Q1 2022 Arko Corp. Earnings Call
[music].
Greetings and welcome to the Arco's first quarter 2022 financial results Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Ross <unk>, Vice President Investor Relations you may begin.
Thank you.
And welcome to Arco's first quarter fiscal year 2022 earnings conference call and webcast on today's call are already Cutler, Chairman, President and Chief Executive Officer, and Dan <unk>, Chief Financial Officer, Our earnings Press release quarterly report that was filed with the SEC and earnings presentation are available.
On Arcos website at Arco Corp Dot com.
Before we begin please note that all first 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 1095. 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.
Please refer to today's press release, our quarterly report on Form 10-Q for the quarter ended March 31, 2022, 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 imply.
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 the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliations of our non-GAAP measures to the most.
Direct comparable GAAP measures.
I would also like to note that we're conducting our call today from our respective remote locations as.
There may be brief delays cross talk or other minor technical issues. During this call. We thank you Didnt ask for your patience and understanding and now I would like to turn the call over to Ari.
Thank you Ross and good morning, everyone.
We are pleased to report strong results for the first quarter of 2022.
On today's call I will briefly review our financial highlights for the quarter ended March 31 2022.
I will also provide an update on our business and few trends.
Don will review our financial results in more detail and we will take your questions.
Our first quarter adjusted EBITDA was $51 million.
This is an increase of 18, 4%.
The prior year period.
We have achieved double digit adjusted EBITDA growth in each of the five quarters. Since we became publicly listed on NASDAQ.
We are comparing these strong results to our banner first quarter 2021.
Both quarters had their challenges.
But there were a much different from a consumer and business perspective.
In the first quarter of 2021, Covid vaccine, we are rolling out consumers at significant spending power.
This is approximately $1 a day.
This year rapid inflation and issues created by the tragic war, Ukraine led to a completely different market condition and a considerably different consumer environment than in the first quarter of 2021.
We believe that we're well positioned for an economic environment characterized by increased price sensitivity. For example, we are expanding our offering of lower priced pizza food and fresh coffee.
Even with much higher inflation and rising fuel prices in the first quarter of 2022, we had a very strong quarter.
On a two year stock basis same store merchandise sales, excluding cigarettes increased nine 3%.
We have promising trajectory and velocity and into the second quarter.
Merchandise gross margin increased to 29, 5% or 210 basis points compared to the prior year quarter.
Same store merchandise gross profit increased by $3 8 million compared to the prior year quarter.
We strive to price or fuel competitively.
Retail fuel gallons sold grew by five 9% compared to the prior year quarter retail fuel margin increased to 37 five cents per gallon from 32, one cents per gallon in the prior year quarter.
Resulted in an increase in same store funeral gross profit of $9 $7 million, excluding intercompany charges compared to the prior year quarter.
We remain committed to our organic growth initiatives, we are announcing our store base with this.
Strategic long term programs to ensure that our offering is competitive for both our loyal customers and attract new customers.
Quick serve restaurants.
We opened Tuesday, Barbara franchisees Q1, barring any supply chain difficulties with equipment. We are on track and expect to open a total of $50 a barrel this year.
We believe these partnerships adds value to our stores and resonate request countries consumers.
In the first quarter, we installed being two cup coffee at 75 stores.
As of today, we haven't been to cop in more than 270 stores. These stores are now in the coffee business 24 seven.
We remain on track to deliver on this initiative.
We stayed in Q4, we plan to install machines and 525 stores in 2022.
This quarter, we also completed one remodel and easy Mark in broken Bow, Oklahoma.
As of today, we have completed six remodeled in 2022, including one being completed this week.
Turning to raze and rebuild.
I want to walk you through early results from our recent raise and rebuild store 3894, a scotsman on Interstate 77 close to the border.
North and South Carolina.
The following numbers reflect the first quarter of 2022 compared to the same period in 2021.
Customer count increased by 50%.
Gallons sold increased 112, 7%.
Same store sales increased 66% importantly, same store sales excluding cigarettes increased 94%. We are pleased with these results.
We are continuing to assess the raze and rebuild and remodel and new to industry stores as part of our organic growth strategy.
We continue to enhance the loyalty program we.
We are pleased with key matrix of this program, which posted nearly 600000 opt in members as of the end of the first quarter.
These represent a large base of loyalty members consumers before we can directly communicate and provide special offers.
Two matrix the likely share showed the value of our loyalty program and what customers have made seven more trips per month. This.
And this customer spend about an additional $90 per month more than non enrolled customers.
We consider this to be excellent numbers.
We believe continued investment in this program is essential we remain on track to deliver our announced loyalty App this year.
Moving to other business update we announced the quarter Petroleum acquisition in late February we expect the closing to occur late second quarter early third quarter of 2022.
Paul will then add the following operating segment in addition to GPM.
Our retail business one of the largest convenience store operator in America.
Our national wholesale operation.
