Greetings and welcome to Arko Corp First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ross Parman. Thank you. You may begin.

Thank you. Good morning and welcome to Arko's first quarter 2023 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 on Form 10-Q for the first quarter of 2023 as filed with the SEC, and our earnings presentation are available on Arko's website at arkocorp.com. Before we begin today, please note that all first-quarter 2023 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 quarterly report on Form 10-Q for the quarter ended March 31, 2023, 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 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, cross-talk, or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now, I'd like to turn the call over to Arie.

Thank you, Ross. Good morning, everyone. We appreciate you joining the call. Yesterday, you may have seen two major announcements the Company made that we believe show how well we are positioned to continue executing our growth strategy well into the future. Our subsidiary, GPM Petroleum, has upsized its credit line by $300 million to $800 million from a syndicate of banks, and we also extended the maturity until May of 2028. We also increased and extended the Company's program agreement with Oak Street, which can provide up to $1.5 billion to purchase and lease real estate to GPM or its affiliates through September 30, 2024. In aggregate, Arko currently has more than $2 billion in available capital for continued M&A activity, including cash, lines of credit, and the extended Oak Street Program Agreement. We are focused on continuing our acquisition strategy to enhance value for our stockholders. Turning to our results, this was another strong quarter for higher merchandise contribution and acquisitions. First-quarter same-store merchandise sales, excluding cigarettes, grew 7.6%. Same-store sales increased by 3.8%. The increase in same-store sales was driven by continued strong performance in high-margin destination categories, including in-depth detail on these categories in our first-quarter presentation on arkocorp.com. Some highlights of these destination categories included packaged beverages sales, which increased 9.6%, candy was up 18.3%, and beer increased 6.2%. Another key headline is the growth in merchandising contribution dollars of $8.1 million or 7.7% on a same-store basis. Total merchandise margin grew 120 basis points to 30.7% this quarter compared to 29.5% in Q1 2022. We believe that these results show that our numerous marketing and merchandising initiatives are resonating with customers and driving sales growth. Higher merchandise contribution margin and a recent acquisition helped to offset lower fuel contribution and an increase in-store operating expenses, resulting in adjusted EBITDA of $47.5 million for the quarter compared to $50.1 million in the prior year quarter, a decline of 5.2%. Total fuel contribution increased to $123.8 million compared to $112.9 million in the prior year quarter, an increase of $10.9 million. On a same-store basis, including legacy wholesale sites, total fuel contribution dollars were $95.2 million, which declined by $15.4 million compared to $110.6 million in Q1 2022. The fuel contribution was lower with the majority of this decline related to elevated fuel margin in March 2022 at same-store retail sites compared to March 2023. TPG was $0.477 per gallon versus $0.373 per gallon in March 2023. This was driven by an increase in fuel prices due in part to the invasion of Ukraine. We still believe that structurally higher margin would remain, given increased operating pressures. Going back to our strong in-store performance, I will now update you on our three key merchandising and marketing pillars. Our first pillar is to grow sales in core destination categories with data-driven decision and strong supplier partnerships. Cigarettes are certainly a destination category. However, core destination categories are our refocused investment on resources, such as people, space, and capital. These are packaged beverages, beer, candy, salty snacks, sweet snacks, and alternative snacks. These categories drove 63% of our Q1 same-store sales excluding cigarettes and 43% of our total same-store sales. Our customers expect and deserve for us to have the right assortment, space, and value in these categories. Same-store sales in these six core categories grew by approximately 10% in Q1 2023 over Q1 2022. The margin rates in these categories grew 110 basis points in Q1 2023 over Q1 2022. We continue to refine and drive the expansion of these categories across our company-operated stores to ensure that we are offering our customers the right assortment and value proposition. The core criteria of our M&A strategy is to acquire chains where we can add value. Arko's scale, purchasing power, and merchandising and marketing expertise have enabled the company to improve the performance of stores that we purchase by enhancing product assortment, product placement, promotional events, and loyalty. One example of our ability to add value is that our 36 Handy Mart stores in North Carolina, which we acquired in November 2021. As a follow-up to the detail we shared on our last call, we continue to make progress in the stores. First-quarter results at Handy Mart stores were as follows: our sales in Q1 2023 compared to Q1 2022, our first full quarter of operation, merchandise sales increased 6.7% and merchandise sales, excluding cigarettes increased 12.2%. Merchandise margin increased 400 basis points to 33.2% compared to 29.2% in the prior-year quarter. Sales of the six core destination categories we mentioned earlier grew by 14.9%. We are also encouraged