Hale Holden

Hale Holden inquired about the M&A opportunities for ARKO Petroleum Corp. (APC) now that it operates as a separate entity with its own currency and balance sheet, specifically concerning expansion in fuel distribution, and sought clarification on the implied retail business EBITDA for 2026.

Answer

Arie Kotler, Chairman, President, and Chief Executive Officer, Arko, highlighted the substantial M&A potential in the highly fragmented fuel distribution industry, where ARKO currently holds only 1% market share of over 195 billion gallons. He emphasized APC's strong capital position ($635 million available for acquisition) and low leverage, coupled with ARKO's proven track record of 26 acquisitions. Mr. Kotler also noted the growth opportunities in the fleet fueling business, with plans for 20 new cardlock locations in 2026, each costing $1 million-$2 million and targeting mid-to-high teens returns. Galagher Jeff, Chief Financial Officer, Arko, clarified that the retail business EBITDA cannot be simply derived by subtracting APC's guidance from the total company guidance due to intercompany eliminations, such as wholesale fuel sales to retail stores. He directed to the segment breakdowns in the earnings release for more detailed financial information.

Hale Holden from Barclays inquired about the M&A opportunities for ARKO Petroleum Corp. (APC) now that it has a separate currency and balance sheet, focusing on its potential to expand in fuel distribution. He also asked for clarification on how to calculate the retail business's implied EBITDA for 2026, given the total company and APC guidance.

Answer

Arie Kotler, Chairman, President, and CEO of ARKO, highlighted the substantial growth runway for APC in the highly fragmented fuel distribution industry, where ARKO currently holds only 1% market share. He noted APC's strong capital position with over $635 million available for acquisitions and a low leverage ratio, emphasizing ARKO's track record of 26 acquisitions. Kotler also pointed to the fleet business's potential, targeting 20 new cardlock locations in 2026 with mid to high teens returns on $1-2 million investments. Galagher Jeff, CFO, clarified that the retail business EBITDA cannot be simply derived by subtracting APC's EBITDA from the total company guidance due to intercompany eliminations for fuel sales from wholesale to retail stores. He advised referring to segment breakdowns in the release and promised more transparency for APC going forward.

Hale Holden from Barclays inquired about the status of the Other Tobacco Products (OTP) back-bar refresh, asking if the project was complete. He also asked what key performance indicators, such as merchandise sales lift, would define a successful new store format conversion.

Answer

CEO Arie Kotler confirmed that the back-bar refresh project, covering around 1,000 stores, was completed by the end of Q1/beginning of Q2. For the new store format, Kotler defined success as increased store traffic, a larger basket size, and expanded inside margin from higher-margin foodservice sales. He cited the first remodeled store as seeing a 6% lift in ex-cigarette sales in July year-over-year.

Hale Holden inquired about the puts and takes within the reaffirmed full-year guidance, specifically how the recent decline in crude and retail fuel prices has been factored in.

Answer

Rob Giammatteo, EVP and CFO, explained that the reaffirmed guidance incorporates a more constructive view on fuel margins, offset by lowered expectations for in-store sales and fuel gallons. He also highlighted a more aggressive stance on managing operating expenses and G&A, noting that G&A will be leaned out as the dealerization program progresses and was already down year-over-year, excluding a legal accrual.

Hale Holden from Barclays asked for help bridging the 2025 EBITDA guidance, which is down year-over-year, with the expected $20 million in annualized dealerization savings. He also sought confirmation that the company expects to be free cash flow positive in 2025.

Answer

EVP and CFO Rob Giammatteo clarified that the $20 million in savings is a run-rate figure that will not be fully achieved in 2025, as conversions are ongoing. He explained the accretive program is offsetting underlying negative same-store trends. Regarding cash flow, he suggested it was 'reasonable' to model positive cash build based on historical CapEx levels, without giving explicit guidance.

Hale Holden from Barclays sought clarification on the run-rate benefit of the dealerization program, specifically the difference between the $8.5 million and the $15-$20 million figures, and also asked what gave management confidence that fuel volume declines were at or near a trough.

Answer

CEO Arie Kotler clarified that the $8.5 million is the annualized run-rate benefit from the ~150 stores being converted by the end of 2024. The total annualized benefit will reach $15-$20 million once additional conversions are completed in H1 2025. CFO Robert Giammatteo corrected that they are only 'hoping' Q3 was a trough for fuel volumes and are still guiding for a mid-single-digit decline in Q4. Kotler added his optimism for 2025 is based on broader economic expectations.

Hale Holden asked about the merger and acquisition (M&A) opportunities for ARKO Petroleum Corp. (APC) now that it operates with its own separate currency and balance sheet, specifically in the fuel distribution sector. Hale Holden also sought clarification on how to calculate the implied Adjusted EBITDA for ARKO's retail business for 2026, given the separate Adjusted EBITDA guidance for the overall company and for APC.

Answer

Arie Kotler, Chairman, President, and CEO, highlighted the highly fragmented fuel distribution industry, where APC holds only 1% market share despite distributing over 2 billion gallons. He emphasized APC's strong capital position ($635 million available for acquisition) and low leverage, along with ARKO's track record of 26 acquisitions in 11 years. He also pointed to the fragmented cardlock operator market within the fleet business, where APC plans 20 new cardlocks in 2026 (10 already identified), targeting mid to high teens returns on $1 million-$2 million investments. Galagher Jeff, CFO, explained that a simple subtraction of APC's Adjusted EBITDA from ARKO's total Adjusted EBITDA is not accurate due to intercompany eliminations, as part of the wholesale business (APC) sells fuel to ARKO's retail stores. He advised referring to the segment breakdowns in the release and noted that APC would soon provide separate, more transparent financial information.

Hale Holden from Barclays inquired about the M&A opportunities for ARKO Petroleum Corp. (APC) now that it operates with a separate currency and balance sheet, specifically regarding expansion in fuel distribution. He also asked for clarification on calculating the retail business's EBITDA for 2026 by subtracting APC's guidance from ARKO's total guidance.

Answer

Arie Kotler, Chairman, President, and CEO of ARKO Petroleum, outlined significant M&A potential for APC in the highly fragmented fuel distribution and cardlock industries, citing ARKO's track record, substantial available capital, and plans for 20 new NTI cardlock locations targeting mid-to-high teens returns. Galagher Jeff, CFO, clarified that a direct subtraction of APC's EBITDA from ARKO's total EBITDA would be inaccurate for determining retail EBITDA due to intercompany eliminations.

Hale Holden asked about Central Garden & Pet's inventory levels and capacity to fulfill chase orders for a potentially strong spring season. He also sought clarification on the company's consumer commentary for both pet and garden segments, specifically if the read on consumer behavior remained tepid or unchanged.

Answer

J.D. Walker, President of Garden Consumer Products, confirmed reasonable in-store inventories and strong pre-builds, ready for demand surges, with Brad Smith, CFO, adding that network design enhances agility. John Hanson, President of Pet Consumer Products, expressed a more bullish outlook for pet, citing stabilization. J.D. Walker, President of Garden Consumer Products, was optimistic for garden, noting a shift to 'do-it-yourself' projects, while Brad Smith, CFO, emphasized the consumer's continued focus on value.

Hale Holden asked about Central Garden & Pet's inventory levels and fulfillment capabilities to handle potential surge in demand for garden products if favorable spring weather occurs. He also sought clarification on the company's consumer commentary for both the pet and garden segments, asking if the outlook remained tepid or unchanged from the past six months.

Answer

J.D. Walker, President of Garden Consumer Products, confirmed reasonable in-store inventories and strong pre-builds, indicating readiness for increased demand, also noting the wild bird business performs well in cold weather. Brad Smith, CFO, added that network design improvements enhance agility for surge orders. John Hanson, President of Pet Consumer Products, expressed a more bullish outlook for pet, confirming the category has seen the bottom. J.D. Walker, President of Garden Consumer Products, was optimistic for garden, noting a shift to 'do-it-yourself' and historical resilience. Brad Smith, CFO, emphasized that consumers remain value-focused, addressed through private label and cost-friendly product innovations.

Hale Holden from Barclays asked for clarification on the sequential improvement in pet durables on a two-year basis to gauge stabilization, and requested a simple explanation for the timing of the Q1 Garden shipment pull-forward.

Answer

John Hanson, President of Pet Consumer Products, reiterated that while declines are lessening sequentially, it's still a year-over-year decline. J.D. Walker, President of Garden Consumer Products, explained the Q1 timing was due to large retail customers picking up their initial store-set inventory in the last week of December rather than the first week of January, which is a normal but unpredictable timing variable.

Hale Holden from Barclays asked about the size of the LeSueur Canada brand, the timeline for recovering tariff costs through pricing, and if recent disclosures imply more imminent asset sales.

Answer

CFO Bruce Wacha confirmed the Canadian brand is smaller and that more asset sales are expected as part of the ongoing strategic review. CEO Casey Keller stated that fully recovering tariff impacts through pricing will likely take into fiscal 2026 due to retailer lead times and contract structures.

Hale Holden from Barclays asked for clarification on the materiality of potential tariffs on Canadian maple syrup and inquired about the portfolio's potential risk from any material reductions to SNAP benefits.

Answer

CFO Bruce Wacha provided context on the maple syrup business, noting its sales are around $70 million, and clarified that the Green Giant Canadian business is largely self-contained and not at risk. Regarding SNAP, Wacha stated they believe B&G has less exposure than some peers. CEO Casey Keller added that their portfolio of meal-preparation products is unlikely to be targeted for exclusion if SNAP benefits become more directed, though a general reduction in benefits could have some impact.

Hale Holden of Barclays inquired if the Specialty segment's margin decline was solely due to Crisco and asked if the 2025 volume normalization outlook included the foodservice channel.

Answer

CFO Bruce Wacha explained the Specialty segment's sales were down more than profit, as lower soybean oil costs were passed through via lower pricing for Crisco. CEO Casey Keller clarified that he expects gradual improvement throughout 2025, with normalization more likely in the second half, and noted that third-party data suggests foodservice traffic may remain negative in early 2025.

Hale Holden of Barclays asked for clarification on the Brazilian tax settlement, questioning if it resulted in a cash return or was an accounting credit. He also inquired about the expected price increase percentage consumers might see on shelves due to tariffs and the potential for an elasticity hit.

Answer

EVP & CFO Deborah A. O'Connor clarified that the Brazil tax issue involved resolving a $20 million liability for a $7 million cash payment, with the remaining $13 million being a non-cash accounting adjustment to the income statement. Regarding pricing, she noted it's complex due to the mix of products and inventory, but the goal is to cover costs and maintain margin. President & CEO Thomas Tedford added that while difficult to quantify, the company's forecast appropriately models a modest volume decline due to price elasticity.

Hale Holden of Barclays asked about the magnitude of the back-to-school sales pull-forward into Q1, the potential for channel inventory shortages, and the quantum of recent and planned U.S. price increases related to tariffs.

Answer

President and CEO Tom Tedford characterized the back-to-school pull-forward as relatively insignificant for the full season and assured there is no risk of inventory shortages, as the company is well-positioned to handle replenishment. Regarding price increases, he stated the company will protect its gross margins but was cautious on specifics pending the final outcome of reciprocal tariffs, confirming the next pricing action depends on the 90-day tariff expiration.

Hale Holden asked if potential additional cost savings in 2025 would be part of a normal program or something larger. He also sought clarification on whether the third-party consultant's work was focused on streamlining new products or evaluating potential divestitures.

Answer

President and CEO Tom Tedford stated that while ongoing productivity programs will continue, the company is also evaluating opportunities for cost optimization beyond the normalized program for 2025, though no decisions have been made. He clarified that the third-party consultant is reviewing the entire product portfolio to improve revenue outcomes from new product development, not to evaluate divestitures.

Hale Holden from Barclays sought to confirm if the raised EBITDA guidance for the year includes new SG&A costs for the Pro2col launch and asked about the drivers of strong Q1 cash conversion despite high bonus payouts.

Answer

CFO John DeSimone confirmed that the updated guidance includes the operating costs for Pro2col, which are meaningful but not material for a company of Herbalife's size. Regarding cash flow, DeSimone explained that the strong conversion was driven by successfully executing initiatives to lower the company's minimum required cash balance, allowing them to draw down cash to pay debt and cover operating needs.

Hale Holden asked if the company could potentially achieve a better leverage ratio than the stated 3.0x target for 2025 and requested a simplified explanation of the recent intellectual property transfer to Europe and its impact on the tax rate.

Answer

CFO John DeSimone responded that the official leverage target remains 'at or below 3.0x,' which allows for the possibility of outperformance. Regarding the IP transfer, he explained its primary purpose is to facilitate more efficient cash movement for debt paydown and provide future operational flexibility. He clarified that the one-time non-cash tax benefit will be offset by non-cash detriments in future periods, and both will be excluded from adjusted results, resulting in no change to the company's cash tax rate.

Hale Holden inquired if the new internal banking structure would reduce the amount of cash held on the balance sheet and asked for the rationale behind no longer reporting India as a stand-alone geography, requesting color on its performance.

Answer

CFO John DeSimone confirmed the internal bank is designed to reduce required cash holdings and clarified that India has always been reported within the APAC region, not as a stand-alone segment. President Stephan Gratziani added that while India's high-growth phase is moderating due to its larger scale, the market saw a 30% increase in new distributors in Q3.

Hale Holden from Barclays inquired about the outlook for inflation and deflation, the health of the consumer in Ingles' markets, and whether the noted labor tightness was a widespread issue.

Answer

CFO Ronald Freeman identified rising egg prices as the most significant inflationary pressure, impacting various product categories. He conveyed that consumer sentiment in their operating areas is positive, with people feeling better due to recent wage increases. Freeman confirmed that the difficulty in hiring associates is a widespread issue across their markets, reflecting a tighter national labor market and general wage growth.