ARKO Corp.

Good day, everyone, and welcome to today, our GoCorp third quarter 2024 earnings. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your telephone keypad. Please note this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets, and Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to ARCO's third quarter 2024 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the third quarter of 2024, as filed with the SEC, are available on ARCO's website at www.arcocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2023. Before we begin, please note that all third quarter 2024 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statement section at the end of our third quarter 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and ARCO is under no obligation to update or revise forward-looking statements made on this call, whether as a result of new information, future events, or otherwise, except as required by law. On this call, management will share operating results on both a GAAP basis and on a non-GAAP basis. Descriptions of these non-GAAP financial measures that we use such as operating income as adjusted and adjusted EBITDA, and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings release or in our quarterly report on Form 10Q for the quarter ended September 30, 2024. Additionally, management will share profit measures for our individual business segments along with fuel contribution, which is calculated as fuel revenue less fuel cost and exclude intercompany charges by our subsidiary, GPMP. And now, I would like to turn the call over to Ari.

Thank you, Jordan, and thank you all for joining. In the third quarter, we deliver adjusted EBITDA at the midpoint of our guidance by remaining highly focused on managing our operating expenses, both within retail operations at store level and through advancing our dealerization initiative, which I will cover shortly. We, along with other operators in our industry, are seeing persistent pressure on consumers as they grapple with inflation and increased prices for daily necessities, with the cost of goods in fundamental categories like fuel and groceries up more than 20% in 2020. During the quarter, consumer spending remained restrained, and strong summer promotions were unable to accelerate soft merchandising trends from earlier in the year. That said, we continue to believe we are equipped to navigate this environment and, as always, continue to offer everyday value to our customers to help them during these challenging times and believe in the resilience of our industry as we look consumer spending in 2025. Looking at our merchandise efforts, we are seeing a shift in purchasing behavior with a growing number of consumers prioritizing discounts and exploring multiple channels to find the best value. Traffic trends remain challenging throughout the quarter, and we continue to focus on ways to deliver value to our customers through promotional bundles and loyalty offers coming online as we move into the fourth quarter. As we look ahead to the balance of the year, we have value oriented promotions coming online. Just to name a couple, we are offering our Tyson Chicken Sandwich Value Meal with a large fountain drink and chips for only $4.99, enabling our customers to have a full meal at a reasonable price. Additionally, we are offering customers the ability to grab a free Nathan hot dog with the purchase of any large fountain drink for only $1.99. These are just a couple of examples of the many promotions we are launching to provide much-needed value to our customers. These promotions support our strategies around both announcing our food service offerings and our loyalty programs. On food service, in the second quarter, we expanded the food service offering with Nathan's Famous Hot Dog, which are now available hot and ready in more than 500 of our retail stores across the country. We've seen strong customer response with same-store hot dog sales for the third quarter up more than 30%. We also continue to see positive results in the value-oriented pizza offerings that we launched in the first quarter. Same-store non-franchise pizza sales in Q3 increased approximately 11.5%, and unit sold increased 23.1%. With respect to loyalty, we continue to grow the base of enrolled members in our loyalty program because of the value associated with being a member. Enrolled loyalty members spend an average of $110 per month, or 80% more than non-enrolled customers, and visit almost eight times per month, or almost twice as often as non-enrolled customers. In focusing our efforts to continue enrollment and provide additional value to our customers just before the holidays, we kicked off yesterday the FAS Million Swipstick, For the remainder of the year, Fast Rewards members who purchase any of over 700 qualifying items will receive a scratch card at checkout that has prizes or coupons for items that can be redeemed at any of our retail stores. In addition to the instant price portion of the sweepstakes, enrolled Fast Rewards members will also be entered into a drawing for a grand prize scratch card with the chance to win $1 million. Pulling back from near-term operations, I want to spend some time talking about more structural changes to our business that are part of the foundation we are building for the future. These such elements of our merchandising assortment are channel strategy and NTIs. First, on a merchandising assortment, it has been some time since we discussed with you all our cigarettes and tobacco offerings. We are seeing the strength of our OTP assortment, which has been growing longer term, and has a contribution margin rate that is approximately 20 percentage points higher than our cigarettes category. Recognizing the demand-driven mix shift across tobacco products we have started to install new back bar fixtures, allocating space to our OTP assortment. We expect to roll this new back bar installation to 1,000 stores by the end of the first quarter 2025 to support this growing category and expect OTP growth story to be positive. Given that approximately one out of two of our enrolled loyalty members are cigarettes or OTP consumers, we will be increasing our focus in 2025 on these customers and plan to provide them with additional value. Next, I'd like to share an update on our channel optimization efforts. As part of our transformation plan, we are converting retail stores to dealer sites where we believe that we can realize higher profit from ongoing fuel supply agreements and rental income than from continuing to operate these stores in a retail segment. On our last call, we shared that we expected to convert 40 retail stores to dealer sites by the end of the third quarter, and we exceeded this target, converting 51 retail stores to dealer sites. By the end of the fourth quarter, we expect to convert another approximately 100 retail stores taken together. We expect these approximately 150 stores will represent an annualized benefit to combine all sales segments and retail segment operating income of approximately $8.5 million. To provide more detail on the magnitude of the channel optimization we are undergoing at scale, taking into account future expected conversion of retail stores, we expect this initiative to cumulatively benefit combined wholesale segment and retail segment operating income by approximately 15 to 20 million dollars. We expect this conversion will lead to an economic uplift while allowing us to increase our focus on the jewels of the retail portfolio and to prioritize our future investments in this location. We believe that this will enable us to maximize the potential of all of our segments. We see tremendous opportunity with the work we are doing, which we expect to compounded with reduction of supporting G&A costs as we refine our retail footprint. Moving on, I wanted to touch on another leg of our organic growth for ARCO, our NTIs. We markedly expanded our NTI pipeline with eight new-to-industry stores. In the third quarter, we opened one of these, an Andymart store in Newport, North Carolina, delivering value and high-quality shopping experience to the Newport community. We are pleased with the performance of this store and have seen food service sales penetration over 20% at that location for the month it has been open in Q3. This success further supports the efforts we are putting into developing our food service offerings. Of the remaining new-to-industry stores in the pipeline, we expect to open three more by the end of the year with the balance over the course of 2025. You will note that this pipeline represents a marked increase to our prior cadence of NTIs, which reflects our efforts to support the long-term organic growth of our business. Further, we expect that our NTI program will play an essential role in our transformation plan, and we look forward to discussing all of this in greater detail at our upcoming Investor Day. Concurrent with this effort to support organic growth, I wanted to give you an update on our new design pilot for our remodel program as part of our transformation plan. To date, we have finalized store layout and merchandise assortment, including development of system-wide branding for our announced food service offerings. We anticipate beginning permitting to implement the new design in our seven pilot stores in the fourth quarter and to begin remodeling activity in early 2025. I will now turn the call over to Rob to review financial results for the third quarter and touch upon our guidance for the fourth quarter and full year. Thank you, Ari.

