Greetings, welcome to Arko Corp., Third Quarter 2023 Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets, and Investor Relations. Thank you. You may begin.

Thank you. Good morning, and welcome to Arko's third 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. During our call today, unless otherwise stated, management will compare results to the same period in 2022. Management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our third quarter 2023 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views as of today, with respect to future events, and ARKO will not update or revise forward-looking statements made on this call, whether as a result of new information, future events, or otherwise. On this call, management will share operating results on both a GAAP basis and a non-GAAP basis. Description of those non-GAAP financial measures we use, such as adjusted EBITDA and reconciliations of these measures to our results, as reported in accordance with GAAP, are detailed in our earnings release and in our quarterly report on Form 10-Q for the third quarter 2023, or in our 2023 third quarter earnings presentation posted on our website. And now I would like to turn the call over to Arie.

Thank you, Jordan. Good morning, everyone. We appreciate you joining the call. As always, I would like to start off by thanking our dedicated team members for their continuous focus on improving the experience for our customers, their dedication to driving long-term value to our stockholders through execution of our marketing and merchandising strategies, and continued integration of our newly acquired businesses. I'm very pleased with our third quarter performance. This quarter, we navigated varying macro and economic environments, and we believe that our results compare favorably to what was a strong prior year quarter. You'll remember Q3 and Q4 of last year were strong quarters for us and the industry. I remain confident in our strategy and our team and believe we are well positioned to improve and unlock even more value from our platform for our stockholders. Key points this quarter include our execution and integration of our acquired businesses, the significant growth in our loyalty program, and our continually expanding merchandise contribution margin. Our efforts in these three areas helped to offset lower organic fuel contribution driven by the prior year quarter's elevated cents per gallon and this quarter's industry-wide lower fuel demand. We have had a busy last 12 months, closing on five acquisitions since the beginning of Q3 last year and adding approximately 720 locations across our retail, wholesale, and fleet segments. As was the case last quarter, our press release and public filing provide financial information and key metrics of our recently acquired businesses. We have delivered consistent and impressive growth in adjusted EBITDA, of which we can be very proud. As I said, we are very pleased with our performance this quarter with the adjusted EBITDA of $91.2 million compared to a record adjusted EBITDA of $99.5 million in the prior year quarter. The year-over-year decline was primarily due to lower fuel contribution at same stores, which I will explain shortly. Although we have multiple segments, our primary business is the operation of convenience stores. We derive a significant portion of our revenues from the retail sales of fuel, with the products offered in our stores generating a large proportion of our profitability. I noted last quarter that we believe same store merchandise sales, excluding cigarettes best reflects the strength of our organic merchandise performance. This quarter, same store merchandise sales excluding cigarettes grew approximately 1% compared to Q3 of 2022, which is 5.3% on a two-year stack. Total same store merchandise sales increased 0.1% compared to Q3 2022, which were impacted by approximately $2 million in increased loyalty investments associated with customer acquisition related to expanding membership in the fas REWARDS loyalty program, other loyalty promotions, and growth in the total loyalty membership base, a long-term goal of the company. This caused a reduction in the same store merchandise sales of approximately 0.4%. With that backdrop, we were still able to grow merchandise margin again this quarter, improving 50 basis points to 31.7%. This improvement is on top of the 60 basis point expansion we experienced in Q3 2022 over Q3 2021. We worked with the right assortment of high margin core destination merchandise that our customers expect and want while providing them with excellent service. This quarter, our merchandise contribution increased $21.8 million or 15.7% over the prior year period, primarily as a result of the recent acquisition and stable organic performance in our same-store operations. In our stores, we continue to focus on our three merchandising and marketing key strategic pillars. Our fas REWARDS loyalty program, growing sales in core destination categories, and expanding our food and beverage service. I would like to detail the results of our merchandise initiatives. As we have previously mentioned, we have been making significant investments in our fas REWARDS loyalty program, including the major upgrade to our loyalty app, which went live on March 28 of this year, and our special $10 enrollment promotion that commenced on May 17 and concluded on September 19. We believe that our loyalty program develops and enhances our relationship with our customers, drives more trips and spend with our existing customers, and attracts new loyal customers. This was a very active quarter for loyalty enrollment. We added more than 365,000 enrolled members during the quarter, ending Q3 with 1.85 million total enrolled fas REWARDS members. This is a 50% increase in enrolled members since the end of Q3 2022. We attribute the increase to our strong $10 loyalty enrollment promotion. In addition, I'm very pleased that our loyalty members are taking greater advantage of the value we