Greetings, and welcome to Arko Corp's Second Quarter 2023 Earnings 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 Second 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 second quarter of 2023 as filed with the SEC and our earnings presentation are available on Arko's website, at arkocorp.com. Before we begin, please note that all second 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 June 30, 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, 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. We appreciate you joining the call. First, I'd like to thank our approximately 14,000 employees for their hard work and dedication, which I see first-hand every day. We have had a busy first half of 2023 and continue to execute our strategy of creating long-term shareholder value. I have great conviction that we are doing the right things. We have a deliberate focus on improving the performance of our retail stores, including our customer service and experience through our marketing and merchandising strategy, and of course, executing on accretive M&A transactions. Looking at our performance, I’m extremely happy with our results this quarter. Adjusted EBITDA for the quarter was $86.2 million, compared to $79 million in the prior year quarter, an increase of 9.1%, including recent acquisitions. I encourage you to review our earnings release, in which we provide more color on how our recent acquisitions contributed to our performance. The headlines this quarter are our strong organic growth in merchandise gross profit, which was offset by lower organic fuel gross profit and increased labor expense. At our retail stores, we continue to see the positive results of our many initiatives. Our strong and experienced merchandising and marketing team continued to work to maintain our trajectory of generating more gross profit inside our stores by focusing their efforts on our three strategic key pillars; growing sales in core destination categories; our fas REWARDS loyalty program; and expanding our food and beverage service. As a result, merchandise gross profit dollars grew to $135.6 million, a 5% increase on a same-store basis as compared to Q2 2022. Merchandise margin on a same-store basis grew 130 basis points to 31.9%, compared to 30.6% in Q2 2022. I’m very proud of these results. This quarter, same-store merchandise sales excluding cigarettes grew 3.8% and same-store sales increased by 0.7% compared to Q2 2022. We consider a store to be a same-store beginning in the first quarter in which the store has a full quarter of activity in the prior year. I want to underscore why we believe that the same-store sales excluding cigarettes is an important metric for judging our performance. Our marketing and merchandising initiative intentionally focuses on our core destination categories, which are packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks and beer. We measure our retail success on our ability to grow sales and profitability outside of cigarettes and in our core destination categories. We have executed on our strategy, growing merchandise sales and gross profit while decreasing our exposure to cigarettes. We encourage you to look at our second quarter presentation on arkocorp.com, where we have provided some information about this trend and our performance. I will detail some key metrics, with all numbers comparing Q2 2023 to Q2 2020 over the last 3 years. As a result of our strategy, as a percentage of total merchandise sales, core destination categories have increased from 38.4% to 44.6%. Cigarettes have decreased from 38.2% to 29.6% of total merchandise sales. Since Q2 2020, gross profit dollars from core destination categories have grown 67%, while gross profit dollars from cigarettes have only increased 7.5%. In the same timeframe, all other categories' gross profit dollars have grown approximately 32%. The gross margin in core destination categories has expanded approximately 546 basis points, while cigarette gross margin has expanded by approximately 148 basis points. Turning to the progress of our three key merchandising and marketing pillars. Our first pillar is to grow sales in core destination categories through data-driven decisions, execution and strong supplier partnerships. We define our core destination categories as those categories where we invest resources such as people, technology, space and capital. Same-store sales in these categories for Q2 this year increased by 5.6% as compared to the prior year period, with 12.2% same-store growth in candy. Importantly, margin in these core destination categories on a same-store basis grew 150 basis points year-over-year. These categories were approximately 65% of our Q2 same-store sales, excluding