by early results at the Pride stores that we recently acquired and reset. We believe we will have similar results at the TEG stores that we are currently in the process of resetting. Moving to the second pillar, our fas REWARDS loyalty program. We implemented a major new upgrade to our loyalty app that was launched on March 29 to develop and strengthen relationships with our customers and drive more trips with our existing customers, while attracting new loyal customers. We currently enjoy approximately 1.38 million enrolled members. Since the launch of the upgraded app, the number of member enrollments each week has increased by an average of approximately 30% compared to pre-launch enrollment. We're also excited to announce our 100 days of summer loyalty enrollment offer that starts on May 17. The new customers we enroll with valid email addresses and phone numbers will be rewarded with $10 in fas BUCKS delivered to their new app wallet, which these customers need to spend in our stores on participating categories. We are very excited about this promotional offer, as we know that enrolled marketable members make more trips and spend more in our stores than non-enrolled members. In fact, in Q1 2023, our enrolled members made an average of almost six more trips per month compared to non-enrolled members. In Q1 2023, enrolled members spent on average approximately $68.50 more per month than non-enrolled members. Additionally, the Q1 2023 enrolled members increased their average monthly spend by 8.2% compared to Q1 2022. While early, we are encouraged by engagement in the new app, including the redemption of our in-app-only HOT deals, as well as the use of our new in-app order and delivery functionality. The third pillar is expanding our packaged and fresh food offerings, including pizza, chicken, prepared foods, and other options. Same-store franchise sales across all brands increased 24.5% in the first quarter as compared to the prior year. While we have made great progress with our grab 'n' go prepared foods, frozen foods, and franchise partnership with Sbarro and Dunkin', we are still in the early stage of defining this strategy along with assortment and price value proposition for the consumer and our go-to-market strategy. Our goal is to become a destination for packaged, prepared, and fresh food and we look forward to providing further updates. Our objective is to make continuous improvement in each pillar and position our core convenience store business to continue delivering great results and exceeding our customers' expectations. Right now, we are in the midst of our store operation team's annual pride ride. We think of this as going through our stores for spring cleaning. We do this every year, including visits and inspections at all of our stores. This event allows us to rally together and prepare for the 100 days of summer, our biggest selling season, and to ensure that we are customer-ready for the big selling season. Switching gears to EV, we continue to make progress on electric vehicle charging. At the end of Q1, our network included more than 50 charging ports, with plans to add more charging capacity across the country. Turning to M&A, following the closing of the Quarles and Pride acquisition in 2022, we closed the TEG acquisition on March 1, 2023. TEG added 135 convenience stores and expanded our southern retail territory into Alabama and Mississippi, as well as 192 dealer locations. We are pleased with the results of this acquisition so far. The WTG acquisition is anticipated to close in the second quarter. This acquisition will significantly enhance the Company's footprint in attractive western Texas. Now, let me briefly address our proposal to acquire TravelCenters of America. Our intentions were consistent with our track record and strategy that has been very successful, making Arko an acquirer of choice, transparency, and open negotiation. We believe our proposal, had we been given an opportunity to perform customary diligence, could have provided immediate cash value to TA stockholders at a significant premium to the next best offer with no financing contingencies. For the record, neither our proposal to TA nor any other previous acquisition has ever had financing contingencies. Our repeated attempts to engage with TA's management and Board were met with firm resistance, resulting in a more public conversation through press releases and filings rather than productive discussions. We believe a wider group of investors now fully appreciate how rapidly Arko can move to create the right conditions for a deal. We appreciate Oak Street and others moving very rapidly along with us. We reserve cash and maintain flexible financing, so we can take advantage when the right opportunity arises. Given our liquidity, we will continue to evaluate deals, concentrating on returns on capital consistent with our traditional disciplined approach. We are also investing in our business, and we are more committed than ever to driving long-term sustainable inside sales growth, expanding margins, and gross profit dollars. Before I hand the call over to Don, and given that we're not currently providing guidance, I want to detail seasonality and reiterate our historical seasonal performance. We believe that historical quarterly cadence is an important factor to consider when evaluating our performance. The first quarter historically is our least active sales period, while the third quarter is our strongest. Using an average of 2021 and 2022, the first quarter contributes about 17% of overall adjusted EBITDA, the second quarter about 28%, the third quarter has historically contributed about 32%, and the fourth quarter about 23%. I will now turn the call over to Don.

