ARKO Corp.

Greetings and welcome to the ARCO second quarter 2021 earnings 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Mandeville, Managing Director of Investor Relations at ICR. Thank you. You may begin.

Thank you. Good morning and welcome to ARCO's second quarter fiscal year 2021 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Don Bissell, Chief Financial Officer. By now, everyone should have access to the company's earnings press release that was filed with the SEC this morning and is also available on the investor relations section of ARCO's website at www.arcocorp.com. Before we begin, Please note that all second quarter 2021 financial information is unaudited, and during the course of this call, management may make forward-looking statements within the means 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, and similar references to future periods. These statements speak only as of today, 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 today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31, 2020, and 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. Except as required by federal security laws, ARCO does not undertake to publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events, changing circumstances, or for any other reason. Please note 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, 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 directly comparable GAAP measures. I would also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now I would like to turn the call over to Ari.

Thank you, Chris, and good morning, everyone. On today's call, I will briefly review our financial highlights for the quarter ended June 30, 2021, and provide an update on our business. Dan will then review our financial results in more detail before we take your questions. I would like to start by thanking our over 10,000 associates company-wide for rising to occasion and once again continuing to execute in a challenging environment brought on by COVID-19 and several other dynamics. Let's review a few of these challenges and how we successfully navigate them. To start, much like the rest of the economy, we are experiencing a very tight labor market. To address this, we have implemented several hiring initiatives, including $500 sign-on bonuses, fast rewards points to existing associates, overtime hours, and job fairs, along with hiring an additional team of 10 full-time recruiters. Next was the Colonial Pipeline cyber attack, which disrupted fuel supply in the Southeast for several days and continued shortage of transportation drivers. Our fuel logistics team leveraged our strong fuel supplier and transportation partnerships to minimize disruption, successfully secure supply, and continue to manage supply efficiently on an ongoing basis. Supply chain disruption in store merchandise was also persistent, related to continued driver and labor shortages, as well as lack of availability in certain raw materials. However, the marketing department also leveraged our strong supplier partnership and conducted regular supply chain calls with our top suppliers. Solutions included extended delivery times, product substitutions, and inventory buildup to ensure we met our customers' needs. Lastly, there's COVID-19. When it comes to the pandemic, the top priority is the safety of our associates and customers. To that end, we continue to encourage and educate our associates on the importance of getting vaccinated. As a new variant of the virus continues to spread, we are ready and prepared with PPE supplies such as masks, sanitizers, and wipes to meet the needs of customers and our employees. In spite of these challenges, once again, our business model proved resilient, and we are very pleased to report strong results for the second quarter of 2021. Our adjusted EBITDA was $75.7 million for the quarter versus $68.5 million, up over 10% versus the prior year period, supported by strong results in overall profitability of our Empire acquisition, which is currently exceeding our expectation along with continued in-store sales and margin growth. We experienced another quarter of merchandise margin expansion of 140 basis points, and a solid 2.4% increase in same-store merchandise sales. Importantly, we realized further sequential acceleration in our two-year stock to 7.4% from 6.2% for same-store merchandise sales. Excluding cigarettes, our results are even more impressive, with same-store sales of 4.3% and 10.2% on a one- and two-year basis. Additionally, we have an increase in same-store sales of IO margin other tobacco products of 6.3% from the prior year, with a category margin increase of 170 basis points, which is in line with market trend of cigarette consumer converting to other tobacco products. Let me now add some color to the three key drivers of our inside sales and margin. The first one is process improvement. We have implemented new processes to include annual category reviews, annual top-to-top suppliers meetings, annual planogram resets