cigarettes, and 45% of our total same-store sales. We work to ensure that our stores meet our high space assortment standards for these core destination categories and that we offer our customers the right assortment and value proposition. This reinforces my belief that we are doing the right things by way of assortment and marketing. This is the Arko Way, which we quickly implemented in our recent acquisitions. We previously provided an update on our success at Handy Mart. This is not a one-off. We are seeing similar progress in our newly acquired Pride locations, where we added approximately 1,000 items into stores. At these locations, merchandise margin increased 290 basis points to 34.8%, compared to Q1 2023. Moving to the second pillar of our fas REWARDS loyalty program, we are very pleased with the results from the major operator of our loyalty app, which went live on March 28. We believe that our program develops and enhances our relationship with our customers, drives more trips with our existing customers and attracts new loyal customers. To support the growth in our loyalty program, on May 17 we launched our 100 Days of Summer loyalty enrollment offer, and new customers who enrolled with a valid email address and phone number are rewarded with $10 in fas bucks delivered to their new app wallet. We are seeing increased cadence of enrollment and, importantly, of marketable loyalty members. At the end of Q2 of this year, we had 1.48 million enrolled members, and we are just getting started. Marketable members, which are loyal customers with whom we can communicate, are up approximately 37% over the prior year period and 10.5% higher than the prior quarter. In fact, since we launched our new app in March, we added more than 205,000 net enrolled marketable members. We know that enrolled marketable members make more trips and spend more in our stores than non-enrolled members. In Q2, enrolled members made an average of almost 6 more trips per month versus non-enrolled members. For the same period, they also spent, on average, more than $60 per month more than non-enrolled members. Given the increased frequency and spend of enrolled members, we are very excited about the upside opportunities as the program gains more traction. Our third pillar is expanding our food and beverage services, and we are making great progress. This includes branded food franchises, packaged fresh and frozen food offerings, including pizza, chicken, roller grills, and hot, cold and frozen dispensed beverages. Although we have a lot of upside to grow our food and beverage offerings, I want to highlight our existing capabilities. We currently have over 150 branded food franchises, over 160 in-store delis, over 160 hot grab-and-go units, over 1,200 cold grab-and-go units, over 370 roller grills and over 700 bean-to-cup coffee stores. We have expanded bean-to-cup coffee by 135 stores since the first quarter of 2023. Branded franchise food sales increased 10.4% on a same-store basis in the second quarter as compared to the prior year. Our grab-and-go sales have increased 13.4% in Q2 2023 as compared to the prior year period. We are happy with this performance but know we have more to achieve and plan to grow in this category, particularly in a way that allows us to control our own destiny. We are targeting approximately 120 more stores for roller grills by the year-end of 2023. We have targeted an additional approximately 230 stores for further bean-to-cup coffee expansion by the end of 2023. We continue to challenge ourselves on our food and beverage service offerings and how we can continue to improve. Our objective is to improve our performance in each pillar. I believe this will position our core convenience store business for further growth, delivering great results while exceeding our customers' expectations. As you know, I like to get out with the team to keep our fingers on the pulse at our retail stores and check the performance of our operations. I and several senior executives recently surprise-visited many stores. We walk into the stores unannounced, speak to our associates and managers and truly inspect each store. I believe we have made a lot of progress on our merchandise execution but believe we still have more to go. We understand that excellent customer experience and service is a necessity and is core to our business. The operations team's goal is for merchandise and marketing plans to be closely followed and mix and assortment in each location executed to our strategy and always in stock. We will continue to invest in updating key areas of our stores that we believe are essential for continued growth. We are more committed than ever to driving long-term sustainable inside sales