Greetings, and welcome to ARCO Corporations 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. [Operator Instructions] 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 with the SEC this morning, and is also available on the Investor Relations section of ARCO’s website at www.arkocorp.com. Before we begin, please note that first quarter 2021 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 the non-GAAP financial measures provide useful information for investors, the presentation of this information does not intend it to be considered in isolation or the substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for reconciliations the most directly comparable GAAP 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 31, 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 continued to expand and consumer continued to show greater willingness to venture out and about with you convenience and more importantly, ARKO is clearly positioned to benefit from increased consumer mobility as we approach the summer holidays and driving season. 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 nicely ahead of the 4% plus quarter today trends we spoke to on our Q4 call on March 25. A trend shows steady acceleration doing 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 at 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 strange in higher margin single serve versus multipack sales in the package beverage and beer categories during Q1 versus prior year. In addition, we have…

Thanks, Arie. It is great to be speaking with you all today about our strong first quarter results. Total revenue excluding fuel was $381 million, a 13.2% increase from the prior year period. This was a result of balanced contribution between strong same-store merchandise sales growth of 6% in the Empire acquisition, with Empire contributing 8.2% of the increase. Merchandise margin dollars increased by $13.9 million versus the prior year, while margin percent increased to 27.4% from 26.1%, largely due to a shift from low margin cigarette and beer sales to higher margin center store and packaged beverage sales. Empire retail sites accounted for $6.8 million of the increase. Retail fuel profitability, excluding intercompany charges for the quarter increased $10.8 million or 17.5%. Empire, I can’t afford $10.5 million of this increase. We saw a strong year-over-year increases in fuel margin to $0.321 per gallon from $0.263 per gallon. Same store fuel volumes declined 13.8% due to lower traffic levels related to the COVID 19 pandemic, but traffic improved throughout the quarter, reflecting Arie’s comment on increased consumer mobility. For the first quarter of 2021, wholesale fuel profitability, excluding intercompany charges increased approximately $16.2 million compared to the prior year period with the Empire acquisition accounting for approximately $16 million of the growth. Fuel contribution from non-consignment agent locations grew by $8.9 million compared to the prior year due to 176 million gallon increase in fuel volume. Fuel margin cents per gallon for these locations decreased 0.9 cents versus the first quarter of 2020. The decrease in margin is due to the inclusion of Empire non-consignment sales, which includes spot market sales and longer-term contracts that are generally a lower margin than our historical ARKO contracts. Fuel margin contribution from consignment agent locations grew $7.3 million compared to the prior…

Thanks, Don. Through all of this, we believe we are primed for growth to our strategic acquisition strategy and commitment to the customer experience, driving traffic and expanding margin at our existing stores. We are focused on aggressive growth and gaining market share. I would be remiss if I did not mention and sincerely thank our over 10,000 associates company-wide for their dedication and commitment to customer throughout the quarter. We appreciate everyone joining the call today and your interest in ARKO. I will now turn it over to the operator for questions. Operator?

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, everybody. Thank you for taking my questions and congrats on a good start to 2021. I guess first Arie, I want to circle back on the Oak Street partnership and maybe just talk a little bit more detail what this partnership kind of gives you guys. Would it give you now the ability to look at larger acquisition targets and maybe you previously did or does this more give you just further ability to execute more transactions, more frequently, because of the additional financing flexibility?

Yes. Thank you, Bobby, and good morning. Well, the Oak Street Capital agreement that we signed, they give us more flexibility, as you guys probably – as you can probably imagine. I mean, the terms over here are much better than the terms that we had before given our size and of course, given our performance. Yes, he’s going to give us an opportunity to look on a much broader and bigger acquisition and broadly actually make us a little bit more aggressive and more attractive. But as I said, it’s a program that is already set and given the amount of acquisition and there’s a lot of acquisition out there, a lot of activity in the marketplace right now. So this is just another set to help us be more competitive over here.

