do, we're really trying to concentrate on items that the consumers are looking for. There is no question that given that we are going into you recession right now, we are in recession already and people have less money to spend, we need to concentrate on items that people can afford.

That's the reason I mentioned the pizza, for example. There is a reason why we relaunched 210 stores with pizza. We are selling pizza to, for example, to loyal customers we are selling pizza for $0.99.

We concentrate on things that we can actually lower costs, like the bean-to-cup coffee, for example, that give us the opportunity for very little waste, less labor intense. By doing that, we can be more competitive from better pricing to our consumers. Again, it's really across the board.

It's not one item but given that you have pricings, we need to find ways how to decrease prices or how to actually provide more attractive prices to our consumers. That's where we actually add our marketing team and our merchandising team basically going after all of those initiatives and making sure that we have the rights offering in place.

I don't think we are going to change, or we will change any strategy. As I mentioned, the grab-and-go that we actually initiate last year is very successful. This is again, one of the items that we did when we actually felt that there's going to be an opportunity given where we are heading.

Just for your reference, we are right now, this is the first year that we are going to have a full year of grab-and-go and frozen food. I kept talking about this last year, just for your benefits, Q1 gross profit dollar in grab-and-go increased by 18.9% while sales increased by 20.1%, frozen food.

It's another item to help consumers because, at the end of the day, consumers need to feed their families. Our frozen food, since this is the first year that we have full year initiative, frozen food, increased gross profit dollars increased 65%, while sales increased this quarter by 88.7%.

It just show you that all of those initiatives that we put in place last year thinking where we are heading are actually working right now and working very, very well..

Our next question is from Mark Astrachan with Stifel..

Maybe just starting on building on the last set of questions, maybe talking a bit about out the same-store sales or in-store sales, any impact there from staffing? It sounds like it's still, obviously not where you want it to be.

Do you see anything from that or perhaps any sort of impact from all of the pricing that we hear from your suppliers the consumer staples companies, is that having any impact on it? Is the volatility on the fuel prices having an impact on it? Just directional color on how you think about the correlation and those things, or maybe other items which are correlated which I didn't mention would be helpful..

Sure. So, let's start with staffing. I don't think staffing -- of course, everybody would like to be 100% staffed in their stores but that's not going to happen any time soon at any retailer. So, I don't think from a staffing standpoint there is any issue.

Remember, we are not -- our foodservice business, as you can see is adding pizza, grab-and-go sandwiches, so we are less labor-intense when it comes to our inside sales and that's probably why we are not being impacted like some of the others that are heavily involved in foodservice. I think from a staffing standpoint, we are in a good place.

Basically, from a cost standpoint, if you're really looking on our sales X cigarettes, we had a terrific quarter. We really had a terrific quarter and that's, by the way, you're looking on margin, you see an increase in margin.

I think what we see over here is that the top performers during the quarter were really -- and that's where you see that the business is going in the right direction.

Pacbev [ph], for example, even though this is first quarter which is the lowest quarter, Pacbev [ph] was up in terms of sales by 1.6% but the margin basis point basically, we were up 310 basis points, for example. The same thing you see on candy.

Candy was up 3.9% with 6.4% increase basically in margin and that's what drove the margin by the way, over here. You see a big decline in cigarettes, however, on the other side, you see a huge increase in OTP. If you're really looking on total nicotine, total nicotine was basically up, especially on margin.

Our margin, basically on total nicotine was up dramatically, same still margin on OTP was up 660 basis points which means that you see that people are just shifting from one category to another but we actually see the business, I mean, the business continue to be very healthy while we are able to increase margin which means that the sales X cigarettes continue to grow over here.

So, I don't think there is any issue, inflation could actually create any issues over here. I actually think it's great, some opportunities in terms of the mix that we would be able to actually change over here and offer to our consumers..

Got it. Okay.

Then, shift thing over to M&A opportunities, could you remind us, or maybe talk to your comments on the macro environment as well as volatility of fuel, how does that potentially impact, or how has that historically impacted opportunities in M&A? I assume it helps from a small or mom-and-pop type place that just doesn't want to deal with it.

Does that make it more or less opportunistic relative to where you'd be in a normal world, whatever that is?.

Sure. So, I keep talking about CPG and we actually believe CPG increased just because gallons are -- actually gallons driven are down and there's some other challenges within the box. You mentioned mom-and-pop and smaller basically chains. So, I think the issues that they're seeing between are inside the box that would actually drive CPG up.

If one day CPG decrease, I'm assuming that we are going to see an increase inside the box with everything going on over here. With that being said, the pipeline is very active right now, especially Q1 is always the slow Q but I can tell you that as the year continues to ramp up, we see a lot of opportunities.

Just in the last basically couple of months, we see a lot of opportunities coming into market, I think actually this year it's more active than last year same time and I think given where we stand from a liquidity standpoint, the agreement, if Oak Street Capital that we just signed for $1.15 billion, I just think that give us a great opportunity to continue to actually grow to those acquisition.

