ARKO Corp.

Greetings. Welcome to ARCO Corp third quarter 2023 results. 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. Please note this conference is being recorded. I will now turn the conference over to your host, Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets, and Investor Relations. Thank you. You may begin.

Thank you. Good morning and welcome to ARCO's third quarter 2023 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Don Bassell, Chief Financial Officer. Our earnings press release quarterly report on Form 10-Q for the third quarter of 2023, as filed with the SEC, and our earnings presentation 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 2022. 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 statements section at the end of our third quarter 2023 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 as of today with respect to future events, and ARCO will not update or revise forward-looking statements made on this call, whether as a result of management of new information, future events, or otherwise. On this call, management will share operating results on both a GAAP basis and a non-GAAP basis. Description of those non-GAAP financial measures that we use, such as adjusted EBITDA and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings release and in our quarterly report on Form 10-Q for the third quarter, 2023, or in our 2023 third quarter earnings presentation posted on our website. And now I would like to turn the call over to Ari.

Thank you, Jordan. Good morning, everyone. We appreciate you joining the call. As always, I would like to start off by thanking our dedicated team members for their continuous focus on improving the experience for our customers, their dedication to driving long-term value to our stockholders through execution of our marketing and merchandising strategies and continued integration of our newly acquired businesses. I'm very pleased with our third quarter performance. This quarter, we navigated varying macro and economic environments, and we believe that our results compare favorably to what was a strong prior year quarter. You'll remember Q3 and Q4 of last year for a strong quarter for us and the industry. I remain confident in our strategy and our team and believe we are well positioned to improve and unlock ever more value from our platform for our stockholders. Key points this quarter include our execution and integration of our acquired businesses, the significant growth in our loyalty program, and our continually expanding merchandise contribution margin. Our efforts in these three areas help to offset lower organic fuel contribution driven by the prior year quarters elevated cents per gallon and this quarter's industry-wide lower fuel demand. We have had a busy last 12 months closing on five acquisitions since the beginning of Q3 last year, and adding approximately 720 locations across our retail, wholesale, and fleet segments. As was the case last quarter, our press release and public filing provides financial information and key metrics of our recently acquired businesses. We have delivered consistent and impressive growth in adjusted EBITDA, which I'm very proud of. As I said, we are very pleased with our performance this quarter with the adjusted EBITDA of $91.2 million compared to a record adjusted EBITDA of $99.5 million in the prior year quarter. The year-over-year decline was primarily due to lower fuel contribution at same stores, which I will explain shortly. As you know, although we have multiple segments, our primary business is the operation of convenience stores. We derive a significant portion of our revenues from the retail sales of fuel, with the products offered in our stores generating a large proportion of our profitability. I noted last quarter that we believe same-store merchandise sales excluding cigarettes best reflects the strength of our organic merchandise performance. This quarter, same-store merchandise sales excluding cigarettes grew approximately 1% compared to Q3 of 2022. That is 5.3% on a two-year stock. Total same-store merchandise sales increased 0.1% compared to Q3 2022, which were impacted by approximately $2 million in increased loyalty investments associated with customer acquisition related to expanding membership in the Fast Rewards loyalty program, other loyalty promotions, and growth in the total loyalty membership base. a long-term goal of the company. This caused a reduction in the same store merchandise sales of approximately 0.4%. With that backdrop, we were still able to grow merchandise margin again this quarter, improving 50 basis points to 31.7%. This improvement is on the top of the 60 basis points expansion we experienced in Q3 2022 over Q3 2021. We work to have the right assortment of high margin core destination merchandise that our customers expect and want while providing them with excellent service. This quarter, our merchandise contribution increased $21.8 million or 15.7% over the prior year period, primarily as a result of the recent acquisition and stable organic performance in our same store. In our stores, we continue to focus on our three merchandising and marketing key strategic pillars. Our fast rewards loyalty program, growing sales in core destination categories, and expanding our food and beverage service. I would like to detail the results of our merchandise initiatives. As we have previously mentioned, we have been making significant investments in our Fast Rewards loyalty program, including the major upgrade to our loyalty app, which went live on March 28th of this year, and our special $10 enrollment promotion that commenced on May 17th and concluded on September 19th. We believe that our loyalty program develops and enhances our relationship with our customers, drives more trips and spend with our existing customers, and attracts new loyal customers. This was a very active quarter for loyalty enrollment. We added more than 365,000 enrolled members during the quarter, ending Q3 with 1.85 million total enrolled past reward members. This is a 50% increase in enrolled members since the end of Q3 2022. We attribute the increase to our strong $10 loyalty enrollment promotion. In addition, I'm very pleased that our loyalty members are taking greater advantage of the value we offer and participated in more of our member-only promotional activity this quarter. I said before that we invested in loyalty, which impacted our same-store merchandise sales metrics, and we plan to continue our efforts to expand our loyalty membership base targeting 3 million enrolled members by the end of 2024. We have strong conviction behind this investment as active enrolled members make more trips and spend more than