Arko Corp. (ARKO) 2022 Q4 法說會逐字稿

Greetings, and welcome to the ARKO Corp. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. George Parman, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, and welcome to ARKO's Fourth Quarter and Fiscal Year 2022 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer; and Don Bassell, Chief Financial Officer. Our earnings press release, annual report on Form 10-K for the year ended December 31, 2022, as filed with the SEC and our earnings presentation are available on ARKO's website at arcocorp.com.

Before we begin, please note that all fourth quarter 2022 financial information is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as will, may, expect, plan, intend, could, estimate, project and similar references to future periods. These statements speak only as of today and are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to our press release, our annual report on Form 10-K for the fiscal year ended December 31, 2022, and our other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please note that on today's call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA, adjusted EBITDA and free cash flow. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for our financial information presented in accordance with GAAP.

Please refer to our earnings press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we're conducting our call today from our respective remote locations. As such, there may be brief delays, 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, and thank you for joining us. Before we get started, I'm sure you all have heard that Don announced that he will retire after a distinguished 42-year career. Don is a great partner and a resource. As we reported, we will remain in the position for several more quarters, leading the finance team while the search for his replacement is underway. Don's time with the company has been marked by significant growth and excellent performance in our business, and 2022 was another year of strong results and continued expansion. These results emphasize that at our core, ARKO is a retail convenience store operator. It is important to remember that the majority of our profits are generated in our stores.

ARKO increased operating income by 18.9% to $33.7 million in Q4 2022 versus the prior year fourth quarter. Adjusted EBITDA increased 24.1% compared to Q4 2021 $72.4 million in Q4 2022 and increased 17.3% year-over-year to $301.1 million in 2022. Our balance sheet continues to be very strong. In Q4, the company recorded $69.5 million in net cash provided by operating activities and $43.8 million in free cash flow.

For the year, ARKO generated $209.3 million in net cash provided by operating activities and $110.7 million in free cash flow. This is a direct result of executing our core strategy, both in stores and in fuel cells across the business. In 2022, we continue to successfully invest in many initiatives in our stores. Over the past 4 years, we have realigned and expand our marketing and merchandising team. Their strategic initiative has successfully led to continued gross profit expansion inside our stores.

Compared to 2020, merchandise contribution has grown by 23.4%. According to IRI, in 2022, total dollar sales in our stores outpaced their markets, showing the strength of our favorable assortment, loyalty and marketing programs. This includes key product categories like beer, wine, packaged beverages, packaged sweet snacks, frozen foods, alternative snacks and general merchandise. Q4 merchandise margin increased 50 basis points to 30.5% from 30% in Q4 2021. Merchandise margin expanded by 110 basis points to 30.4% for full year 2022 compared to 29.3% in 2021.

Fourth quarter same-store merchandise sales, excluding cigarettes, increased 9.2% on a 2-year stack basis. IRI data also shows that we maintain share in our competitive retailer market area, including cigarettes and grew by 10 basis points, excluding tobacco products. Fourth quarter 2022 same-store sales, including cigarettes, increased 1.2%. It is worth noting that the concentration of same-store cigarette sales declined from 38.7% of in-store sales in Q4 2020 to 32.7% of in-store sales in Q4 2022 due to change in consumer behavior and our margin optimization strategy.

We continue to price tobacco projects competitively to attract adult tobacco consumers. However, our main in-store focus is to lead with an assortment relevant to our customers and on developing our programs in higher-margin items like food service and dispensed beverage categories.

Our in-store growth strategy is based on 3 key pillars. The first pillar is to grow sales in core destination categories for data-driven decisions that meet today's customers' needs. When we acquire new sites, we often add hundreds of items to the acquired stores. We focus on key merchandise that we know resonate with our customers. I will detail the benefits of this shortly in a brief case study of our Handy Mart acquisition.

The second key pillar is using our Fas REWARDS loyalty program to develop and strengthen the relationship with our customers. Our objective is to drive more trips inside stores while providing exceptional value. We ended the year with almost 1.3 million enroll loyalty members. We're pleased by the consumer response to our current loyalty initiatives. Loyalty customers continue to incrementally grow their total spend over the course of the year. Our loyalty marketing is apparently resonating with them.