Good afternoon, everyone. Before turning to third quarter 2024 results, I want to reiterate that our reported results for adjusted EBITDA include the non-cash portion of rent expense, consistent with the change in methodology we articulated last quarter. On this basis, adjusted EBITDA was 78.8 million for the quarter, compared to 87.3 million from the year-ago period, with the decrease caused primarily by lower retail fuel and merchandise contribution. At the segment level, our retail segment contributed approximately $71 million in operating income compared to $81.5 million in the year-ago period. Adjusted operating income for the quarter was $85.1 million compared to $96.5 million in the year-ago period. Total retail merchandise sales were down approximately 7.3% for the quarter, with merchandise contribution down 4.2%, on margin rate expansion of 110 basis points. Total retail fuel contribution was down 3.4%, with a 5.9% gallon decline, partially offset by a margin increase of one cent per gallon. Same-store merchandise sales, excluding cigarettes, were down 5.7% versus the year-ago period, while total same-store merchandise sales were down 7.7%. Same-store transactions were down high single digits for the quarter, reflecting continued external headwinds. The decline in transactions was partially offset by a low single-digit increase in average dollar sale. The impact of the sales decline was partially offset by continued same-store margin rate expansion, which was up 100 basis points as compared to the year-ago period. Same-store fuel contribution was down approximately 4.3 percent for the quarter, with a decline in gallons partially offset by stronger year-on-year fuel margin per gallon. Same-store fuel gallon demand was down 6.6 percent for the quarter, while fuel margin of 41.4 cents per gallon was up one cent per gallon from the year-ago period. Same-store operating expenses were down approximately 1.4 percent for the quarter. Moving on to our wholesale segment, Operating income was $8.2 million for the quarter compared to $10 million in the year-ago period. Adjusted operating income was $20.3 million for the quarter versus $22.6 million in the year-ago period, caused by a decline in gallons and lower fuel margin per gallon, which resulted primarily from reduced prompt pay discounts. Fuel margin was $9.6 cents per gallon versus $10.5 cents per gallon in the year-ago period. For our fleet segment, Operating income was 10.8 million for the quarter compared to 8.8 million in the year-ago period. Adjusted operating income was 12.6 million for the quarter versus 10.7 million in the year-ago period, with total gallons roughly flat to the prior year. Increased segment operating income was driven by strong fuel margin performance, which was 43.5 cents per gallon for the quarter versus 38.4 cents per gallon in the year-ago period. Total company general and administrative expense for the quarter was 38.6 million versus 44.1 million in the year-ago period, with favorability driven by lower stock-based compensation expense and changes in year-on-year timing of incentive compensation accruals. Net interest and other financial expenses for the quarter were 23.6 million compared to 14.6 million in the year-ago period, with the change caused primarily by fair value adjustments related to our warrants. Net income for the quarter was $9.7 million compared to $21.5 million for the year-ago period. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet, excluding lease-related financing liabilities, we ended the third quarter with $885 million in long-term debt comprised of our 2029 senior notes, the outstanding balance on our Capital One line, and the remainder primarily related to real estate and equipment financing. Our $140 million ABL remains completely undrawn as we continue to manage working capital needs from operating cash flow. We maintain substantial liquidity of approximately $869 million, including $292 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $29.3 million, Turning to our fourth quarter and full year guidance. We expect our fourth quarter adjusted EBITDA to be in a range of 53 to 63 million. Supporting assumptions include a low to mid single digit decline in same store sales, a mid single digit decline in retail gallon demand, and a retail fuel margin of 38 cents per gallon on the lower end and 42 cents per gallon on the higher end of our guidance. Our overall guide reflects expectations for EBITDA growth in our wholesale and fleet segments, driven by the accumulating benefit of our retail wholesale channel optimization work and continued strength in fuel margin in our fleet channel. Our fourth quarter guide translates to a full year 2024 adjusted EBITDA range of $245 to $255 million. The midpoint of our revised EBITDA outlook is $5 million below our beginning of year guide reflecting our reduced expectation for fourth quarter same-store merchandise sales. And with that, I'll hand it back to Ari for closing remarks.