offer and participated in more of our member-only promotional activities this quarter. I said before that we invested in loyalty, which impacted our same-store merchandise sales metrics, and we plan to continue our efforts to expand our loyalty membership base, targeting 3 million enrolled members by the end of 2024. We have strong conviction behind these investments, as active enrolled members make more trips and spend more than non-enrolled members. This quarter, active enrolled members made an average of more than four additional trips per month compared to our non-enrolled members. For the same period, they also spent on average $41 per month, more than non-enrolled members. You'll note that the frequency and average spend are lower than the numbers we referenced last quarter. However, given the large addition of new members, particularly later in the quarter, our averages were negatively impacted by new members who have not yet had the opportunity to mature and normalize spending habits. We believe we will see upside from these new members, and we welcome them to the family. To give some context around our loyalty initiatives, excluding sales for any time period prior to the implementation of our loyalty program at recently acquired locations or acquisitions where we have not yet implemented our loyalty program, 19.3% of our merchandise sales this quarter were from enrolled loyalty members. We believe that mix can grow and help achieve 30%-plus merchandise sales penetration over time. Our active enrolled members generate greater sales and contributions compared to our non-enrolled customers. Let's move to the core destination categories, which are packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks, and beer. These six categories accounted for 53% of our merchandise contribution this quarter. These concentrations allow us to focus our initiatives on categories that we believe will drive growth. We have a deliberate approach to these categories using data-driven decisions in our execution. We leverage our strong supplier partnerships, and our results speak for themselves. Year-over-year, we have continued to grow contribution dollars from these categories. Over the last three years, our concentration of merchandise contribution from these categories has expanded approximately 570 basis points, and merchandise contribution for these categories has grown at an approximately 17% compounded annual growth rate. Same-store sales in these categories for this quarter increased by 2.4% as compared to the prior year period. We are extremely pleased with these results as we continue to drive merchandise sales growth and margin improvement inside our stores. Our third pillar is expanding our food and beverage service, where we see tremendous opportunities. In October, we announced the addition of Richard Guidry, to the GPM leadership team. Richard fills the newly created role as GPM Senior Vice President of Food. We believe his distinguished track record and long experience underscore how serious we are about nailing the strategy, growth, and execution of our foods business. Since joining GPM, he has been getting up to speed, meeting with partners in the organization, meeting with our supplier partners, visiting stores, and even working shifts to better understand how our stores operate. We see the development of our strategy around food as a multi-year opportunity, with wins along the way. We are extremely excited to welcome Richard to the team and look forward to sharing more as we work with Richard to further develop our full-service strategy. As I hope it's clear, we tried to position our core convenience store business for further growth, delivering great results while exceeding our customers' expectations. Turning to fuel, I will note that according to OPUS data, fuel gallon demand decreased nationally over the quarter compared to the prior year quarter, contributing to the trend that we saw at ARKO, with a decrease of 5.3% in same-store gallons. However, total retail gallons increased 14.8% because of our recent acquisition. Retail fuel contribution increased to $121.3 million, a 3.2% increase. As always, our team remained focused on striking the right balance between volume and pricing to optimize fuel contribution dollars. Our retail fuel margin remained strong at $0.403 per gallon, only $0.045 lower compared to the prior year quarter. We believe this demonstrates the sustainability of a higher fuel margin. We know that fuel margins vary from quarter to quarter. However, as we look to deliver long-term stockholder value, we believe that this structurally higher margin will remain for the foreseeable future. Marginal operators with their cost structures and operating pressures have faced increasing breakeven fuel margins, creating support for these levels. Moving to M&A, we have continued to integrate the Quarles, Pride, TEG, and WTG acquisitions, which have served to increase our earnings base while expanding our footprint into new and adjacent territories. I'd like to briefly discuss Quarles, the first of our most recent acquisitions, as an example. As we show in our investor presentation for this quarter, the Quarles acquisition generated approximately $24 million in adjusted EBITDA in the last three quarters alone. Since closing on the acquisition in July 2022, we have already earned back our entire portion of the cash consideration paid for that transaction. We also continued to invest in the businesses we acquired as opportunities arise. For example, we have put capital to work at WCG deploying investment CapEx to upgrade its fleet capabilities and infrastructure to be more like Quarles, and to provide even more upside to that business. We believe our successful track record of making disciplined and aggressive acquisitions will continue to enhance value for our stockholders, especially as we continue to see tremendous opportunity ahead of us in our acquisition strategy, with a deep pipeline of potential opportunities. Importantly, we