For example, our $0.99 coffee program for enrolled members has had a very strong result. Enrolled members purchased over 741,000 more cups of coffee in 2022 than in 2021. We are in the process of rolling out our new loyalty app, which has many exciting new high-value features for the benefit of our existing and new loyalty customers. We are in the final stages of preparing our stores for activation of our new loyalty app, and it will be available in the App Store soon.

Our goal is to increase new customer enrollment and announced customer engagement with real-time information like fuel pricing and rewards balance. We will be able to target customers by their primary store with relevant high-value in-store and in-app deals for our growing numbers of members. We expect that order and delivery will be facilitated through the app, capitalizing on our partnership with third-party services that provide delivery at over 1,000 of our stores. We will also be able to make age-verified special offers to adult customers 21 years and older.

Our third pillar is expanding our packaged and fresh food offering, including pizza, chicken, prepared sandwiches and many other options. Sbarro and other QSR like offerings are a component of this pillar. Since establishing this franchise relationship, we now have 18 Sbarro location. We continue to expand our food offering and implement a variety of food options, and we are making progress in identifying food offerings at the price point that we resonate with our customers and that we can use across our stores.

Our goal is to increase margin, trips and average basket size. We know that we have a long runway to significantly increase margin as we expand this important category to meet our customer needs. We believe that in our markets, we can create a value proposition to position our stores as a food destination. Updating areas of our store with announced food and drink offerings has continued to work well for us.

Unit sales of bean-to-cup coffee increased 7.2% in 2022 and are trending up. We believe that through continuous improvement in each pillar, our core convenience store business is well positioned to deliver great results.

Turning to fuel, gross profit is the most important metric when analyzing our performance. We believe our strategy to maximize fuel gross profit while maintaining competitive pricing has consistently proven itself in a volatile market environment. We believe our strategy enables strong results as price decline as they have from their peak in June 2022 with some volatility through Q3 and Q4 and a total gallons in the market decline.

We compete in fuel market by market using data-driven approach based on our fuel strategy that we have also designed to attract customers into our stores. In 2022, we have held merchandise dollar share in our competitive retailer market areas while significantly improving fuel gross profit. This led to, on one hand, same-store gallons decreasing by 8.3% in Q4 compared to a 0.2% decline in the prior year quarter. And for the year, same-store gallon declined 8.1% compared to a 1.3% decline in 2021.

On the other hand, retail fuel profitability grew to $104.3 million, a 16.3% increase compared to the $89.7 million in the fourth quarter of 2021. For the year, we increased retail fuel gross profit by 19% and to $416.2 million compared to $349.9 million in 2021. We believe based on 2022 national fuel volumes, but in our markets, overall demand is likely to remain lower than in 2019. We also believe that cents per gallon is structurally higher than it was in the past, given pressures across the operating environment.

OpEx continued to increase across our industry. The labor market is still competitive and wage growth has been strong nationally. We believe our strategy is resilient across many price environments as our results have shown. Turning to M&A. Capital allocation is one of the many things, and we always think about the best areas to deploy capital. We have proven track records of discipline and consistent growth. We believe that acquisition will continue to drive EBITDA growth.

Company's return on invested capital across our many acquisitions underscore that continue M&A is an effective use of capital. Our financial strength, financing ability and agreement with Oak Street continue to give us an advantage in our ability to move quickly and get deals done. Our balance sheet is strong with manageable debt and favorable interest rates. Our industry continues to be highly fragmented. As a result, the overall deal pipeline is still strong, and we expect to expand our core convenience store business to our acquisition strategy.

There are also opportunities to make accretive deals and acquire expertise in complementary areas that will grow the business. We believe our stores can grow their food offerings. If we believe there's an interesting opportunity or investment that can enhance our stores and create unique value proposition for our customers, we will closely examine the opportunity. We announced 4 highly accretive acquisition in 2022, of which were already closed Quarles and pride. Before getting into further details, I'd like to illustrate how we drive growth in new acquisitions.