Thank you, Arie. The Company has continued to record excellent results. Our initiatives are clearly gaining traction. The stable, ratable cash flow from the wholesale and fleet fueling segments have enhanced our deal-making flexibility and augmented further investment in our core convenience store business. Our balance sheet continues to be strong, and we currently have a very good liquidity position. As of March 31, 2023, we had cash and cash equivalents of approximately $256 million. Our outstanding debt excluding capital leases was approximately $809 million, resulting in net debt of $553 million. Additionally, we continue to realize excellent cash flow. For the quarter, net cash provided by operating activities was $15.9 million versus $30.1 million for the first quarter of 2022. This included an investment in working capital associated with the TEG acquisition. Getting into results for our convenience stores, merchandise revenue for the first quarter of 2023 increased to $400.4 million versus $367 million in the prior year quarter. Merchandise margin increased quarter-over-quarter by 120 basis points to 30.7%. Total capital expenditures were approximately $23.4 million for the quarter. This compared to capital expenditures of $20.7 million in Q1 2022. Retail fuel profitability excluding intercompany charges for the first quarter of 2023 declined by 1.9% this quarter to $88.1 million. This was a $1.7 million decline versus Q1 2022. There was an $11.4 million decrease in same-store fuel profit excluding intercompany charges, primarily offset by $10.8 million in fuel contribution from the TEG and Pride acquisitions. The Company maintains a relatively strong retail fuel margin of $0.354 per gallon for Q1 2023 compared to $0.375 per gallon in Q1 2022. First quarter convenience store operating expenses increased $18.9 million or 12.1% versus the prior-year quarter due to $15.9 million of expenses related to the TEG and Pride acquisitions and an increase in expenses at same stores, including approximately $6 million or 9.7% of higher personnel costs compared to Q1 2022. The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to dealers. Moving to wholesale for the quarter, wholesale fuel contribution excluding intercompany charges decreased approximately $1.8 million. The relatively new fleet fueling business generated fuel revenues of approximately $127.5 million for the first quarter. Fuel contribution excluding intercompany charges from the fleet fueling sites was approximately $13.8 million for the quarter. Fuel margin cents per gallon excluding intercompany charges for the proprietary cardlock locations was $0.445 per gallon. Net interest and other financial expenses for the first quarter decreased by $2.4 million versus the prior-year quarter to $13.6 million. Net loss for the quarter was $2.5 million versus net income of $2.3 million in the prior-year period. Adjusted EBITDA was $47.5 million compared to $50.1 million in the first quarter of 2022. In the first quarter, the company repurchased approximately 89,000 shares of our common stock for a total of approximately $700,000. There are approximately $10.3 million remaining under our previously announced $50 million stock repurchase program. Because of our continued 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 June 1, 2023, to stockholders of record as of May 19, 2023. And now, I will turn the call back over to Arie.

Thanks, Don. I will close by saying that we believe 2023 will be another year of strong performance and growth. I want to thank the company's more than 13,000 employees for their hard work and dedication. Now, we will take your questions.

Our first question comes from Anthony Bonadio with Wells Fargo. Please go ahead with your question.

Yes. Hi, good morning, guys. So just quickly on the Oak Street facility to start. Beyond the upsizing versus last year, is there anything else you can tell us about how the terms of the agreement differ from last year? And then anything you can tell us about the new cap rate?

Good morning, Anthony. This is our secret sauce. I mean, the only thing I can say about that is that every deal is going to be different. Right now, we amended the program agreement in order to be attractive and active over here. And as we move along, I'm assuming we're going to be able to provide more information as soon as we start to transact, but we are not sharing at this point any other terms that can actually be competitive.

Understood. And then on the fuel side of the business, can you just talk about your latest thinking on the balance between achieving incremental per-gallon gross profit versus potentially driving additional gallon volume? And then in that context, just any color on your price gaps to peers in fuel versus how that's trended historically?