to ensure new items execution and additional marketing resources to ensure all categories are receiving the appropriate amount of attention. The second one was consumer-facing initiatives. Having grown through acquisition, each grant has select opportunities for growth, and we are in the process of executing them. They include adding approximately 525 grab-and-go coolers and 650 freezers for frozen foods, revised fountain assortment in over 250 stores, expanding our partnership with DoorDash, which is now available at 684 sites, including 84 sites in Virginia that now deliver beer, an expanded OTP offering, an enhanced value food offering, and enhanced assortment driven by process improvements. And the third one, of course, is supplier partnerships. In May, we extended and restructured our Coolmark All-Sale Supply Agreement. This is particularly impactful as the agreement aligned our sales growth and profitability incentives. In addition, we awarded Coolmark 190 additional stores, allowing us to consolidate down to two all-sellers. Retail gallon stores dropped 27% compared to a year ago, reflected continued increase in consumer mobility, as we are now in the summer driving season and the economy as a whole has received an increase in vaccinations. On the same store basis, gallons were up 11.9%, and despite a fairly considerable run-up in fuel prices throughout the quarter, our fuel margin was quite resilient, having come in at 34.3 cents per gallon for retail. Reaching gear to our longer-term strategic growth initiative, beginning with M&A. We have an aggressive yet disciplined M&A strategy as our priority is deploying capital at a very attractive return. We have many M&A opportunities in the pipeline that we are actively exploring, and I look forward to talking about this in the future. The Empire acquisition we closed in October 2020 is outperforming our expectations. We have been very pleased with the acquisition from both synergies and growth perspectives as we've managed to renegotiate three major fuel contracts and add 52 net new dealers since we closed, with 19 of those coming just in the second quarter alone. A recent acquisition of 60 convenience stores under the highly regarded brand Express Stop in Michigan and Ohio closed during the quarter and added over $26 million in revenues and $800,000 in net income for the quarter. This is a high-quality operation and a brand well-regarded within the communities to which it services. On our remodel and new store prototype initiative, as stated previously, we believe that we have significant embedded opportunity to optimize our store base and invest capital prudently for remodeling stores. We opened our second remodel site at the end of the second quarter, and while very early, we are pleased with the preliminary results. Among other upgrades, the new site includes the following features, new interior and exterior design, newly incorporated store deli featuring fried chicken, pizza, and hot grab-and-go, inclusive of breakfast and snacking items, bean-to-cup coffee machine with a selection of always-fresh coffee, a walk-in beer cave featuring easy access to a large variety of cold beer, craft beer, and seltzer offerings, and of course, we expanded the fountain assortment featuring 16 flavors and chewy ice. Our third site, which is the Raisin Rebuild, is expected to open within the next two months. will be a 5,600 square foot travel center, nearly two times larger than our average store, with 26 fueling positions, located on six acres of land in Rock Hill, South Carolina, just off Interstate I-77. Two additional sites are completing the design phase and are in the permitting process. Construction on those sites is planned to begin by the end of the third quarter. Three additional sites are in the design phase and will be moving to permitting shortly. Planning for 2022 has already begun, including the addition of resources to increase the scale and pace of remodels. Lastly, we have our Fast Rewards Loyalty Program. As a reminder, we relaunched our loyalty program last November with the focus being develop lasting customer relationships and positively influence consumer behavior by driving incremental trips and increase in basket size. We are currently enrolling approximately 5,000 new Fast Rewards members each week, and now have in excess of 480,000 enrolled members with whom we communicate on a regular basis, and I'm excited to share with you some of our early results. Since relaunch, our enrolled customers are visiting our stores over four times more often than non-loyal customers, and their average spend per trip is two times larger. In conclusion, I'm very pleased that we are continuing to demonstrate our strength and capabilities as we navigate through a constantly changing consumer environment. I hope you are as excited as I am about our multiple growth opportunities, which we believe position us well for the future. I would like now to turn the call over to Don, who will walk you through our financial results.