Okay. And then maybe secondly, for me, going back to the Empire side of things, recently closed integration going well. Have you started to see some of the volume savings as you guys have basically doubled your fuel purchases when you acquired Empire, as those start to show up in the retail fuel margins that we’re looking at here for 1Q? Or if the contract still haven’t meaningfully started to renew yet, I guess.

Well, from a fuel standpoint, a lot of the synergies already took place when it’s come to the retail business along with of course synergies coming from the merchandise sales that’s basically something that we already achieve and is taking place, in terms of the 84 company operated stores. We still have some room and of course always negotiation going on basically on the fuel supply contract, when it’s come to the rest of the business over there. But the 84 stores already achieved our goals over here. And as we continue to – we just – recently just basically changed planograms and move basically an update the planogram in those Empire stores. So I’m assuming you’re going to see some more results coming in the next – in the near future we’ll be here.

Yes. I was more asking kind of in the sense of your prior existing large retail network, have you started to see the savings flow through on purchases of fuel, because now you guys are buying 2 billion gallons roughly versus the prior 1 billion gallons, just having a much more increased size of fuel purchases from the suppliers.

Sure. Yes. So the short answer that this is still ongoing. I mean, some of them already achieved and some of them are budgeted basically in an ongoing discussions as we speak.

Very good. Okay. And then lastly for me, I mean, Don, just quickly on the Israel Bonds, buying them back early, I believe at a little bit of a premium. Can you maybe talk about kind of the reasoning behind why now and just help us connect the dots on that capital structure change.

Yes, sure. There’s a couple of reasons. Number one, they had a pretty short maturity until June of 2024 and they had a relatively aggressive amortization during those three years. And also with they’re being – I mean, the bonds themselves were very favorable interest, but because of the treaties between Israel and the U.S. that adds a little premium onto them. But it was more related to the maturity coming up and the amount of amortization that we had to pay, that we felt that there was a better way to go finance that probably in the U.S. It was great for us during our growth has helped us tremendously, but given the short tenure what’s left on it, it was probably better to pay it off. And we paid a whole lot less interest in doing that.

Thank you. I appreciate the details and the time here. Best of luck here in the second quarter.

Thank you.

Our next question is from Kelly Bania with BMO Capital. Please proceed with your question.

Hi, good morning. Thanks for taking our questions. Arie, just curious as you begin to kind of ramp up the remodels for this year. Any color on how the cost of those remodels are coming in just given kind of a lot of the inflation in raw materials and wages and just any update on what you’re seeing there.

Sure. So I think I mentioned that in our last call, the first store that we did in Collinsville, Virginia, our cost was around 600 – if I remember correctly, $650,000 to $675,000. And that was a really everything from scratch to finish. So when we talked earlier and mentioned we average store around $1 million. I think that we’ve just – the last one with just we just finished, I think that was going to be in line between that maybe even though the $1 million investment in those stores. So we don’t see any basically major changes over here, we’ve increased of raw materials.

Okay. That’s helpful. And just curious on CPG margins particularly on the retail side, how that came in relative to your expectations. And if you – if it’s just a function of market dynamics that are driving those higher or if you think there’s anything related to kind of wages and the wage pressure across the retail landscape. Are you starting to see competitors kind of offset that in retail margins? Or is that more of a function of just the dynamics of the first quarter?

I think it’s both, it’s a dynamic of the first quarter. But at the same time, remember, I mean, price of fuel right now is at the $60 already. We are back to normal probably as before the pandemic. I think, the concentration, I mean, our team is doing a great job over here. Concentration going after also expanded margin in areas that you can actually expand, I mean, this is something that we’ve been doing all along since the pandemic started. And we continue to see support over here. As long as we have the support, I mean we’re going to continue to go after margin dollars and this is really what we after. We are after margin dollars, as long as we say that this is not the impact in any way that inside sales.

Okay. That’s helpful. Maybe just one more for me, just in terms of gallons, I think if I heard you correctly, I think you maybe said retail gallons were slightly positive in March. Just curious how that’s continued to progress and should we assume that wholesales on a similar trajectory?