And call the largest cargo fueling operation.
On the east coast of United States.
Importantly day to day operation of each operating segment are overseen by highly skilled leadership with decades of diverse experience <unk>.
This include employees, who are expert in convenience stores.
Total box multi unit retailing merchandising fuel environmental human resources and sales.
We plan to continue to report the results of each operating unit and <unk> separately. Our goal is to provide investor visibility into our finances and operation.
We believe there are long term growth opportunities in each operating segment.
Our in store initiatives and merchandising strategy combined with our scale and also are an advantage when pursuing these opportunities.
Our priority continues to be the growing capital at attractive returns. We believe our program agreement with Ox Street real estate capital is there any competitive advantage.
On April 13, we announced an amendment to our agreement with <unk>, including a one year extension to the agreement and at 1.15 billion real property commitment from Oak Street.
We used during the extended term of the agreement.
This is in addition to approximately $253 million, which has already been utilized under the original op sweep agreement.
And due to a $130 million in real estate, they have agreed to purchase and the quality of acquisition.
We have an aggressive growth strategy.
Working with Ox Street is giving us significant dealmaking flexibility and the ability to close deals at attractive multiples.
As a result of our cash generation ability and our strong financial position. We have continued to return capital to our loyal stockholders. Our board of directors declared our second quarterly dividend and we continue our publicly announced share repurchase program up to an aggregate of $50 million.
Our excellent results demonstrates our strength and capabilities, we continue to execute our differentiated strategy.
We believe our liquidity dealmaking ability and other strategic partnerships.
Put us in a very good place as dealmaking velocity increase in the market.
Importantly, we believe that our scale and strategy allow us to succeed while remaining highly competitive both from fuel and merchandise.
We strive to put our customer first particularly in uncertain times.
I would like now to turn the call over to Don who will walk you through our financial results.
Thanks Ari.
Look forward to detailing our strong first quarter 2022 results.
It is an increasing interest rate environment. We believe we acted with foresight when we issued our senior unsecured notes at a competitive rate of five 1% to 5%.
As a reminder, this is a private offering of $450 million aggregate principal due in 2029.
Our balance sheet remains strong.
Our March 31, total liquidity was approximately $744 million.
<unk> of cash short term investments of approximately $300 million.
The approximately $444 million of unused availability under our lines of credit.
In total we believe that we have many methods continue our growth strategy.
We believe we have flexibility to make acquisitions at an attractive ROI.
We plan to continue to invest in our business and we intend to continue to reward stockholders by returning capital as determined by our board of directors.
Total revenue, excluding fuel was $389 $3 million.
A 2% increase from the prior year period.
Merchandise margin dollars increased by $9 $7 million versus the prior year, while margin percent increased to 29, 5% from 27, 4%.
Retail fuel profitability, excluding intercompany charges for the quarter increased $17 $3 million or 24%.
We saw strong year over year increase in fuel margin to 37, five cents per gallon from $32.01 per gallon.
Same store fuel volumes decreased three 1%.
For the first quarter of 2022 wholesale fuel profitability, excluding intercompany charges increased approximately $5 4 million compared.
Compared to the prior year period.
Fuel contribution from fuel supply locations increased by $3 $3 million compared to the prior year period due to greater prompt pay discounts related to higher fuel costs and greater fuel rebates.
Fuel margin per gallon for these locations increased to seven cents per gallon.
Versus $5 <unk>.
In the first quarter of 2021.
Fuel contribution from consignment agent locations grew $2 1 million compared to the prior year period.
Fuel margin per gallon was 2009.
Primarily due to greater prompt pay discounts related to higher fuel costs, greater fuel rebates and improved rack to retail margins.
Although volume sold through consignment locations aggregated, 17% of the combined total.
Fuel margin dollars realized accounted for approximately 45% of the total fuel margin dollar contribution from wholesale.
First quarter store operating expenses increased $21 6 million.
Or 14, 9% versus the prior year due to incremental expenses as a result of the acquisitions completed in 2021 and an increase in expenses at same stores.
<unk> higher personnel costs and credit card fees.
General and administrative expenses increased $5 1 million or 19% for the quarter as compared to prior year.
Primarily due to annual wage increases and share based compensation expense.
Net interest and other financial expenses decreased by $12 6 million to $16 million in the quarter.
This is primarily related to several factors.
A reduction of $9 $9 million for expenses related to fair value adjustments for our public warrants.
<unk> and deferred shares.
$4 5 million of additional interest expense recorded in the first quarter of 2021 related to the early redemption of the series C bonds.
Which were partially offset by lower rate debt outstanding in 'twenty, one 2021 and a net period over period decrease in foreign currency gains recorded a $1 1 million.
Adjusted EBITDA was $50 1 million, an increase of $7 8 million or 18, 4% compared to the first quarter of 2021.
Our net income was $2 $3 million the improvement of almost $17 million compared.
Compared to a loss of $14 7 million in Q1 'twenty one.