remain well-capitalized to execute on opportunities as they arise. As of September 30, 2023, we had $204 million in cash on hand and $623 million of availability under our lines of credit. In all together, with the available capacity of almost $1.5 billion under our program agreement with Oak Street, ARKO currently has access to more than $2 billion in available liquidity for continued M&A activity. I want to focus on the discipline point for just a moment. I'm proud of the team here for executing 25 acquisitions out of hundreds of potential deals we produced over the last 10 years, including the five we have closed over the last year. One last point before I turn the call over to Don. In line with our capital allocation strategies, we continue to have plans in place for new industry stores, with four, in particular, that have been identified and are in different stages of development. 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, Ari. As our many initiatives continue to gain traction, the company has continued to record strong results. Our balance sheet continues to be strong, and we currently have a very good liquidity position. As of September 30, 2023, we had cash and cash equivalents of approximately $204 million. Our outstanding debt, excluding capital leases, was approximately $828 million, resulting in net debt of $624 million. For the quarter, net cash provided by operating activities was $32.8 million versus $67.6 million for the third quarter of 2022. This included higher net interest and tax payments in the quarter over prior year periods and the technical delay in receiving approximately $12.1 million from a routine credit card processor, as well as the decrease in adjusted EBITDA. Getting into results for our convenience stores, merchandise revenue for the third quarter of 2023 increased to $506.4 million versus $445.8 million in the prior year quarter. Merchandise margin increased by 50 basis points compared to the prior year quarter to 31.7%. Total capital expenditures were approximately $25.6 million for the quarter. This is compared to capital expenditures of $27.7 million in Q3 2022. Retail fuel profitability, excluding intercompany charges for the third quarter of 2023 increased 3.2% this quarter to $121.3 million. This includes a decrease of $16.6 million in same-store fuel contribution, excluding intercompany charges, more than offset by $21.7 million in fuel contributions from recent acquisitions. The company maintains a relatively strong retail fuel margin of $0.406 per gallon for the third quarter of 2023 compared to $0.449 per gallon on a same-store basis in Q3 2022. Third quarter convenience store operating expenses increased by $30.2 million, or 17.2%, versus the prior year quarter, primarily due to $34.4 million of expenses related to recent acquisitions, offset by a decrease of approximately $1.7 million at same stores, mainly driven by lower credit card fees and by underperforming retail sites that we closed or converted to dealers. As always, we seek to improve our operational efficiencies at stores. On a same-store basis, these expenses decreased by 1% over the prior year period. Importantly, same-store personnel expenses remained flat, increasing only 0.1% over the prior year period, as we continue to appropriately balance labor expenses while providing superior customer service. We continue to fill positions to ensure excellent service for our customers. We continue to review, evaluate and refine hours to right-size labor and alter associates' tasks to reduce inefficiencies. For the most part, any increase in same-store hours is mostly offset by reductions in overtime hours. Moving to wholesale and fleet, this quarter, we benefited from a full quarter of Quarles, which we acquired on July 22, 2022. In wholesale, fuel contribution excluding intercompany charges was similar compared to the prior year period as incremental contribution from our recent acquisitions offset margin decreases. Fuel contribution excluding intercompany charges from the fleet fueling sites was approximately $14.3 million for the quarter, an increase of $3.3 million compared to the prior year quarter. Fuel margin cents per gallon, excluding intercompany charges for the proprietary cardlock locations was $0.394 per gallon. This segment benefited from an 8.2 million gallon increase that offset a $0.024 contraction in margin at our proprietary cardlock locations over the prior year quarter. Looking ahead to Q4, we do not expect our fleet fueling margin to be as remarkable as the prior period. In Q4 last year, the fleet business had a contribution per gallon of $0.517, which was due to price volatility in the second half of 2022. We do not believe that high margin is reflective of a normal quarter. Net interest and other financial expenses for the third quarter of 2023 decreased by $5.2 million versus the prior year quarter to $14.6 million. The majority of this is due to an increase of approximately $11.6 million in income related to favorable fair value adjustments compared to the prior year quarter. Net income for the quarter was $21.5 million compared to net income of $25 million in the prior year quarter. Adjusted EBITDA for the quarter was $91.2 million compared to $99.5 million in Q3 2022, primarily due to reduced fuel contribution at same stores. In the third quarter of 2023, the company repurchased approximately 1.5 million shares of our common stock for a total of approximately $11.6 million at an average price of $7.53. As of September 30, 2023, there was approximately $37.5 million remaining under our previously announced upsized $100 million stock repurchase program. Because of our continued strong results and desire to enhance returns for our stockholders, we announced on Monday that ARKO's Board of Directors declared a quarterly dividend of $0.03 per share of common stock to be paid on December 1, 2023, to stockholders of record as of November 17, 2023. And now I'll turn the call back over to Ari.

