Greetings, and welcome to the Arko Third Quarter 2022 Financial Results Call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. [Operator Instructions] 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 Arko. Thank you. You may begin.

Thank you. Good morning, and welcome to Arko's third quarter 2022 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer; and Don Bassell, Chief Financial Officer. Our earnings press release, quarterly report as filed with the SEC and our earnings presentation are available on Arko's website at arkocorp.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, cross talk 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 Arie.

Thank you, Ross. Good morning, everyone, and thank you for joining us. Arko strong results for the 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. Arko 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 2 very important strategic and accretive acquisitions since the end of the second quarter, including the core acquisition, which closed in Q3, a portion of the purchase price for acquisitions announced in 2022, including 2 that have not yet grown 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 30, 2022. We continue to raise value to our business by pursuing very active growth strategy. Upon closing, the Transit Energy Group acquisition will add approximately 150 convenience stores and expand our certain retail territory into Alabama and Mississippi. Upon closing our acquisition of price convenience holding, will add 31 convenience stores plus a new-to-industry store that broke ground in July. It expands our New England territory into Massachusetts. Both Transit Energy Group and price as 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…

Good morning. Arie detailed our most recently announced agreements to acquire the TEG business and pride. Our first deal of the year, Quarles closed on July 22. As Arie mentioned, we are known for consistent, disciplined investments in our growth and value enhancing initiatives. But our strength in integrating new stores, sites and employees should not be overlooked. Quarles is a great example. Systems, personnel and operations have been rapidly integrated. The team doing that work has done a great job. We are very pleased with this acquisition and business. It's important to understand how we view the reportable segments outside of our core convenience store business. Wholesale fleet are accretive to our bottom line, but the bulk of our profit is derived from our retail segment were our self-operating convenience stores. The other segments are important for our capital allocation strategy. We believe they give us stable, ratable cash flows so we can move quickly to pursue opportunities and invest in our stores. These segments also give us more leverage with fuel and merchandise suppliers and superior rebates. Our balance sheet continues to be strong, and we currently have a good liquidity position. As of September 30, 2022, we had cash and cash equivalents of approximately $283 million. Our outstanding debt, excluding capital leases, was approximately $734 million, resulting in net debt of $451 million. Our $450 million bond issuance in October of last year, which locked in a 5.125% coupon looks increasingly beneficial as interest rates have increased significantly since then. We continue to realize excellent free cash flow. For the quarter, net cash provided by operating activities was $67.6 million versus $60.5 million for the third quarter of 2021. After the expected closings of the TEG and prior acquisitions, there will be approximately $683 million remaining under…

Thanks, Don. I will close by saying that we believe we have the right long-term strategy in place as well as the execution capabilities that make me confident about delivering growth for the long term. We believe that our business has performed exceptionally well in a challenging environment. Our model is very resilient, and I believe we're well positioned to deliver future value for our stockholders. We're very excited about the rest of this year. We will now take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Good morning. Thank you taking my question and Congrats on our nice EBITDA performance. I guess, Arie, first question for me is just the M&A environment for you guys has picked up here in 2022 with a lot of announced acquisitions. So, I'm just curious on the capacity of the business to further integrate acquisitions as we head into 2023? Do you still see opportunities that you could take on additional acquisitions if they're available? Or do we need to take a pause to kind of integrate the ones that have been announced? And as a second part of that, can you maybe talk about some of the investments or capabilities that you guys have done on the integration to be able to handle multiple acquisitions at one time?

Sure. Good morning, Bobby. Thank you for the question over here. I'll start, first of all, with the 2 acquisitions that we already report in Q -- basically Q2, Q3. We already closed the first one, which is closed. We closed the core acquisition back in July. And I can tell you right now that this company is fully integrated within our company. I mean, that was a very, very successful acquisition for us, and you can probably see the results already. Regarding the other two acquisitions that we just announced, yes, we have the capacity. We have an M&A team. I can tell you, as a matter of fact, we are putting another integration team in place right now given the amount of opportunities that we see in the marketplace. And the idea over here is really to create another team on the top of the M&A team and the operating team with professional that's going to be able to help us to integrate all of those companies that we actually put together. Regarding your question in terms of opportunities and capacity, if you notice in our presentation that we published yesterday, we still have run in -- over $1.3 billion in dry powder between our cash line of credit and the Oak Street basically agreement that we signed. And this is after taking into account those two large acquisitions that we already announced. So, there is no question -- remember, this is our key growth for the past eight years. I mean we've been growing through acquisition. We closed on 21 acquisition already. And this is really something that I would say that probably had one of the best team over here in the marketplace when it comes to acquisition and integration of those companies.

Thank you. My second question is just around the fuel volume trends for retail. As we saw prices come back down a little bit at the pump, did you see any type of behavior change on volume? Or was the volume fairly consistent throughout the quarter?

No. So if you guys remember in -- Bobby in Q2, I specifically mentioned the minute price is $5. We saw -- that was back in June. We saw a double-digit decline in fuel volume. We continue to see that during the month of July, the month of July, I can tell you that our gallons were down around 12.5%, 12.6% in the month of July. And then all of a sudden, when price decreased towards the four and below the four towards the three, we all have decided to saw a shift in gallon and the gallons were down around 8%. You're really looking on September -- I'm sorry, August and September, there is an improvement of almost 50% in the decline of gallons. The gallons were down around 8%. But I think the very, very interesting story over here is that during the month of July, when gallons were down 12.6%, the same store sales, not including cigarettes, were down 2.4%. Excluding cigarettes, were down 1.3%. However, the minutes price decreased below the $5 -- in August, our same store sales were basically 1.2% and excluding cigarettes, were 4.4%. And in the month of September, when prices continue to decline, that was a big story for us. I mean same store sales were 3.6%, while same-store sales, excluding cigarettes, which is the most important thing over here because that would drive the margin. We're up over 7.4%. And I can tell you right now that we see the same trend in the month of October going into the months basically of November. So as price continue to decline at the pump our basically our gallons getting better and improvement. And at the same time, as I said, the most important categories, which is same store sales, excluding cigarettes, are just continue to sky high over year.