I want to walk through the 2022 performance of our Handy Mart acquisition that closed in November 2021. Quarter-over-quarter, we monitor progress of all of our new acquisitions. We fully reset 36 stores, adding over 700 merchandise items. This is the value that we bring to our customers, increasing mix with in-demand items.

We also implemented our pure pricing system. For these numbers, I am comparing against seller provided trailing 12-month figures from 2021 when we conducted our due diligence. In-store margin have increased 6.9% from 31.3% to 33.5%. Merchandise contribution has grown 10.8%. As of December 31, 2022, we increased average cent per gallon by $0.06. In the 2 quarters following the reset, merchandise sales increased 7.6% compared to the 2 quarters prior to resets. Most importantly, although adding an approximately $6 million in rent to Oak Street, we've increased store level EBITDA by approximately 30% in just 1 year. The purchase multiple was reduced from about 1.3x to 1x, and our return on investment is 96%. This case study underscores an important part of our strategy. In this highly competitive industry, being an effective capital allocator is essential. But capital allocation alone is not what makes our business successful. Execution in operations is what drives us forward.

Our teams have been very effective at improving marketing, in-store mix and offering to drive sales at our newly acquired stores. The virtues of our scale and the efficiencies afforded us by our scale allow us to compete market by market, store by store every day. We plan to undertake similar value-added measures in the approximately 155 company-operated convenience stores we expect to add to our network in the first half of this year once we close the remaining 2 acquisitions announced in 2022.

The Transit Energy Group acquisition we at approximately 135 convenience stores and expand our Southern retail territory into Alabama and Mississippi. We expect this transaction to close in the first quarter. The WTG acquisition is anticipated to close in the second quarter. This acquisition will significantly announced the company's footprint in the attractive Permian Basin market with 24 company-operated uncalled convenience stores across Western Texas.

The company would also acquired 57 proprietary refueling cardlock site strategically located in large industrial areas in West Texas and Southeast New Mexico and 52 private cardlock sites, sites service a diverse base of customers. The WTG acquisition fits very well in our business model and build on the fleet fueling business we acquired from Quarles in July 2022.

We believe that fleet fueling is an excellent business and the timing of the Quarles acquisition and our rapid integration could not have been better. We realized strong cash flow because of fuel price volatility in the second half of 2022 since closing. The Quarles acquisition, which closed on July 22, 2022, contribute incremental adjusted EBITDA in 2022 of $20 million. This exceeds our expectation based on our modeling.

We closed the Pride Convenience Holding acquisition on December 6. This was our second deal for 2022. This strategic acquisition added 31 convenience stores plus a new-to-industry store that broke ground in July 2022. It expands our New England territory into Massachusetts. We are on pace with our integration efforts and look forward to adding value to these stores with a larger assortment and new promotions.

In addition to these acquisitions, in 2022, we fully remodeled 6 stores and started the planning and engineering phase of an NTI store in Atlanta, Texas. We expect construction of that project to be completed in 2024. We are also expanding our EB network. The Pride acquisition increased our total EV charging network with 18 charger installed across 5 stores in Massachusetts. Importantly, prior to our acquisition, Pride was awarded a number of grants to expand its EV charging capacity in Massachusetts, which has aggressive EV targets.

We plan to put these grants to use to expand EV chargers availability in these markets. As part of our overall strategy, we pursue grants and subsidies across our footprint to expand our EV charging capacity. We have 6 other active EV projects in various phases of development on top of our chargers currently in place in Marysville, Ohio and Bertrand, Michigan. We continue to identify potential opportunities to install EV charging across our footprint. Our goal is to offer EV drivers convenience and amenities they seek in charging destination away from their homes at areas where we identify sufficient potential demand.

One more note. In December, we released our environmental sustainability, social responsibility and corporate governance report for the year 2021. We are currently working on the implementation of our sustainability work plans with a focus on long-term value creation.

With that, I will turn it over to Don.

Thank you, Arie, and thank you for the kind words. It's no secret that I'm a convenience store fanatic. This is a great industry, and my colleagues and peers at ARKO, who share my passion are the reasons I enjoy coming to work every day. This is a great company and a great company to work for.