Thank you, Don. We believe that we have a significant opportunity to increase our sales and profitability by continuing to execute on our organic and inorganic strategies, improving the performance of our current store to enhance offerings to meet our customers' needs, and growing our store base in existing and continuous markets through acquisitions. Now we will take your questions.

Thank you. Our first question is from Bobby Griffin with Raymond James. Please proceed.

Good morning, everybody. Thanks for taking my questions. Ari, I guess my first question is on the gallon side of the business, particularly in retail. Are you seeing a divergence or separation between some of the legacy stores and some of the newly acquired stores? The gist of the question is when I look at total gallon stores versus our estimates, the comp gallons underperformed or missed us by little, but the total gallons were actually pretty close to our model. So are you just seeing the newer acquired stores maybe perform at a little bit higher per store gallon basis than legacy stores that are in your business?

Good morning, Bobby. No, I don't think so. I really think that our approach is not a macro approach. And if you think about our business, we price fuel location by location, market by market. Our approach is really more relevant to how we compete. Our strategy is consistent with the legacy stores and with the stores that we just acquired. We are working really hard to optimize gross profit dollars. But if you really look, every market is different. But I don't think anything is different between the acquisitions we just made. I think it's really all about footprints. I mean, different footprints, different gallons, and then some others.

I guess my follow-up question is whether the newly acquired stores are in different locations that allow them to generate more gallons per store compared to some of the legacy stores included in the comparable sales data.

It's a mixed situation because we bought stores like the Pride Stores in the Northeast. In that region, I believe the gallons per store are higher compared to the Southeast. However, it's a valid point to discuss. For instance, looking at Fiji, which is located in the Southeast and some parts of the Southwest, it has lower gallons than the Northeast. Regarding the Quarles acquisition, most of it is actually from a different business. I think that highlights the difference in the mix compared to the others.

Okay, that's helpful. And I guess the second part of that is the industry has continued to face some gallon pressure here. You referenced OPUS data was down during the quarter. How do you think that is translating into just pure traffic to your business? Is that a challenge on the traffic side when we kind of want to think about that as it relates to merchandise sales? Are you seeing different traffic counts inside the stores than what maybe the gallon, the same store gallon showing?

Yes, so another great question. Before COVID, I used to assume that the traffic inside the stores was really based on basically the price at the pump. I actually think what happened actually after COVID, I think things changed. Now I believe that the more offering you have inside the stores, and you see it, by the way, with the core destination categories that increased tremendously. As we continue to offer great value inside our stores and as we continue to add food inside the stores, I believe that will impact our gallons moving forward. So I don't think losing gallons impacts our insights; it has become the other way around.