As I said, I think that we are going to continue to see more activity in the marketplace, as people actually continue to see those challenges. We keep talking about the inside sale, we keep talking about inflation, supply chain interruption.

I just want remind you we are number six in the country and if number six in the country, we are dealing with supply chain interruption, you can't even imagine what are small guys are actually dealing with right now? So, like you said, when they start to see all of those issues that they run into, I think that's basically what changed their mind and say, "You know what, this is maybe an opportunity for us to get out, it's not going to get better anytime soon.".

Our next question is from Karru Martinson with Jefferies..

When you talk about pricing competitively in these rural and secondary markets, who are you going up against?.

We are competing with the large national players and at the same time we are competing with basically the local chain that are in town. I mean, every market is different.

Every market is different and some of them, you are dealing with the mom-and-pop across the street and some of them you're dealing with as I said, large chains that are out there but we basically keep being competitive. That's really, really what you have to be. You have to be competitive in the marketplace that you are actually operating.

That's the reason the loyalty program come into play, that's why loyalty program is very, very important for us and especially in those markets because as I mentioned if you really look on those small town and small markets, I keep telling everybody, our customers are probably the same customers that are coming in on a daily basis.

As we continue to grow a loyalty base, it just show you loyal customers that are actually coming to our stores, are coming seven times more to our stores and spending $90 more than, I'll call it the non, you know, engaged, loyal customers.

We are talking about registered customers that we can talk to and we can offer, you know, provide them those offerings. Again, those are really the customers that increase their basket and coming more often.

As I said, you have to be competitive across basically from a cigarette standpoint, to beer standpoint, to everything else in the store over there. But there's no question that the number one item that you need to be competitive is of course, nicotine, given that nicotine represents a high basically percentage basically within our store.

Even though numbers keep going down, I mean, at the beginning of the pandemic just for your benefits, we were at around 40% cigarettes as basically percentage of sales.

And today we are at 35% which means that as you can see, we keep increasing base over here which means that we're either selling the right product or customers like us and they're coming more often..

Okay. When we look at holding the fuel margin at the level we are and seeing the merchandise margin, I just wanted to reconcile that with the drop and the overall EBITDA margins that we saw as this percent of sales.

Is that just because of the wholesale impact this quarter, or it's just trying to reconcile that? What was driving that?.

Don, would you like to answer that?.

Yes. If you're looking at EBITDA margin as a percent of sales, I mean, that's going to drop just because if you've got fuel sales in there, naturally sales have gone up, I mean, the price of fuel has gone up and obviously, the revenue of fuel has gone up.

So, naturally, with taking the big increases that we've had in fuel, that margin will come down, that's just a matter of math. Again, if we go down into the $2 range, it would show a better margin but our focus really is on cents per gallon and what that overall fuel GP is..

Right. Just wanted to make sure I wasn't missing anything there.

Then as you look at those tuck-ins and that M&A strategy, any change to what you would consider a target leverage of where you want to run this business?.

No, I don't think anything changed in terms of leverage. As I said, we keep having liquidity, we keep spending and doing acquisition, as you remember we just signed a new acquisition, a nice one at the beginning.

Just say last quarter in February, we signed the cold acquisition that we are planning on closing and as you can see, we continue to be consistent.

We are looking to deploy our capital very attractively, I don't think anything is going to change, this is going to be acquisition number 21 already and I don't think we have to change anything other than continue to be competitive.

I think given where our liquidity is sitting right now in the marketplace and give even that we were able to fix our interest rate for example.

As Don mentioned, last a year when we actually raised our bonds $450 million for 5.125% interest rate for the next eight years or for the next seven and a half years fixed, given that and given the amount of cash that we actually carry and the agreement of the Oak Street, I think gave us the opportunity to go after larger deals and not compete basically on increase in interest rates, for example..

Right.

Two comments on that, if you look at our liquidity for year-end versus where we're in Q1, we're only $6 million lower and that's after doing share purchases of $14 million, paying dividends, putting a $5 million deposit down on the Corals acquisition, so Q1 is usually a lower cash generation, so we spent a lot of cash in Q1 and yet our liquidity only went down by roughly $6 million.

So, we will lever up like we did for the Empire deal, we will lever up but then we can see a clear pathway to bring it down which it has come down as long as we can see what the opportunities or synergies are for us going forward..

Our final question comes from William Reuter with Bank of America..

Following up on the last question, Karru's question, in terms of how high you would take leverage given you mentioned the M&A pipeline is strong.

Is there a number for the maximum that you would go up to before we start delevering?.

Our target internally is 2.5 and leverage is measured several ways. We look at it as net leverage and we don't look at capital lease, because those are mostly real estate capital leases is defined in GAAP. Our target is 2.5 but we will go up. We will go up to a 4-lever or 5-lever as long as we can see that coming down.