Our growth and strong performance culminating in the company's inclusion of the Fortune 500 list as a part of my professional life that I'll always be proud of. The company has continued to record excellent results. Our in-store performance continues as our numerous initiatives gain traction. We're making excellent progress with our integration capabilities, which is great for the company. Our other segments have continued to generate stable, ratable cash flows that benefit our capital allocation. Our balance sheet continues to be strong. We have a very good liquidity position as well. As of December 31, 2022, we had cash and cash equivalents of approximately $299 million.

Our outstanding debt, excluding capital leases, was approximately $752 million, resulting in net debt of $453 million. We continue to realize excellent cash flow. For the quarter, net cash provided by operating activities was $69.5 million and $209.3 million for the year versus $39.6 million for the fourth quarter of 2021 and $159.2 million for the prior year.

After the expected closings of the TEG and WTG acquisitions, there will be approximately $575 million remaining under our Oak Street agreement. Getting into results of our convenience stores. Merchandise revenue for the fourth quarter of 2022 increased to $403.1 million versus $396.1 million in the prior year quarter.

For the year, merchandise revenue increased nearly 2% to $1.65 billion from $1.62 billion in 2021. Margin percentage year-over-year increased by 110 basis points to 30.4%. The Capital expenditures increased both the result of spending supporting our initiatives and other investments in our stores, including 6 full store models and other necessary upgrades.

Total capital expenditures were approximately $98.6 million for the year ending December 31, 2022, which included the purchase of certain properties being the cup coffee equipment, upgrades to our fuel dispensers and other investments in our stores. This is compared to net capital expenditures of $73 million for the prior year, which is composed of $226.2 million net of $152.9 million of proceeds paid by Oak Street for 2 transactions accounted for as deemed sale leasebacks and the purchase of certain key properties.

In fuel, we continue to believe that margins have moved structurally higher given industry volume declines, increased credit card fees, higher operating expense and cost of labor. We believe our strategy of managing margin and volume while maintaining competitive pricing is key to optimizing profitability as a growing company.

Retail fuel profitability, excluding intercompany charges for the fourth quarter of 2022, grew 16.3% this quarter, totaling $104.3 million. This was a $14.6 million increase versus Q4 2021. For the year, retail fuel profitability increased 19% to $416.2 million from $349.9 million in 2021. The company increased retail fuel margin to $0.414 per gallon for the year compared to $0.337 per gallon in 2021.

Fourth quarter convenience store operating expenses increased $13.6 million or 8.7% versus prior year due to incremental expenses related to the prior acquisition and an increase in expenses of same stores. Same-store credit card fees for the quarter increased by $0.7 million or by 3.5%, while salaries and wages increased by $7 million or by 11.5%, both compared to Q4 2021.

For the year ended December 31, 2022, store operating expenses increased $75.9 million or 12.8% as compared to the year ended December 31, 2021. This was due to approximately $36 million of incremental expenses related to Pride acquisitions and the 2021 acquisitions and an increase in expenses at same stores, including $32 million of higher personnel costs or 14.2% and $10.4 million of higher credit card fees or 14.5% due to higher retail prices. The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to independent dealers.

Moving to Wholesale for the year. Wholesale fuel contribution, excluding intercompany charges, increased approximately $9.7 million. This was primarily due to a 20.2% increase in fuel margin cents per gallon, which was partially offset by a 7.7% overall decline in volume, with gallons from fuel supply locations down 8.4% year-over-year. For the quarter, wholesale fuel contribution, including intercompany charges, decreased $1.8 million.

Last quarter, we discussed the rapid integration of Quarles, which closed on July 22. We're very pleased with this acquisition and business. This acquisition has produced strong cash flow in the second half, primarily because of fuel price volatility. The acquisition added adjusted EBITDA of $20 million for the year. We're very happy with the excellent work done by the highly skilled Quarles team. The fleet fueling business generated fuel revenues of approximately $149.9 million for the fourth quarter and $270.7 million for the year.