Okay, and one last one for me, Don, on that $12 million delay from the credit card processor. Is that just a pure timing aspect where you'll get that $12 million back in the fourth quarter?

Yeah, we already received it the first week of October. It was an isolated event at a certain set of stores. They were just changing their backend. And we already received it the first week.

Perfect. All right. I appreciate it. Well, best of luck going forward, and I'll jump back in the queue. Thank you.

Thank you, Bobby.

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

Hi, good morning. Thanks for taking our questions. Also wondering if we could just talk a little bit more about the gallons. I think Arie, you mentioned the OPUS data. But just wondering if you've done any more analysis on kind of market share in your region, both for your retail segment and the same-store gallon decline there. But also, as you think about how your dealer customers are doing. I believe we're estimating gallons down maybe around high-single-digit range on an organic basis. Just how you think about that going forward? Is that kind of a good run rate we should continue to use in terms of a gallon decline for those segments?

Good morning, Kelly. I don't have a crystal ball for predicting the future. What I do know is that the decrease in gallons is very close to the OPUS data that was reported. We are continuing to focus on increasing gross profit dollars, even if it means losing some of those dollars. I don't believe demand will return to the 2019 levels; instead, I think it will remain somewhat soft. We see this trend across our competitors as well, and it's not just related to ARKO; it's affecting our competitors too. As I mentioned earlier, many mom-and-pop stores in the market are facing similar challenges to what we are experiencing.

Okay, and can you also just talk about the fas REWARDS and investments that you made in the quarter? How we should think about the kind of annualized cost of that and what is the expected ROI of that total investment for the reward loyalty program?

Sure. As I mentioned, this year focuses on fas REWARDS, ensuring we have the right assortment and providing value to our customers. On May 17, we launched a $10 enrollment promotion offering $10 in fas cash back to customers with a valid email and phone number. We saw a significant increase in Q2 and especially in Q3, with loyal customers increasing by over 50% compared to Q3 2022. Our goal is to keep increasing that. Loyal customers account for 19.3% of our inside sales. This $10 promotion is very impactful. Our aim is to grow our loyal membership to 3 million by the end of 2024. Offering $10 certainly influences sales, which is why same-store sales were 0.1%; without the impact of approximately $2 million from the promotion, same-store sales would have increased by another 0.4%. Excluding cigarettes, another metric for our business, same-store sales would likely have added another 0.6%. This is a long-term investment, and quarterly trends show that loyal members constituted 13.6% of inside sales in Q3 2021, increased to 16.7% in Q3 2022, and now are at 19.3% in Q3 2023. It's worth noting that we continue to improve margins while offering great value to our loyal members, with a margin increase of 50 basis points compared to Q3 2022.

Just a couple follow-up questions there. If you get to 3 million members by '24, what percent of your sales or customer base will that represent? And maybe just in terms of the $10 enrollment program, I mean, is that going to continue at that level? Or how do you think about cycling that next year? Should we expect that could impact traffic or just trying to think about how we cycle this promotion as we get to Q2, Q3 next year?

Sure. So I can tell you that as of November 1, we paused that in September, and as of November 1, we started it all over again because we saw a huge impact based on that. Again, it's not a big dollar amount, but I think the impact is tremendous here. Those customers are coming more often. We see more trips, we see more trips because those members actually enrolled just close to the end of the quarter. It takes some time for those members to start to get offerings from us. I mean, we are providing offerings to those members regularly. Almost on a daily basis, they get great offerings. This is what we are counting on. This is a long-term investment. We believe as we continue to grow our loyalty member base, that we will increase inside sales, and that's going to drive customers to the pump as well, because we have great offerings inside the store that will send customers with nice cents per gallon off when they come to purchase fuel.

Okay, thanks. Just one more for me, Arie. On operating expenses, the same-store personnel expenses, nearly flat. I think you called out a reduction in overtime hours. Maybe can you just provide an order of magnitude of how that is impacting the overall OpEx, when it starts to cycle, and what you're seeing just in terms of wages and wage rates in the market today?

