Greetings, and welcome to the Arko Corp. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ross Parman, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, and welcome to Arko's fourth quarter and 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, annual report on Form 10-K for the year ended December 31, 2022, has been filed with the SEC and our earnings presentation is available on Arko's website at arkocorp.com. Before we begin, please note that all fourth quarter 2022 financial information is unaudited. And 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 our press release, our annual report on Form 10-K for the fiscal year ended December 31, 2022, and our other filings with the SEC 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, adjusted EBITDA, and free cash flow. 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 our financial information presented in accordance with GAAP. Please refer to our earnings press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we're 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. And now I would like to turn the call over to Arie.

Thank you, Ross. Good morning, everyone. And thank you for joining us. Before we get started, I'm sure you will all love to hear that Don announced that he will retire after a distinguished 42-year career. Don is a great partner and resource. As we reported he will remain in the position for several more quarters, leading the finance team while the search for his replacement is underway. Don's time with the company has been marked by significant growth and excellent performance in our business. And 2022 was another year of strong results and continued expansion. This result emphasizes that at our core, Arko is a retail convenience store operator. It is important to remember that the majority of our profits are generated in our stores. Arko increased operating income by 18.9% or $33.7 million in Q4 2022, versus the prior year fourth quarter. Adjusted EBITDA increased 24.1% compared to Q4 2021 to $72.4 million in Q4 2022 and increased 17.3% year-over-year to $301.1 million in 2022. Our balance sheet continued to be very strong. In Q4, the company recorded $69.5 million in net cash provided by operating activities and $43.8 million in free cash flow. For the year, Arko generated $209.3 million in net cash provided by operating activities and $110.7 million in free cash flow. This is a direct result of executing our core strategy, both in-stores and in fuel sales across the business. In 2022, we continued to successfully invest in many initiatives in our stores. Over the past four years, we have realigned and expanded our marketing and merchandising team, their strategic initiatives have successfully led to continued gross profit expansion inside our stores. Compared to 2020, merchandise contribution has grown by 23.4%. According to IRI in 2022, total dollar sales in our stores outpaced the market share during the string of our favorable assortment, loyalty, and marketing programs. This includes key product categories like beer, wine, packaged beverages, packaged sweet snacks, frozen foods, alternative snacks, and general merchandise. Q4 merchandise margin increased 50 basis points to 30.5% from 30% in Q4 2021. Merchandise margin expanded by 110 basis points to 30.4% for full year 2022 compared to 29.3% in 2021. Fourth quarter same-store merchandise sales excluding cigarettes increased 9.2% on a two-year tax basis. IRI data also shows that we maintained share in our competitive retailer market area including cigarettes and grew by 10 basis points excluding tobacco products. Fourth quarter 2022 same-store sales including cigarettes increased 1.2%. It is worth noting that the concentration of same-store cigarette sales declined from 38.7% of in-store sales in Q4 2020 to 32.7% of in-store sales in Q4 2022, due to change in consumer behavior and our margin optimization strategy. We continue to price tobacco products competitively to attract adult tobacco consumers; however, our main in-store focus is to lead with an assortment relevant to our customers and on developing our programs in higher margin items like food service and dispense beverage categories. Our in-store growth strategy is based on three key pillars. The first pillar is to grow sales in core destination categories for data-driven decisions that meet today's customers' needs. When we acquire new sites, we often add hundreds of items to the acquired stores. We focus on key merchandise that we know resonates with our customers. I will detail the benefits of this shortly in a brief case study of our Handy Mart acquisition. The second key pillar is using our fast rewards loyalty program to develop and strengthen the relationship with our customers. Our objective is to drive more trips inside stores while providing exceptional value. We ended the year with almost 1.3 million enrolled loyalty members, placed by the consumer response to our current loyalty initiatives, that the customers continue to incrementally grow their total spend over the course of