Thanks, Ari. It's great to be speaking with you all today about our strong second quarter results. Total revenue, excluding fuel, was $449 million, a 10.4% increase from the prior year period. This was a result of strong same-store merchandise sales growth of 2.4% on top of 5% growth in the prior year period and the Express Stop and Empire acquisitions, which contributed 9.6% of the overall 10.4% increase. This was partially offset by a decrease from underperforming sites that were either closed or converted to dealer-operated sites. Merchandise margin dollars increased by $15.3 million versus the prior year, while margin expanded approximately 140 basis points to 28.7%, largely due to a lower reliance on cigarettes and higher contribution from packaged beverage, other tobacco products, and other center store items. The Express Stop and Empire acquisitions contributed $10.1 million, while same stores increased by $6.9 million, which was offset by sites that were either closed or converted to dealer-operated sites. Retail fuel profitability, excluding intercompany charges for the quarter, increased $2.2 million, or 2.5%, on increased volume, a function of our 11.9% increase in same-store fuel volumes, as well as Express Stop and Empire's contribution, offset by a reduction in fuel margin, 34.3 cents per gallon versus a record-setting 42.5 cents per gallon from the prior year. For the second quarter of 2021, Wholesale fuel profitability, excluding intercompany charges, increased approximately $20.9 million compared to the prior year period, with the majority coming from the Empire acquisition, which contributed approximately $20.6 million of the growth. Fuel contribution from non-consignment agent locations grew by $11.7 million compared to the prior year due to a $207 million gallon increase in fuel volume. Fuel margin cents per gallon for these locations increased two cents of a cent versus the second quarter of 2020 due to an increase in the prompt pay discount on fuel invoices related to the increased cost of fuel. Fuel contribution from consignment agent locations grew $9.2 million compared to the prior year due to an increase in volume of 37 million gallons, although fuel margin cents per gallon declined 4.7 cents versus a record-setting 30.1 cents per gallon from the prior year. Second quarter store operating expenses increased $28.6 million, or 22.7%, versus prior year, primarily due to approximately $22 million of incremental expenses related to the Express Stop and Empire acquisitions. General and administrative expenses increased $11.3 million, or 55.2%, for the quarter as compared to the prior year, primarily due to expenses associated with the Express Stop and Empire acquisitions, annual wage increases, incentive accruals, and stock compensation expenses. Net interest and other financial expenses decreased by half a million dollars to $12 million in the quarter, primarily due to favorable fair value adjustments of $2.3 million and lower foreign currency losses, which were partially offset by higher interest expense from incremental debt in 2021. Second quarter net income was $25.5 million compared to $21.9 million for the prior year. Incremental earnings in the second quarter were related to strong results from the Empire acquisition, coupled with strong same-store merchandise margin, with partial offsets coming from higher expenses, including depreciation related to acquisitions. Minority interest was almost eliminated versus prior year, primarily as a result of the merger in late December 2020. Adjusted EBITDA was $75.7 million, an increase of $7.2 million, or 10.5%, compared to the second quarter of 2020. higher same-store merchandise margin contribution, and $22 million from the Empire acquisition were partially offset by the previously mentioned reduced fuel margin as well as higher credit card fees. Our balance sheet remains strong. On June 30th, the company's total liquidity was approximately $509 million, consisting of cash and cash equivalents of $229.4 million plus $31.8 million of restricted investments and approximately $248 million of unused availability under our lines of credit. Outstanding debt was $685.7 million, resulting in net debt of $424.5 million. For the first six months of 2021, net cash provided by operating activities was $59 million versus $101.9 million for the first six months of 2020. The decrease was primarily due to working capital changes related to higher fuel costs and increased volumes. there were approximately $7.9 million of higher tax payments, $11.9 million of higher net interest payments, including $5.2 million related to the early redemption of the Israeli bombs. Operating cash flow was also impacted by approximately $13.6 million of incentive payments. 2020 included favorable working capital adjustment of approximately $16 million, which went away in Q3 2020. Capital expenditures were $32.6 million for the six months ended June 30, 2021, compared to $20.5 million for the prior year period. We ended the quarter with 1,381 retail sites and 1,647 wholesale sites. I am very proud of the dedication of our team and the profitable growth momentum of the business, demonstrated by our strong financial results as we continue our journey as one of the largest and most successful convenience store operators in the country. And with that, I'll turn it back over to Ari.