Sure. It's a very good topic and very good question. So maybe I will break it down a little bit by what happened in Q1, because the Q1 decline is really in March 2023, as I basically explained earlier. So we entered 2023 with a decrease of 8%, 8.3% in January. And as we continue to move along towards, basically the cycling of the invasion of Ukraine, we saw much less decrease in February. For example, the decrease was only 4.7%, and as we entered March, the March decrease was only 4.5%. So, we are going to be competitive as always. We are always competitive, but you know what, I think what we see over here is that the minute the price of fuel started to drop in March, the unleaded price on average was 396. This year, the unleaded price was 329. So I think in this environment, when the price of fuel is much lower than the prior year, I think we're going to have a little bit more flexibility over here. I think people are going to drive more. And as I said, we will continue to look for gross profit dollars, but at the same time, being competitive. And as you can see, we always say that there is very little correlation, if any, between inside sales and outside sales. I mean, I believe margins are going to continue to be high given that operating expenses are higher. But again, we are making sure that we are ultra-competitive outside and very, very competitive inside and have the great offering for the people to come in.

Thanks, Arie.

Our next question is from Kelly Bania with BMO Capital Markets. Please proceed with your question.

Hi, good morning. Thanks for taking our questions. Arie or Don, I was just wondering if you could help us and maybe we missed it - just the contribution from Pride and Quarles in the quarter and on an EBITDA basis, just trying to kind of back into what maybe was organic in terms of EBITDA for the quarter. Any help you could do there would be great.

Don, would you like to take it?

Sure, sure. Hi, Kelly. Good morning. We did not specifically break out TEG or Pride or Quarles for that because again, it's only one quarter of the - of year-over-year. And I know it's hard to do from organic models. I think the message that we wanted to pass on is, look, we had great merchandise results, we had a very tough fuel margin in March that we're up against, and basically because of our acquisitions with Pride, Quarles, and TEG, we're able to offset that loss in fuel. So I think if you take anything away from this, we basically were able to keep our EBITDA very close to last year against all the headwinds we faced. As we go forward, we will consider disclosing those numbers, but again, the message to take away is we have this model that can weather the fuel ups and downs and that these acquisitions help us balance that year-over-year.

And just to add further, just to finish the line on this one. We are $15.4 million on gross profit dollar compared to the prior year on a same-store and as Don mentioned, we are only $2.6 million on EBITDA to the prior year. So as you can see, the $15.4 million was basically offset with inside sales and the help of those acquisitions and that's how we basically finished the quarter very close to the quarter last year.

Got it. And Don, you mentioned the seasonality pattern, I guess historically over the last two years. Are you at all suggesting those are good kind of rough frame of reference for this year as well or what would be any other key seasonality items to keep in mind, given the volatility in fuel margins and the comparisons as well as the M&A that's still flowing through?

Sure, sure. So again we're not going to project what they are. We try to give that out so that you could - again we're a relatively new public company with a lot of acquisitions and things going on. I mean, if you look at '21 and '22, there were acquisitions, but there weren't any major things like an Empire like that. It's more just to look at it as a historical past and provide you the historical - provide the historical information out to the public. I think what was interesting when you look at seasonality, it's not just - it's not just sales volume, it's also how the different things happening. For example, in the summer, your merchandise margins are higher because you're buying higher-margin stuff. Typically, you will see lower fuel margins in the first quarter and things like that. The exception being last year. So again, we just want to - just point that out and bring that to everyone's attention, potential from a historical perspective, not as guidance. And again, I know with our acquisitions that sometimes it can be confusing, but I think we've - at least in my belief we've sort of returned back to a more normal pattern that we've seen, but it's yet to be seen what happens as you know each year provides its own, but certainly the last two or three years have been kind of unique. But we think '21 and '22 again have probably even more what we are used to seeing.

Okay, that's helpful. And then I'll just ask one more on the inside same-store sales. Can you just give a little bit more color on the breakdown of traffic, inflation, items per basket, just really unpack that same-store sales figure for us a little more.

Yes, sure. Arie, do you want to say or do you want me to?

Go ahead.

Okay. So again, we're continuing to see the same pattern we talked about before, we're continuing to see obviously people coming in, and with less trips at a bigger basket and that's also part of what we're trying to drive the loyalty too. I mean, yes, there is inflation driven in there and obviously, every time prices go up, we try and pass it on, as most people do, because you can tell, looking just at our personnel expenses are very high. But what we're really focused on is what is it doing in our margin, where are we doing on the GP dollars? Because obviously, we could sell a lot of cigarettes and really both boost our sales, and you can look at the increase that come from cigarette. So it's really hard to break apart the inflation piece of it, but we're focused on, as Arie already talked about is the key categories inside the store, and we still think there's a lot of opportunity inside the store without doing some other things that we can unlock a lot of this, and that's why we stay very, very focused on. I mean all categories, but again on the sales and making sure we can extract as much as we can not only from new acquisitions, but also from our base.