growth, expanding margin and gross profit dollars, and we know that there is a runway for improvement in growth. Turning to fuel, total fuel contribution increased to $156 million, compared to $130.8 million in the prior year quarter, an increase of $25.2 million. At our stores, on a same-store basis, retail fuel gross profit for Q2 was down 5.1% as compared to the prior year period. This reflects the impact from both declining gallons sold of 2.6% and slightly lower cents per gallon, $0.011 on a same-store basis, both as compared to the prior year period. I will note that according to OPIS data, volume is down year-over-year in each of the regions in which we operate. Second quarter retail cent per gallon on a same-store basis was $0.403, against $0.414 in the prior year period, as we continue to cycle elevated cents per gallon from 2022. We still believe that structurally higher margins will remain. Margins to operators with their cost structure and operating pressures are one of the main factors of this assessment. Looking ahead for Q3, we do not expect retail fuel margin to be as remarkable as the prior year period. In Q3 2022, we netted retail cents per gallon of $0.448, which was exceptional, and we do not believe that high margin is reflective of a normal quarter. As always, we continue pursuing our strategy of fuel gross profit optimization. Turning to M&A. Following the closing of the Quarles and Pride acquisitions 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. We also added 181 dealer locations. As I mentioned earlier, we are encouraged by early results at the Pride stores that we recently reset to our standards. We believe we will have similar results at the TEG stores that we recently reset. WTG, which we closed on June 6, 2023, added 24 company-operated Uncle's convenience stores and significantly enhanced the company's footprint into the attractive Western Texas market. This is our second closing in 2023. We expect this to add approximately $14.9 million of adjusted EBITDA on an annualized basis, including expected synergies. As part of this acquisition, we added 68 GASCARD-branded fleet fueling cardlock sites and 43 private cardlock sites, one of the largest fleet fueling operations in West Texas. Approximately 75% of 2022 fuel sales by volume in WTG cardlock locations were diesel. In addition, the WTG business issues fuel cards that provide customers with access to a nationwide network of fueling sites. Arko's fleet fueling segment expects to leverage its leading marketing and operational knowledge to manage fleet fueling sites and create value for our customers. We see a major opportunity to leverage our expertise at Quarles to improve the operation at our newly acquired cardlock sites. This is clearly a complementary acquisition, and we are pleased with the results so far. During the second quarter, GPM Petroleum upsized its credit line by $300 million, to $800 million, and extended in maturity until May of 2028. There is $602 million of availability under our line of credit as of June 30, 2023. In all, Arko currently has access to more than $2 billion in available funding for continued M&A activity. We continue to see tremendous opportunity ahead of us in our acquisition strategy, with a deep pipeline of potential opportunities. We believe our successful track record of making accretive acquisitions will continue to enhance value for our stockholders. Lastly, I'd like to welcome a new Pride location to our footprint. On June 30, we opened our newest location in South Windsor, Connecticut. I encourage those in the area to come visit. This location is beautiful, almost a 5,000-square-foot store, offering indoor and outdoor seating to enjoy Chester's Chicken and our food and beverage program. The location is equipped with a drive-through to offer our guests even more convenience. There are 40 parking spaces for our customers, 16 retail fuel pumps and 10 high-flow diesel pumps, along with a truck parking area. We have additional new units in the pipeline that are in various stages of development, and I look forward to adding more in the future. One last point before I turn the call over to Don. We continue to make progress on the electric vehicle front. As we are always monitoring the EV transition, I will note that there is very limited penetration in our core footprint. That said, we assess installation on a site-by-site basis and with a view on return on capital. We were among the first to install EV charging capabilities in Wisconsin, and we now have 15 EV charging locations, with 62 ports across 9 states. I remain excited about the many achievable opportunities in front of us. Thank you for your time today. And with that, I will now turn the call over to Don.