Thanks, Don. We are excited to continue the strong execution against our priority as we drive growth and increase shareholder value. Thanks for joining the call today and your interest in ARCO. I will now turn it over to the operator for questions. Operator?

Thank you. At this time, we will be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Bobby Griffin with Raymond James. Pleased to see with your question.

Good morning, everybody. Thank you for taking my questions and congrats on a strong quarter. All right, I guess first I want to unpack the merchandise margin performance a little bit more. Pretty impressive growth year over year. Can you maybe dive into a little bit more details of what's driving the expansion of merchandise margin? And then more importantly, what opportunities do you see going forward over kind of the next one or two years for where merchandise margin could go? Is it possible that works its way into the low 30s like some of your peers? Sure.

I would answer that. So, You know, as I mentioned and as I mentioned on the call, you know, the ex-cigarette numbers came very, very strong. You know, we are at 4.3%. Same store sells ex-cigarettes. And as you can see, you know, the margin, the high margin comes from PacBev, comes from, you know, Grab and Go, for example. Our Grab and Go... same-store sales are up 51.3% compared to last year, and the margin increase from 31.4% to 37.8%. That's just one example. The other example is same-store sales on frozen food that I mentioned. I've been talking about adding freezers all along, and again, we are up 43.7% with a margin increase from 30.9% to 35.4%. So You know, as we continue to move from cigarettes, our percentage of cigarette sales continue to come down, and we see an increase on, you know, merchandise sales. You know, that's going to continue to drive the margin up substantially. You know, the same thing, by the way, goes to nicotine. You know, we keep talking about OTP, and as you can imagine, as consumers, stop buying cigarettes, they're moving to other types of nicotine. I mentioned that. We saw an increase of over 6.3% of other tobacco products with a margin increase of even better, 170 basis points. Yes, I think we're going to continue to see that. As we move along, because remember last year, a lot of people were pantry-loaded cigarettes and beer during this time period. So the more people are out, the more people are going to continue to basically purchase merchandise inside the store, the center of the store, with a much higher margin.

Okay. And then what about on – I understand there are still very tiny base, only a few of them done. But what about on the remodel stores? Like what are the merchandise margins there? look like there versus kind of the core average, the company average? Is it significantly higher? Is there any color to help us understand as those become a bigger and bigger part of the mix of your stores, what the potential margin upside could be inside those stores?

Yeah. You know, as you know, it's really too early. Our second store just opened six weeks ago. It's a little bit too early, but I think the mix within the store, as I mentioned, I mean, we added... You know, all of the items that I mentioned earlier are basically high margin items. I mean, we talked about the food, for example, the food service. So, you know, we added, you know, grab and go. We added pizza. We added fried chicken. You know, those are really high margin, you know, high margin items that we added to the stores. We added more assortment of fountain drinks. We, you know, we extended, of course, the beer cave. All of those things that I mentioned are much higher margins than basically what we see from the rest of the stores. So there is no question that the more stores we're going to continue to remodel, the more features like this we're going to continue to add to the stores. There is no question that we expect the margin to expand because of that. Okay.

And then how many – you mentioned the plans look good for 2022, but do you have a number you can share on how many remodels you might be able to get done in 2022? or you're targeting?

Uh, we don't have the, we don't, we don't have the final number, uh, at the moment. Uh, but this is something that we are working on right now.

Okay. And I guess lastly for me, um, you called out labor in the prepared remarks, um, and understanding of the tight labor environment for everybody right now. Has it, has it, has it hindered results at all? Is it more just, you know, a challenge that you're working through? Have you had to cut store hours or anything like that for us to keep in mind?

Sure. So, you know, it's, uh, You know, we are not different than any other retailer, as you can imagine. And as you guys remember, I've been mentioning it from the beginning, you know, of our calls. You know, the one thing that we are different probably from the rest is that we were not fully involved in food service. And we decided to, you know, shift gears towards grab-and-go and frozen food when, you know, less labor and intensity is required on this one. You know, This is our business. I mean, we have the challenges like everybody else, and we continue to work through those challenges. Yes, we did reduce hours in around 75 stores. But again, the hours were reduced just because we felt that, you know, in those particular stores, the third shift, you know, I'm talking about after 11 o'clock at night, we just felt that there is really no reason to keep those stores open from a profitability standpoint. You know, we always look on profitability. But this is really, you know, what we did over here. Other than that, you know, we continue to work through all of those issues, and, you know, we know how to manage our business. This is what we're doing.

And let me just add on to Ari's point about the reduced hours. They're not significant. We're trying to shave them, like, in the morning and the evening, and we're even in the process of starting to restore those hours now. So I think, you know, they're being done strategically where it makes sense, where we're having problems, but it wasn't like cutting out massive hours. It was just being done where we had particular issues and we're already in the process of restoring some of those stores that we cut the hours on.

I understand. I appreciate the details. Best of luck here in the second half. Thank you, Bobby.