the year. Our loyalty and marketing is evidently resonating with them. For example, our $0.99 coffee program for enrolled members has had very strong results; enrolled members purchased over 741,000 more cups of coffee in 2022 than in 2021. We are in the process of rolling out a new loyalty app which has many exciting new high-value features for the benefit of our existing and new loyalty customers. We are in the final stages of preparing our stores for activation of our new loyalty app, and it will be available in the app store soon. Our goal is to increase new customer enrollment and enhance customer engagement, with real-time information like fuel pricing and rewards balance. We will be able to target customers by their primary store with relevant high-value in-store and in-app deals for our growing numbers of members. We expect that order and delivery will be facilitated through the app, capitalizing on our partnership with third-party services that provide delivery at over 1000 of our stores. We will also be able to make age-verified special offers to adult customers, 21 years and older. Our third pillar is expanding our packaged and fresh food offering including pizza, chicken, prepared sandwiches, and many other options, to borrow and other QSR-like offerings that are components of this pillar. Since establishing this franchise relationship, we now have 18 locations. We continue to expand our food offerings and implement a variety of food options. We are making progress in identifying food offerings at a price point that will resonate with our customers and that we can use across our stores. Our goal is to increase margin trips and average basket size. We know that we have a long runway to significantly increase margin as we expand this important category to meet our customers' needs. We believe that in our markets, we can create a value proposition to position our stores as a food destination. Updating areas of our store with nice food and drink offerings has continued to work well for us. Unit sales of coffee increased 7.2% in 2022 and are trending up. We believe that through continuous improvement in each pillar, our core convenience store business is well-positioned to deliver great results. Turning to fuel, gross profit is the most important metric when analyzing our performance. We believe our strategy to maximize fuel gross profit while maintaining competitive pricing has consistently proven itself in a volatile market environment. We believe our strategy enables strong results as prices decline, as they have from their peak in June 2022, with some volatility throughout Q3 and Q4, and as total gallons in the market decline. We compete in the fuel market by market using a data-driven approach based on a fuel strategy that we have also designed to attract customers into our stores. In 2022, we gained merchandise dollar share in our competitive retail market areas while significantly improving fuel gross profit. This led to, on one hand, same store gallons decreasing by 8.3% in Q4, compared to a 0.2% decline in the prior year quarter, and for the year, same store gallons declined 8.1% compared to a 1.3% decline in 2021. On the other hand, retail fuel profitability grew to $104.3 million, a 16.3% increase compared to the $89.7 million in the fourth quarter of 2021. For the year, we increased retail fuel gross profits by 19% to $416.2 million compared to $349.9 million in 2021. We believe, based on 2022 national fuel volumes, that in all markets overall demand is likely to remain lower than in 2019. We also believe that cents per gallon is structurally higher than it was in the past, given pressures across the operating environment. Operating expenses continue to increase across our industry. The labor market is still competitive, and wage growth has been strong nationally. We believe our strategy is resilient across many price environments, as our results have shown. Turning to M&A. Capital allocation is one of the many things we always think about regarding the best areas to deploy capital. We have a proven track record of discipline and consistent growth. We believe that acquisition will continue to drive EBITDA growth; the company's return on invested capital across our many acquisitions underscores that continued M&A is an effective use of capital. Our financial strength, financing ability, and agreement with Oak Street continue to give us an advantage in our ability to move quickly and close deals. Our balance sheet is strong, with manageable debt and favorable interest rates. Our industry continues to be highly fragmented. As a result, the overall deal pipeline is still strong, and we expect to expand our core convenience store business through our acquisition strategy. There are also opportunities to make accretive deals and acquire expertise in complementary areas that will grow the business. We believe our stores can grow their food offerings. If we believe there's an interesting opportunity or investment that can enhance our stores and create unique value propositions for our