Thanks, Rob. As we wrap up, I want to reiterate our concentration on adapting to the dynamic market landscape. We remain focused on food service, strategic store transformation, and value-driven initiatives. I want to thank the company's employees for their continued hard work over the quarter and the quarters to come. Thank you for joining today's call. We appreciate your ongoing support and look forward to announcing shareholder value. With that, we will open it up to questions.

At this time, if you would like to ask a question, please press the star and one. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one if you would like to ask a question. Our first question from Bobby Griffin with Raymond James. Your line is now open.

Good afternoon, everybody. Thanks for taking my questions. So Ari, I guess first thing I wanted to talk about, you talked a little bit about the seven store pilot that you guys are building out. Um, can you maybe provide a little bit more detail on the go to market strategy there? Like what brands are going to be under what some of the other things that this pilot might include, you know, and if it's successful, like what's some of the timeline to roll out some of the big initiatives to, you know, a larger base of the stores?

Sure. Yes. No, not a problem. So, uh, you know, just to, to be, you know, to basically, uh, to explain it very carefully, this is, uh, this pilot, it was very, very crucial for us, uh, in order to, you know, to make everything right over here, you know, we actually hired a third party consultant, uh, to make sure that not only we do it right, we also went and recruited a large group of people, to test our food, to make sure that this is what the customer is looking for. We got their feedback. And after we actually finish all of that, we are in a process right now of finalizing the store layout and making sure we have the right merchandise assortment, including the development of system-wide branding for the announced food service. We are coming up right now with a brand, a brand name that will be attached to the food service. We are not prepared to actually disclose it at this time. We're actually working on that and we'll disclose it immediately after we finish the layout. But the idea is really to start permits in the next couple, basically during the Q4, we're going to actually go through permits. And the idea is to start implementing and start construction the beginning of Q1 2025. Assuming those seven stores pilot will actually be successful, that's what we believe, we're going to start to basically to add more and more stores in the region that we are actually working on, which is basically the stores around the Richmond market.