Outstanding debt, excluding capital leases was approximately $717 million.
And net debt.
$417 million.
For the quarter net cash provided by operating activities was $30 1 million versus $11 $3 million for the first quarter of 2021.
Capital expenditures were $27 million for the quarter compared to $17 $5 million in the prior year.
On April 29, our board of directors declared a quarterly dividend of <unk> <unk> per share of common stock to be paid on June 15th with a record date of May 31 2022.
We continue our publicly announced share repurchase program for up to an aggregate of $50 million of our outstanding shares of common stock.
During the three months ended March 31, 2022, the company repurchased approximately one 4 million shares of common stock under the repurchase program.
For approximately $12 million.
At an average price per share of $8 49.
Which we believe represented an opportunistic use of capital.
With our current cash flow and operating results. We expect to continue this program, while investing appropriately in our business.
As of March 31, 2022, there were $123 2 million shares of <unk> common stock outstanding.
We ended the quarter with 1396 retail sites and 1625 wholesale sites.
I am pleased that we have demonstrated our strength and capabilities, we had another quarter of solid financial results.
We continue to execute as we navigate through a very turbulent environment.
We believe we are well positioned for long term success and with that I will turn it back over to Ari.
Thank you dawn.
We believe we are primed for continued growth.
To thank our over 11000 team members for their continued efforts to exceed our customer's expectation.
We believe that we are unique business and a differentiated market leader, we've made significant progress as our company has grown.
We think execute drive growth and increase stockholder value over the long term.
Thank you for joining the call today and your interest in Oracle.
I'll now turn it over to the operator for questions operator.
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One moment, please while we poll for questions.
Our first question is from Bobby Griffin with Raymond James. Please proceed with your question.
Good morning, Buddy. Thank you for taking my questions arent done well I was hoping could you could you maybe give us a little bit more detail on the one remodel that you reference not particularly the lift but just what type of remodel was that was it a complete tear down to the to the land and rebuild a store was it one of the lighter capital.
One how long did it take to do what type of capital you have to spend in that remodel for example, just anything like that to help us put some context around those impressive results for the store.
Sure absolutely good morning, Bobby.
So this is for 289 for the stores that I mentioned.
Opened the store just in November .
End of last year.
The results that we are actually seeing over here, which are absolutely great results our results for.
For the first quarter of 2022.
Was the raze and rebuild.
Store before was the 3500 square foot store today close to 5700 5600.
So square foot stores.
Additional diesel canopy in the back I mean, this is a story that you've seen in our presentation that full picture in our presentation sitting on six four acres.
From start to finish it took us a little bit less than a year.
And that's just because we had to basically work on major plant is over here given the size of the store and given where the store is located.
And as I mentioned I mean, you can see the results over here and the results are just absolutely great.
In the stores ex cigarettes, almost exceeded 100% from prior year.
Yes.
Is that a is that an remodel that's over and above compared to what we're going to target and I guess the second part of the question is when do we get into a time period, where we'll have the pace of remodels being a little bit more faster than they are now.
Given those results investors would like to see.
See more remodels happened, obviously, because the list is pretty impressive.
Sure sure sure absolutely. So I just wanted to go back to what I said quarter after quarter.
Remember, we state that we're going to do 10 stores.
We're basically completed two spare stores last year.
It was basically putting a prototype together.
Then we finish our first raze and rebuild at the end of November and this quarter.
<unk> completed.
Five stores.
And as we see it there'll be here when I say this quarter I mean in Q2, we completed five stores remodel.
And we are just completing number six.
<unk>.
So we're going to have a total of nine stores altogether.
So far from early resolves and every remodel as you can see over here and I. Appreciate we've seen that the best rebuilds are coming from raze and rebuild.
And this is something that we are concentrating at the moment.
While we are learning from the others. The other thinks that just opened in the last I'll call. It anywhere from 30 days to this week.
<unk> continued to kind of to carry to carry information to learn from those results and again those are much smaller remodel this is around $650000 remodel.
Based on the information that we learned so far.
As I said I mean, we're going to continue to increase our pace I would say.
We'd probably take us another quarter to learn a little bit more and then we are going to make a decision, but as I said, so far it looks like concentration going forward, the raze and rebuild that we just.
Completed and see those double digit increases high double digit increases.
Bob I just wanted to I'm, sorry, I just wanted to add one more thing I want to say Bobby why are we waiting for those results as you can imagine we're not stopping I mean, you don't need to tell you that price increase.
Given what is happening in the marketplace from a construction standpoint.
Standpoint, so while we are waiting for those resorts, we are doing other things in between not to just wait for a free month for the remodel.
Simple the 15th the borrower that we have decided to open this year was.
While we actually waiting for those results, we want to make sure that we're not waiting and stopping we actually moving forward and as I said, we open suites of ours already.
Number basically four actually opened this month, we have another five in the pipeline that already.