customers, we will closely examine the opportunity. We announced four highly accretive acquisitions in 2022, of which we already closed Quarles and Pride. Before getting into further details, I'd like to illustrate how we drive growth in new acquisitions. I want to walk through the 2022 performance of our Handy Mart acquisition that closed in November 2021. Quarter-over-Quarter, we monitor the progress of all of our new acquisitions. We fully reset 36 stores, adding over 700 merchandise items. This is the value that we bring to our customers by increasing the mix of in-demand items. We also implemented our fuel pricing system. For these numbers, I am comparing against seller-provided trailing 12-month figures from May 2021 when we conducted our due diligence. In-store margin has increased 6.9% from 31.3% to 33.5%. Merchandise contribution has grown 10.8%. As of December 31, 2022, we increased average cents per gallon by $0.6. In the two full quarters following the reset, merchandise sales increased 7.6% compared to the two quarters prior to resets. Most importantly, although we added approximately $6 million in rent to Oak Street, we've increased store-level EBITDA by approximately 30% in just one year. The purchase multiple was reduced from about 1.3 times to one time, and our return on investment is 96%. This case study underscores an important part of our strategy in this highly competitive industry. Being an effective capital allocator is essential. But capital allocation alone is not what makes our business successful. Execution in operation is what drives us forward. Our teams have been very effective at improving marketing, in-store mix, and offerings to drive sales at our newly acquired stores. If you're curious about our scale, the efficiencies afforded us by our scale allow us to compete market by market, store by store every day. We plan to undertake similar value-added measures in approximately 155 company-operated convenience stores we expect to add to our network in the first half of this year once we close the remaining two acquisitions announced in 2022. The Transit Energy Group acquisition will add approximately 135 convenience stores and expand our retail territory into Alabama and Mississippi. We expect the transaction to close in the first quarter. The WTG acquisition is anticipated to close in the second quarter. This acquisition will significantly enhance the company's footprint in the attractive Permian Basin market, with 24 company-operated unfilled convenience stores across western Texas. The company will also acquire 57 proprietary fuel card locks located strategically in large industrial areas in West Texas, and Southeast New Mexico, and 52 private card lock sites. These sites service a diverse base of customers. The WTG acquisition fits very well in our business model and builds on the fleet fueling business we acquired from Quarles in July 2022. We realized strong cash flow because of fuel price volatility in the second half of 2022 since closing. The Quarles acquisition, which closed on July 22, 2022, contributed incremental adjusted EBITDA in 2022 of $20 million. This exceeds our expectations based on our modeling. We closed the Price Convenience Holding acquisition on December 6. This was our second deal for 2022. This strategic acquisition of 31 convenience stores, plus a new to industry store that broke ground in July 2022, allows us to expand our New England territory into Massachusetts. We are on page three for integration efforts and look forward to adding value to the stores with a larger assortment and new promotions. In addition to this acquisition in 2022, we fully remodeled six stores and started the planning and engineering phase of an NDI store in Atlanta, Texas. We expect construction of that project to be completed in 2024. We are also expanding our EV network. The Pride acquisition increases our total EV charging network with 18 chargers installed across five stores in Massachusetts. Importantly, prior to our acquisition Pride was awarded several grants to expand its EV charging capacity in Massachusetts, which has aggressive EV targets. We plan to put these grants to use to expand EV charger availability in these markets. As part of our overall strategy, we pursue grants and subsidies across our footprints to expand our EV charging capacity. We have six other active EV projects in various phases of development. On top of our chargers, currently in place in Marysville, Ohio, and Bertrand, Michigan. We continue to identify potential opportunities to install EV charging across our footprint. Our goal is to offer EV drivers convenience and amenities they seek in charging destinations away from their home at areas where we identify sufficient potential demand. One more note, in December, we released our Environmental Sustainability, Social Responsibility, and Corporate Governance Report for the year 2021. We are currently working on the implementation of our sustainability work plans with a focus on long-term value creation. With that, I will turn it over to Don.