Fuel contribution, excluding intercompany charges from the fleet fueling sites was approximately $16.9 million for the quarter and $27.8 million for the year. Fuel margin cents per gallon, excluding intercompany charges for the proprietary cardlock was $0.539 per gallon for the fourth quarter and $0.78 per gallon at the third-party cardlock locations.

For the year, fuel margin sets per gallon, excluding intercompany charges, was $0.484 per gallon at proprietary locations and 6.5% per gallon at the third-party cardlock locations. Net interest and other financial expenses for the full year decreased by $11.8 million versus the prior year to $59.4 million. Net interest and other financial expenses for the quarter were $16.3 million compared to $16.2 million for the prior year quarter.

Net income for the quarter was $12.6 million versus $12.93 million from the prior year period. Net income for the year increased 21.1% to $72 million compared to $59.4 million for the prior year. Adjusted EBITDA was $72.4 million, an increase of $14.1 million compared to the fourth quarter of 2021. For the year, adjusted EBITDA net of incremental bonuses was $301.1 million. This number has increased 64.2% since 2020, showing the rapid pace of our progress.

This has been another great year for the company. As a result of our strong results and desire to enhance returns for stockholders, ARKO's Board of Directors declared a quarterly dividend of $0.03 per share of common stock to be paid on March 21, 2023, to stockholders of record as of March 9, 2023.

And now I'll turn the call back over to Arie.

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

(Operator Instructions) The first question today is coming from Bobby Griffin of Raymond James.

This is [Alison Frames] on for Bobby Griffin. First, I just wanted to touch on kind of some of the main initiatives for 2023. Given the Oak Street partnership renews in May and assuming that the cap rate will increase given current interest rate trends, does that change the focus for M&A to a little more focus on some of the other initiatives within the stores for EBITDA growth in 2023?

No, I don't think it's going to change anything. There is no question that cap rates might move a little bit given interest rates continue to rise. But I just think that given our size and our economy of scale, I think our transaction continue to be very lucrative -- as you remember in the past, we showed 38% return on our capital in past. And right now, in this presentation, we're basically showing 59%. So the worst can happen is that we go back to the 38% return on capital, which is still a great return on capital for us. But I don't think anything will basically change dramatically over here. I think we're going to continue to grow through acquisition. And at the same time, we have all of the other opportunities that I described on the call, which include (inaudible) the store. Okay.

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

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

The next question is coming from Hale Holden of Barclays.

I guess, 2 or 3 questions. The first one is, I heard your comments on retail sale margins being structurally higher just given the cost environment for independents, but they were still pretty high in the fourth quarter. And maybe you could just give us a range of where you thought they might be on a go-forward basis for the next year or 2 because $0.40 was pretty high.

So I think the $0.40, it's really a demonstration of basically of our capability of increasing gross profit dollars. I tell people in this environment, I don't talk CPG anymore, I told gross profit dollars. As I mentioned earlier, and we have a presentation out there. OpEx are up $75 million from -- basically from 2021. And I tell people, the only way to pay for that is actually to increase the margin outside the store. That's the only way to pay. I mean, in order for you to pay $75 million increase in OpEx, you need to almost have 15% increase inside the stores, which is not possible. It's just not possible.

So I believe that as we're going towards this inflation cycle as we go towards basically interest rates rising, cost of supply rising, wages basically increases over here. I think the margin basically going to be supported up just because all of those reasons that everybody has, by the way, the same issues. It's not ARKO in particular. It's actually everybody has the same issues. And I think given our size, we probably can be a little bit more flexible. But as I said, I mean, one of the things that we see in Q4, and we demonstrate that not only that CPG was up and gross profit basically outside the world was up, it didn't impact the sales inside the stores. As you can see, our same-store sales ex cigarette inside the store were up 4.1%. And we continue to see this trend, by the way, moving forward. And I think that just demonstrates that CPG will continue to rise on gross profit dollar outside the stores continue to rise because of all of those reasons.

