ARKO Corp.

Greetings and welcome to the ARCO third quarter 2022 financial results 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. I would now like to turn the conference over to your host, Ross Parman, Vice President, Investor Relations and Government Affairs for ARCO. Thank you. You may begin.

Thank you. Good morning, and welcome to ARCO's third quarter 2022 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Don Basile, Chief Financial Officer. Our earnings press release quarterly report is filed with the SEC, and our earnings presentation are available on ARCO's website at arcocor.com. Before we begin, please note that all third quarter 2022 financial information is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as will, may, expect, plan, intend, could, estimate, project, and similar references to future periods. These statements speak only as of today and are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to our press release, our quarterly report on Form 10-Q for the quarter ended September 30, 2022, and our other filings with the SEC, including our annual report on Form 10-K, for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or 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 our financial information presented in accordance with GAAP. Please refer to our earnings press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we're 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, Ross, and good morning, everyone, and thank you for joining us. ARCO has strong results for third quarter, highlighting the strength of our business model. We have continued to build long-term value for our stockholders. The company has excellent performance and execution across the business. ARCO increased operating income by 20.1% to $65.7 million versus the prior year third quarter. Adjusted EBITDA was an all-time third quarter high for the company, increasing 24.1% compared to Q3 2021 to $99.5 million. We have had seven straight quarters of comparable quarter-adjusted EBITDA growth. We announced two very important strategic and accretive acquisitions since the end of the second quarter, including the Qualls acquisition, which closed in Q3, Our portion of the purchase price for acquisitions announced in 2022, including two that have not yet closed, was approximately $178 million. In return, we expect to generate, using estimated forward-looking non-GAAP measures, approximately $57 million of adjusted EBITDA on an annual run rate, including synergies. This amounts to approximately 25% of adjusted EBITDA for the nine months ending September 30th, 2022. We continue to add value to our business by pursuing very active growth strategy. Upon closing the Transit Energy Group acquisition, we'll add approximately 150 convenience stores and expand our start and retail territory into Alabama and Mississippi. Upon closing our acquisition of Price Convenience Holdings, we'll add 31 convenience stores plus a new two-industry store that broke ground in July. It expands our New England territory into Massachusetts. Both Transit Energy Group and Pride have a long-term presence in their communities. We believe that these businesses will benefit significantly from our core capabilities. We're very excited about introducing more consumers to our assortments, promotions, services, and of course, fast rewards. I'm very excited by the pace of our deal-making and with the performance of all areas of our business. In our stores, the company increased its market share, excluding cigarettes, underscoring our many initiatives, favorable assortments, loyalty, and marketing programs are resonating with customers. Merchandise margins increased 60 basis points to a company-high 31.2%. We have grown this important metric by 330 basis points since Q3 2020. Third quarter, same-store merchandise sales, excluding cigarettes, increased 4.3% compared to Q3 2021, and 6.1% on a two-year stock basis. We also had a very strong quarter in fuels. Our strategy has been consistent. Last quarter, I noted that we believe that our fuel strategy also enables strong results as prices decline. This quarter underscores that belief. Total fuel profitability grew to $155.1 million, a 28.5% increase compared to the third quarter of 2021. From July through September, As fuel prices declined approximately 80 cents per gallon, same-store sales, excluding cigarettes, accelerated. Notably, same-store sales, including cigarettes, also grew. We are very strategic with our cigarette pricing. We believe that we have shown how our strategy is capable of great results in a variety of price environments. Our balance sheet is very strong. we generated $67.6 million in net cash from operating activities this quarter. For the nine months ended September 30th, 2022, ARCA generated $139.8 million in net cash from operating activities. As a result of this and a record strong result, confidence in the business and desire to announce returns for stockholders Our board of directors increased our dividend by 50% this quarter to 3 cents per share. This is the company's four consecutive quarterly dividends. Our top priority is executing our strategy in stores, in fuel, and in M&A. Discipline, consistent