Process.
In the work.
And we do have some other initiatives for example, that's the reason we decided not to wait if they've been to cop, usually we could bring to cop on the remodel stores, we have decided not to wait and put 525 stores has been to cap coffee machine to make sure that that we actually avoid the delay.
<unk> learning getting gathering more information over here.
Yes, Bobby.
That's exactly what I was about to add in.
Exactly what I always said that Theres. Many features of these remodels, we don't want to wait and so on.
He just said it.
We wanted to take the low hanging fruit and take advantage of those opportunities without waiting for the remodel to happen.
Okay.
Just just last comment on that Bobby because you know you mentioned you asked the question and I understand the question about.
Keeping the pace actually increase the pace that's exactly the reason why we are actually putting those initiatives in place. So why are we waiting for resorts. We are basically getting the other initiative in place which of course all of those initiatives that I mentioned as you can imagine will continue to increase store profitability.
While we actually learning from the ones that we just completed.
Okay, I understand and I guess second part the second question for me and I'll jump back in it.
Get a lot of questions over rising gas prices and any change in customer behavior in terms of trips or amount of items or buying in the store basket size, but maybe just curious throughout the quarter. When you saw prices move up did you notice any changes in your customers around any of those metrics that would be helpful.
No and understanding.
Sure. So first of all this is something that we see almost every time every few years, when we actually see a huge price increase going from <unk>.
$60 $70 last year to over 100 to 120 at some point in the queue.
You'll always see that people are less disposable income in their pocket.
And because of that of course, we see customers coming in more often to field gas.
Last year.
The affiliate car it took $30 $40, we might see a once a week while the weaken off given that people are not driving as they used to driving the path I mean, right now all of the sudden with $80 $90. I mean people are coming more often so we see people coming more often.
To fill their cars they were actually of course, there is more trips.
Same time.
As I mentioned.
Mentioning before we are in such different market, we are enrolled and secondary market.
The correlation between people coming for gas will keep people coming inside the stores are very very little.
So that's but there is no question that youll see an increase in customers coming to fit to actually fulfill their car versus what we saw last year no question about that.
Okay I appreciate the details best of luck going forward.
Thank you very much.
Our next question is from Kelly Bania with BMO capital. Please proceed with your question.
Hi, good morning, Ian.
John Thanks for taking our questions.
Wanted to just start with gallons and curious how.
<unk> are tracking relative to your expectation for wholesale and.
In retail and if you can maybe help us understand where retail and wholesale gallons are on a same store basis.
Site basis, I guess relative to 2019.
Not a problem and Dan would you like to take it.
Yes, I mean as far as as far as same store.
We're down three 5% in terms of <unk>.
Of.
Wholesale we don't we actually don't have the same store a record we have not track that against 2019, but we're obviously not back to 2019 levels, nor do we project anytime soon that we're coming back to 2019 levels.
And this is one of the reasons Kelly I think we've talked about before while we're seeing some of the expanded margin in the market.
With a lot of.
Businesses doing the hybrid work from home, we don't expect that to happen. So the philosophies that we basically go after is that we're gonna be competitive out there in the marketplace.
And and and.
Do the best we can to optimize fuel margin dollars. So.
Yes, Mark fuel gallons are important and we keep adding fuel gallons through our acquisitions and but we don't ever see at least our belief is we don't think we'll see a real returned in 2019 levels.
Yeah.
Okay.
And can you just help us understand.
A little bit on the expense line, where same store wages are tracking.
Any color on what that is looking like how that compares to your expectation and just any color on what youre seeing from credit card fees and how that impacted the quarter.
Yes, so so I can give you a sort of a number on same store credit cards, it's about $3 million higher than what we had in Q1 that number.
Personnel.
We expected it to be higher where we're in a little bit under our expectations.
For the quarter, but we had already planned for this to be higher so it's not a surprise to us.
Obviously, the surprise for the quarter was the credit card piece, but obviously, that's somewhat offset by two things number one prompt pay and also by higher fuel margin, but we absolutely expect the personnel expense will be higher but it is not as high as what our expectations were.
Yeah.
Okay and do you see is it stabilizing or is it accelerating just any company.
Color on the direction here in terms of labor to IHS.
I think I think 2021 was it was a really kind of a volatile year for wages, we see it we see it stabilizing.
C open positions lowering.
And we see it as like setting to a new level. So.
It's not as volatile as it was in 2021.
It's definitely not.
Back to pre pandemic, and we all know thats, a new level or set up but as I said before I don't believe we're going to see.
Wages take the same pace up that we saw in 2021, although we will have a certain pockets.
It's everybody's competing for labor.
But again, our expectations that we set for ourselves that is running slightly below and quite frankly, I'd like to see that number come up because that means we're.
While we are much better off from a staffing perspective.
Every other retail business we.
We still have open positions and open positions, while they save money on labor costs. They also.
We would do better to have the stores fully staffed but that said we are we our stores are open they are staffed but obviously the more staffing you can have and the more customer facing labor you can have the better it is for us.
Okay, Okay, and Kelly I would like to we'd like to jump just with your prior question regarding to Golan between retail and wholesale I want to point to something that I think it is very very important for you to pay attention.
For everybody of course, so if you remember we mentioned of course.
$8 is very very important to us when it comes to our fuel and you saw this quarter $9 $7 million above prior year, but something very importantly.
You can note there'll be here is historically on wholesale however, edge was five per gallon that was.
We actually kept talking about stores wholesale business into the <unk>.
What happened is that since we actually bought Empire.
<unk> continued to renegotiate contracts.
We have contract renegotiation wheat prices are fuel.
At such level.
We receive actually a greater prompt pay discounts related to of course to our fuel cost. So we are today at around seven.
And again, given those two things that I just mentioned, we believe that <unk> actually will stick right now with <unk>.
During this period and I think this is something <unk>.
Very important to notice from that.
Perfect.
Very very helpful.
Don just a follow up on the labor, how where are you from a staffing perspective, how much more do you need to get to where you would like to be in terms of fully staffed position.
I don't have that exact number aware.
Where it is.
From a percentage basis I will tell you it's better I know, we will we are planning on and we've done a lot of initiatives from a from a hiring spree I mean, our focus has been on making sure that we have making.
Making sure the key positions like managers district managers and things like that and we've done a great job on closing that gap.
But as you know.
The.
Hourly retail employee is a very tough employee to get and turnover since we launched a lot of our programs like we did a lot of the $500 to 500 hours and we track them and we've seen their turnover is much less so I know already considering several programs to do coming out and there will be more information brought that in the future.
Yeah.
Obviously, one of the key things on a number of the numbers are better and obviously the other thing Thats better is with <unk>, which really hit us really hard in January because once somebody has is not just the person is out but as the crew that has it as well so omicron really really hit us hard in January with a lot of openings and now we're down to zero and three cases, a week, so thats been a real world.
And helping our staffing, but I know there's other initiatives.
Well.
Be talking about in the future about things that we're doing to really not only not only too.
Bring on staffing, but also to retention for our existing staffing too.
Yeah, and I want to mention something just to add one more comment on this one.
We are not different than any other retailer, let's put it this way I mean, everybody is competing on the <unk>.
Hourly associates I can tell you Kelly that where we are today versus where we were in 2021.
An obsolete different basically world when.
If you compare it to last year as Don mentioned Q1 was tough beginning of January .
It's actually rich software everybody I mean, we've all Macquarie.
And don't forget last year people have more money to spend people receive a lot of money from the government. So the labor market was a little bit more tougher I think we're very very pleased with where we stand today I mean.
We are very very very little amount of stores that we have to change.
Basically in Q1 and again most of it was really because of Colgate nothing related to LIBOR. So.
Just to give you and maybe just one more.
For reference.
Since we launched the $500.
$500 for $500 I can tell you that the turnover decreased by almost 50%.
We have a lot of more initiatives like this coming in especially now adding that towards the summer.
We are starting a big hiring campaign why are up to 5000 employees during the summer.
And of course, all of those initiatives of course, helping every retailer in the marketplace.
Okay. This is very helpful. Thank you just one last one from me and then I'll pass it on.
Alright.
Comment that you made about <unk>.
We are being positioned for an increasingly price sensitive consumer environment can you just.
Elaborate a little bit more on what you are seeing when did it start.
The store at the pump and do you anticipate making any adjustments to your strategy in terms of pricing or otherwise as a result of what sounds like a changing environment.
Sure. So I don't think anything changed since last year.
In English.
<unk> is taking place, especially now when.
Most of the issues that you see with a lot of.
Shipment is that don't have driver and if you add finally drivers.
Price of shipping actually increased dramatically.
What was it trying to do we're really trying to concentrate on items that the consumers are looking for I mean, there is no question that given that.
But we are going into recession right now we are in a recession already and people have less money to spend we need to concentrate on items that people can't afford that's the reason I mentioned the pizza for example, I mean, there is a reason why we relaunched 210 stores with pizza.
We are selling pizza tool for example to our loyal customers, we are selling pizza for 99 cents.
We concentrate on things that we can actually lower cost like they've been to cop coffee for example.
The opportunity for very little waste less labor and pads and by doing that we can be more competitive and offer better pricing to our consumers.
But again, it's really across the board, it's not one item, but given that you have price increases we need to find ways to decrease prices.
To actually provide more attractive prices to our consumers and Thats why we actually had our marketing team and our merchandising team.
Following basically going after all of those initiatives and making sure that we have the rights offering in place I don't think were going to change we will change any strategy as I mentioned, the grab and go.
The grab and go that we actually initiate last year.
A very very successful. This is again one of the items that we did when we actually felt.
Going to be an opportunity given.