Thank you, Arie. As our many initiatives continue to gain traction, the company has continued to report excellent results. Our balance sheet continues to be strong, and we currently have a very good liquidity position. As of June 30, 2023, we had cash and cash equivalents of approximately $220 million, our outstanding debt, excluding capital leases, was approximately $824 million, resulting in net debt of $604 million. Further, we enjoyed the benefit of our Oak Street program, which Arie mentioned earlier on the call. Additionally, we continue to realize excellent cash flow. For the quarter, net cash provided by operating activities was $30.1 million, versus $42.1 million for the second quarter of 2022. This included an investment in working capital associated with the WTG acquisition as well as higher net interest and tax payments in the quarter over the prior year period. Getting to the results of our convenience stores. Merchandise revenue for the second quarter of 2023 increased to $484.6 million, versus $431.8 million in the prior year quarter. Merchandise margin increased by 150 basis points as compared to the prior year quarter to 31.9%. Total capital expenditures were roughly $27.6 million for the quarter. This is compared to capital expenditures of $24.5 million in Q2 2022. Retail fuel profitability, excluding intercompany charges, for the second quarter of 2023 increased 11.4% this quarter to $116.6 million. This includes a decrease of $5.2 million in same-store fuel profits, excluding intercompany charges, more than offset by $19 million in fuel contributions from acquisitions. The company maintained relatively strong retail fuel margin of $0.403 per gallon for the second quarter, compared to $0.414 per gallon on a same-store basis in Q2 2022. Second quarter convenience store operating expenses increased $29.5 million, or 17.5%, versus the prior year quarter, primarily due to $29.8 million of expenses related to the recent acquisitions and an approximately $3.2 million increase in expenses at same stores, mainly driven by approximately $4.2 million, or 6.5%, of higher personnel costs compared to Q2 2022. The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to dealers. I'd like to pause here and give some color around our labor costs. We like others in the industry, have faced wage inflation. Our average hourly wage increased $1.50 an hour in Q2, or approximately 10%, on a same-store basis as compared to the prior year period as we continue to invest in our employees. We have made a concerted effort to wisely use hours and decrease overtime hours as we continue to fill open positions. Moving to wholesale for the quarter. Wholesale fuel contribution, excluding intercompany charges, decreased approximately $2.5 million compared to the prior year period. This was primarily due to lower prompt-pay discounts related to lower fuel costs and declining fuel volumes at legacy wholesale sites, partially offset by $5.4 million contributed by our recent acquisitions. The relatively new fleet fueling business generated fuel revenues of approximately $121.1 million for the second quarter. Fuel contribution, excluding intercompany charges, from the fleet fueling sites was approximately $14.4 million for the quarter. Fuel margin cents per gallon, excluding intercompany charges, for the proprietary cardlock locations was $0.439 per gallon. Net interest and other financial expenses for the second quarter increased by $12.8 million versus the prior year quarter to $20.2 million. The majority of this is related to approximately $7 million due to favorable fair value adjustments in the prior year quarter. Net income for the quarter was $14.5 million, versus net income of $31.8 million in the prior year period, primarily due to an approximately $15 million increase in depreciation and amortization expenses in connection with recent acquisitions and the favorable fair value adjustments in the prior year quarter. Adjusted EBITDA was $86.2 million, compared to $79 million in the second quarter of 2022. In the second quarter, the company repurchased 1,487,349 shares of our common stock for a total of approximately $11.2 million. There are as of June 30, 2023, approximately $49.1 million remaining under our previously announced upsized $100 million stock repurchase program. Because of our continued strong results and desire to enhance returns for stockholders, we announced on Friday that Arko's Board of Directors declared a quarterly dividend of $0.03 per share of common stock, to be paid on September 1, 2023, to stockholders of record as of August 15, 2023. And with that, I'll 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'm very proud of our continual progress as a company. Now we will take your questions.

