ARKO Corp.

Greetings and welcome to ARCO Corp First Quarter 2023 Financial Results Conference Call. At this time, all participants are on 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. Thank you. You may begin.

Thank you. Good morning, and welcome to ARCO's first quarter 2023 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Don Vassell, Chief Financial Officer. Our earnings press release quarterly report on Form 10-Q for the first quarter of 2023, as filed with the SEC, and our earnings presentation are available on ARCO's website at arcocor.com. Before we begin today, please note that all first quarter 2023 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 March 31, 2023, 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'd also like to note that we're conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalks, 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 Ari.

Thank you, Ross. Good morning, everyone. We appreciate you joining the call. Yesterday, you may have seen two major announcements the company made that we believe show how well we are positioned to continue executing our growth strategy well into the future. Our subsidiary, GPM Petroleum, has upsided its credit line by $300 million to $800 million from syndicated banks and we also extended the maturity until May of 2028. We also increased and extended the company's program agreement with Oak Street, which can provide up to $1.5 billion to purchase and lease real estate to GPM or its affiliates through September 30, 2024. In aggregate, ARCA currently has more than $2 billion in available capital for continued M&A activity, including cash, lines of credit, and the extended Oak Street program agreement. We are focused on continuing our acquisition strategy to enhance value for our stockholders. Turning to our results, this was another strong quarter for higher merchandise contribution and acquisitions. First quarter, same-store merchandise sales, excluding cigarettes, grew 7.6%. Same-store sales increased by 3.8%. The increase in same-store sales was driven by continued strong performance in high-margin destination categories. We include in-depth details on these categories in our first quarter presentation on arcocorp.com. Some highlights of these destination categories included packaged beverages sales, which increased 9.6%. Candy was up 18.3%, and beer increased 6.2%. Another key headline is the growth in merchandising contribution dollars of $8.1 million, or 7.7% on a same-store basis. Total merchandise margin grew 120 basis points to 30.7% this quarter, compared to 29.5% in Q1 2022. We believe that these results show that our numerous marketing and merchandising initiatives are working, resonating with customers and driving sales growth. Higher merchandise contribution margin and a recent acquisition helped to offset lower fuel contribution and increase in-store operating expenses, resulting in adjusted EBITDA of $47.5 million for the quarter, compared to $50.1 million in the prior year quarter, a decline of 5.2%. Total fuel contribution increased to $123.8 million, compared to $112.9 million in the prior year quarter, an increase of $10.9 million. On a same-store basis, including legacy oil sales sites, Total fuel contribution dollars were $95.2 million, which declined $15.4 million compared to $110.6 million in Q1 2022. The fuel contribution was lower with the majority of this decline related to elevated fuel margin in March 2022 at same-store retail sites compared to March 2023. TPG was 47.7 cents per gallon versus 37.3 cents per gallon in March 2023. It was driven by increase in fuel prices, due in part to the invasion of Ukraine. We still believe that structurally, higher margin will remain given increased operating pressures. Going back to our strong in-store performance, I will now update you on our three key merchandising and marketing pillars. Our first pillar is to grow sell in core destination categories through data-driven decision and strong supplier partnerships. Cigarettes are certainly a destination category. However, core destination categories are where we focus investment or resources such as people, space, and capital. These are packaged beverages, beer, candy, salty snacks, sweet snacks, and alternative snacks. These categories draw 63% of our Q1 same-store sales excluding cigarettes and 43% of our total same-store sales. Our customers expect and deserve for us to have the right assortment, space, and value in these categories. Same-store sales in these six core categories grew by approximately 10% in Q1 2023 over Q1 2022. The margin rates in these categories grew 110 basis points in Q1 2023 over Q1 2022. We continue to refine and drive the expansion of these categories across our company-operated stores to ensure that we are offering our customers the right assortment and value proposition. The core criteria of our M&A strategy is to acquire a chain where we can add value. ARCO's scale, purchasing power, and merchandising and marketing expertise has enabled the company to improve the performance of stores that we purchase by improving the product assortment product placement, promotional events, and loyalty. One example of our ability to add value is at our 36 Andymart stores in North Carolina, which we acquired in November 2021. As follow-up to detail we shared on our last call, we continue to make progress in these stores. First quarter results at Andymart stores were as follows, and are all Q1 2023 compared to Q1 2022, our first full quarter of operations. Merchandise sales increased 6.7% and merchandise sales excluding cigarettes increased 12.2%. Merchandise margin increased 400 basis points to 33.2% compared to 29.2% in the prior year quarter. Sales of the six core destination