I want to add a couple of points. It's important for everyone to know that regarding the difference of $0.47 versus $0.37, we do not expect a $0.10 variation from quarter to quarter or month to month. This situation is mainly due to the impact of the Ukraine invasion, which caused a sudden increase in March. After that spike, prices settled at $0.37, making it a one-time event. Out of the $15.4 million, approximately $13 million occurred in March, which is a decrease that was offset by the acquisition and our inside sales. Regarding your question about our core product categories, we provide details in our presentation on the Arko Corp website. We describe an increase across six core categories, which account for nearly 60% of merchandise sales, excluding cigarettes. For instance, candy sales increased by 18.3%, while packaged beverages rose by 9.6%. These categories contributed to an increase in gross profit dollars. Additionally, I want to highlight our initiatives, such as adding 550 bean-to-cup coffee machines to our stores. In Q1 2023, our coffee sales grew by 133% compared to Q1 2022. Specifically, in those 550 stores with the new machines, sales reached 208,000 cups, reflecting a 155% increase year over year. All these initiatives are yielding positive results, as indicated by the increase in gross profit dollars. Our efforts from 2022 are beginning to show their benefits, including the Handy Mart acquisition, which added around 700 new items. For our Pride stores, which we recently reset, we introduced over 1,000 new items, and TEG is also undergoing a reset with an average increase of another 1,000 items. Overall, this represents a 20% to 25% increase in core items. This clearly demonstrates our focus and achievements in a short timeframe.

Thanks, Arie, I'll get back in the queue.

Thank you.

Our next question is from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, guys. Thank you for taking my questions. I guess, Arie and Don, first, I just wanted to talk and maybe unpack OpEx growth a little bit more. So quarter actually even against tough comparisons had pretty good gross profit growth but OpEx up on a GAAP basis at least 17% year-over-year. Can you kind of talk about some of the drivers in that and are the new acquisitions just bringing on a faster growth of OpEx, and is there any opportunity to kind of control that or slow that growth going forward?

Great question. Let’s break it down. First, regarding retail operating expenses, we did see a significant increase, but if we exclude the impacts from TEG and Pride, the additional expense was about $18 million solely related to retail. Labor costs for the same stores accounted for $6 million of that. The remaining expenses actually saw a decrease, primarily due to converting some stores to dealers. Additionally, the rise in labor expenses is partly a positive indicator; last year, we had many open positions, so while inflation is a factor, a significant portion of our increased costs stems from filling those positions. This trend is encouraging moving forward. As for general and administrative expenses, when we exclude costs associated with acquisitions and non-cash equity awards, G&A has not increased substantially. We aim to integrate the acquisitions smoothly and anticipate realizing further synergies from them. Overall, the driving factors behind the expenses include both the acquisitions and the filling of previously unfilled labor positions, which applies to both stores and G&A operations.

Okay, I appreciate the detail. And then I guess secondly, for me and my last question. Arie, I mean, the TA acquisition was obviously a big potential acquisition that you guys looked at. So maybe I was just hoping, you could talk a little bit about your philosophy and the company's philosophy on size of targets that you'd look at, especially now considering the new financing you've updated us. And then maybe putting in context of also you have an outstanding share repurchase program out there and the stock is at least in our view at a pretty compelling valuation. Just how do you kind of balance those two aspects?

Yes, I think those two aspects all stand on their own. We have enough liquidity right now to continue with share repurchase on one end, and on the other end, we are going to value acquisition probably no different than what we did before. I mean, the TravelCenters acquisition was a big acquisition, it was a great opportunity for us to double the size of this company, double EBITDA and probably more than double EBITDA with synergies. We probably were able to achieve a lot of synergies over here given our size and given their size. And this is something that we focused on. I mean we look on multiple, and the multiples were just great, and we felt that this is a great opportunity, and that's the reason, by the way, we approached them and tried to pursue it because we felt that this was going to make this company much bigger and much stronger. So that was the approach. I don't think anything really changed in our approach, Bobby. We're going to continue to pursue small acquisitions, mid-sized acquisitions, large acquisitions - given that we have an M&A team out there. I don't think we are basically not paying attention to all of the acquisitions that are in the marketplace. We're going to continue to be disciplined. We're going to continue to basically look on return on our capital to our shareholders. So I don't really think anything changed over here, as you mentioned, the stock price. My opinion, it's probably similar to yours. I think the stock is cheap right now, and we will actually evaluate that and see what else needs to be done on our end.