Thank you, Arie, and thank you for the kind words. It's no secret that I'm a convenience store fanatic. This is a great industry. And my colleagues and peers at Arko who share my passion are the reasons I enjoy coming to work every day. This is a great company, and a great company to work for. Our growth and strong performance, culminating in the company's inclusion in the Fortune 500 list is a part of my professional life that I'll always be proud of. The company has continued to record excellent results. Our in-store performance continues as our numerous initiatives gain traction. We're making excellent progress with our integration capabilities, which is great for the company. Our other segments have continued to generate stable, reliable cash flows that benefit our capital allocation. Our balance sheet continues to be strong. We have a very good liquidity position as well. As of December 31, 2022, we had cash and cash equivalents of approximately $299 million, our outstanding debt, excluding capital leases was approximately $752 million, resulting in net debt of $453 million. We continue to realize excellent cash flow. For the quarter, net cash provided by operating activities was $69.5 million and $209.3 million for the year, versus $39.6 million for the fourth quarter of 2021 and $159.2 million for the prior year. After the expected closings of the TEG and WTG acquisitions, there will be approximately $575 million remaining under our Oak Street agreement. Getting into results of our convenience stores, merchandise revenue for the fourth quarter of 2022 increased to $403.1 million versus $396.1 million in the prior year quarter. For the year, merchandise revenue increased nearly 2% to $1.65 billion from $1.62 billion in 2021. Margin percentage year-over-year increased by 110 basis points to 30.4%. Capital expenditures increased both as a result of spending supporting our initiatives and other investments in our stores, including six full-store remodels and other necessary upgrades. Total capital expenditures were approximately $98.6 million for the year ending December 31, 2022, which included the purchase of several properties, coffee equipment upgrades, and other investments in our stores. This is compared to net capital expenditures of $73 million for the prior year, which is composed of $226.2 million net of $152.9 million of proceeds paid by Oak Street for two transactions accounted for as deemed sale-leasebacks and the purchase of several properties. In fuel, we continue to believe that margins have moved structurally higher given industry headwinds, declining credit card fees, and higher operating expenses due to labor costs. We believe our strategy of managing margin and volume while maintaining competitive pricing is key to optimizing profitability as a growing company. Retail fuel profitability, excluding intercompany charges for the fourth quarter of 2022 grew 16.3% this quarter, totaling $104.3 million. This was a $14.6 million increase versus Q4 2021. For the year, retail fuel profitability increased 19% to $416.2 million from $349.9 million in 2021. The company increased retail fuel margins to $0.414 per gallon for the year compared to $0.337 per gallon in 2021. Fourth Quarter convenience store operating expenses increased $13.6 million or 8.7% versus prior year, due to incremental expenses related to product position and increased expenses in the same stores. Same-store credit card fees for the quarter increased by $0.7 million or 3.5%, while salaries and wages increased by $7 million or by 11.5%, both compared to Q4 2021. For the year ended December 31, 2022, store operating expenses increased $75.9 million or 12.8% as compared to the year ended December 31, 2021. This was due to approximately $36 million of incremental expenses related to product acquisitions and the 2021 acquisitions, and increased expenses in the same stores, including $32 million of higher personnel costs of 14.2% and $10.4 million of higher credit card fees of 14.5% due to higher retail prices. The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to independent dealers. Moving to wholesale for the year, wholesale fuel contributions, excluding intercompany charges increased approximately $9.7 million. This was primarily due to a 20.2% increase in fuel margin cents per gallon, which was partially offset by a 7.7% overall decline in volume, with gallons from fuel supply locations down 8.4% year-over-year. For the quarter, wholesale fuel contributions, including intercompany charges decreased $1.8 million. Last quarter, we discussed the rapid integration of Quarles, which closed on July 22. We're very pleased with this acquisition in business. This acquisition has produced strong cash flow in the second half primarily because of fuel price volatility. The acquisition added adjusted EBITDA of $20 million for the year. We're very happy with the excellent work done by the highly skilled Quarles team. The fleet fueling business generated fuel revenues of approximately $149.9 million for the fourth quarter and $270.7 million for the year. Fuel contribution, excluding intercompany charges from the fleet fueling side was approximately $16.9 million for the quarter and $27.8 million for the year. Fuel margin cents per gallon excluding intercompany charges was $0.539 per gallon for the fourth quarter and $0.078 per gallon at the third-party Quarles locations. For the year, fuel margin cents per gallon excluding intercompany charges was $0.484 per gallon at proprietary locations and 6.5% per gallon at the third-party Quarles locations. Net interest and other financial expenses for the full year decreased by $11.8 million versus the prior year to $59.4 million. Net interest and other financial expenses for the quarter were $16.3 million, compared to $16.2 million for the prior year quarter. Net income for the quarter was $12.86 million versus $12.93 million from the prior year period. Net income for the year increased 21.1% to $72 million, compared to $59.4 million for the prior year. Adjusted EBITDA was $72.4 million, an increase of $14.1 million compared to the fourth quarter of 2021. For the year, adjusted EBITDA reached $301.1 million. This number has increased 64.2% since 2020, showing the rapid pace of our progress. This has been another great year for the company. As a result of our strong results and desire to enhance returns for stockholders, Arko's Board of Directors declared a quarterly dividend of $0.03 per share of common stock to be paid on March 21, 2023, for stockholders recorded as of March 9, 2023. And now I'll turn the call back over to Arie.