An example of that is the Empire acquisition because that wasn't just what we could do for empire but what that did for us as a total company. So look, every deal stands on its own, there's no magic number that we stand on, if we see a deal where it has a much higher leverage and we see a pathway down, we're not committed to same number.

I think we're committed to a certain leverage target long term but there's not a magic number that we look at for any one deal..

Yes but just to be clear, I just want to maybe finalize the comment over here. Just to be clear, I think the targets continue to be 2.5 times that's just for your benefit, the target. Remember, we closed Empire just a year and a half ago. So, yes we lever but look how we came all the way down back.

When we lever, we actually lever when we buying businesses that generating a lot of cash flow and we know that in a very short order we'll get back to and that's what we did on Empire. That's just a great example but nothing really changed from a strategy standpoint or from the leverage standpoint.

As I said, given all liquidity and given our agreement with folks, I don't think should take a long time for us actually to lever highly and have to actually be very important for us to do that..

Got it. That makes sense. Then, Arie, on the increase in your merchandise offerings with some lower prices, you mentioned pizza and coffee, grab-and-go sandwiches, a lot of supermarkets have mentioned they're still seeing strength at relatively high-priced items.

Are you already seeing a trade down from higher-priced items, or are you just positioning yourself for what you anticipate?.

First of all, we are always, you know, the things that people are buying in our stores, I would call it the lower-priced items anyway. They're buying candy, they're buying drinks, so we are not really competing with supermarkets but I don't think anything changed. As I said, I think the only thing that changed is with our initiative.

I think the increase in margin is really because of the initiative that we're actually able to put in place. That's really the story, I mean, there is a big change in basically consumer behavior, the basket that we are selling right now, of course decreased cigarettes and increase other items that got a much higher margin.

Just to remind everybody, we are at 29.5, 210 basis points on the lowest quarter of the year. So, my belief that we are going to continue to see margin keep increasing, you know, we finished the year last year in 2021, at 30% margin with margin at first quarter at 27.5.

We are right now at 29 point, we already 210 basis points on bulk prior year, so I believe the trend will continue and we'll actually see increase in margin here to stay..

Okay. And then on the strong retail fuel margin, I think throughout history rising fuel prices have contributed to lower margins, however greater periods of volatility, I think, lead to higher margins.

Is it the volatility that has led your margins to be so strong, or what would be the other contributing factors?.

Well, volatility is always good given our business, volatility is absolutely good but I think what happens since the beginning of COVID just as I said, consumer behavior changed dramatically, a lot competition lost their morning traffic and lunch traffic and given that they're relying heavily on the morning breakfast and the lunch traffic over here, that's what drove margin outside the box higher.

I think until we see a big shift, it has to be a very, very big shift inside the stores, I think until then my belief is that margin is here to stay. That's just my belief.

It's really trading dollars for one side to another, we were fortunate enough that you were -- unfortunately we were not heavily involved in foodservice back then, so we were not basically impacted like some of the others, that's probably the reason for that.

I really believe that based on trend and based on what I see in the marketplace that the gallon is going to continue to decrease while margin is going to continue to increase. That's my belief..

Okay. Then just lastly for me, on the strong wholesale fuel margins of $0.07, you referenced that there was some purchasing scale getting bigger.

Is this related to your purchasing scale, or is this related to I guess a better competitive position with your customers? I guess what would be the couple contributing factors there?.

I think this is two parts. Number one, there is the better margin piece of this which we should continue to keep. There's also a factor of higher fuel costs. So, as fuel cost come down, we will lose that piece of it but we will maintain the higher rebate portion of it.

So, it's kind of a hedge against credit card fees which go up, because credit card fees obviously are cost of fuel but prompt pay discount affects both our retail business and our wholesale business.

So, the piece of it that's related to the prompt pay, obviously, if wholesale fuel costs come down, that will come down somewhat but obviously, that will translate it into more gallons but there's a piece that will stay and that's related to better negotiations with rebates that we're realizing..

Just to add one more comment on this one. As I mentioned, remember right now we are enjoying the prompt pay discount on $100, basically, a barrel versus in the past was lower but remember when those prices come down, the credit card fees will come down as well.

So, it was a hedge that was obviously created non-intentionally but that's basically have an edge that actually was created over here and I think that will be the trade-off.

So, when you see the wholesale basically gross profit goes down a little bit, you're going to see an increase in gross profit basically on the retail piece which represents, of course, the bigger piece of our business..

We have reached the end of the question and answer session and I'll now turn the call over to Arie Kotler, for closing remarks..

Thank you very much, Kyle and thank you, everybody. It's been pleasure being with all of you guys today here, I want to thank you for joining the call and I can only wish you a great summer. We're adding into a 100th day of summer, that's basically our biggest business is to a 100th day of summer and I wish everybody success over here.

Thank you, again..

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation..