ARKO Corp.

Greetings and welcome to ARCO Corporation's first 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 call is being recorded. I would now like to turn the call over to your host, Chris Mandeville, Managing Director of Investor Relations. Thank you. You may begin.

Thank you. Good morning and welcome to ARCO's first quarter fiscal year 2021 earnings conference call and webcast. On today's call are Arie Kotler, Chairman and Chief Executive Officer, and Don Bassell, Chief Financial Officer. By now, everyone should have access to the company's earnings press release that was filed at 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 first quarter 21 financial information reported in accordance with U.S. GAAP is unaudited, and during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as will, may, accept, plan, intend, could, estimate, and similar references to future periods. These statements 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. Please note that on today's call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA, and adjusted EBITDA. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliations to the most directly comparable gap measures. I'd 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'd like to turn the call over to Arie Kotler.

Thank you, Chris, and good morning, everyone. On today's call, I will briefly review our financial highlights for the quarter ended March 31st, 2021, and provide an update on our business. Don will then review our financial results in more detail before we take your questions. We are very pleased to report strong results for the first quarter of 2021. The headline is that our adjusted EBITDA was $42.3 million, up 150% versus the prior year period, while our profitability increased 17.5% in retail fuel and 16.5% in inside merchandise for the quarter, showcasing a great balance between what is going on in store and at the pump. As vaccination distribution continues to expand and consumers continue to show greater willingness to venture out and about, we view convenience and, more importantly, ARCO as squarely positioned to benefit from increased consumer mobility as we approach the summer holidays and driving seasons. We have seen and currently continue to see tremendous improvement in our merchandise same-store sales trends, while gallons have been steadily recovering. Specific to our in-store performance, merchandise same-store sales grew 6% for the quarter, nightly ahead of the 4%-plus quarter-to-date trends we spoke to on our Q4 call on March 25th. As trends showed steady acceleration, due in part, increased consumer mobility and greater transaction counts. Excluding cigarettes, our results are even more impressive, with same-store sales of 9.2%. Given that 2020 was a leap year, Q1 2020 had one additional day versus Q1 2021. Adjusting 2020 to eliminate that additional day, our same-store sales and same-store sales ex-cigarettes would have been 7.2% and 10.4%, respectively. Also trending positively is what we saw, trend in higher margin single serve versus multi-pack sales in the packaged beverage and beer categories during Q1 versus prior year. In addition, we have seen favorable sales shift from lower margin categories, specifically cigarettes and beer in Q1 2021 versus prior year. During the onset of the pandemic, consumer pantry loaded lower margin items like beer and cigarettes, soap, We are seeing margin improvement in addition to top line growth. While gallons sold were still down compared to a year ago due to the pandemic, fuel has been trending towards recovery as travel has picked up with same store gallons up a half of 1% in March. Fuel margin expansion continue as the retail fuel margin increased 22% to 32.1 cents per gallon. I will now take a moment to provide an update on our acquisition strategy. We are very proud of our dedicated M&A team with regards to its well-developed target diligence and transaction execution, while the entire organization's integration capabilities have also been impressive. Our industry is highly fragmented and ripe for consolidation as we believe that scale continues to become increasingly important and our priority continues to be deploying capital at very attractive returns. On May 4th, we announced that we received A $1 billion real property commitment from Chicago-based real estate investment firm Oak Street Real Estate Capital. Under and subject to the terms of the agreement, Oak Street has agreed to purchase and lease to us underlying real estate associated with acquisition of convenience store brands and fueling stations while we will own and operate the related acquired businesses. We expect this partnership to enhance our financial flexibility and purchasing power and as a result, should allow us to be more aggressive with our M&A strategy. In March, we announced our planned acquisition of approximately 60 Express Stop convenience stores in Michigan and Ohio, where Express Stop is a highly regarded brand. The acquisition is currently on track to close soon. The Empire acquisition we closed in October 2020 was a highly strategic combination that meaningfully increased our scale and included direct operation of 84 convenience stores and the supply of fuel to more than 1,400 independently operating fueling stations in 30 states and the District of Columbia. We have been very pleased with the acquisition and evidence by the 14 new dealer supply agreements that were signed in Q1 and we continue to realize anticipated synergies associated with this acquisition. Turning to our organic grow efforts and starting with our remodel program, As stated previously, we believe that we have significant embedded opportunity to optimize our store base and invest capital prudently for remodeling stores and we remain focused on executing against this initiative. We completed our first remodel in Collinsville, Virginia in late February. Two more remodel projects starting during the first quarter 2021. One site in Richmond, Virginia is expected to be completed in June. and the other site in Rock Hill, South Carolina is a raise and rebuild of a truck stop with an expected completion this September. The remaining seven of the 10 remodeling projects planned for 2021 are to take place in the Richmond and Fredericksburg, Virginia markets. We mentioned previously that in 2021, due to changing consumer preferences and desire to greatly expand our take-home food offerings, We intend to add approximately 525 new grab-and-go coolers, of which approximately 63% have either been installed or are in the process. Additionally, we intend to add approximately 650 new frozen food freezers, of which approximately 62% have either been installed or are in the process. While it is too early to give a full ROI on both projects, we are already seeing the results of the new equipment coupled with the planogramming effort. On the same store basis, the retail grab-and-go category sales increased 35.4% versus Q1 2020 and the margin percentage has increased from 21.3% in Q1 2020 to 34.9% for Q1 2021. Turning to the frozen food category, sales increased 55.1% versus Q1 2020 and the margin percentage for Q1 2021 is 44.2% versus 29.1% for Q1 2020. We discussed on our last call that we are announcing a loyalty program and focusing on customer engagement as we have added management steps to create a more customer engaging, consistent, and nurturing experience across our network. I'm proud to report that our loyalty enrollment has met our expectations. We remain laser focused on having the right assortment at the right value for our customers to our strategic supplier partnership and planning process. Our DODASH delivery partnership also continue to scale. As of today, we now operate in over 625 sites or nearly half of all of the company operated stores. In conclusion, our robust results continue to demonstrate our strength and capabilities and we believe we are extremely well positioned to move forward with our differentiated strategy. I would like to now turn the call over to Don who will walk you through our financial results.