Okay. And then on the details you gave about the OTP and adding more back bar space, have you guys done that in a subset of stores? I'm just trying to get a sense of like what the contribution of that updated back bar could be. Is there anything you could share there? Is it still too early to be able to tell that?

So, yes, we started a test in, I'll call it in many stores. The test was very successful. At least we see the result. We see that, you know, the minute we actually, you know, investing in the back bar, You know, we're basically seeing the uplift. People are actually moving from cigarettes to OTP. And that's what actually, that's the reason why we are moving with the new features. And we're rolling them, you know, out to a thousand stores. And the idea is really to finish the installation, like I said, by the end of Q1 2025. We don't have, you know, we cannot provide at the moment, you know, results. It's too early, but there's no question that the cigarette consumers are shifting towards OTP. People are not basically going to stop smoking. They're just moving to other tobacco products. Our goal over here is to make sure that we have everything they're looking for in order to basically convert them from cigarettes to other tobacco products. The margin is much higher over there And this is where the industry is going. At the end of the day, we want to make sure that we are there. We want to make sure that our customers, just for your benefit, we check that. And when you're talking about our involved members, one out of two customers are actually a tobacco consumer. So you're talking about more than 50% of our customers are actually either cigarette smokers or, you know, consuming, you know, other tobacco products. And, you know, we see that as a huge opportunity for us, given that between cigarettes and OTP, you know, we're talking about almost 40% of ourselves.

And OTP, Bobby, represents about 10% total merchandise penetration. So it is significant.

Okay. That's helpful. And I guess I'm focusing just kind of these questions on the merchandise side of things, you know, just given some of the trends we're seeing. Like, if you unpack it by, I know you guys operate a handful or a good bit of different brands, and you're kind of in different regions. You've got some rural exposure, some urban exposure. Are you seeing anything from a regional difference or brand difference that can maybe point to some of the weakness, or is it pretty unanimous across the chain in terms of, like, the negative 7-7 comp we look at that's not a big delta across different areas of the country that you operate in?

I will let Rob answer that, but I just want to make sure that the brands have nothing to do. It's different regions, but it's not about the brand. But Rob, I'll let you take this.

Yeah, Bobby, nothing that we've seen specifically at the regional level. So, I mean, there are puts and takes, point here, point there, but it is pretty broad-based, and that's why we think it's more of a macro issue. We don't see any significant pockets by regions.

Okay, I'll jump back in the queue for now. I want to add one more thing, Bobby, just for your benefit. I just want to finish with something. So, you know, as I mentioned earlier, you know, the pressure that we see on the consumer, it's basically, you know, it's countrywide. It's not just a specific area. It's a countrywide pressure that, you know, we see on the consumer. We see, you know, this sentiment across, you know, many industries, including QSR. That's the reason we focused on sales excluding cigarettes. sales excluding cigarettes were down 5.7%. But at the end of the day, you know, our concentration in, you know, in this environment, our concentration is to add more and more food service offering, you know, the margin is higher. And, you know, even though our sales excluding cigarettes were 5.7% down, our margin was up 110 basis points. And this is really the concentration, you know, how to, you know, increase margin, increase profitability while the trend is we're basically down during Q3. I can tell you that the current trend, at least, you know, it's a little bit more favorable than what we saw during Q3. And, you know, I'm very, very bullish, you know, between Q4 all the way to 2025, I believe that. I'm very optimistic about, you know, the outcome and, you know, moving forward.

Okay. Thank you, Ari. Thank you, everyone. I'll jump back in the queue. Best of luck here in the fourth quarter. Thank you, Bobby. Thanks, Bobby.

Thank you. We'll take our next question from Kelly Bania with BMO Capital Markets. Your line is now open.