So I'll let Don answer this question if that's okay with you, Kelly?

Yeah. Hi, Kelly. The way we're looking at it is we're switching hours from overtime to regular hours. So it's not necessarily the difference in hours being worked; more of those hours are being worked at a regular rate versus an overtime rate. We did a promotion last summer for all employees for the 100 days of summer. This year, we have not had to do that kind of incentive. Yes, you do have rising labor wages, but what you're seeing is a reduction in incentives that have been offered in the past. Net-net, you get sort of this flat increase. Rates are increasing, but they're not increasing at the rate we saw earlier. We're happy to see almost flat personnel expenses; it's really how you're spending your money, and we're putting more into the wage rate rather than just incentives.

Could you remind us when you expect to return to a normal schedule regarding overtime?

Could you clarify your question? I'm not sure what you're asking?

I'm just trying to understand from a comparison standpoint when the overtime hours start to get back to normal. Are you still shuffling increases for the next couple of quarters?

Right, right. A lot of it was wage increases that we've been doing all year. This has really been a focus from operations to really cut down those overtime hours, give people a better quality of life, raise the hourly wage, and use temporary resources to fill in for things to give people relief. In terms of cycling, it would really be done by the end of this year. This has been a major focus.

Got it? And just maybe the last one for me, any thoughts on just how you're planning CapEx for 2024 that we can start to think about incorporating into our model?

Don, would you like to answer that?

Sure. Our maintenance capital expenditures will remain significant this year as we wrap up our EMV conversions, which we've estimated to be between $10 million and $12 million annually. We anticipate additional projects that will require capital expenditures moving forward, although I won't provide specific guidance. Overall, about two-thirds of our total capital expenditures are for maintenance and one-third for investments. This can serve as a guideline for you. There will be upcoming projects that will need capital expenditures, and many of these are expected to deliver a substantial return on investment as well.

Thank you.

Thank you, Kelly.

Our next question is from Alok Patel with Stifel. Please proceed.

All right, this is Alok on for Mark. My first question is on quarter-to-date trends, any notable changes in foot traffic given the macro conditions and resumption of student loan payments? And then if you can kind of frame the answer around whether you're offering more, we're seeing higher demand for private label? And if so, which categories?

Yeah, so I'll start, maybe with the second question related to what we focus on and what we see. As I mentioned earlier, a large portion of our sales actually happened in the core categories. In those core categories, for example, we see an increase in particular categories, for example, candy. Candy, this quarter, was almost 4.8%, more than the prior year quarter. Beer, for example, is another strong category at 2.8%. Salty snacks at 4.1% above the prior year quarter. I think what we see over here is coming back to the members I mentioned earlier, those loyal members taking advantage of our offerings inside the stores. Because of that, I think we see an increase in those categories in particular. Regarding your question on traffic and trends, the inflation impact now is actually affecting all customers. There is no question about that. This is the reason why we need to be very competitive and make sure that we have the right offering inside stores, including food service. People have less dollars to spend, and because of that, they’re going to visit more to the convenience store.

Got it. So as a quick follow-up, within the core destination categories, which categories are driving sales growth for the balance of the year and into 2024? And then if you can kind of discuss the drivers supporting the great strengths that you've realized in those categories, that would be great. It would be awesome if you can also provide the year-over-year numbers for packaged beverages.

Yeah, so I'll start with the six categories. If you're looking at packaged beverages, they were up 1.5% this quarter; alternative snacks were up 1.6%; candy was up 4.8%; beer was up 2.8%; packaged sweet snacks were up 2.2%; and salty snacks around 4.1%. If you remember, we are cycling a very strong Q3 2022. But those are really the core categories. If you really look at those two categories, not only have they continued to perform very well for us and aligned with our strategy, over the last three years, the contribution from these categories expanded approximately 570 basis points, with total merchandise contributions growing at approximately 17% compounded annual growth rate. That’s basically what we see from those six categories over the past three years.

Got it. Thanks. I'll pass it on.

Appreciate that. Thank you.