growth is central to our strategy. Most of you know that we started with approximately 200 company-operated convenience stores in early 2013. Since then, we have acquired approximately 1,300 company-operated stores in total. The company's scale and resources allow us to pursue multiple opportunities at once. This is an advantage that we believe enables us to deliver great results for our stockholders. Investments in well-established chains with grand equity and long-standing ties to their communities are key to our models and performance. We use our financial strength and financing ability and agreement with Oak Street to our strategic advantage. Our industry continues to be highly fragmented. The overall deal pipeline today has many potential acquisitions. We expect to continue executing our acquisition strategy. When we pursue a deal, my team and I walk through the stores as part of due diligence. We look for opportunities to announce the value proposition of this local chain with our scale and expertise. For example, we have consistently gotten better merchandise and fuel costs than the chain we acquire. Our sophisticated assortments, promotion, and pricing strategies are well advanced compared to our regional acquisition. We usually retain the majority of employees in chain we acquire. And I'm proud that our company creates jobs as we continue to grow. And of course, we have highly seasoned management who excel in their roles. This allows us to successfully close and efficiently integrate the businesses we acquire, which we believe creates significant value for our cost stockholders. I'd like to walk through the three key pillars of our marketing and store initiative that has driven our strong in-store performance. The first key pillar is careful management of core destination categories, such as packaged beverages, candy, snacks, and nicotine products, just to name a few. We invest in the assortment, square footage allocated for merchandising, and loyalty promotions for these categories. The goal is to be the go-to convenience store in our geographic and increase our market share of these in-demand categories. Looking at performance in this pillar, this quarter we maintained total market share, including cigarettes, and grew market share by 10 basis points, excluding cigarettes. Coffee is an important initiative, and we have seen excellent results. The number of enrolled loyalty customers who made their first recorded coffee purchase in our stores increased 55.6% this quarter compared to Q3 2021. And this quarter, unique customer coffee purchases by enrolled loyalty customers increased 57.1%, while their net total coffee spend increased approximately 51%, both compared to Q3 2021. We also had a great performance in key center store categories like candy, packaged sweet snacks, salty snacks, beer, wine, and packaged beverages. Frozen foods same-store sales increased 60% versus Q3 2021. Our second key pillar is the fast rewards loyalty program, replaced by the continued growth and consumer response. A newly updated loyalty app is currently being tested prior to rolling it out chain-wide. The new app is designed to further enhance our personal relationship with our customers. Our goal is to drive increased frequency and total spend through order and delivery and relevant in-store and in-app personalized deals. One key point of differentiation is the ability for members to stock rewards and save even more. We believe that this is a great feature for the over 1.2 million members. The new app will launch with a strong enrollment offer to encourage new customers to sign up for these great savings. We know that when a customer enrolls, we have an opportunity to increase their trip frequency and total spend. Here is an example using data we have been tracking. When customers enroll in our loyalty program, we see incremental month-over-month growth in basket size. The third key pillar is food service. We are relatively new in this evolving higher-margin segment in the convenience channels. We have a long runway for developing high-margin food programs across our stores. We are continuing to work on expanding our pizza offerings. We are also exploring many opportunities that we hope to introduce soon. Year-to-date, we've opened 13 Sabaro pizza restaurants. We plan to open five more this quarter. We also have 377 stores with roller grills for hot dogs and tornadoes, 199 stores with pizza by the slice, and 146 stores with fried chicken and hot breakfast sandwiches. I believe that our store can become more of a food destination. We believe a strong food offering and value proposition can position us to compete even more in food service. Our investment in these three key pillars are leading to great in-store performance. We believe our core convenience store segment is well positioned to continue to deliver great results. We also believe that there is a unique opportunity to continue to scale and grow our footprint with accretive acquisition. This is our historic source of growth. We plan and act for the long term. And we believe our strategies will continue to create value for our long-term stockholders. With that, I will turn it over to Don.