Good evening. Thanks for taking our questions. You kind of just touched on it a little bit, but I was curious about your outlook for seeing store sales into the fourth quarter, improving to that low to mid-single-digit area. Is that just due to comparisons? It sounds like October maybe was a little bit better. And then maybe you could just loop in how kind of the hurricane activity affected the business across the board in the quarter.

Yeah, Kelly, I'll take that. So you're spot on. October was markedly better than September. So, you know, still... You know, in the negative, you know, with this wire fourth quarter guide, isn't that down low to mid single? But it was markedly better than September, and we're cautiously optimistic that Q3 was a bottom. In terms of the hurricane, you know, it kind of hit us right at the end of the third quarter, so we only had about a couple days in the third quarter. No material impact on the third quarter. Obviously, tons of human impact, but from a financial standpoint, no material impact for Q3. And the bulk of the stores are back on, you know, within a week after that. So we don't see that being, you know, hugely material for Q4.

Oops, got it. And another question just on the promotional activity. How would you characterize promotional activity across the board in the third quarter and How do you feel about what you're getting from the vendors in terms of supporting that? And what are you doing on your own from an ARCO funding of promotions standpoint?

Sure. So, you know, as I mentioned at the beginning of the quarter, most of our promotional activities is being funded by the vendors, 100%. We had tons of promotional activities in the third quarter. I mentioned it, I believe, on our last call. We had tons of promotional activity. Everybody is suffering, including our vendors. Our vendors want to make sure that they're selling more. They had the same issues during Q3. They're all working with us towards Q4. As I mentioned earlier, the Fast Million. Fast Million was a very good success for us a few years ago. And given that, you know, we are at the fourth quarter, you know, just before the holidays, we felt that, you know, we need to push really, really hard, you know, with promotional activity to finish the year. That's why we launched yesterday the Fast Million. We have a chance to win a million dollars. And, you know, as I said, we have 700 items and, you know, those 700 items are all being supported. All of those promotions are being supported by our vendors. and they're actually funding it 100%. I mean, there is a big launch just for your benefit, given I mentioned OTP, and given that at least one out of our two customers are either cigarette customers or OTP customers, we are launching a big OTP promotion in December to deliver a significant saving to our customers and, of course, to drive traffic. We are talking about a promotion that is entirely funded by the supplier. And, you know, we're talking about a $1.99 price tag, which basically adds saving of over $10 on this promotion. I mean, this is something very big. And again, we are doing it just before the end of the year because, you know, we believe that this is the opportunity to push sales as we conclude the fourth quarter.

Thank you. I wanted to just also... If I can say one more, I just wanted to ask about the store optimization. Is the message that we should take that it should be largely complete by the end of the fourth quarter, or is this something that will be kind of more of an ongoing initiative as we kind of move through the years? And can you help us understand just how you selected the stores and what made them the right candidates for this strategy?

Sure. So the answer is we're going to be completed with approximately 150 stores by the end of the fourth quarter. When we're going to actually be done with those 150 stores, we are talking about a benefit of approximately $8.5 million between the segments. That's the benefit. As I mentioned earlier, we're talking about total benefit of anywhere between $15 to $20 million prior to, you know, GNA savings. We're going to continue with that during basically the first quarter all the way to the second quarter, I believe. You know, we're going to finish our, you know, the majority of them. But the big portion of them, the 150 stores, will be done by the end of – the fourth quarter. And just the way to think about that, we're basically taking retail stores that we don't believe there is much upside investing in those stores. We don't see the return on capital on those stores. And we are shifting them towards the wholesale segment, which means that we're going to have a supply agreement with those operators. We're going to collect rent from those operators. And at the end of the day, you're just going to increase profitability at the wholesale segment and make more money than what those stores were actually making when they were actually on during the retail segment. So that's the thought process behind that. It's all about return on investment at the end of the day and capital allocations.

Got it. And just one last one for me. I think you mentioned same store operating expenses down 1.4%. Can you just talk about how you achieve that? And if that's something that we can, where we can see some sustainable, you know, declines in terms of operating expenses, or was there any factors impacting that for this quarter?