Our first question comes from Karru Martinson with Jefferies.

Good morning. When we look at the same-store sales on the merchandise front, how much of that do you feel was pricing versus the traffic that you're getting in?

Good morning, Karru. That's a good question. So I think it's a mixed bag. I mean, sales are up in part due to inflation. At the same time, we also see some unit decline, but there are some subcategories unit growth such as energy drinks is up 4.7%, roller grill is up 14.5% and the single beers are up 4.05%. So I think it's really a mixed bag between inflation and some categories are down and some categories basically are up over here. And that's the reason why we are adding assortment and using category management to add higher-margin items to our mix over here. It's really all about consumer behavior, and we try to follow consumer behavior to make sure that we're keeping pace over here. And we're strategically working really, really hard over here to shift the consumer to higher-margin projects, especially to our loyalty program. That's really something that we're working really hard to plan ahead.

And when you look at that footprint, how much opportunity is there to add kind of those branded food franchise offerings? And how do those stores that have them perform relative to the rest of the network?

Sure. So we actually review each and every store on an individual basis. We have today over 160 different delis inside the stores. Our first thing that we are doing is we're actually transforming some of our current delis and their footprint, of course, to a better menu offering. Such as, for example, Dunkin', we continue to build Dunkin' in the Tri-City area. We see a great opportunity over there, and we continue to build new ones basically and add them to our footprint. I think at the end of the day, we are really, really trying to figure out a structure of our food and beverage service offering based on the consumer behavior. And as I said earlier, I mean, we have over 150 branded food franchises at the moment, and you see what happened to sales. I mean, sales are up 10.4% quarter-over-quarter. So we are moving along based on demand. I mean, again, we have a huge pipeline of opportunities. For example, we were talking about the bean-to-cup coffee stores, for example. Total coffee cups are up 71.35% year-over-year, which is approximately 278,000 more cups. We have for this year another 120 stores that we are going to add roller grills, and we have another 230 stores that we are going to add bean-to-cup basically to the offering. So we have a huge runway ahead of us.

Okay. And then just lastly, the year ago third quarter, very strong performance. Is there anything that we should be aware of as we cycle that quarter or things that we would call out on a comparison basis?

As you know, we are not talking about Q3. We are not providing guidance over here. I think the one thing that I mentioned on the call was fuel margin last quarter. As you remember, fuel margin in the third quarter of 2022, really fuel margin was just remarkable given that the average national price back in the end of June, beginning of July was above $5 a gallon. And then we saw a big drop in a very short order between, I would call it, the beginning of July to the end of July, beginning of August. So I think those remarkable basically cents per gallon, I don't believe we're going to see them in Q3 2023. But as you see, even in Q2 2023, we're very, very close to $0.40 per gallon over here. So it's slightly below what we basically saw in Q2. But at the same time, shifting to merchandise sales, you see what happened to merchandise sales. Our inside sales, excluding cigarettes are up tremendously. Our margin, quarter-after-quarter-after-quarter, we continue to increase margin. And I think some of the results from the inside sales and with our initiatives I think are going to overcome some of the CPG shortage that we probably saw between 2022 and 2023.

Our next question is from Ben Wood with BMO Capital Markets.

This is Ben on behalf of me and Kelly. Thank you for taking our questions. And we definitely appreciate all the additional transparency on the acquired growth. We first wanted to dig in on that. Now that you've kind of closed all the deals and had at least a couple of them for a quarter or two, any changes to the previously disclosed EBITDA run rate target? And then in general, how is the synergy capture coming relative to expectations? And can you just refresh us on where we should expect to see those in the P&L and the timing of the big chunks?

Sure. Given that Don was working really hard with our team to add additional disclosures over here, I will let Don answer the question.

Thanks. Ben, just know a lot of this was based on discussions with you, especially, and other analysts so we can get a lot more transparency about what's going on. Obviously, not all this, we are realizing synergies on them, on the acquisition, but we're not done yet. We still have a lot more to do. I think one of the things, I don't know if Arie talked about it or not, talk about the opportunities of putting additional items in the stores. There's been tremendous upside with Pride, as he talked about. We also have not yet fully realized the G&A synergies that we're looking for because a lot of these are so new. But there are several things we can point to and talking about things that are not yet there, for example, putting our loyalty programs into TEG, putting them into WTG. There's a lot of open runway. But we've gotten a lot of the synergies just from what we've gotten from a cost standpoint. But obviously, there's a lot more to add.

Okay. That's great. And then just switching gears quickly. On the labor disclosure that you went through, Don. I believe you mentioned average hourly wage increased 10% in 2Q. Do you know where that puts you relative to peers? And who is your biggest competitor on the labor front? I guess, trying to gauge if this was a catch-up or could get ahead and try to figure out what the risk is that these wages run higher.

Ben, that's a great question. It's something we talk about all the time. Our competitors are everybody. It's not just our competitors in the industry. It's fast feeders. It's Walmart. It's everybody, anybody paying an hourly wage. I think a couple of things to point out. Number one, yes, we were up 6.5% in Q2, but that's down, the cadence is down, from Q1, where we were at 9.7%. And something else that's important to point out is our overtime has decreased a tremendous amount. And that goes towards, I think, quality of life, that we're getting the people and also getting temp services and things like that so people aren't having to be taxed to those hours. So we always do wage surveys. We're not the lowest. We're not the highest. But we go market-by-market and be competitive for the employees we want. We also want to make sure that those employees have a good quality of life.