Thanks, Don. I will close by saying that we believe that we have the right long-term strategy in place as well as execution capabilities to deliver growth for the long-term. I want to thank the company's over 12,000 employees for their hard work and dedication. I believe that our excellent results for the quarter and for the year are a great tailwind as we start 2023 and mark a decade of rapid growth at the company. Now we will take your questions.

Thank you. The floor is now open for questions. The first question today is coming from Bobby Griffin of Raymond James. Please go ahead.

Good morning. This is someone on behalf of Bobby Griffin. Thank you for taking our questions. First, I wanted to discuss some of the main initiatives for 2023. With the Oak Street partnership renewing in May and considering that the cap rate is expected to increase due to current interest rate trends, does this shift the focus for mergers and acquisitions to concentrate more on other initiatives within the store for EBITDA growth in 2023?

Thank you for the question, and say hello to Bobby. I don’t believe anything will change significantly. While cap rates may shift slightly due to rising interest rates, our size and economies of scale allow our transactions to remain very profitable. Previously, we reported a 38% return on our capital, and currently, we are showing 59%. Even if we revert to a 38% return, it remains an excellent return for us. I expect our growth through acquisitions to continue, along with the various other opportunities I mentioned on the call, which include our personnel in the store.

Okay, that's very helpful. And then maybe secondly, for us, just touch on the cost environment in the box a little bit. Are you currently continuing to see significant year-over-year cost pressures or are store OpEx costs starting to behave a little bit better?

I think the cost OpEx starts to actually settle a little bit. As you can see year-over-year, we have an increase of almost $75 million, $80 million increase in OpEx inside the stores, which that's what, by the way, drove the CPG, or the gross profit dollars outside the store, a little bit higher given the environment. I think we're going to see those things settle as we enter into 2023, but I'm assuming that we're going to continue to see increases, maybe not significant, as we saw in 2021 and 2022. But we'll still see some kind of increase in 2023.

Okay, thank you so much. And best of luck here in 2023.

Thank you for your time.

Thank you. The next question is coming from Hill Hogan of Barclays. Please go ahead.

Hi, good morning. I guess two or three questions. The first one is I heard your comments on retail fuel margins being structurally higher, just given the cost environment for independence, but they were still pretty high in the fourth quarter. And maybe you could just give us a range of where you thought they might be on a go-forward basis for the next year or two because $0.40 was pretty high.