Yeah, I think, Kelly, some of the same trends that are in place is we have softer sales. Certainly, we're right-sizing the labor in the stores so that we're not over-investing there. So, again, that's a, you know, it's a savings, but it's, you know, we'd rather have the sales to go with that. But that's, you know, just conscious management of, you know, labor hours in the stores to flex down. You'd also have some benefits from the credit card fees on the lower sales and, you know, the lower gallons that's also helping that. So, Again, it's diligent labor management in the stores and the combination of the credit card that's primarily driving that down. And for the fourth quarter guide, you should kind of expect that type of a trend to continue.

Thank you. You're welcome.

Thank you. And we'll take our next question from Anthony Bonadario with Wells Fargo. Your line is open.

Yeah. Hey, guys. Thanks for taking our questions. So I wanted to ask about the NTIs. I know you guys are sort of expanding that pipeline a bit with the eight new boxes. It seems like you're hitting the gas a bit on growth, but I would think it takes some time to sort of build that muscle internally. I guess, how quickly do you think that sort of organic unit growth could ramp? How high could that growth go over time?

Yes, Anthony, you're right. you know, we're actually starting with no NTI or very little NTI in the past. We're going all the way to eight NTI in a very short order. Those eight NTI, you know, we have one that just opened. We have another three that will open between now and the end of the year. And we have another four that we're going to complete during 2025. While we are working on those eight NTI, as you can imagine, we have already started working on the pipeline. So, you know, if we went from zero to 100, you know, from zero to almost eight in a very short order, you know, the idea will be that in the future, we're going to start to ramp this up. I don't know the quantity at the moment. I can't provide you quantity at the moment, but I can tell you that this is an area that we feel it's an opportunity for us, given our liquidity, given our footprint in the marketplace, an economy of scale, of course, we believe we're going to be able to ramp it up, you know, at least, you know, finishing what we have on the pipeline right now between, you know, now and the end of 2025 and then ramp up during 2026. Got it.

That's helpful. And then I guess just thinking back historically, you guys have been pretty acquisitive. How do you think about the return on capital doing it that way and opening organic boxes versus sort of going out and acquiring more like you used to?

I think it's just another opportunity, just another way to allocate capital. I mean, you know, given our ability, given what we have, you know, cash on hand and given our balance sheet right now, we will actually continue both. I mean, we are not stopping with acquisition at the moment. You know, we're just, you know, looking on what's the best way to, you know, to basically to allocate our capital and what's the best return on investment for us, you know, in the short term and in the long term. You know, NCIs, of course, require a lot of capital, more than probably what we actually spend in acquisition. But at the end of the day, you know, we are investing in areas that we see the opportunity for additional growth, you know, from a population standpoint and, you know, from the economy.

Got it. And just to squeeze one more in, I know you guys aren't giving guidance yet on 2025, but just any early thoughts there, high-level insights? puts and takes, how you're thinking about the backdrop and sort of idiosyncratic drivers in the businesses we're starting to model that.

Look, I think, yeah, look, Anthony, we're not going to share anything explicitly here today. But, you know, as you think about when we talk to an investor, they will have more context over a multi-year period. But You know, some of the larger themes that are in place, I mean, we've talked to you about the food penetration, the initiative on that front. That's an accretive area. We've had a track record of multiple years of margin rate accretion on the merchandising side. I think that's likely, you know, a trend that would continue over time. You know, fuel gallons, you know, is probably a bit more of a macro that, you know, again, we're hopeful. As we mentioned, the Q3 was a bottom. And, you know, hopefully next year this industry starts to pick up and, you know, we get into that secular growth pattern again. But You know, we've had a pattern there. And, again, some of the macro factors, I think, would be a driver in that front. And, you know, we'll continue to price on the fuel side to optimize for fuel contribution. I mean, that's important to us. It's a trend. And, again, you should probably expect to see that sort of thing continue. So hopefully a little color there. And, again, we'll share more of the multi-year view when we're together at Investor Day.

And just to finish, Anthony, you can take into account, as I mentioned, around $8.5 million just from the project, the 150 stores that we're talking over here. This is something that we feel very, very comfortable with that. And as I mentioned earlier, moving into 2025, we see this whole transformation, moving stores from retail to wholesale. As I said, you can see over there between $15 to $20 million there. going into 2025. I think those are really the two things that we feel very, very comfortable because it's really shifting between one segment to another segment. And as I said, the volatility over there is much, much lower than, you know, concentrating on same store sales. Thank you.