Well, since people – since vaccination took place, we see more and more people out there, people are out there, people are driving more. Remember we are right now entering into the a hundred days of summer coming Memorial Day weekend very soon. So we are expecting to see more and more people getting out there versus what happened last year. If you remember last year from March to May, people were basically just at home. So we see people more – driving more, taking more vacation and we believe that gallons really increased as we are moving towards the summer right now. No question about that.

Thank you.

Sure.

[Operator Instructions] Our next question comes from Mark Astrachan with Stifel. Please proceed with your question.

Yeah. Thanks, and good morning, everyone. I guess I wanted to first ask about your merchandise same-store sales. So it implies for the quarter a bit of an acceleration on a tier basis in March. I guess, one, how much of that was driven by stimulus, two, any sort of thoughts on where we are in the June quarter. And maybe I’ll just start there and have a couple of follow-ups.

Sure. So I’ll start with as you remember in March, when I was talking in March, I told everybody that our same-store sales are actually nowhere 4%. No question that we saw it basically a big acceleration in March. And I think it’s basically back to what I just told Kelly a minute ago. I think people are just getting out, people get more comfortable. People get vaccinated, getting out, driving more, people start to – we start to see more and more events outside. And so I’m assuming that we’re going to expect to see increase in merchandise sales as long as people are going to continue to get out there and feel more comfortable.

Okay. So any color you’re willing to provide on the June quarter so far?

We are not going to comment on the June quarter, but what I can tell you is that there is a lot of initiative regardless – regarding basically regardless the pandemic, there is a lot of initiatives that are taking place in our stores. I mean an example, I just mentioned, talking inside sales, so I just mentioned the installation of the freezers, the grab-n-go. We have a lot of initiatives going on in those stores. I mean we just – we actually have a Dunkin’ Donuts. We have three new Dunkin’ Donuts stores that are actually being open. We just talk about the expansion of the door dash delivery. I mean we went from 300 stores to over 650 stores. We have their remodel stores that are actually taking place right now and expect to open in June our second store. We have –we launched the fas REWARDS and we have more and more activity and we see more involvement on the fas REWARDS since we launched that. So as I said there is a lot of initiatives going on over here in order to make sure that our same-store sales continue to basically perform.

Okay, got it. And then any sort of commentary you can provide on the events of the last week and how we should be thinking about impact positive, negative on the business just more in totality, but also I’m curious about presumably the benefit of people waiting online for gas on merchandise sales as well.

Sure, sure. So I can’t give you a full color. I can just tell you that remember, we are operating in 33 states. And if you’re really thinking about that, the area that really got hurt is the Southeast all the way to Virginia, that those are the really areas that hurt. At the same time, just to remind everybody, we are mostly branded fuel. We are mostly branded fuel and giving our sides and giving our exposure and our, of course, relationship with the branded fuel. I mean we were able to grab resources from areas that were not the impact. The interesting thing that we saw here actually is that area like Florida, for example, the project in Florida, it’s a waterborne product, it’s all coming from the goal about the panic buying over here was unbelievable. I mean people are standing in line in Florida and I’m not scratching my head. And I said, but there is no impact in Florida. And we saw the panic buying by the way, across many, many states that basically were not impact from that. So that’s one way to think about that. The second thing, as I mentioned, given that we are rebranded, as you can imagine branded fuel, when the brand put everybody on allocation, you can assume that the unbranded guys actually going to be out there for a long period. I mean they started. They restarted the colonial pipeline yesterday night. So we are assuming that in the next few days, things will get back to normal. If not to normal, close to normal. But as I said, I mean the resources that we were able to bring and pull from outside of those days help us tremendously over here.

Got it. Okay. Thank you.

Okay.

We have reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to Arie Kotler for closing comments.

Thank you very much. And again, we’d like to thank each and every one of you for participating this morning and looking forward to seeing you again on our next call after Q2. Thank you, and have a good day, everybody.

This concludes today’s conference. You may disconnect your lines at this time. And we thank you for your participation.