Okay, I appreciate the details. Best of luck here in the second quarter.

Thank you very much, Bobby. We appreciate your question.

Our next question is from Mark Astrachan with Stifel. Please proceed with your question.

Yes. Hi, good morning, everyone. I appreciate you don't give guidance. I guess I'm curious how the quarter came in relative to your expectations. If there was anything that stood out through the totality of the results relative to what you thought three months ago?

Well, it's a tricky question, Mark. Good morning. First of all, because we are not providing guidance, so it's a little bit difficult for me to answer. I can tell you that the quarter came in very close to our expectations. Let me put it this way: very close to our expectation. Not a big surprise, and again I think that we didn't anticipate $0.47. I can tell you that. We were not anticipating $0.47 again in the month of March. So that was not a surprise to us. We still believe that margin CPG will continue to elevate and will continue to be high just because of all of the other noise with operating expenses being high. And I think that we were able to offset the $15 million decrease over here that we did anticipate in terms of margin, I think we were able to actually offset them with the acquisition that we had and with the strong inside sales that we were actually able to perform over here.

Got it. Then on the inside store sales, so the core categories that you highlighted in the presentation. I'm curious if you could unpack how much pricing drove the same-store sales growth relative to volumes of those categories and how that potentially plays into - to margins, but then also as you start lapping the significant inflation-based pricing that a lot of these companies put into place starting a year ago or so at this point, did that contribute to traffic increasing or purchases or the conversion of purchases within the store? Thanks.

Well, I can give you the breakdown, but what I can say and I think going back and I'm using the coffee just because this is a great example. Okay. When I keep talking about the loyal members, for example. And this is the reason why we're pushing so hard with loyal members. We are going to implement this program on May 17; we are going to provide $10 for every customers that will actually come to our stores, enroll, provide his email and telephone number. There is a reason for that, and I kept talking about the $0.99 increase. I mean, when you sell 326,000 cups more, which is a 133.7%. You obviously understand that some of it, or a lot of it is actually because of traffic, because of loyal customers coming to our stores more often. I mean, you can see it. I mean, loyal customers coming to our stores six times more often than the non-loyal customers, there is an increase in basket. I mean, their average purchase in Q1, which is the lowest quarter is $68.50, and I think that's actually, I think, tell - explain the message about increase in other product and sales. When you're talking about the increase on cardholders buying coffee, it's 130% more than the cardholders that bought coffee last year, prior-year.

Yes, Mark, let me elaborate on that. What Arie mentioned is accurate; we can't break it out specifically, but I can tell you that these increases are mostly driven by the rise in units sold. While there is some inflation, the actions and tactics we've implemented to expand shelf space and ensure the right products are available have led to more units being sold. Inflation is present, but it is not the primary factor; the key point is that we are seeing more units moving off the shelf.

To conclude this question, I want to highlight Handy Mart as an example. We are competing in a market where nearly 100,000 stores are mom-and-pop shops and small chains. We chose Handy Mart because we have completed 23 acquisitions and will soon finalize the 24th. Since acquiring Handy Mart, we have increased the gross margin, specifically the merchandise margin, by 400 basis points compared to last year. Sales across all categories at Handy Mart grew by 14.9%. This growth isn't due to price hikes; it's a genuine increase in inside sales. Our various initiatives, including marketing and merchandising strategies, are significantly boosting sales, particularly in our smaller acquisitions. Additionally, we have Pride with 31 large locations that we've recently reset, and TEG with 135 locations currently undergoing resets. We believe the acquisitions we've completed will continue to yield substantial impacts.

Got it, okay. And just lastly, I'm curious given the volatility in the macro, how that has impacted, if at all, just M&A, generally, are there more or less the same number of targets out there? Bigger, smaller, any sort of change relative to maybe 3, 6, 9, 12 months ago?

I don't see any change; I actually see an increase in M&A activities, M&A opportunities. We all see what happened to interest rates. We all see what is happening over here, and I just think that given interest rates higher, I believe multiples should actually decrease a little bit; they are settling a little bit, and that's what we anticipate at least moving forward, but I don't see any decrease whatsoever. I see that actually an increase on the other side because a lot of small chains with all of those things that you mentioned. As I've said, I want to make sure no one takes it for granted that we were able to achieve those inside sales, grow an increase in margin of 120 basis points. Most of the small chains are not able; as a matter of fact, they are actually going backwards because they don't have the economy of scale and they don't have the capacity, and they don't have the relationships with the suppliers. So when you don't have those capability, you basically maybe even losing margin given that you don't have economy of scale over here. So, the minute you start struggling, I mean, the first thing you do is try to figure out how do you exit the business.

