Greetings. Welcome to Arko's Financial Results Conference Call for the First Quarter of 2022. Please note that this call is being recorded. I will now hand it over to your host, Ross Parman, Vice President of 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 meaning 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, and 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 Form 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 an 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 were much different from a consumer and business perspective. In the first quarter of 2021, COVID vaccines were rolling out, consumers had significant spending power, and 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 stack basis, same-store merchandise sales, excluding cigarettes, increased 9.3%. We see a promising sales 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 our fuel competitively. Retail fuel gallons 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 expanding our store base with these strategic long-term programs to ensure that our offering is competitive for both our loyal customers and to attract new customers. In the quick-serve restaurants, we opened two Savara franchises in Q1, barring any supply chain difficulties with equipment. We are on track and expect to open a total of 50 Savara this year. We believe these partnerships add value to our stores and resonate with price-conscious 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, as 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 through 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 numbers reflect the first quarter of 2022 compared to the same period in 2021. Customer count increased by 50%. Gallons sold increased 112.7%. Same-store sales increased 66%. Importantly, same-store sales, excluding cigarettes, increased 94%. We are pleased with these results. 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 our loyalty program. We are pleased with key metrics 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 we can directly communicate with and provide special offers. Two metrics I would like to share show the value of our loyalty program: our customers have made seven more trips per month and these customers have spent about an additional $90 per month more than non-involved customers. 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 announced the Quarles Petroleum acquisition in late February. We expect the closing to occur in the second quarter, early third quarter of 2022. Arko will then have the following operating segments in addition to GPMP: a retail business, one of the largest convenience store operators in America; our national oral 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 operations. 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 a 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 in addition to approximately $253 million which has already been utilized under the original Oak Street agreement and 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 partnerships 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 in both 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 is strong. On March 31, total liquidity was approximately $744 million, consisting of cash and 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 the 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 intercompany 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 2022, 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 increases 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 the 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: a 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 decrease 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 29, our board of directors declared a quarterly dividend 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 the three months ended March 31, 2022, the company repurchased approximately $1.4 million shares of common stock under the repurchase program for approximately $12 million, at 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-line 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.

Our first question is from Bobby Griffin with Raymond James.

Don, I was hoping you could 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 a full raise and rebuild. The store before was a 3,500 square foot store; today it's close to a 5,700-5,600 square foot store. We added additional diesel canopies 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 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, excluding 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 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 takes over for the quarter. As you remember, we stated that we are going to do ten stores. We basically completed two stores last year that were basically putting a prototype together. Since then, we finished 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 on 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 a $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 it will 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 are 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 opened three Savara 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 initiatives, 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 machines 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 initiatives 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 the number 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 a sudden with $80, $90, people are 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 rural and secondary markets, such that the correlation between people coming for gas or keep people coming inside the stores is 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.