Our next question comes from Bobby Griffin with Raymond James.

Good morning, buddy. Thanks for taking my questions and congrats on a nicely balanced quarter. I guess, Don, just a follow-up on the OpEx side of things and the labor, like, what do you think a healthy same-store operating expense growth rate is for this industry or what you would target? Is it 3% or 4% or are we still kind of in where same-store are going to have to grow a lot higher than that? I'm just trying to get a better feel for what the core business should grow over time and then we can layer on the acquisitions as we model them in.

And Bobby, thanks. And this is a question we struggle with all the time. Because obviously, when we had a slowdown of wage growth, I apologize. While it was mainly driven by $4.2 million in higher personnel costs, we also had a benefit because credit cards were down because we didn't have those high rates out there. So look, we think we have opportunities because of our size and because of everything else that as we consolidate to lower those costs, going forward. The biggest unknown is going to be labor. But again, as we look and go forward, I think in my opinion we've kind of hit that peak and are starting to move downward. But there could be other economic conditions that could affect that. But I think one of the things that I point to, and I think I talked about with Ben just before, is that we have slowed that growth from 9.7% down into the mid-6%s and that we have increased the hourly wage. And the other thing I want to point out is that we went from a model where we were trying to do incentives and stay-on bonuses and then also trying to put it into the wage. So I think that the opportunities we have because the cost of turnover is huge, and that's something we don't talk about a lot. And so our turnover is down, and that's going to slow down operating expense growth. And we've put a lot of resources at that to do it. So filling opening positions with committed associates is essential in providing excellent customer service, and that's what we're really focused on.

Okay. Appreciate that. And then secondly for me, Arie, I mean, we've closed here a good bit of acquisitions in the last year or so. Just recently closed one here in June. Can you maybe talk about where you're at from the M&A journey? And as we sit here today, does there need to be a pause for integration or do you still have the bandwidth to be aggressive out there from M&A if there are opportunities?

So as you remember this, Bobby, I keep saying it almost on every call, that's our DNA. That's really the Arko core DNA acquisitions. We continue to grow through acquisitions, and I think that's one of the reasons while most of the industry is down a little bit quarter-after-quarter on their EBITDA, because we know that CPG was a little bit elevated prior year, we continue to basically grow EBITDA given our basically acquisition model over here. We just finished to upsize our credit line by $300 million to $800 million, and we extended maturity to 2028. We have $602 million availability under our line of credit. As of June 30, 2023, we're sitting on a lot of cash. We have the Oak Street capital agreement that we just renewed recently. So we have over $2 billion in available funding to continue M&A activity. We will continue the M&A activity. Our team was built to integrate those locations, and we're going to continue to do so. We're going to continue to do so, and we're going to continue to add more labor to it, and we're going to increase the teams on the integration side, but there is no reason for us to stop any time soon.

Okay. And then lastly for me, I was looking through some of the newly disclosed data about the recent acquisitions, and I second everybody else's comments, I appreciate that disclosure. When you look at Pride, the merchandise margin is notably higher than maybe some of the consolidated stores or the consolidated average for the company at 34.8%. So is there an opportunity there, I guess, for kind of reverse synergies across learnings? And can you maybe talk about what Pride does well to drive that higher merchandise margin and if there is any opportunity to kind of take some of that expertise and put it back into more of the core Arko stores?