Right.

I think that's an issue.

Mark. One other thing. And I think, and one thing we really didn't talk about is with the renewal and upsizing our GPMP agreement now to 2028 and our bonds that are due in 2029, we have now long-term financing commitments that there are not in the short term. So there is no near-term payments we have to get over or whatever. So, and we've designed it this way also, same thing that what we do with Oak Street. So I think that puts us in a really good position that our cash flow should remain very strong over the years to come with no big balloon payments that we have to make, and that's one of the reasons why we went early on GPMP to get that not only upsize but also to get it extended into 2028.

Got it. Thank you.

Thank you.

Our next question is from William Reuter with Bank of America. Please proceed with your question.

Hi, I have two. So, the first is your merchandise comps were up, I think, this was mostly on inflation, although there was a comment, just a bit ago about units being up as well. So I just wanted a little bit of clarification there. And then two, historically, I think, I view this as a pretty recession-resistant category where you may benefit from some trade-down as much as you benefit from some consumers trading out purchases entirely. I guess, what are your thoughts on that?

I want to clarify my earlier comment. Yes, we are seeing inflation. However, we cannot break it down specifically. Internally, we have observed that higher margin items are moving more units. It’s important to convey that this is not solely due to inflation; it is intentional. We are focusing on ensuring that higher margin items are completed and promoted for consumer purchase, which is resulting in increased unit sales. In contrast, cigarette sales are declining in volume despite rising prices. I'll let you continue from here.

I want to clarify that this is not about inflation; it's about our initiatives and everything we're doing. You're absolutely right that we are a resilient business in a resilient industry. This is one of the few industries that remained stable during the 2008-2009 downturn. We were not affected then, and during this inflationary period, people continue to come to our stores to purchase essential items. Smoking continues regardless of the circumstances, and the same goes for the beer category, as well as salty snacks and candy. No matter the recession, people will still buy small candy bars. What we are seeing is a shift where customers are moving from quick-service restaurants and regular dining to local convenience stores for sandwiches. This shift represents growth opportunities for us. Currently, we have pizza available in 200 locations and offer coffee in most locations, with bean-to-cup services in over 550 spots. For loyal members, coffee is priced at $0.99, and when they come in for coffee, they also tend to pick up other items they want. I genuinely believe our business will perform better during inflation compared to many others.

Sorry, just one more from me. You mentioned that you are seeing more M&A opportunities; you referenced interest rates. Does this mean that valuations of those opportunities are becoming more attractive and coming down or are valuations remaining where they've been over the last year?

You know, it's difficult to answer because maybe for some people, valuation in their mind continues to stay high. When it comes to us, I mean, we will continue to basically evaluate those acquisitions on what is our return on capital. That's the way we're looking on them. So maybe from a valuation standpoint, valuations didn't - are not changing a lot. But remember, given our size today and our economy of scale today and our purchasing power today, we probably are able to pay a little bit more than what we paid last year and what we paid maybe the year before. And again, this is driven just because of our size and just because of our capabilities. That's absolutely. So I think the bigger we are, we believe it will give us opportunity to be a little bit more attractive versus some other small chains that don't have the economy of scale over here. But I - I think that valuation did not change a lot, but again this is just the beginning. Remember, interest rates start to increase only last year. We are at 525 right now with the last increase just recently. So I don't think there is a lot of acquisition that happened over the last three or four months, and the ones that happened, I think were relatively for a little bit lower valuation that we saw probably last year but it's not dramatic. I want to be very clear. This is not something dramatic that multiples went from 10 to 5 for example, it's maybe half a multiple or so that's what I basically see over here.

Perfect, thank you.

Thank you.

Our next question is from Hale Holden with Barclays. Please proceed with your question.

Good morning. $0.99 is an unbelievable deal for a cup of coffee. I have two questions. The first one is about TravelCenters. That's a slightly different model than your core large truck stop lots, and I was wondering if you still have the flexibility to consider transactions like TravelCenters that may fall outside of what Arko currently focuses on, or should we view you more as concentrating on your core operations?