Where are we heading and just for your reference we have right. Now. This is the first year that we're going to have a full year of grab and go and frozen food I kept talking about this last year just for your benefit Q1.
Gross profit dollars and grab and go increased by 18, 9%, while sales increased by 21% frozen foods. Its another item to add consumers because at the end of the day consumers need to feed their families our frozen food.
Yes. This is the first year that we have full year initiate the frozen food increased gross profit dollars increased 65% while sales increased this quarter by 88, 7% you just show you that all of those initiatives that we put in place last year thinking.
Thinking where are we heading.
We're actually working right now and working very very well.
Thank you.
Of course.
Our next question is from Mark Astrachan with Stifel. Please proceed with your question.
Yes, thanks, and good morning, everyone.
I guess, maybe just starting on the building on the last set of questions.
Maybe talking a bit about the same store sales or in store sales.
Any impact there from from staffing it sounds like it's still obviously not where you want it to be so do you see anything from that or perhaps any sort of impact from all of the pricing that we hear from your supplier or other consumer staples companies is that having any impact on it.
Is the volatility on the fuel prices, having an impact on it just sort of directional color on how you think about the correlation and those things or maybe other items, which are correlated which I didn't mention would be helpful. Thank you.
Sure sure so let's start with our staffing staffing.
Of course, everybody would like to be 100% stock in their stores, but that's not going to happen anytime soon at any retailer. So I don't think from a staffing standpoint.
There is any issue remember we are not we are our foodservice business as you can see it adding pizza grab and go sandwich is so we are less labor intensive when it's come to our inside sales and Thats, probably why why we're not being impacted like some of the others that are heavily involved in foodservice.
So I think on the staffing standpoint.
We are in a good place.
From basically from a cost standpoint.
If you're really looking on our sales ex cigarettes, I mean, we had a terrific quarter.
Quarter, you really had a terrific quarter and if you're really looking and that's by the way Youre looking on margin Youll see an increase in margin and I think what we see over here is.
The top performers during the quarter.
We really and Thats why you see that the business is going into right direction Pac Bev for example, Pac Bev even though this is the first quarter, which is the lowest quarter Pac Bev was up.
Terms of sales by one 6%, but the margin the margin basis points basically we were up 310 basis points for example, the <unk>.
<unk>, you'll see on Kennedy.
<unk> was up three 9% six 4% increase in.
Basically in margin and Thats, what drove the margin and by the way over here.
You'll see a big decline in cigarettes. However on the other side you see a huge increase in otp. So if you're really looking on the total <unk> total nicotine was basically up especially on margin I mean, our margin on basically on total nicotine.
It was up dramatically our same store margin on Otp was up 660 basis points, which means that you see that people are just shifting from one category to another but we actually see the bid I mean, the business continues to be very healthy very healthy while we are able to increase margin, which means that the <unk> figure.
Let's continue to grow will be here.
And so I don't think there is any issue inflation.
Do we actually create any issues of your I actually think it's great. Some opportunities in terms of the mix that we would be able to to actually change over here.
And offer to our consumers.
Got it Okay, and then shifting over to M&A opportunities.
Can you remind us or maybe talk to.
Okay.
Your comments on the macro environment.
As volatility.
Fuel does that potentially impact or how is that historically impacted opportunities in M&A I assume that helps from a smaller mom and pop type place that just doesn't want to deal with it.
Does that make it more or less opportunistic relative to where you'd be in a normal world wherever that is.
Sure.
I keep talking about CPG.
And we actually believe CPG inquiries, just because gallons are actually galarneau driven are down and there is some other challenges within the box you mentioned mom and pop and smaller basically changed so I think the.
The issues that you're seeing between our inside the box that would actually drive CPG op and.
One day CPG decreased I'm, assuming that we're going to see an increase inside the box.
Everything going on over here, but with that being said the pipeline is very very active right now, especially Q1 is always the slowest Q, but I can tell you that.
You're continuing to ramp up I mean, we see a lot of opportunities I mean, just in the last.
Basically a couple of months, we see a lot of opportunities coming into market.
I think actually deteriorates more active than last year same time.
And I think given where we stand from a liquidity standpoint.
The agreement if off Street capital that we just signed.
For one to one $5 billion I, just think that give us great opportunity to continue to actually grow through those acquisition and I think as I said I think that we're going to continue to see more activity in the marketplace as people actually continue to see those challenges.
We keep talking about the insights that we keep talking about inflation.
Supply chain interruption I just wanted to remind you I mean, we are number six in the country.
And if number six in the country, we are dealing with supply chain interruption you can't even imagine what are the smaller guys are actually doing it right. Now so like you said I mean, when they start to see all of those issues that they run into.
I think thats thats basically what.
Your mind lets say you know what this is maybe an opportunity for us to get out it's not going to get better anytime soon.
Yeah understood. Thank you I appreciate the color.
Sure.
Thank you.
