ARKO Corp.

Today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release annual report on Form 10-K for the year ended December 31st, 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. Before we begin, please note that all fourth quarter 2023 financial information is unaudited. During this call, 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 fourth 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 with respect to future events, and ARCA will not update or revise forward-looking statements made on this call. whether as a result 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. Descriptions of those non-GAAP financial measures that we use, such as adjusted operating income and adjusted EBITDA, and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings release. in our annual report on Form 10-K for the fiscal year ended December 31st, 2023, or in our 2023 fourth quarter earnings presentation posted on our website. Additionally, management will share profit measures of our individual business segments along with fuel contribution, which is calculated as fuel revenue less fuel costs and exclude intercompany charges by GPMP. And now, I would like to turn the call over to Ari.

Thank you, Jordan. Good morning, everyone, and thank you for joining us. Before getting into our financial results, I would like to start off with a few opening remarks. First, as I'm sure you saw earlier this year, we welcome Rob Giammatteo to the company to serve as Executive Vice President and Chief Financial Officer. We believe that Rob's experience in directly relevant financial and transformation roles in retail and convenience would be extremely additive to the company that Don Basel, our former CFO, has helped build over the years and will help drive announced financial performance as we continue to strengthen our business. To that end, I would like to personally welcome Rob to the ARCO team and have already seen the value his experience has brought to the team since joining in January. I would also like to thank Don for his contribution to the company, which have enabled the company to achieve significant growth and excellent performance. As we reported, Don will remain with the company until April 2024 to ensure a smooth transition to Rob. Second, reflecting on our first three years as a public company, we have significantly broadened our geographic footprint through acquisition, and have delivered approximately $166 million in net income that results in approximately $850 million in cumulative adjusted EBITDA over this period. In the past 18 months alone, we've closed on five acquisitions, adding almost 200 retail stores and approximately 520 new sites across our wholesale and fleet fueling segments. I'm very proud of our team and their incredible work to successfully integrate these assets. We are confident that we bought attractive assets at attractive prices, delivered meaningful cash-on-cash returns, and provided us with scale and related synergies that have improved our relative competitive positioning. I wanted to touch briefly on our prize acquisition, which we completed in December 2022, and included 31 Pride retail convenience stores and one store under construction that is now open. Since closing the acquisition in just over one year, we have earned back in adjusted EBITDA approximately 65% of ARCO's consideration paid for that transaction. This was driven by our successful integration, including the additional of over 1,000 items on average to the stores and the transition of Pride loyalty members to our Fast Rewards program. We were able to increase merchandise margin in our Pride location by approximately 260 basis points from Q1 2023 to Q4 2023. We believe that rapid return and integration of Pride reflect the acquisition of good assets at a good price. As we move into 2024, We are focusing more of our management attention and other resources to further push, refine, and improve our organic growth strategy to drive performance at our retail stores and unlock the value of our retail segment, which is core to our business. I believe we have many levers to pull. Our team is focused on executing on our initiative and later this year, we are planning to us an investor day in which we will share with you our multi-year roadmap and specific milestones to enhance organic performance and drive shareholder value. Turning to our full year results, we delivered $290.4 million in adjusted EBITDA for 2023, holding performance within 3.5% of 2022, which had a record retail CPG of over 41 cents per gallon. We delivered this result in the context of a 3.4% decline in national Opus fuel gallon demand, with a more pronounced decline in the fourth quarter. Annuli acquired businesses and continued momentum with our in-store merchandising efforts served to mostly offset lower gallon demand. As we have discussed in the past, we have directed our retail fuel pricing team to optimize fuel contribution at the site level. While we recognize this pricing strategy results in a tradeoff between gallon demand and CPG, we believe this is the correct strategy currently given market and consumer trends in the areas in which we operate. We plan to maintain this pricing methodology while we evaluated in the context of our overall multi-year roadmap. Total retail fuel contribution for the year was $435 million, up close to 5% for the year. Turning to inside store sales, many of our 2023 initiatives continue to show momentum due to our focus on our three key merchandising and marketing pillars. Our Fast Rewards Loyalty Program, growing sales in core destination categories, and expanding our food