So I think the $0.40 is really a demonstration of basically our capability of increasing gross profit dollars. As I tell people in this environment, I don't talk CPG anymore, I talk gross profit dollars. As I mentioned earlier, we have a presentation out there; OpEx are up $75 million from basically 2021. And I tell people, the only way to pay for that is actually to increase the margin outside the store. That's the only way to pay. I mean, in order for you to pay a $75 million increase in OpEx, you need to have almost a 15% increase inside the store, which is not possible, it's just not possible. So I believe that as we're going towards this inflation cycle, as we go towards basically interest rates rising and cost of supply rising, wages basically increase over here, I think the margin will be supported just because of all of those reasons that everybody has, by the way, the same issues. It's not just Arko in particular, it's actually everybody has the same issues. And I think given our size, we probably can be a little bit more flexible. But as I said, one of the things that we see in Q4, and we demonstrated that not only that CPG was up, and gross profit outside the world was up, it didn't impact the sales inside the stores. As you can see our same-store sales as cigarettes inside the store were up 4.1%. And we continue to see this trend moving forward. And I think that demonstrates that CPG will continue to rise across gross profit dollars outside the stores continue to rise, because of all those reasons.

Got it. And then how do you balance that with the fuel volume decline in the quarter going forward? I mean, it's sort of like a tricky stabilization act, I think.

Well, it's a great question. And as I always say, we believe that we have the right tools in place. And given that, we believe we have the right tools. We always try to find the sweet spot between losing gallons on one end and basically getting margin. So yes, our gallons were down for the year 8.1%. But if you really look at gross profit, gross profit dollars, you'll see that gross profit dollars was almost 20%. So you have a, you have to find this sweet spot. At the same time, you need to be very careful and make sure that you continue to be competitive. I think that's one of the things that we see. And you're probably different from some others, but very similar to the accolades to the small operators; 40% of our stores are operated in cities with populations of 20,000 people or less, and an additional 20% is between 20,000 to 50,000. So we are in a lot of rural locations. And our belief is that gallons, we're just not there. It's not that we lost 8% of the gallon and someone else picked up the 8% of the gallon. That's not the case over there. We just think that people were driving less. However, we are recycling right now. Almost we are in February right now, we really recycling right now, the beginning of the year last year. And if you remember, the volatility of fuel prices started at the beginning of March 2022. And now when basically prices, at least, they are down right now dramatically from what we saw last year, we start to see increasing gallons compared to last year because of that.

Got it. And then my last question was, you made a reference in the script on M&A looking at adjacencies or adjacent categories. Just wondering if you could give us an example of sort of where you were thinking that might be accretive to the quarter?

Our primary focus is on company-operated stores, which form the backbone of our business. We continue to expand and acquire more of these stores. In terms of operating profits, the retail segment accounts for 76% of our business, indicating consistent growth. Additionally, we have exciting wholesale and Cardlock opportunities that have shown impressive potential. In just five months, we achieved the EBITDA we projected for the entire year, marking a successful year for us. This adjacent opportunity allows us to generate strong cash flow while maintaining our focus on retail and company-operated stores, where most of our profits originate. Our work at Handy Mart has been significant, with nearly 700 new items introduced, and our recent acquisition of Pride is poised for further growth, likely exceeding the 700 items due to larger store formats. We plan to implement the same successful strategies we used at Handy Mart across our fuel business. I believe that given our current scale, we will continue to see improved results each quarter as we apply our strategies. There are numerous opportunities to explore, particularly in food service, which we view as highly promising. This includes expanding our pizza offerings and adding grab-and-go freezers, with plans to introduce 200 additional freezers in more locations. We're also incorporating bean-to-cup coffee machines in Pride Stores. With the upcoming TG acquisition on the horizon, we have significant growth potential ahead of us.

Great. Thank you so much. I appreciate it.

I appreciate the question.

Thank you. The next question is coming from Alok Patel of Stifel. Please go ahead.

Hi everyone. This is Ollie Patel on the line from Mark Astrachan. I wanted to follow up regarding in short merchandise, can you talk about which categories are more or less elastic? How you think about pricing as you move through 2023 and the potential benefit from higher promotional activity or just reduced pricing?