Our next question is from Karru Martinson with Jefferies. Please proceed.

Good morning. This is kind of a big-picture question. Why is the fuel demand down when we look at the overall industry, and ultimately more people are going to work more days in the office? What's driving the broader category?

If I had the right answer, I would share it. However, we are depending on OPUS data, which indicates a nationwide decline in volume of about 3.49%. I want to remind everyone that our footprint is in rural areas; nearly 40% of our stores are in towns with populations under 20,000. In those rural towns, people tend to drive less compared to other regions. Additionally, our stores are not situated on major highways, which I believe contributes to this trend. This pattern is consistent with other competitors in our market as well.

So okay, when you talk about seeing sustainable strong margins on fuel, are we still looking at in this stable environment, being able to maintain kind of over $0.40 per gallon?

It’s a good question. I don't have a crystal ball on whether we can keep the $0.40 margins. The one thing I can say is we are today the sixth largest operator in the country. We are competing with many large chains and also with a lot of small operators like mom-and-pop stores. You can appreciate that about 70% of the industry, almost 100,000 convenience stores and gas stations, are chains with 50 stores or less; 50% of that is mom-and-pop operations. I think everyone in that category is facing rising expenses like insurance and electricity, higher fixed expenses than they had before. Because of that, we believe that structurally higher margins can remain in place. But again, that's just my assumption based on years in the business.

Then what are we seeing on the inflationary front when it comes to inside the stores on merchandising? Are you still seeing pressure there? And where are you on your pricing?

Well, I think the results speak for themselves. That's the reason I mentioned that if you look at sales, excluding cigarettes, you can see the results over here. It's very important for us to provide value to our customers. We believe as long as we continue to do that, our customers will keep coming back. This is the reason loyalty is a very, very important component of our strategy.

Thank you very much. Appreciate it.

Thank you. Our next question is from William Reiter with Bank of America. Please proceed.

Hi. My first question is on the merchandise margin expansion. You mentioned marketing, and then merchandising. Is this largely based upon mix and having more food and consumables and those six major categories of growth? Or what are some of the bigger contributors to expansion?

I think the mix is absolutely very important. Going back to the three key pillars that I mentioned on the call, the core categories are critical. They're driving margin tremendously. The other piece is food service. Food service is something that will help us continue to grow margin, and this is an area that we keep investing in. I mentioned the six categories; if you want, I can go through them again. But those six core categories, led by candy, drive the majority of our sales. If you look at those core categories, they are up 2.4% on the same-store sales pro basis, Q3 versus Q3 2023 versus Q3 2022. Again, it's all driven by those three key pillars I mentioned.

Got it. And then I think when you were talking about M&A, you mentioned that there are four that are in the pipeline, I guess. Did I hear that correctly? Is there any way you can dimensionalize how large these are?

You didn't hear that correctly unfortunately; we closed on five acquisitions since July 2022 until the end of this quarter. The five acquisitions include Quarles, which was a great opportunity we executed on. We are now over 14 months after closing. After that, we closed on Pride, which was 31 locations in the Northeast. Since then, we opened another store within Pride. Then we had TEG and WTG. Just recently during Q3, we closed another acquisition, acquiring seven stores from one of our dealers.

Okay. Just lastly, for me a question on the $10 program. Would it be possible for customers to create new email addresses each time? Is there any way to address this? Are you able to track to make sure that they're not doing this just each time creating a new one?

The answer is yes. There is an opportunity for people. We have some measurement and compliance in place, and in some cases, if someone tries to dispute it, we try to figure out a way to catch them. But again, this is not our main focus. We need to concentrate on how to increase the base. We see what is happening with those loyal customers; we will concentrate on targeting them and executing versus just watching our customers to ensure no one is taking advantage.

Understood. Okay. All right. That's all for me. Thank you.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Arie for closing comments.

Thank you once again for joining the call this morning and for your great questions. It was really a lot of great questions this morning. I'm very pleased with our results this quarter as we navigate from comparison to the back half of last year. I remain very excited about the many achievable opportunities in front of us. Thank you again for your questions and the time you spent this morning.

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