Sure, sure. So I think that the number one thing to remind everybody, cigarette sales concentration in the Northeast is probably a little bit lower than some other areas in the country. So I think the one thing that you see in Pride, we added over 1,000 different items into the mix over here. In Handy Mart, if you remember, we talked about adding 700 items. Pride, we added more than 1,000 items to the mix. We added more food service, so expand more food service, and bean-to-cup coffee to the mix. So I think the basket and the mix concentration over there it's a little bit different. There's some other areas in the country. That's the reason the margin it's a little bit higher. No question, we increased margin by adding basically those additional products in the store. But I think there is one thing, Bobby, that I think I have to mention. Besides all of the good things that we're doing and adding products and assortment and making sure that we have the right products, loyalty it's a big piece to it, and I keep talking about loyalty. I think it's very important to emphasize basically the sales, excluding cigarettes, that we try basically to point almost quarter-over-quarter-over-quarter. And the reason I said that is because if you're really looking on our sales excluding cigarettes, on average, since Q2 2020, we are up, on average, 4.6%. While at the same time, basically the cigarette sales, on average, since Q2 2020 are down 3.6%. So what I'm trying to say is that we have a huge increase in the core categories, and those core categories, by the way, are the ones that are driving the margin up. And this is where we are focusing. And that's the reason we keep showing and mentioning that the cigarettes basically sales since Q2 2020 were down from 38.2% to 29.6% this quarter. And that's very important because that's what drives the margin. The minute you sell more of the core categories, that's what's going to drive the margin and that's basically what you see in Pride. That's the reason the margin is higher because the core categories are up tremendously.

And Bobby, just a quick note. There are aspects at Pride that we are already considering for transfer. They have their own bakery with a wide variety of products, including pistachio muffins, which I've never encountered before. We're exploring how to incorporate some of that into our locations in Connecticut and enhance their commissary and bakery. We can draw significant insights from each of our acquisitions and apply them back to our core stores.

Thank you. I might have to try one of the muffins, but I appreciate the details Don, Arie. And best of luck here going forward.

Our next question comes from Anthony Bonadio with Wells Fargo.

Hey. Good morning, guys. And I echo everyone's comments on the added disclosure. So thanks for that. So not to beat a dead horse on gross margins here, but it does look like this was the highest merch margin quarter you guys have ever had, and definitely seems to speak to some of the stuff you're doing strategically inside the store. So can you just help us parse out some of the biggest contributors to that 150-bps expansion we saw in the quarter? And then is that 31% to 32% range sort of a good way to think about the run rate for the business in the back half of the year?

Thank you, Anthony. One thing we have done successfully and continue to excel at is selecting the right assortment tailored to consumer behavior. We've seen notable increases across various categories. For instance, alternative snacks grew by 3.9%, candy, which has been one of our largest categories, rose by 12.2%, packed beverages increased by 5.2%, and packed sweet snacks were up by 7.3%. These key categories are what significantly boosted our margins and continue to contribute positively. Since the second quarter of 2020 or 2021, we have consistently increased our margins substantially, primarily due to these core categories. In terms of gross profit, we saw growth of 67%, and same-store sales in these key categories increased by 5.6%.

Okay. That's helpful. Thank you. And then just quickly on M&A, you've now closed a handful of deals that were announced at the end of last year. But it does seem like things have quieted down a bit, at least in terms of new deal announcements to date. Maybe that's just a function of timing, but can you just talk a little bit more about what you're seeing in terms of deal flow and valuations, has that moderated at all? And then just any color that you could give us there would be helpful.

Well, we closed 2 acquisitions just from July to December 2022 and already closed another 2 acquisitions since technically, March to June. Those are large acquisitions. I mean, if you're looking on TEG; TEG was 135 company-operated stores and over 180 dealers. I don't see any slowdown in the marketplace. I think that there is a robust pipeline out there. And of course, we continue to evaluate and pursue all of that. But again, I don't think anything slowed down. I just think that everybody gets used to probably Arko reporting 4 acquisitions a year versus 2 already. But as I said, we have tremendous amounts of opportunities ahead of us when it comes to acquisitions, and the pipeline is solid, I can assure you that.

Our next question comes from Mark Astrachan with Stifel.

Hi. Thanks and good morning, everybody. I guess just following up on the last couple of lines of questions there M&A-wise, maybe remind us about strategy on build versus buy, just to start, please?