Sure, sure. First of all, I can maybe touch on a couple of categories where basically we saw a big increase or a very, very nice increase over there. I mean, the first one, of course, is candy. I mean, everybody knows that candy, countrywide candy is up. So nice increasing candy. Frozen foods continue to be a big hit for us. As you know, you guys remember from the beginning of 2021, we implemented over 700 freezers into our stores and continue to grow. I mean, this quarter, just this quarter frozen foods was up 19.2%. The same thing goes for packaged sweet snacks, I mean over a 14% increase, Pack Beverages continue to grow 4.7% increase. So we believe that the big opportunity for us is really loyalty. And as we continue to grow, and as we continue to offer great promotions to our loyal customers, not only their baskets increase, but they're also coming more often. And that I think will drive our profitability inside the stores. The one thing I want to touch on, of course, is that remember, we started in 2020, Q4 2020, our same-store sales cigarettes were around 38.9%, almost 39%. And today, the concentration of cigarettes inside our box is around 32.9%. This is a 6% difference, which means that we were able to increase the basket and sell 6% more of other products that their margin is probably two or three times better than the margin on cigarettes. And that's the focus of the year. The focus is to continue to increase inside sales with high-margin items, which include the food service item and all of the other categories I just mentioned. And we see it by the way in Q1 already, in Q1, the inside sales excluding cigarettes continue to be very, very strong, similar to what we saw in Q4 2022.

Got you. And then I had a quick follow up on exit rates for margins, just any commentary on how December was stacking up compared to November or October. And whether that momentum or that level of margin has carried over into January and February; any color on that would be great.

Are you talking inside the store?

No, I was referring to fuel margins.

Fuel margin? Well, I can't really comment about what happened in Q1. There is no question that Q4 was very, very strong compared to the rest of the year, no question about that. The only thing I can tell you is that nothing significantly really changed. That's the one thing I can tell you; I think we saw maybe a little bit of softening in Q1. But that happened, by the way, in Q1 2022 as well. Just for everybody's memory, Q1 2022 the CPG was a little bit lower than Q4 2021. And we see the same thing over here. Remember, Q1 is always the Q that people drive less, weather-wise it's not great to be outside. But I don't think that this is going to demonstrate anything. Q4 to Q1, I don't think it's really going to provide any kind of demonstration over here. The one thing I can tell you is that we see gallons picking up basically in February compared to basically the prior year. That's one thing that we see.

Got it, thanks.

Thank you.

Thank you. The next question is coming from Karru Martinson of Jefferies. Please go ahead.

Good morning, when you look at adding pizza, grab and go freezers and things of that like, is there a change in the kind of CapEx philosophy or the investment needed in the boxes here?

No, there's really no change. Like everything else, usually when we make those changes, and usually when we add those items inside the box, we don't view the same philosophy that we use on return on capital. I mean, and I'll give you an example. When we added the bean-to-cup coffee machines to over 500, and almost 550 stores last year, we said yes, return on capital is very important, but at the same time, this is a must if you want to be in the business of selling coffee. And you want to tell the market that you're selling coffee 24 hours, basically 24 hours a day, seven days a week, and you get the same fresh cup of coffee, you need to make the investment because you assume that with that investment, you assume that people are going to come in, and not only are you going to become a destination for coffee, they're going to pick up some other items or bakery items because of that. So as long as you have the item that will be actually sold with coffee, this is an investment. The same thing goes for pizza, and the same thing goes for the rest of the food service item. You invest in freezers, you invest in grab-and-go and the assumption is that the minute someone grabs a sandwich, he is also going to grab a drink, and maybe some chips with that. And this is really the way we're thinking about that. We're thinking about how can we increase the basket, how can we increase actually the inside sales. And that's what I call a functional remodel, which means that you actually need to invest in areas that are basically going to impact some other areas within the stores.

Okay, and how do we reconcile what we're reading in the journal, and what have you is the headlines are the consumers pulling back, and consumers trading down to private label, and yet you're seeing a 19% increase in food sales, and you're seeing people shop the insides of your stores on that front. What's the disconnect that we're not getting in your local markets?