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

Well, you -- it's a great question. And as I always said, we believe that we have the right tools in place. And given that we believe we have the right tools in place, we always try to find the sweet spot between losing gallons on one end and basically getting margins. So yes, our gallons were down for the year, 8.1%. But if you're really looking on gross profit, gross profit dollars, you see that gross profit dollars was almost 20%. So you have to find the sweet spot. And at the same time, you need to be very careful in making sure that you continue to be competitive. I think that's one of the things that we see, and we're probably different than some others, but very similar to the -- I'll call it, to the small operators, 40% of our stores are operated in cities that have population of 20,000 people or less and an additional 20% is between 20,000 to 50,000.

So we are in a lot of roll locations. And I believe is that gallons were just not there. It's not that we lose 8% of the gallon and someone else pick up the 8% of the gallons. That's not the case over there. We just think that people were driving less. However, we are recycling right now almost -- we are in February right now. We're really recycling right now at the beginning of the work last year. And if you remember, the volatility of fuel prices started at the beginning of March 2022. And now when basically prices, at least they are down right now dramatically from what we saw last year, we start to see increase in gallons compared to last year because of that.

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

Well, our main core is, of course, company-operated stores. That's our main core. I mean if you're really looking at our company, we continue to grow and continue to buy company-operated stores. 70% of far, if you're really looking on our operating profit, 76% of our business has basically come from our retail segment.

And as I mentioned, I mean, as we're going to continue to grow, now we have an wholesale opportunity, which is a great opportunity for us. We have the Cardlock opportunity, which is an unbelievable opportunity for us. I mean you see the results. I mean we basically deliver in 5 months we deliver the EBITDA that we basically underwrote to deliver for the full year to the great year for us. And again, this is just the, like I said, adjacent opportunity for us to continue to deliver great cash flow, while at the same time, we're going to continue to concentrate on our retail business and company-operated stores because this is where we see the majority of the profit is coming from. And I think the Handy Mart the description about what we did in Handy Mart, adding almost 700 assortments. And member, we have 3 acquisitions. We just closed the Pride acquisition and just start to reset those stores. And as I mentioned, 700 items were added in Handy Mart, I believe in pride, the opportunity is much bigger. I think it's more than 700 items is going to be added over there, given that those are bigger stores. The same thing goes to fuel. We're going to use our same strategy that we use in Handy Mart using company-wide. We're going to continue to use those strategies. And I think given our size right now, I think we're going to be able to deliver better and better results quarter after quarter, given we implement our strategy over here. And there is a lot of opportunities that, again, I can sit down for 5 hours and talking about all of those opportunities, especially foodservice. I mean we believe food service in this environment. It's a great opportunity for us. When I talk foodservice, I'm talking more about pizza, grab and go, freezers, we have opportunity to add 200 freezers in additional stores. We are adding bean-to-cup coffee machines into the Pride stores. We're getting ready to close the TG acquisition, and we're going to reset those stores. So again, we have a big runway over here ahead of us.

The next question is coming from Alok Patel of Stifel.

This is Alok Patel on the line for Mark Ashorgen. I wanted to follow up regarding in-store merchandise. Can you talk about which categories are more or less elastic. How do you think about pricing as you move through 2023 and the potential benefit from higher promotional activity or just reduce pricing?

First of all, I can maybe touch a couple of categories that we're basically -- we saw a big increase or a very nice increase over there. I mean the first one, of course, is candy. I mean, everybody knows that can be country-wide candies up. We saw a nice increase in candy. Frozen foods continue to be a big hit for us. As you guys remember, from the beginning of 2021, we implemented over 700 freezers into our stores and continue to grow. I mean, this quarter, just this quarter, frozen food was up 19.2%. The same thing goes to packaged sweet snacks. I mean, over 14% increase. (inaudible) Bev continued to grow 4.7% increase. So we believe that the big opportunity for us is really loyalty. And as we continue to grow and as we continue to offer great basically trade promotions to our loyal customers, not only that their basket increase, I mean they're coming more often and that, I think, will drive our profitability inside the stores. The one thing I want to touch, of course, is that remember, we started 2020, Q4 2020, our same-store sales cigarettes was around 38.9%, almost 39%. And today, the concentration of cigarettes inside our box, it's around 32.9%. This is a 6% different, which means that we were able to increase the basket and sell 6% more of other products that their margin is probably 2 or 3x better than the margin on cigarettes. And that's the focus of the year. The focus is to continue to increase inside sales with high-margin items, which include the foodservice items and all of the other categories I just mentioned. And we see it, by the way, in Q1 already. I mean Q1, I mean, the inside sales, excluding cigarettes continue to be very, very strong, similar to what we saw in Q4 2022.