I wanted to just start with gallons and curious how gallons are tracking relative to your expectations, 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 from 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 it was obviously somewhat offset by two things. Number one, prompt pay and also by higher fuel margins, but we absolutely expected the personnel expense to be higher but 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 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 is 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 gallons between retail and wholesale. I want to point to something that I think is very, very important for you to pay attention to and for everybody, of course. If you remember, we mentioned, of course, that profit dollars are very, very important to us when it comes to fuel, and you saw this quarter $9.7 million above the prior year. Something very important to take note of is that historically on wholesale, our average was $0.05 per gallon. That was what we actually kept talking about stores in the wholesale business; it was at $0.05. What happened is that since we actually bought Empire and continue to renegotiate contracts, with contract renegotiation, with prices of fuel at such levels, we receive actually a greater prompt pay discount related to higher fuel costs. We are today at around $0.07. Again, given those two things that I just mentioned, we believe that $0.05 will actually 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 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 of 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 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 retain 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’s 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 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 help 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 increases are taking place, especially now when most of the issues that you see with a lot of shipments is that, A, you don't have drivers 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 a recession right now, we are in a 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 at $0.99. We concentrate on things that we can actually lower costs, like the bean-to-cup coffee, for example, that gives us the opportunity for very little waste, less labor-intensive. By doing that, we can be more competitive with better pricing to our consumers. Again, it's really across the board. It's not just one item, but given that you have prices, we need to find ways 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 right offerings 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 initiated 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%; in frozen food, 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 a full year initiative, frozen food, increased gross profit dollars increased 65%, while sales increased this quarter by 88.7%. It just shows you that all of those initiatives that we put in place last year thinking about 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 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 in 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. Let's begin with staffing. While everyone desires to have full staffing in their stores, that's unlikely to be realized in the near future across any retailer. Therefore, I don’t see any issues from a staffing perspective. It’s important to note that our foodservice business is expanding with additions like pizza and grab-and-go sandwiches, which requires less labor for inside sales, possibly explaining why we aren't as affected as some others heavily focused on foodservice. Overall, from a staffing standpoint, we’re in a good position. From a cost perspective, if we examine sales excluding cigarettes, we had an excellent quarter. We saw growth in margin as well. The top performers during this quarter indicate that the business is moving in a positive direction. Pacbev experienced a sales increase of 1.6%, and we had an improvement of 310 basis points in margin. Similarly, candy sales rose by 3.9%, accompanied by a 6.4% increase in margin, contributing significantly to our margin growth. While there was a substantial decline in cigarette sales, we observed a significant rise in other tobacco products (OTP). Overall, total nicotine sales increased, especially in terms of margin. The margin for total nicotine rose dramatically; specifically, OTP margins improved by 660 basis points, which indicates a shift in consumer preferences from one category to another. We continue to see a healthy business with increasing margins, suggesting that sales excluding cigarettes are still growing. Thus, I don't foresee any challenges arising from inflation, and I genuinely believe there are excellent opportunities to adjust our offerings for 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. I want to emphasize that we believe Consumer Packaged Goods (CPG) increased despite a decline in gallons driven and other challenges within the sector. You mentioned smaller chains struggling, which may be contributing to the rise in CPG. If CPG were to decline, I anticipate an increase in activity within the sector due to current challenges. Right now, our pipeline is very active, particularly as we enter Q1, typically a slower quarter. However, we see many opportunities emerging in the market, and I believe this year is more dynamic than the same time last year. The recent agreement with Oak Street Capital for $1.15 billion puts us in a strong position to pursue growth and acquisitions. I expect continued activity in the marketplace as these challenges persist. As a leading player in the industry, we face supply chain disruptions, and I can only imagine the difficulties smaller companies are encountering. When they confront these obstacles, it may prompt them to consider exiting the market, seeing it as an opportunity given that conditions aren't likely to improve 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 the local chains 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 comes into play; that's why the loyalty program is very, very important for us, especially in those markets because, as I mentioned, if you really look at those small towns 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 shows 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 come more often. As I said, you have to be competitive across 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 percentage of sales 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 a percentage of sales, and today we are at 35%, which means that as you can see, we keep increasing the 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 in 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 making acquisitions, as you remember we just signed a new acquisition, a nice one at the beginning of the 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 given even that we were able to fix our interest rates, for example. As Don mentioned, last 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 Oak Street, I think gives us the opportunity to go after larger deals and not compete on increases 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 Quarles 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 leases because those are mostly real estate capital leases 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 the 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 back down. When we lever, we actually lever when we're buying businesses that generate 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 it 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 initiatives that we're actually able to put in place. That's really the story; I mean, there is a big change in consumer behavior; the basket that we are selling right now, of course decreased cigarettes and increased 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 the first quarter at 27.5. We are right now at 29 point, we already 210 basis points on the bulk prior year, so I believe the trend will continue, and we will actually see increases 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?

Volatility is generally beneficial for our business, and I believe it's particularly advantageous. However, since the onset of COVID, consumer behavior has changed significantly. Many competitors lost their morning and lunch traffic, as they depended heavily on those times for business, which contributed to our margin improvements. I think unless there's a substantial change within the stores, margins will likely remain stable. That's my perspective. We're essentially reallocating funds between different areas, and fortunately, we weren't heavily involved in foodservice during that period, which may explain our performance compared to others. Based on current trends and observations in the market, I believe that while gallon sales will likely continue to decline, margins will keep increasing. That's my view.

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 of 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 costs 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 the cost of fuel, but prompt pay discounts affect both our retail business and our wholesale business. So, the piece of it that's related to prompt pay, obviously, if wholesale fuel costs come down, that will come down somewhat, but obviously, that will translate 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 unintentionally, but that's basically an edge that actually was created over here, and I think that will be the trade-off. So, when you see the wholesale gross profit goes down a little bit, you're going to see an increase in gross profit 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 a 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 the 100th day of summer; that's basically our biggest business is to the 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.