Thank you. Our next question comes from Kelly Bonia with BMO Capital. Please proceed with your question.

Hi. Good morning. Thanks for taking our questions. Just had a couple here. First, just the comment about the integration of wholesale, I think, running ahead of expectations. Maybe just wondering if you could elaborate a little bit more on what you're seeing there and just your expectations now for wholesale and Empire, now that you've had a little more time under the belt.

Sure. Don, would you like to take this? Sure, I'd be happy to. Kelly, I think the biggest thing that we found is, number one, obviously, When we look at total gallons, we're signing up a lot more accounts. You heard Ari talk about 52 new accounts since inception. I mean, we've got a very aggressive team on the ground signing them up. So that's really been helping us is the additional fuel volume. Obviously, we benefited from the higher margin levels than we anticipated. But I think the biggest boost that we found out of all this is just what we thought would be true. is proving to be true plus more is that we've got a very aggressive team on the ground that's bringing on a lot of new business.

Perfect. And in terms of gallons, or sorry, go ahead.

Just to add, Kelly, just to add, you know, I mentioned the three supply contracts that we were able to negotiate. Remember, those things are going across. They're not going only on the wholesale business. They're actually going to impact also the retail business. And as you can see, you know, we came with a very high you know, CPG margin for the quarter. So just, you know, just to note that as well.

And good point, Ari. Sorry I left that out. And I want to point one thing out. That is ongoing, too. It's not just the, you know, we've gotten done what we think we expected to get done. But, you know, as we know, agreements expire and this will be ongoing. So I think between the combination of the gallons, and again, as Ari mentioned, which is very important, the That was our plan to go out and aggressively negotiate it, and we got the target of what we thought we would get done. This isn't a thing that will keep on giving us benefits going forward as we go through agreements that come up for closer exploration.

Okay, that's very helpful. I guess maybe just to follow up on the retail business, I guess, one, would you attribute that sequential acceleration in fuel margins specifically? to the supply contracts or anything else? I know it's always hard to know, but I guess what would you attribute that sequential exploration in? And then can you also just talk about gallons on the retail side and how those are coming in line with your expectation and maybe where we are on a gallon standpoint versus 2019 kind of on a pro forma basis with everything? Sure.

So let me start, I'll let Don answer the second piece of the question, but let me start with basically with the gallons. So as you understand, profitability is something that we are always laser focused. And we want to make sure that while we focus on profitability, we're not losing gallons because of that. We are managing the gallons market by market, region by region. Uh, and you know, as we look at demand over there, you, we just, you know, there are some pockets that we see opportunities. And as we see opportunities that, uh, you know, to keep, uh, to keep margin, uh, you know, I did over 30 cents, uh, basically range. I mean, this is something that we continue to do on a daily basis. And, you know, as I said, at the end of the day, uh, there is no question that people are driving less. People are working from home more. And we don't have the same mobility that we saw probably in 2019. And because of that, you know, we are trying to go at least up to the margin in areas that we think we can. I will let maybe Don answer the second piece of the question.

Sure. So, Kelly, on a gallon basis, we're not back to 2019 levels. I mean, obviously, we saw a nice increase. But I think, again, it's a different story by area. I don't know that we'll, in the short term, get back to the 2019 levels. I think we're, you know, experiencing a new reality, especially with the new variant out there. I think companies have now, you know, put off going back to work plans. People are changing habits. But I think what we're doing, as Ari talked about, is for us it's maintaining the volumes that we're, you know, they're steadily growing and have been pretty stable, but we're also trying to maximize the gross profit out of that. So we're very competitive out there. We're not, you know, outside of the bounds of the market. But, you know, we're not – who knows if we'll get back to 2019 levels. We're not there yet, but we are growing.

Yeah, I just want to add one more thing just to finish the sentence on this one. I think I mentioned at probably the beginning of 2021, I mentioned that, you know, right now we see a tight labor environment. And when you have a tight labor environment, you know, there is no question that a lot of the comps that actually are, you know, more involved with food service, And, you know, given that, you know, you have, you know, shrinking labor, which means that, you know, a lot of people are not able to continue to get the same results that they get within the stores. You know, the area that we're going to see probably an expansion will probably be outside the store, which is the fuel margin. And this is something that we've been seeing for the past 15 months, as you know.