Given the current market conditions and the fact that 40% of our stores are located in towns with populations of 20,000 or fewer, it's clear that consumers in those areas are seeking value. The small size of many competitors—75% of the industry consists of small chains with 50 stores or less—makes it challenging for them to offer private label products and provide value to customers. In contrast, our company boasts over 1,400 stores, soon to exceed 1,500, which gives us the necessary scale and a dedicated merchandising team that works tirelessly to deliver valuable products to consumers. This focus on value is why we experienced such a strong fourth quarter performance in categories beyond cigarettes, and I can affirm that the positive trend is continuing. As long as we maintain our size and leverage our merchandising expertise, we can meet consumer demand for value, which is increasingly important in today's market.

Thank you very much. Appreciate it.

Thank you.

Thank you. The next question is coming from William Reuter of Bank of America. Please go ahead.

Hi, you mentioned that the M&A pipeline continues to be strong, I guess is there anything you can share with us about the attributes in terms of how big these are? Are they the same kind of general size that historical acquisitions have been? And I guess I'm talking on the retail side here?

I don't believe there has been any change in size. It's consistent with what you've previously observed; we completed four acquisitions, three of which were in retail. Our approach remains disciplined, as we've been since 2020. You haven't seen us engaging in double-digit multiples for our acquisitions. We've signed 24 deals and closed 22, with plans to finalize two more. Our store base is expanding nicely. However, many others may have paid higher multiples. As interest rates rise, some of these businesses may struggle to refinance and might consider selling. Operating medium or small-sized chains has become more challenging compared to pre-pandemic times.

Okay, that's helpful. As a follow-up, you mentioned that 60% of your stores are in relatively rural or smaller population areas. Historically, there haven't been many large operators building stores there. Have you noticed any changes in that regard over the past year or two, considering the strong profitability of outside-the-store fuel margins?

I don't see a lot of people building stores in this environment. It's not just because it's challenging, but also because construction costs are likely 40% higher than pre-pandemic levels. I haven't noticed many large stores being constructed in our markets at all. However, this situation does not raise any concerns for us.

Good to hear. Okay. Thank you.

Thank you.

Thank you. The next question is coming from Anthony Bonadio of Wells Fargo. Please go ahead.

Thanks, guys, and congrats Don on your retirement. So I just wanted to ask about acquisition synergies. And I think you guys illustrated a lot of this well in the Handy Mart example in your opening remarks. I think you gave something in the range of 27% of EBITDA in synergies on the transit acquisition. Obviously, you're growing, continuing to help there. But are you finding that numbers creeping higher over time as you guys evolve the model and refine your approach to things like prepared food, merchandising, and the loyalty program? And then how high could we see that go over time?

Don, I will let you take this. Don, I believe you're on mute.

I thought I was off mute. It's important to note that with Handy Mart, we're taking proactive steps to implement resets. As we expand, our costs decrease, and our efficiency improves. We're examining not just store operations but also our general and administrative structure. There are definitely more synergies ahead, and we have now clearly defined three segments operating on the same platform, leading to natural synergies. Our main objective is to expedite these resets and realize these synergies quickly, which will drive our growth further. While I won't provide a specific percentage, we have noted that our acquisitions, including Quarles and Handy Mart, have exceeded expectations, and we are pleased with the outcomes from Empire as well. We're refining our approach and are excited to focus on enhancing not just acquired synergies, but also improving our internal processes to make it easier for our operators, allowing them to engage more with customers. This means that synergies will increase organically across our own sites as well.

Thank you. I'm showing up for additional questions in the queue at this time. I'd like to turn the floor back over to Mr. Kotler for closing comments.

Thank you very much. First, I would like to thank you all for joining the call. Great question, a lot of questions this time, which is great. We had a tremendous quarter, we had a tremendous year, grew our EBITDA again. This is the second anniversary of being a public company over here. We grew EBITDA from $256 million last year to $301 million this year. And as you can see, we have another two acquisitions that we're getting ready to close. I think we continue to perform very, very well and continue to execute. As Don mentioned earlier, every time when we put numbers in front of our investors, we actually beat those numbers. So we're trying to be ultra-conservative over here. And I'm looking forward to a great 2023. Thank you everybody for participating, and have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.