Thank you. Our next question is from car room Martinsen with Jefferies. Please proceed with your question.
Good morning.
When you talk about pricing competitive typically in these rural in secondary markets, who are you going up against.
Well, we are competing with the large national players then at the same time, we are competing with.
Basically the local chain that are in Tom I mean, that's.
Every every market is different every market is different and some of them you are dealing with the mom and pop across the street and some of them you're dealing with as I said large chain that out there, but we basically keep being competitive I mean, that's really what you have to be you have to be competitive.
In the marketplace that you are actually operating.
The reason the loyalty program.
Coming to play that's why loyalty program is very very important for us and especially in those markets.
Because as I mentioned, I mean, if you're really looking on those smaller small town and small market our customers I keep telling everybody. Our customers are broadly the same customer that's coming in on a daily basis.
As we continue to grow our loyalty base.
Julia I mean loyal customers that actually coming to our stores are cutting seven times more to our stores and spending $90 more than I'll call. It the non.
<unk> engaged loyal customers, we are talking about the register customer that we can talk to and we can also provide them those offerings. So.
Again, those are really the customers that.
Increase their basket and coming more often and as I said, you will have to be competitive across basically from a cigarette standpoint to beer standpoint to everything else in the store with it but there's no question that the number one item that you need to be competitive with of course <unk> given that <unk> represents.
<unk> based.
Basically percentage within our basically within our store, even though numbers keep going down I mean at the beginning of the pandemic just for your benefit we were at around 40%.
Cigarettes are basically percentage of sale and today, we are at 35%, which means that as you can see we keep increasing the base of the year, which mean that we either selling the right products or customers like us I think.
More often.
Okay, and when we look at.
The.
Holding the fuel margin at the level, we are seeing the merchandize margin just wanted to reconcile that with the drop in the overall EBITDA margins that we saw is as a percent of sales is that just because of the wholesale impact.
This quarter or just trying to reconcile that what was driving that.
I mean, if you are what you'd like to answer that.
If youre looking at EBITDA margin as a percent of sales I mean, thats going to drop just because if <unk> got fuel cells and theyre naturally sales have gone up I mean, the price of fuel has gone up and obviously the revenue fuel has gone up so naturally with taking the big increases that we've had in fuel that margin will come down I mean, that's just a matter of math so again, yes.
If we go down into the $2 range.
It would show a better margin, but our focus really is on <unk>.
Per gallon and what that overall fuel GPS.
So I'm not sure I wasn't missing anything there and then as you look at those those tuck ins.
And that M&A strategy.
Change to what you would consider a target leverage of where you want to run this business.
No I don't think anything changed in terms of.
Leverage as I said, I mean, we keep having liquidity, we keep spending in doing acquisition.
Remember, we just signed the new acquisition and <unk> at the beginning just the last quarter in February .
The <unk> acquisition, we are planning on closing.
You can see we continue to be consistent we are looking to deploy our capital.
Very attractively I don't think anything is going to change I mean, we.
This is going to be acquisition number 21 already.
And I don't think we have to change anything other than continue to be competitive and I think given where our liquidity is sitting right now in the marketplace.
And given that we were able to fix our interest rate for example.
Mentioned, I mean last year, when we actually raised our bonds $450 million.
5.125% interest rate for the next eight years or for the next step in and off years fixed.
Given that and given the amount of.
Cash that we actually carry in their agreement the bulk Street I think.
Give us the opportunity to go after larger deals.
And not compete on basically an increase in interest rates for example.
Alright, great and two comments on that I mean, if you look at our liquidity for yearend versus versus where we are in Q1 were only $6 million lower and thats after doing share repurchases of $14 million paying dividend, putting a $5 million deposit down on the <unk> acquisition.
And so Q1 is usually a lower cash generation. So we spent a lot of cash and in Q1 and yet our liquidity only went down by roughly $6 million and so and so we will lever up like we did for the Empire deal, we will lever up but then we could see a clear pathway to bring it down which it has come down as long as we can see.
See what the opportunities are those synergies are for us going forward.
Thank you very much guys I appreciate it.
Thank you.
Our final question comes from William Reuter with Bank of America. Please proceed with your question.
Good morning.
So following up on the last question cruise question.
In terms of how high you would take leverage given you mentioned the M&A pipeline is strong is there a number for the maximum that you would go up to before we start delevering.
I mean, our target internally.
It's $2 five and Leverages measured several ways. We look at we look at is net leverage and we don't look at capital leases because those are mostly real estate capital leases by.
Defined in GAAP I mean, our target is two five but we will go up.
We will go up to a four or five lever as long as we can see that coming down and example of that is the Empire acquisition because that wasn't just what we could do for empire, but what that did for us as a total company. So look every deal stands on its own Theres no magic number.
But we stand on if we see a deal where it has a much higher leverage and we see a pathway down we're not committed to a number I think we're committed to a certain leverage target long term, but there's not a magic number that we look at for any.