Great. That's very helpful. Just also wanted to ask on the labor, just obviously a big topic. Maybe could you just help us understand where turnover is, and can you quantify the impact of maybe the sign-on bonuses and costs that you're kind of maybe hopefully dealing with on a transitory basis? Sure.

So, you know, at the moment we are not commenting on turnover numbers at the moment, but one thing I can tell you is that, you know, we actually see an increase. Basically, we hire more people than we turn. We have more people that are being hired than the numbers of the people that actually turn over here. The $500 bonus, of course, this is something that we measure for the past few weeks, and it's been working. When I say it's been working, it's basically when you hire those people, in order for them to get the $500, they need to stay a period of time basically within our stores. and we see that a lot of those people are actually staying and keeping their jobs. In addition to that, you know, the other thing is really making sure that you have enough recruiters to hire people. You know, the applications are coming in, and, you know, especially now we feel that, and we see that in the last couple of weeks, and I think we're going to see more. You know, there is almost 7.5 million people that at least for the time being, their unemployment benefits are going to expire by the end of August, beginning of September. We believe we're going to see a very high, basically, in application, you know, volume coming in. And this is the reason that, you know, we hire all of those recruiters. We want to make sure that the store people are working at the store and are not focusing on hiring. And because of that, you know, we leave our HR department and edit those recruiters to make sure that they're actually dealing with day-to-day hiring versus in the past, you know, the store manager was just dealing with that. We want to make sure that we take it away from the store manager and he can focus on the store and on his customers.

Yeah, and Kelly, one of the things that we've been able to do that's been very successful is make that hiring decision and offer on the spot. So because the market's so fluid and people are getting so many offers, so we're able to interview, make that hiring decision, Give that offer right then because one of the things we found is if you're taking more than a day or so to get back to the employee, they've already gotten their job. So I think that's been very critical. And as was talked about, you know, since that $500 bonus has come into effect, we're really tracking net hires because that's really important to us. You know, are we increasing the labor force? So I think we have, you know, it was an uphill battle, and I think we're now on the, still while it's an issue, we're on the downside of that hill.

great that's that's very helpful and then just last one for me in terms of the remodels I mean it's really expected to kind of ramp more aggressively next year but just any update on the costs that you're seeing for materials or just the overall outlook for remodels and pace there that that you've provided in the past just any change in the expectations there

There are no changes in expectation. I just want to remind everyone over here that, you know, we decided to do 10 stores this year, not because of a lack of basically pace or lack of basically availability. We decided to do that because we want to make sure that we measure the right concept. So what we're dealing over the past few months is really with making sure we have the right concept in place. And then we basically going to, you know, increase the pace over here. And this is what we're doing. Just for your benefit, in the last couple of stores, we really put everything that you can imagine within the store, and we try to test all kinds of concepts to make sure that this is the right concept. So I think we're getting very close to make some decisions about that, about what's the final concept on that. And the minute we have the final concept, I think we're going to be able to start to increase basically the pace of the year.

Thank you. As a reminder, it is star one to ask a question at this time. Our next question comes from the line of Luke Lemoine with Capital One Securities. Please proceed with your question.

Hey, good morning, Ari, Don. Really good quarter. Just curious, was the Colonial Pipeline impact noticeable in your results? And is there any way you could maybe quantify the impact?

I don't think the Colonial Pipeline actually impacted the results. You know, if you remember, it was a week of some issues in the southeast. But remember, we are very well diversified. You know, when, you know, I know it was all over the news and, you know, people are running even in Florida, which is not impacted by the colonial pipeline. People are just running all over the place just to, you know, to gas station to fill gas. And I think it was more panic buying, you know, buying more than anything else. again, we were given our size and given that we are diversified, we were able to use our connection and our contacts within our logistic department. We were able to bring products from some other states that we do business just next to the Southeast. But I don't think there is any major impact that happened during this quarter. It was just a challenge that we had to deal with probably for two weeks during the first few days of the cyber attack and then Following that, again, the problem of getting product and making more product available to our stores. But I don't think that was something so impactful.