Thank you. We'll take our next question from Connor. Internina with Stifel, your line is open.

Hi, guys. Good afternoon. Thank you for taking my question. First, I want to better understand trends in current customer traffic with the declining gas prices. Are you seeing any more noticeable pickup in foot traffic into stores? Just trying to get a better understanding of the current conversion rate and if there's any particular category like energy drinks. I know you mentioned tobacco, pizza, hot dogs that are driving out performance.

Well, I'll start with it from a transaction standpoint. So, as we mentioned in the prepared remarks, you know, transactions were down high single digit for the third quarter. October was a couple points better than that. And, again, I think, you know, again, that's why we talked about earlier our same store sales are positioned where they were versus how we came out of the third quarter. So, seeing some improvement. Again, it's just one month in. We've got two months to go. But we have seen a little bit of a pickup on that front. From an assortment standpoint, I don't think there's any specific call-out other than we have had OTP was a very strong performer for the quarter. I mean, on a high single-digit decline in transactions, OTP was almost flat. And on the other side, cigarettes was a bit more challenging, down double digits. But the rest of the assortment was sort of in a relative range of itself in that mid-single-digit decline.

Gotcha. Okay. That's helpful. Just a quick follow-up to that. So I noticed that sort of dealerization, the expectations, I guess the total amount of stores expected was a higher amount. Can you kind of outline the longer-term strategic rationale and highlight how this figures into the vision for the business? I mean, you know, you're targeting 150 dealerized locations by the end of the year, you know, turning out all these figures in terms of benefits to the business. But can you just kind of highlight a little bit more of the motivation and how this figures into the sort of long-term vision for Orca?

Sure. So, you know, number one motivation, of course, is to concentrate, as I mentioned, on the dual assets, to make sure that we are concentrating on areas that we see growth opportunities You know, we are today in, you know, approximately, you know, 30 different states, you know, between the wholesale and the retail segment. There is some area that we feel that there is not a lot of opportunities for us to grow. There is not a lot of opportunities for us from a, you know, from a capital standpoint, you know, to invest money in some of those stores. We just don't see the return on investment. And because of that, we feel that some of those locations will be converted to an wholesale location. Remember, at the end of the day, we're not selling the location. We're just leasing the location to a third party, to an operator that is much smaller than us, that may have some stores in the areas that we do business or in the areas that those stores are located, and he's going to pick up those stores. He's going to pay us rent, and they're going to purchase fuel from us moving forward. And with that being said, you know, the transition between retail to wholesale, you know, is going to benefit us making more money moving those stores to just a different segment. So I think that's purely from a profit standpoint. You know, we just modeled that and we just built that area that we just don't see the return on investment in the future. So there's no need for us to invest in those stores. Let's just translate them to wholesale segment and make more money on those stores. That's number one. Related to the rest of the business, which is over 1,000 plus stores, you know, we just feel that those are the best stores in the best market with the best population. You know, we see a lot of futures in those stores at the end of the day. Investing in food service, you know, as I said, food service is a huge opportunity for us in the future. And we just figure out we better off concentrate and spend money and invest money in the best stores of the portfolios. And that's what you're doing. As simple as that. It's purely, you know, it's operation one-on-one, really operation one-on-one. You know, you just, you know, it's not about the quantity of the stores. It's really about the quality. We concentrate on the quality. We concentrate on stores that we believe got tremendous amount of upside and opportunity. And that's what we want to learn. As simple as that and make more money for our shareholders.

Actually, that's helpful. I mean, just as one final question, it sounds like that if you change your expectations for return on investment, you would be leaning further into dealerization. You know, is there really, I mean, if you consider the performance of some of these better performing stores, if they're going to be underperforming in the future, you know, would you anticipate that the dealerization could be ramped up in future periods?