and beverage service. I want to take a moment to touch on each of these pillars now. First, on our Fast Rewards loyalty program. We exceeded the 2 million enrolled member mark in the fourth quarter, and we continue to invest to drive new enrollment growth, deepen our relationship with existing customers, and offer our enrolled members valuable discounts that help address the ongoing inflationary pressure they're facing. We are pleased with what we are seeing from our loyal customers and believe there is significant untapped opportunity as we continue to evolve our loyalty program. In the fourth quarter of 2023, transaction size associated with enrolled loyalty members averaged $12.70 per transaction or approximately 32% more than the $9.62 per transaction for non-enrolled members. As an example of the opportunity we see in front of us, in 2022, we enrolled approximately 283,000 members. In 2023, we enrolled another approximately 730,000 members. We believe this background underpins the opportunity of our loyalty program. We continue to work to accelerate new member involvement and are leveraging our recently launched PISA program to deliver meaningful value for our enrolled loyalty members. I will touch more on our PISA program in a moment. Turning now to our core destination categories, which are packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks, and beer, these six categories accounted for over 50% of our merchandise contribution this quarter and for the full year. This concentration allows us to focus our assortment initiative on a narrow group of categories and leverage strong supplier partnerships that help drive total store sales. As a result of our ongoing work, Penetration of the company's core destination categories represents close to 43% of merchandise sales for the year. Food service proposition as a multi-year process with wins along the way. We are already building the foundation to support our long-term journey to establish ourselves as a food destination and establishing food service credibility. In 2023, we added bean-to-cup coffee in 391 locations, including newly acquired stores bringing the offering to 945 locations. At the end of 2023, we collaborated with Tyson and launched a value-oriented chicken sandwich available for $2.99 for our enrolled loyalty members and available in 300 selected locations. And then, next, I'm very excited about our most recent food service launch. After almost a year of research and development, in January of this year, we launched our pizza offering as a take-and-bake at more than 1,000 stores and hot in approximately 225 of those stores. We have seen very positive customer reaction to the pizza, with over 70% of those stores saying they will definitely purchase again. Our goal over the next several months is to have as many consumers as possible try this pizza and to roll out our pizza offering both take and bake and hot to significantly more stores. The pizza is available to our enrolled loyalty members at the value-oriented price of $4.99 for a high-quality whole pie. In addition, as we shared in October 2023, We created and filled a new senior leadership role that is responsible for developing a company-wide cross-functional food strategy and scaling it across our stores. We look forward to sharing more on this work as we move through the year. Starting this year, we are beginning to build three new stores, with the first expected to break ground in the next few weeks. These new stores will offer a great customer experience, including food service. As we continue to explore opportunities to expand our retail footprint, take a look at the cover of our presentation, where you can see a picture of an unmanned express store on one of our Quals Cardlock locations in the Richmond, Virginia area that just opened two weeks ago. I will now turn the call over to Rob to review financial results and share our thinking on 2024.

Thank you, Ari. Good morning, everyone. I wanted to take a brief moment to thank the talented ARCO team for the warm welcome over these past two months. I'm excited to join the company on its journey toward realizing its full potential and very much look forward to meeting our recovering analysts and speaking with many of you soon. Starting with full year 2023 results, As Ari referenced earlier, total company EBITDA of $290.4 million was down just over 3.5% in 2022. At the segment level, our retail segment delivered approximately $315 million in adjusted operating income, essentially in line with 2022 results with the contribution from our recent acquisitions and continued same-store merchandise contribution growth offsetting reduced same-store fuel contribution. Total merchandise revenue was $1.84 billion, up from $1.65 billion in 2022. Same-store merchandise sales were up 0.4%, with same-store merchandise contribution up over 4%. Excluding cigarettes, same-store merchandise sales were up 2.5%. Same-store fuel gallon demand was down 5.3% for the year, compared to national OPUS, which was down 3.4%. Same store fuel margin of 38.6 CPG was down 2.7 CPG from a record 2022. The combined impact of lower fuel gallons and reduced CPG resulted in a same store fuel contribution decline of approximately 46 million from full year 2022. Full year 2023 adjusted operating income of 79 million at our wholesale segment was essentially in line with 2022, with contributions from acquisitions offsetting the impact of decline in fuel contribution from a record 2022. Full year 2023 adjusted operating income at our fleet segment of approximately $41 million was up just over $20 million from 2022, reflecting a full year of