non-enrolled members. This quarter, active enrolled members made an average of more than four more trips per month compared to non-enrolled members. For the same period, they also spend on average $41 per month more than non-involved members. You'll note that the frequency and average spend are lower than the numbers we referenced last quarter. However, given the large addition of new members, and particularly later in the quarter, However, we're negatively impacted by new members who have not yet had the opportunity to mature to normalize spending habits. We believe we will see upside from these new members, and we welcome them to the family. To give some context around our loyalty initiatives, excluding sales for any time period prior to implementation of our loyalty program at recently acquired location or acquisition where we have not yet implemented our loyalty program, 19.3% of our merchandise sales this quarter were from enrolled loyalty members. We believe that MIPS can grow and hope to achieve 30-plus percent merchandise sales penetration over time. Our active enrolled members generate greater sales and contribution compared to our non-enrolled customers. Let's move to the core destination categories, which are packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks, and beer. These six categories accounted for 53% of our merchandise contribution this quarter. These concentrations allow us to focus our initiative on categories that we believe will move the needle. We have a deliberate approach to these categories using data-driven decisions in our execution, and we leverage our strong supplier partnership. And our results speak for themselves. Year over year, we have continued to grow contribution dollars from these categories. Over the last three years, our concentration of merchandise contribution from these categories has expanded approximately 570 basis points, and merchandise contribution from these categories has grown at approximately 17% compounded annual growth rate. Same-store sales in these categories for this quarter increased by 2.4% as compared to the prior year period. We are extremely pleased with these results, and we are seeing the positive results of our efforts and initiatives as we continue to drive merchandise sales growth and margin improvement inside our stores. Our third pillar is expanding our food and beverage service, where we see tremendous opportunities. In October, we announced the addition of Richard Giedrich, to GPM's leadership team. Richard filled a newly created role as GPM's Senior Vice President of Food. We believe his distinguished track record and long experience underscore how serious we are about nailing the strategy, growth and execution of our food business. Since joining GPM, he has been getting up to speed, meeting with partners in the organization, meeting with our suppliers, partners, visiting stores, and even working shifts to better understand how our stores operate. We see the development of our strategy around food as a multi-year opportunity with wins along the way. We are extremely excited to welcome Richard to the team and look forward to sharing more as we work with Richard to further develop our food service strategy. As I hope is clear, we strive to position our core convenience store business for further growth, delivering great results while exceeding our customers' expectations. Turning to fuel, I will note that according to OPI's data, fuel gallon demand decreased nationally over the quarter compared to the prior year quarter, contributing to the trends that we saw at ARCO, with a decrease of 5.3% in same-store gallons. However, total retail gallons increased 14.8% because of our recent acquisition. Retail fuel contribution increased to $121.3 million, a 3.2% increase. As always, our team remains focused on striking the right balance between volume and pricing to optimize fuel contribution dollars. Our retail fuel margin remains strong at 40.3 cents per gallon, only 4.5 cents lower compared to the prior year quarter. We believe this demonstrates the sustainability of higher fuel margins. We know that fuel margins vary from quarter to quarter. However, as we look to deliver longer-term stockholders' value, we believe that this structurally higher margin will remain for the foreseeable future. Marginal operators, with their cost structure and operating pressures, have faced increasing break-even fuel margins, creating support for these levels. Moving to M&A, we have continued to integrate the quote, price, TEG, and WTG acquisition, which have served to increase our earning base while expanding our footprint into new, and adjacent territories. I'd like to briefly discuss QUALS, the first of our most recent acquisitions, as an example. As we show in our investor presentation for this quarter, the QUALS acquisition generated approximately $24 million in adjusted EBITDA in the last three quarters alone. Since closing on the acquisition in July 2022, we have already earned back our entire portion of the cash consideration paid for that transaction. We also continue to invest in the businesses we acquire as opportunities arise. For example, we have put capital to work at WTG, deploying investment CapEx to upgrade its fleet capabilities and infrastructure to be more like walls and to provide even more upside to that business. We believe our successful track record of making disciplined and accretive acquisitions will continue to enhance value for our stockholders, especially as we continue to see tremendous opportunities ahead of us in our acquisition strategy with a deep pipeline of potential opportunities. And importantly, we remain well capitalized to execute on opportunities as they arise. As of September 30th, 2023, we had $204 million in cash on hand and $623 million of availability under our lines of credit. In all, together with the available capacity of almost $1.5 billion under our program agreement with Off Street, ARCO currently has access to more than $2 billion in available liquidity for continued M&A activity. I want to focus on the discipline point for just a moment. I'm proud of the team here for executing 25 acquisitions out of hundreds of potential deals we've reviewed over the last 10 years, including the five we have closed over the last year. One last point before I turn the call over to Don. In line with our capital allocation strategy, We continue to have plans in place for new to industry stores, with four in particular that have been identified and are in different stages of development. I remain excited about the many achievable opportunities in front of us. Thank you for your time today. And with that, I will now turn the call over to Don. Thank you, Ari.