Yeah, and to follow up, Luke, I mean, essentially what happened, I mean, if there wasn't in the news, I don't think there would have been as big of a problem. Essentially, all the inventory transferred out of tanks into people's cars. So, you know, there were huge spikes in sales when those announcements came out. And then... You know, once everything calmed down, you know, I think net-net, it really didn't have an impact. But it was just a – really, if you think about it, you know, it was just a shift of fuel, which actually helped us because, you know, when you convert over to summer fuels, you have to turn your tank. So in a lot of ways, it helped us turn our tanks over. But I think the news panic caused more issues than anything else, and people were just topping off tanks and panic buying. So, again, it was an incident that concerned us, but I don't think it had major results.

The shortage came because all of a sudden, you know, if you're selling X amount of gallons on a daily basis, all of a sudden you've got, you know, 300% increase in sales during this time. So, you know, it doesn't matter. I mean, you just cannot fill the tank and expect 300% increase, you know, in a very short order. That's usually what happens. And, you know, this is similar to what we see during hurricane season when a hurricane actually hits. I mean, that's usually what we see over there.

Got it. Thanks a bunch.

Thank you. Our next question is coming from the line of Mark Asterton with Cecil. Please proceed with your question.

Thanks, and good morning, everyone. I wanted to ask firstly about just the retail fuel margin and just how to broadly think about that. The numbers obviously have bounced around a bit. It remains pretty good across the industry. Anything that we should be thinking about or keeping in mind as relates to your business specifically relative to kind of what we're seeing more broadly?

No, I think, as I said earlier, I think that at the end of the day, you know, we are competing with the rest of the market. You know, we are in line with the rest of the market. And as I said, I think that, you know, the more people that rely on, you know, basically inside sales, inside the high margin items like food service, the more people rely on that and they can, you know, they can get those results back to the 2019 numbers. I think that margin is going to continue to expand outside. And again, I don't have a crystal ball, of course. I don't know what's going to happen next month. But the only thing I say is that, yeah, This is something that's been going on for the past 15 months. And again, we don't expect that to stop anytime soon.

Okay. And switching over to store acquisitions, I appreciate the earlier commentary on the opportunities out there. Any sense of pace of acquisitions going forward? I mean, to the extent that you can talk about it, I feel like it's been maybe a little bit slower out of the gate than history. And so, you know, if there's a lot of opportunities out there, then should we be expecting that to accelerate from where we are?

Sure. Just to answer your comments, I don't think it's slower. I think that it's consistent. You know, we do a two to three acquisition a year. This is something that we've been mentioning all along. We already finished the first one. We finished the first one already in May. We continue to basically to grow through acquisition. Remember, we mentioned adding just 19 contracts, all-sell contracts, you know, during this quarter. So I think the other thing that you need to take into account over here is basically that now when we have the all-sell business as well, you know, we target, you know, we have a 20% target return. And, you know, if the target comes from increasing wholesale accounts versus just retail accounts, I mean, we're, of course, going after that. I mean, we are trying to be very, very careful. I mean, it's not just doing acquisition. It's doing the acquisition and continue to actually continue to, you know, deploy our capital and receive the return that we saw in the past. I don't think we're going to have any slowdown. I don't expect any slowdown at least, you know, from what you actually guys saw in the past.

Right. And Mark, also to add on, I think Ari said this in the past. I mean, the pipeline's been very robust. So obviously there's things, you know, deals where we're looking at all the time. There's no shortage of deals. There's no shortage of deals that we're working on. Like I said, there's more to come down the road as some of these become, you know, as we finish them and get through and see if we're the successful bidder and finish all the due diligence. So there's no shortage of deals out there. And I think the environment... given a lot of things, has not slowed that down at all.

Yeah, and I just want to mention, you know, given that we have a lot of liquidity over here and given that, you know, we are very liquid, it doesn't mean that we need to do deals that do not make sense. I mean, we are not going to change our strategy. I mean, we have a high, basically, return of investment threshold, and we're going to continue to basically use this threshold, you know, to benefit us. And this is something to take into account. You know, we will not do crazy deals just to make deals. We will do the right deals and continue to basically provide the return that we actually show all along.