operations from quarrels versus a partial year last year, and our WTG acquisition. Full year 2023 total company general and administrative expenses increased approximately 25 million compared to 2022, primarily due to our recent acquisitions. Full year 2023 net interest and other financial expenses increased by approximately 12 million compared to 2022, primarily due to a higher average outstanding debt balance and a higher average interest rate. And finally, full year 2023 net income was approximately 35 million compared to $72 million for 2022. Turning to fourth quarter 2023 results, our retail operating segment delivered approximately $72 million in adjusted operating income for the quarter, which was down 3.3% from the year-ago period. Merchandise sales and merchandise contribution were up 10.8% and 19.6% respectively, reflecting a 240 basis point expansion in margin rate. Retail segment fuel gallons and fuel contribution were up 10.9% and 4.8% respectively to the year-ago period. Operating expense was up 18.2% for the quarter, with the increase related almost entirely to our acquisitions. Growth in all aforementioned segment results was driven by our acquired businesses, which delivered in excess of $12 million in adjusted operating income to our retail segment for the quarter. Same-store merchandise sales excluding cigarettes were down 1.8% versus the year-ago period, while total same-store merchandise sales were down 2.8%. Same-store merchandise contribution was up 3.9% to the year-ago period, reflecting the strong underlying organic margin expansion related to our ongoing merchandise assortment work. Same-store fuel gallon demand was down 7.5% for the quarter compared to National Opus, which was down 4.6%. Same store fuel margin of 38.2 CPG was down 2.7 CPG from a record 2022. The combined impact of lower fuel gallons and reduced CPG resulted in a same store fuel contribution decline of approximately 14 million from the year ago period. Same store operating expenses were up less than 2%. Moving on to our wholesale segment, adjusted operating income was 18.1 million for the quarter versus 17.5 million in the year-ago period, with total gallons up 7.2%. Growth was driven by acquisitions that closed in 2023, which delivered 2.4 million in adjusted operating income for the quarter. For our fleet segment, adjusted operating income was 9.7 million for the quarter versus 13.3 million in the year-ago period, with total gallons up 11.8%. reflecting performance against abnormally high diesel margin per gallon and fuel volatility that we referenced in our 2022 year-end call. Acquisitions that closed in 2023 delivered $2.2 million in adjusted operating income for the quarter. Total company general administrative expense for the quarter was $38.1 million versus $39.3 million in the year-ago period. Total company adjusted EBITDA of $65.5 million for the quarter was down $6.9 million from the prior year period, with the decline primarily due to reduced same-store fuel contribution. Net interest and other financial expenses for the quarter were $22.9 million compared to $16.3 million in the year-ago period. Net income for the quarter was $1.1 million compared to $12.9 million for the year-ago period. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet, excluding lease-related financing liabilities, we ended the fourth quarter with $845 million in long-term debt, comprised of our 2029 senior notes, the draw on our Capital One line, and the remainder primarily related to real estate and equipment financing. Our 140 million ABL remains completely undrawn as we manage working capital needs from operating cash flow. We maintain substantial liquidity of approximately 830 million, including 218 million in cash on hand at year end, along with the remaining availability on our line of credit. Of this total liquidity, approximately 460 million is attached to our Capital One line, which is reserved for M&A activity. Together with our outstanding Oak Street commitment of almost 1.5 billion, we are comfortable that our balance sheet has more than adequate flexibility to support both ongoing organic growth initiatives and M&A. Including investment capital, total capital expenditures for the quarter and full year 2023 were $35.6 million and $111.2 million, respectively. Turning to 2024, as you may have seen in our press release, we have initiated full-year earnings guidance this quarter to help investors better understand our earnings outlook. We are currently modeling total company full year adjusted EBITDA in a range of 250 to 290 million versus 290.4 million for 2023. Our full year earnings outlook corresponds to an average retail fuel margin of 36 CPG on the lower end and 40 CPG on the higher end of our guidance range. Please reference our press release for a full reconciliation of net income to adjusted EBITDA. And finally, some detail on our first quarter, which has historically contributed approximately 16.5% of our full year results. Based on quarter to date trends, we expect our first quarter to contribute less to the full year adjusted EBITDA than in prior years, representing 12 to 14% of our full year adjusted EBITDA guidance. Our guidance framework reflects our expectations for current trends to normalize coming out of the first quarter, along with our ability to leverage our food initiatives, loyalty program, and fuel pricing strategy during the higher traffic summer period. Our first quarter outlook corresponds to an average retail fuel margin of 35 CPG on the lower end and 39 CPG on the higher end of our guidance range. And with that, I'll hand it back to Ari for closing remarks.