I think we, you know, this process, it's not something that came up yesterday. I mean, this process, it was a long-term process. You know, we started this process at the beginning of the year. Since January, we brought an outside consulting firm to help us to evaluate those three segments that we have out there. And we landed at the end of the day on what are the criteria that, you know, should work for us for the future. Obviously, you know, the benefit of having an all-sale, you know, we call it all-sale, but it's really, you know, we are just supplying fuel and making margin in between. But, you know, the good thing about having, you know, those different segments is that at the end of the day, that stores that we just don't see the upside of investing in those stores, we can just convert them to the all-sale segment and just make more money. That's basically the way to look at that. I don't anticipate converting. As soon as we finish with this transformation plan over here, moving the stores that we already allocated to basically to dealer stores and move them to the wholesale segment, I don't anticipate much more to come. It's always an opportunity if something changes, but I think the concentration will be basically how do we generate more dollars from the retail stores that we have decided to keep. But as I said, that is, you know, those decisions were made after months and months and months of, basically, of evaluation, to be clear.

Got it. Thank you so much. That's a very helpful caller. Thank you.

Thank you. We'll take our next question from Hal Holden with Barclays. Your line is now open.

Okay, good afternoon. I just had two clarifications, I guess. Ari, the $8.5 million is the 4Q run rate benefit by the end of the quarter from the dealerizations, but there probably isn't a lot of that baked into the 4Q EBITDA number, or am I not thinking about this correctly?

You are correct. I mean, the 8.5, it's basically on a run rate. It's on a full-year run rate. Given that, you know, we're talking about, you know, we just converted 51 locations, you know, between, you know, Q3 all the way up to the beginning of October. You know, we just completed out of the additional 100 that I mentioned. As of today, we just completed additional 48 stores. So, you know, we have another couple months to go with another 50 stores. I don't think it's going to be meaningful for Q4. But the way to think about it, on a full year runway, you're talking about an $8.5 million. That's the way to think about that.

Right. And so then I got lost in one of the ways you answered an earlier question. So that's eight and a half as a full year run rate, or was it annualized at 15 to 20 for 2025? Eight and a half, it's only on the 150 basically conversions.

We're talking about 150 conversions that will be done by the end of the year. So you need to take into account that starting January 1st, 2025, on a full year, just from those 150 stores, you have $8.5 million benefit just from them. In addition to basically to that, we have additional stores that actually will come, will have additional conversions. you know, going into Q1 and Q2 2025. And, you know, when we're going to finish those conversions on a full-year run rate, it's going to be between $15 million to $20 million.

Great. Thank you. That was very clear. And the second question I had was you guys kind of implied that we were out or very close to the trough in fuel volume declines, and I was wondering what was giving you confidence in that.

I don't think we were suggesting that we were pleased with what we saw in October and we were hoping that the Q3 was a trough. I don't think there was a strong statement about the fuel gallon demand. We're guiding down mid-single for the fourth quarter, which is in line with trends. I'll throw that to Ari for larger thinking on that longer term.

I just think, listen, we all know at the moment that the economy was suffering in Q3, suffering more than you know, basically Q3 2023. As I said, we see some relief in Q4. We see some relief in Q4. And like I said, I think the whole country is bullish on 2025. And, you know, we're just, you know, working towards, you know, what everybody expects to happen in 2025. As I said, I mean, Q3 was a rough quarter across every industry. And given that we see some relief, you know, this industry is a very resilient industry. You know, you are familiar with that. And I really, really think that we are getting to the bottom of it. I think we are at the bottom. Maybe there is a little bit to go, but I really think that we're touching the bottom right now. And from here, with expectation, you know, towards a better economy and things will change over here, you know, hopefully price of fuel, you know, will basically stay at, I'll call it with the $2 range. range versus the $3. You know, we believe that, you know, the minute the price of fuel will stick to the $2, you know, price, you know, headline price, I believe that people are going to start to drive more. That's always something that happens. Again, this is, of course, subject to, you know, nothing bad happen over here, that all of a sudden price of oil goes to $100. You know, that's, of course, going to change my, you know, my expectation over here. But, you know, assuming that You know, the economy, you know, will basically get a little bit better. Interest rate already down, you know, 50 basis points last month. And, I mean, today another 25 basis points. I mean, I'm very, very bullish towards 2025 because of that.

Great. Thank you so much. I appreciate it, fellas.

Thank you so much.

Thank you. We have no further questions in the queue. I'll turn the program back over to Ari Kotler for any additional or closing remarks.

Thank you very much, Brittany. And thank you, everybody, for joining us this afternoon, almost evening. Have a great evening and have a great holiday season coming.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.