Sure. So as I mentioned earlier, the M&A strategy didn't really change, doesn't change. I mean, we are basically evaluating each and every opportunity as they come along. Given the footprint and given the size of our company, we are always, always, always committed to driving long-term shareholder value, which means that if there are opportunities to deploy capital in new-to-industry stores like the one that we just built as Pride in Connecticut, this is the first store that we opened 6 months after actually we took this opportunity. So that's one thing that we are doing. We continue to evaluate not only new-to-industry stores, we also continue to evaluate raze-and-rebuild, which we did a couple already. And again, every time there is an opportunity, we're basically reviewing it based on return on capital. And we can deploy our capital in NTI, in raze-and-rebuild and in acquisition. There is no particular order. I mean, we can basically do it all at the same time. And one thing I want to mention, Mark, because I forgot to talk about that, it's the function remodel. As everybody remembers, costs to remodel stores was up tremendously since the beginning of COVID. And what we decided to do is the function remodel, which is, for example, instead of waiting to remodel a store, we added bean-to-cup coffee to our stores. We add the grab-and-go coolers. We add the freezers. We are adding locations with franchise foods. We're adding pizza. We're adding chicken, roller grill. So we don't stop and wait. We just do all of those things that drive margin. And this is what the customer is looking for right now, and we're making sure that we keep the pace with customer demands.

Got it. Great. And then remind us, with gas prices increasing a little bit here, how to think about the conversion of shoppers coming into the store, any impact there. And somewhat related to that, where are we today in terms of just conversion, not necessarily relating to higher gas prices, just in general, conversion of folks who are buying gas that are coming in to shop? And how does that evolve in stores where I guess just to put sort of high-level investments have been made, to hit your other points of varying degrees of investments in store?

Sure, sure. It's a good question. So what we believe, as we continue to expand the offering inside the stores like food service, loyalty, loyalty is a very big component, we believe that making sure that we have the right offering inside the stores may drive the fuel customers. In the past, we were talking about fuel customers coming to the stores. What we see right now is actually the tremendous offering that we have inside our box, we believe actually reflects on the fuel customers outside. And you basically saw it. I think we saw it in this Q. The gallons were down only 2.6%. And if you're looking on the past 2 quarters, we really, really decreased basically a lot of gallons, and look what happened to our inside sales. I think that that's the driver over here, making sure you have the right offering will drive the customers outside. And what we are making sure with our loyalty program, there is a lot of offerings in our loyalty that if you buy something inside the stores, that will actually provide you up to $0.20, $0.25 outside for fuel. And I think that's something that is helping us tremendously over here.

Got it. And then, just lastly on your reminder about inside sales impact higher gas prices, please?

Well, by definition, every time you have higher gas prices outside the store, it's always impacts sales. But I don't think it's, like, dramatically like we actually saw last year. I mean, yes, prices are above $3. Some areas, you have basically very close to $4, but not similar to what we saw last year. And again, we are focusing on delivering the right value inside the stores. That's our focus. And I think that's very, very important.

Our next question comes from Alex Arnold with Odeon Capital.

I guess I just want to twist the M&A question a little differently. In an environment where access to capital is drying up and you guys have great access to capital, do you see a scenario where you're advantaged or is pricing changing in the market at all?

It's a good question. We didn't see any slowdown in terms of participants compared to what we saw in the past. I mean, I'm assuming that some competitors may be having a little bit of hard time with access to capital but so far, I don't see anything change in the marketplace so far. There are plenty of people with basically capital available to do those acquisitions. Again, I think when it comes to the larger acquisitions, I just think this is probably an area that we have some kind of advantage versus some others. But on the small acquisitions, I think the same basically competitors are still there.

So how about if you look at the seller dynamic, where you have some portion of the owners out there that are going into a refi in a much higher rate environment? Is there any forced selling or more impetus to sell?

Not that we are aware of. Not that we are aware of. And again, this is not something that, I think what we see over here is smaller players actually continue to be challenged with the operational challenges that we always see. That's the reason I kept talking about margin, fuel margin. That's the reason why fuel margin is up, because all of the small operators are basically challenged. They don’t have the same offering that we show over here. They don’t have the gross profit dollars inside the stores that we continue to show over here and I think that because they're challenged. I think that's really what drives them, versus the refinance. I think operational challenges versus interest rates.

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

Thank you, everybody, for your participation this morning. I would like to wish you guys a safe and enjoyable summer.

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