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

Are you talking inside the store?

No, I was referring to fuel margins.

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

The next question is coming from Karru Martinson of Jefferies.

When you look at adding Pizza Grab & Go freezers and things of that like is there a change in the kind of the CapEx philosophy or the investment needed in the boxes here?

No, there is really no change. Like everything else, usually, we -- when we make those changes and usually when we add those items inside the box, we don't view the same philosophy that we use on return on capital. I mean -- and I'll give you an example. When we added the bean-to-cup coffee machines to over 500 and almost 550 stores last year, we said, yes, return on capital is very important. But at the same time, this is a must. If you want to be in the business of selling coffee and you want to tell the market that you're selling coffee 24 basically 24 hours a day, 7 days a week and you get the same fresh cup of coffee, you need to make the investment because you assume that with that investment, you assume that people are going to come in and not only you're going to become a destination for coffee, they're going to pick up some other items, or bakery items is because of that. So as long as you have the items that will be actually told with coffee, this is an investment. The same thing goes to pizza and same thing goes to the rest of the foodservice item. You invest in freezers, you invest in grab-and-gos, and the assumption is that the minute someone basically grab a sandwich is also going to grab a drink and maybe a chips with that. And this is really the way we're thinking about that. We're thinking about how can we increase the basket that we can increase actually the inside sales. And that's -- I call it functional remodel, which means that you actually need to invest in areas that you're not going to basically going to impact some other areas within the stores?

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

Well, given the market that I mentioned and given that, as I said, 40% of our stores are actually sitting in cities that are 20,000 population of 20,000 people or less. As you can imagine, in those areas, you -- the consumer is looking for value. The consumer is looking for value. There is no question about that. And given our size and you're talking about an industry that's 75% of the industry, almost yes, 75%, 70%, 75% of the industry is really small chain with 50 stores less. As you can imagine, very difficult for some of those small chains to implement the private label. Very difficult for some of those small chains to basically to bring value -- valuable items to the consumers. I think given our size and our economy of scale, that we have almost -- we have over 1,400 stores going soon to over 1,500 stores, I think we have the size and the capability and the merchandising team, of course, that work around the clock to make sure that we bring valuable light into those basically the consumer. And by the way, that's the reason I keep saying that that's the reason that Q4 was such a strong Q with other items other than cigarettes. And I can be very pleased and tell you right now that the trend right now continue to be stronger than basically than Q4 when it comes to those categories. So as long as you have the size and economy of scale and you have the merchandising team that will solicit those products, I mean, this is what the customer is looking right now. You're absolutely correct. The consumer is looking for value. The brand, it's not relevant anymore. The value is very, very important, given basically where we are at the moment.

The next question is coming from William Reuter of Bank of America.

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

I think nothing really changed in terms of the sites. I mean it's the same size as you guys saw, we basically did 4 acquisitions, 3 of them involve retail. So I don't think anything's changed in terms of size. I think what we're seeing over here, and that's coming back to what I was basically saying since 2020. We are a very, very, very disciplined purchaser, very disciplined purchaser. And you guys didn't see double-digit multiple when it comes to our acquisition. We still basically signed 24 acquisition, closed 22, getting ready to close another 2. We grow our store base very nicely over here. And I think what you're going to see right now is a lot of people that I don't want to say overpaid, but maybe paid a higher multiple -- as interest rates continue to rise, I think what we're going to see is that some of those folks are going to have to try to refinance, so they're going to try to sell their businesses given that they're not going to be able to refinance in this interest rate environment. And that's -- and it's also become a little bit more difficult to operate a medium, small-sized chain versus what we saw in -- basically before the pandemic.