Got it. Okay. And I guess just lastly and then a follow-up to that other question. So on the remodels, I think some competitors have commented on just supply chain challenges, labor shortages. Any thoughts there, especially if you think about ramping the remodel pace into 2022? Anything that would prevent that from happening near term. And then back on the deals, just in follow-up there, what is it about some of the deals that you're looking at that you're passing on? Are there any sort of big picture things that maybe aren't working out, return profiles, et cetera?

Yeah, so let me basically start with the remodel. I don't think with the remodel we're going to basically – nothing is going to slow us down. I mean, we have the same challenges like everybody else, but, again, I don't see any reason to believe that things will slow down. Again, we're not different than the others. However, as I mentioned, we need to make sure that we have the right concept. And all along from the get-go, I said, we're going to do first-hand stores not because of challenges or because of pace or because we don't have the capability of doing that. As I said, we want to make sure that we see at least 20% return on investment on the concept. And those things take some time. I mean, as you can see, we did – Two stores so far. The second one was just opened with a broad concept, just opened six weeks ago. We're getting ready to test another concept. This is a 5,600-square-foot store. It's like a travel center, a small travel center. And again, it's a big store. It's a different concept. So the minute we actually refine all of those concepts and all sign off and make sure that this concept is a concept that we feel comfortable using, that's going to drive us to the future, I mean, we're going to actually start to pace them. So I don't think we're going to have any slowdown other than making sure we have the right concept. That's regarding to this. Regarding to acquisition without, you know, basically mentioning names or anything like that, I can tell you that every deal in the market, we are participating, or I believe at least every deal in the market, we are participating. You know, we are being invited to almost, you know, everything that we see over here. You know, one of the problems we saw at the beginning of the year is that a lot of people believe that, you know, the Speedway 7-Eleven deal that was, you know, was done for, you know, almost 14 multiple people believe that, you know, they're going to get those numbers. And again, this is not something that, you know, we are willing to pay. This is not the return on investment that we are willing to basically to go after. So, yeah. I don't think that we're not passing on anything other than we are submitting our bids. And, you know, given that the environment, you know, interest rate is very, very low right now. You know, fuel margin are very, very, you know, very high compared to the past. And I think people are not taking this into account. And I can tell you, Mark, that in the past, you know, we saw that in the past. People, you know, you have one year that people just didn't take this into account. And when the word settled, all of a sudden, Again, without mentioning names, you know, it was acquisition that closed for a very high double-digit multiple. And a few years later, those guys end up selling the stores for a much lower multiple because they couldn't basically carry the, you know, the expense couldn't carry the debt. And I think this is something that we're going to see over here moving forward. And because of that, we want to make sure that, you know, we are liquid and we are ready to execute on every opportunity that actually meets our threshold.

Yeah. Mark, I want to add one thing on to the first question you had. There are components of remodels which will go in many of our stores that we're taking advantage of when we see opportunities to buy supplies of them that we're going after and buying them. So we are taking advantage of that and not sitting back and saying, you know, whatever. So we have had several cases where we've gone out and bought certain equipment that we know we're going to need, whether we remodel or whether we're just going to put it in our existing stores as part of a marketing program. So we are doing that proactively. Okay.

Yes, and this is, by the way, this is being said also for acquisition, Mark, just for your benefit. You know, everybody knows that there is some, you know, shortage in computers, EMV sets, and things like that. And like Don mentioned, I mean, we're doing the same thing over here. I mean, we know that, you know, we are, this is basically our DNA. Acquisition is part of our DNA, and we make sure that, you know, we keep enough supply in place. to make sure that when the opportunity basically happens, we are not able to close because of short of supply. So we are actually keeping more inventory basically at the moment.

Okay, great. Thanks, all. Sure.

Thank you. We have reached the end of our question and answer session, so I'd like to pass the floor back over to Ari for additional closing comments.

Thank you very much. Thank you, everybody, for participating. I just, you know, before we end over here, I'd like to say that our thoughts are really with those affected by the virus in the U.S., around the globe. I want to make sure everybody, you know, try to keep safe. I mean, this variant, it's really contagious. And we need to make sure that, you know, everybody just keeping safe over here. Thank you for participating and goodbye.

Ladies and gentlemen, this will conclude today's teleconference and webcast. Once again, we thank you for your participation, and you may disconnect your lines at this time.