TravelCenters presented a unique opportunity, but honestly, there's really only one travel center like it. While there are major players like Pilot and Lowe's among others, they are few and far between. We believe this is a great opportunity because we are in the fuel business, and fuel sales account for 60% of our revenue. Similarly, 65% of TravelCenters' profits derive from inside sales and services, which is comparable to us as about 61% of our gross profit comes from inside sales. They have restaurants, and we see potential in expanding our food service offerings as well. We have completed 24 acquisitions, closing on 23 of them, and we can operate stores of different sizes ranging from 500 to 6,000 square feet. The inside sales model is not significantly different. The appealing size and multiple of this company attracted us, which led us to pursue it. We expect this focus will continue in the future, emphasizing our retail business, where the majority of our profits come from, and we will seek out any available opportunities.

Okay. My second question is about labor inflation. I understand this primarily relates to filling open positions rather than actual wage inflation. However, this suggests that it may be more structural in nature regarding your cost base going forward. I'm curious if I'm considering this correctly. Is this merely a temporary increase in labor costs as you progress through the year until you can find a way to reduce them?

Yes, let me answer that first. It's a combination of both. We are still experiencing wage inflation from competitors and various retail operations. My comment was more focused on the challenge of filling open positions. Just to clarify. Go ahead, Arie.

No problem, I want to add a bit to this. Remember, we are not operating in a vacuum. You can choose to work for us or go across the street. Everyone is competing for the same talent, especially in rural areas. They can work for us or at the QSR location nearby. All companies are facing the same increases in utilities and insurance; everyone is experiencing higher costs. Ultimately, the cost to operate a store is the same for everyone, regardless of size. The positive aspect of increasing labor in the store is that it directly correlates with rising inside sales. When there are more employees, service improves, which boosts sales. If there's only one person in a store, they have to manage the register, assist customers, and restock coolers. With two employees, they can share responsibilities, ensuring that products are properly stocked. This is a common challenge that nearly all retailers in the U.S., particularly in our industry, are encountering. The good news is that as we continue to fill more positions, we should see an increase in sales as a result.

Great, thank you so much. I appreciate it.

Thank you.

Our next question is from Kelly Bania with BMO Capital Markets. Please proceed with your question.

Thanks. I just wanted to fit one more here on gallons. The commentary on the cadence of gallons through the quarter was very helpful, but I was just wondering if you could kind of step back, and as we think about gallons longer term, what would be the conditions or the backdrop that would allow gallons to grow or stabilize in these declines? And Arie, also, you gave a lot of examples of the great work that you're doing inside the store from a margin and merchandising perspective, but as you make these acquisitions, what is happening to gallons? And where do you see gallons going forward for those acquisitions as well as the core kind of base?

Thank you for your question, Kelly. As we're not providing guidance, I wanted to share some details from last year that might be helpful. Last April, the unleaded price was $3.86, and we experienced a loss of about 7.7% in gallons sold. By June, the price had risen to $4.70, leading to a 12.7% decline in gallons sold. Prices remained high at around $4.24 in July, where we saw a 12.6% drop in gallons. However, when the price fell to $3.64 in August, the decline in gallons was only 8%, and as the prices kept dropping, the decrease in gallons also slowed. My viewpoint is that since we're mainly operating in rural areas rather than major highways, higher fuel prices impact people's driving habits. When prices exceed $4, potential customers tend to limit their travel, opting to walk to nearby convenience stores instead. If fuel prices remain in the $3 range and do not spike to $4.70 like last June, I anticipate a minimal decline compared to last year. It's crucial for us to remain competitive, and we're also focused on increasing gross profit dollars. So, the key message is that fuel prices greatly influence our performance. Rising fuel costs also affect the broader economy, not just our company or convenience stores, and we observed a significant downturn when average fuel prices went above $5 nationwide. However, if oil and fuel prices hold steady at current levels, I believe we won’t experience a significant drop compared to the previous year. I didn't answer your question regarding to acquisition. When we actually put them on our platform, we're using the same method that we actually use across the entire chain. So it's something, first of all, we are putting those stores on KSS. This is the algorithm software that we put on and usually, those guys do not have any kind of technology, and we are measuring them. We're not making changes on the spot. We are measuring. We are seeing who is the competition, and then little by little, we start to basically use our methodology over here, which is increasing gross profit dollars as long as we continue to be competitive in the marketplace.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Arie Kotler for closing comments.

Thank you, Robert. Thank you everybody for participating this morning. And we're looking forward to seeing you guys in our stores, especially now, when we are entering 100 days of summer. This is a driving season, drive safe and be safe over there. Thank you.

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