categories I mentioned earlier grew by 14.9%. We are also encouraged by early results at the Pride stores that we recently acquired and reset. We believe we will have similar results at the TEG stores that we are currently in the process of resetting. Moving to the second pillar, our Fast Rewards loyalty program, we implemented a major new upgrade to our loyalty app that was launched March 29th to develop and strengthen relationships with our customers and drive more trips with our existing customers while attracting new loyal customers. We currently enjoy approximately 1.38 million enrolled members. Since the launch of the upgraded app, the number of member enrolling each week has increased an average of approximately 30% compared to pre-launch enrollment. We are also excited to announce our 100 days of summer loyalty enrollment offer that starts on May 17th. A new customer who is enrolled with a valid email address and phone number will be rewarded with $10 in Freshbox delivered through their new app wallet, which these customers may spend in our stores on participating categories. We are very excited about this promotional offer, as we know that enrolled marketable members make more trips and spend more in our stores than non-enrolled members. In fact, in Q1 2023, our enrolled members made an average of almost six more trips per month versus non-enrolled members. In Q1 2023, enrolled members spend on average approximately $68.50 more per month than non-enrolled members. Additionally, the Q1 2023 enrolled members increased their average monthly spend by 8.2% compared to Q1 2022. While early, we are encouraged by engagement in the new app, including the redemption of our in-app only hot deals, as well as use of our new in-app order and delivery functionality. The third pillar is expanding our packaged and fresh food offerings, including pizza, chicken, prepared foods, and other options. Same-store franchise sales across all brands increased 24.5% in the first quarter as compared to the prior year. While we have made great progress with our grab-and-go prepared foods, frozen foods, and franchise partnership with Sabara and Duncan, we are still in the early stage of defining this strategy along with assortment and price value proposition for the consumer and our go-to-market strategy. Our goal is to become destination for packaged, prepared, and fresh food, and we look forward to providing further updates. Our objective is to make continuous improvement in each pillar and position our core convenience store business to continue delivering great results and exceeding our customers' expectations. We're now in the midst of our store operation team annual pride ride. We think of this as going through our stores for spring cleaning. We do this every year, including visits and inspection at all of our stores. These events allow us to rally together and prepare for the 100 days of summer, our biggest selling season, and to ensure that we are customer ready for the big selling season. Switching gears to EV, we continue to make progress on electric vehicle charging. At the end of Q1, our network includes more than 50 charging ports. We plan to add more charging capacity across the country. Turning to M&A, following the closing of Qualls and Pride acquisition in 2022, we closed the TEG acquisition on March 1, 2023. TEG added 135 convenience stores and expanded our southern retail territory into Alabama and Mississippi, as well as 192 dealer locations. We are pleased with the results of this acquisition so far. The WTG acquisition is anticipated to close in the second quarter. This acquisition will significantly enhance the company's footprint in attractive Western Texas. Now let me briefly address our proposal to acquire Travel Center of America. Our intentions were consistent with our track record and strategy that has been very successful and has made ARCO an acquirer of choice, transparency, and open negotiation. We believe our proposal, as we've been given an opportunity to perform customary diligence, could have provided immediate cash value to TA stockholders, a significant premium to the next best offer with no financing contingencies. And for the record, Neither our proposal to TA nor any other previous acquisition have ever had financing contingencies. Our repeated attempts to engage with TA's management and board were met with firm resistance, resulting in a more public conversation through press releases and filings rather than productive discussions. We believe a wider group of investors now fully appreciate how rapidly ARCO can move to create the right condition for a deal, We appreciate Oak Street and others moving very rapidly along with us. We reserve cash and maintain flexible financing so we can take advantage when the right opportunity arrives. Given our liquidity, we will continue to evaluate deals concentrating on return on capital consistent with our traditional discipline approach. We are also investing in our business. We are more committed than ever to driving long-term, sustainable inside sales growth, expanding margin, and gross profit dollars. Before I hand the call over to Don, and given that we're not currently providing guidance, I want to detail seasonality and reiterate our historical seasonal performance. We believe that historical quarterly cadence is an important factor to consider when evaluating our performance. The first quarter historically is our least active sales period, while the third quarter is our strongest. Using an average of 2021 and 2022, the first quarter contributes about 17% of overall adjusted EBITDA, and the second quarter about 28%. The third quarter has historically contributed about 32%, and the fourth quarter about 23%. I will now turn the call over to Don.