And then just as one follow-up. You talked about how 60% of your stores are in relatively rural locations or smaller population locations. Historically, there have not been many large operators that have been building stores there. Have you seen that change at all over the last year or 2 given that profitability of outside the store fuel margins has been so strong?

No. I don't see a lot of people building stores in this environment. And I think not only because of that, it's also because the cost of construction is probably 40% higher than what we saw before we actually entered the pandemic. I don't see a lot of -- basically, a lot of big stores being built in our markets at all. Now this is not even something that I see here that actually provide any kind of concern to us.

The next question is coming from Anthony Bonadio Wells Fargo.

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

Don, will let you take this. So Anthony, I can't provide guidance on what's going to happen in the future. The only thing I can say, and again, go back and refer to the Handy Mart acquisition or the Pride acquisition that we have out here, and this is acquisition that we already closed. There is no question that given our size, economy of scale matter, absolutely matter. But it's only -- not only just economy of scale, it's also, as I mentioned on the call, it's also execution. In Handy Marts, those stores were there for over 100 years. I mean this is a brand that we bought in November, and this is a 101-year-old brand. And those guys had the opportunity to basically to add products to merchandise the store. I think what we bring to the table over here, it's really experience, experience merchandisers. Most of those small companies don't have merchandisers and marketing team that is actually sitting behind them, and they're really relying on the (inaudible) and the wholesaler. Given our size and given that we have the merchandising team and we have the marketing team behind the company and when we come in in 36 stores, I mean, think about it, adding 700 items to the store. I mean this is huge. And you see the results. And by the way, the results are coming in a very short order. I can tell you all that we start to basically to work on the planogram of the stores around June. I mean, literally, just around June. And within 6 months, you see the increase. I mean we went from 31 points basically 5 to 33%. So we actually added 200 basis points to the margin. And on the top of it, we actually saw an increase in sales, which was actually tremendous. And as you can see, we increased total level EBITDA by 30% over year. So I think the smaller the deal, I think the bigger opportunity, the midsize deal, I think the opportunities are going to be there. It's -- again, it's just we bring expertise and execution skills that some of the other companies just don't have given their size.

Arie, can you hear me now?

Yes.

So I thought I was off mute. One of the things, I think, that's important, Anthony, as you saw what we did with Handy Mart, we're not waiting to get in to do the -- like the resets and things like that. And obviously, the bigger we get, the lower our cost is more efficient. And we're also looking not only just at the store level, we're also looking at the G&A structure as well, too. And we're -- there's obviously more synergies to come. And obviously, we've now well-defined 3 different segments. We're all operating on the same platform. And I think there's more synergies to come. It just comes naturally. So I think we'll see that. But the big focus really is to get there as soon as possible and start to do these resets and realize these synergies quickly, which will just lead us to grow even more. So I think -- I don't want to give a percentage on it. But I think one of the things we -- if you note, like when we looked at the Quarles acquisition, we exceeded our expectations were there. We exceeded our expectations with Handy Mart exceeded our expectations with Empire. And I think we're at a point now where we've really gotten the form down, I won't say completely, but now comes the fun part where we really can start focusing in on not just what do we do with synergies, but internal processes and how do we make that even better, make it easier for the operators so they can have more customer-facing time and do things like that. So the synergies not only with the acquired sites, but also with our own sites from an organic standpoint, we'll grow.

I'm showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Holter for closing comments.

Thank you very much. First, I would like to thank you all for joining the call. Great questions, a lot of questions this time, which is great. We had a hell of the quarter. We had a hell of the year, grew our EBITDA. Again, this is the second year that we are second anniversary of being a public company over here. We grew EBITDA from $256 million last year to $301 million this year. And as you can see, we have another 2 acquisitions that we are getting ready to close. I think we continue to perform very, very well, continue to execute. And as Don mentioned earlier, every time when we put numbers in front of our investors, we actually beat those numbers. So we're trying to be also conservative over here. And I'm looking forward for a great 2023. Thank you, everybody, for participating, and have a great day.

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