Any one deal.
Yes, but just to be clear just to be clear, but just to be clear I. Just wanted to maybe finalize that comment over here just to be clear I think the targets continue to be around two and uptime.
Just for your benefit the target.
Remember, we closed Empire, just a year in optical.
So yeah, we lever, but look all we came all the way down back I mean, when we lever we actually did everyone. We buying businesses that are generating a lot of cash flow and we know that in a very short order, we'll get back there.
What we did on that that's just a great.
Example.
But nothing really changed from a strategy standpoint, or from a leverage standpoint, and given as I said, given our liquidity and given I agree with you folks Street I don't think to take a long time for us to to actually deliver highly.
And except to actually be very very.
Important for us too.
To do that.
Got it that makes sense and then Ari on the increase in your merchandise offerings with some lower prices, you mentioned pizza and coffee grabbing go sandwiches.
You know a lot of supermarkets have mentioned, they're still seeing strength at relatively high priced items are you already seeing a trade down from lower from higher price items or are you just positioning yourself for what you anticipate.
First of all we are always.
The things that people are buying in our stores I would call it a lower price items anyway.
<unk> Bank, Canada by drilling so we are not really competing with.
Supermarkets, but.
I don't think anything changes as I said I think the only thing that changes with our initiative I think the increase in margin, it's really because of the initiatives that we were actually able to put in place I mean, that's really the story I mean, there is a big change in basically consumer behavior.
The basket that were selling right now.
Of course decreased cigarettes and increased other item that's got a much higher margin.
And just to remind everybody. We are at 29, five 210 basis points on the lowest quarter of the year.
So I believe that we are going to continue to see margin keep increasing we finished the year last year or 2021.
30% margin aware margin, it's first quarter at 27.
Five I mean, we are right now with 29 point of you're already 210 basis points above prior years, though I believe that trend will continue.
And we actually see an increase in margin.
Here to stay.
Okay, and then on the strong retail fuel margin.
Throughout history rising fuel prices have contributed to lower margins.
However, greater periods of volatility I think lead to higher margins is it the volatility that has led to your margins to be so strong or what would be the other contributing factors.
Well volatility is always good given our business volatility it absolutely goes, but I think what <unk> seen at the beginning of Colby just consumer behavior changed dramatically.
Customers.
A lot of competitive.
Competition lost their morning, Tropic in lunch traffic and given that they're relying heavily on.
The morning breakfast and lunch traffic over here.
What drove margin.
Outside the box.
And I think until we see a shift a big shift you'd have to be a very very big shift.
Inside.
Inside the stores I think until then modulators that margin is here to stay that just might believe its really trade trading dollars.
But one site to another.
We were fortunate enough that we were unfortunately, we were not heavily involved in foodservice back then.
So we were not basically.
That's impacted like some of the others, that's probably the reason for that but I really believe that based on trends and based on what I've seen in the marketplace.
The Golan is going to continue to decrease while our margins continue to increase that's my belief.
Okay and then just lastly for me on the strong wholesale fuel margins.
Seven cents.
Is this you had referenced that there was some purchasing scale of getting bigger is this related to your purchasing scale or is this related to.
I guess, a better competitive position with your customers I guess, what would be the couple of contributing factors there.
So yes.
I think this is two parts. Okay number one there is the better margin piece of this which when we should continue to keep there is also a factor of higher fuel costs. Okay. So.
As steel costs come down we will lose that piece of the book, but we will maintain the higher rebate portion of it. So it's kind of a hedge against the credit card fees, which go up because of credit card fees, obviously, our cost of fuel, but prompt pay discount affects both our <unk>.
Our retail business, our wholesale business. So so the piece of it thats related to the prompt pay if obviously if wholesale costs fuel costs come down that will that will come down somewhat but obviously that will translate into more gallons. So, but there's a piece that will stay and thats related to <unk>.
Negotiations with rebates that we're realizing.
And just to add one more comment just to add one more comment on this one.
As Don mentioned.
Remember right now we are enjoying the compact discount on $100 basically a barrel versus in the past was lower but remember when those prices goes don't come down the credit card fees will come down as well. So it was in the hedge that was obviously created.
Not intentionally but that's basically we have an edge that's actually what's created there'll be here and I think that will be the tradeoff. So when you see the wholesale.
Basically gross profit goes down a little of that you're going to see an increase in gross profit basically on the retail piece, which represent of course, the bigger piece of our business.
Perfect. Thanks for taking all the questions.
Of course, thank you.
We have reached the end of the question and answer session and I will now turn the call over to Ari Cutler for closing remarks.
Thank you very much Carl.
Thank you everybody its been pleasure being with all of you guys today here.
Thank you.
For joining the call and I can only wish you a great summer.
And as we are heading into a 100 deal seller. This is our basically.
Basically our biggest business is two 100 deal summer and I wish everybody successfully here. Thank you again.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Yes.
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Yes.