Thank you, Arie. I appreciate the details. Best of luck here in the fourth quarter.

Thank you very much Bobby.

[Operator Instructions] Our next question comes from the line of Anthony Bonadio with Wells Fargo. Please proceed with your question.

Good morning guys. So, I just wanted to talk about merchandising margins a little bit more. Taking a step back, and I kind of commented this in your remarks, but we're running about 400 beds added before we were in 2019. You've obviously made some changes to the business in that time frame, along with a number of acquisitions. But is that 30% plus rate that we're running at now the right way to think about the business going forward? And then where do you think that can go over time as you continue to chip away strategic efforts inside the store?

Sure. So, I think the increase in margin, Anthony, and good morning by the way, I think the increase in margin, Anthony, it's really the diversity of project that we are selling right now. I think it's -- most of it is because of the initiative that we started since the beginning of 2020. This is where we see the increase in margin. We see a decline in cigarette sales year-over-year. We see an increase in all of the key categories that -- at least for us, those key categories are very, very important. If you're really looking on candy, for example, we were up 8.5%. If you're looking on frozen food. This is a big initiative that we started at the beginning of the pandemic or a little bit into the pandemic. We invested a lot of money, if you remember in frozen foods. This category is up 60%. I mean the same thing goes to packaged beverages, same goes to salty snacks, alcohol, other tobacco products. And those are really the categories that drive the margin. I think driving the margin is really because we have an excellent merchandising team that's really putting the right product on the shelf, concentrating on the fast rewards loyalty program to make sure that loyal customers continue to come in and increase their basket. And I think even its continued to see increase in margin. Based on this trend, I don't have any reason to believe why we shouldn't see basically an extension of the margin as we continue to add more and more food offering into -- basically into the stores.

Got it. That's very helpful color. And then I also wanted to touch on the interest rates. So, I know you guys have a largely fixed rate debt exposure with the senior notes. Don commented on, but you've also got almost $300 million in floating rate that put some exposure to cap rates via the leases on your stores. So, can you just talk about how you're thinking about the impact to the P&L as it continue to rise? And then does that have any impact on how you're thinking about the prioritization of capital from here?

Yes. Before I let Don jump in and maybe explore more just to be clear, you mentioned cap rate. Our cap rates are fixed. We don't have any variable rates when it comes to rent, I just want to be clear over here. I mean our rates on the notes are basically fixed. There is 5.1%. And I think you will agree with me at 1.25% for the next 7 years, I think we are in a very good position on those unsecured notes. And the same thing goes to our -- basically to our leases. It's actually just true to everybody right now that sometimes, especially in this environment, when you have interest rates rising dramatically, our rent is basically fixed. I mean, the only increase in rent is basically anywhere between 1.5% to 2% a year, which is much below the CPI. So, I actually think that we are in a very well positioned. But I'll let Don jump in and maybe explore more.

Yes. All right. Thanks. So, I think, great question, and I know it was the concern. So, 2 things. Number one, a lot of our leases are structured where it's CPI up to a certain amount, and it's usually like 1.5% to 2%. So, if CPI goes up 8%, we're capped at where it can go. So those interest rates really don't affect us that much. And again, a lot of our debt, the majority of it is fixed at 5.125%. But the market has also given us a great opportunity now to take our cash and invest it where before when you can only get 20 basis points for income, we're now able to invest our excess cash and offset some of that. So, we don't see that as a real big issue to us, especially with the majority of it being fixed and the ability to invest the free cash flow and get a nice return to offset that interest expense.

Great. Thanks so much, guys. Good luck.

Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Thanks, and good morning every one. I wanted to ask about contribution to the in-store merchandise comp from pricing that the suppliers are taking and that you're passing through. Maybe you could just talk directionally about that? And then more broadly on the same subject, there's obviously a lot of talk about elasticities being lower than historical levels on pricing going up. Obviously, your business is slightly different in terms of being more impulse in store with fill up driven. But if you could kind of talk directionally about which categories are more or less elastic and kind of how you think about pricing as you move through '23 and the potential benefit from higher promotional activity and or just reduced pricing, that would be helpful. Thank you.

Sure. So, I'll start with the price increase. There is no question that almost every vendor had to push a price increase this year. We try to be very, very careful. -- given our size and given our promotion activity, we try to just move very, very carefully over here, try to create value to our customers. And as prices continue to increase. I mean, we really try to push forward our fast rewards loyalty program with our loyal members. We have over 1.2 million members that we're talking with, and we have millions of customers that actually ended the ear. I think what we're able to do is really to provide them those valuable promotion. So, they did not feel those price increases maybe like some of the others. I think in terms of moving forward, there's no question with interest rates rising, moving towards recession. There is no question that our industry mark is probably much more resilient than some others. And I think the proof for that is what we see right now. I mean, I just -- as I mentioned earlier, as we continue to see interest rates basically continue to hike for whatever it's worth, the sales inside the stores of all of those essential categories continue to increase continue to increase. It's amazing. I mean, we saw 75 basis points increase in September. We saw 75 basis points increase just recently in November. However, the cells inside the store is going to actually continue to increase much higher as interest rates continue to rise over the year. Going into 2023, -- as I mentioned earlier, we are testing right now the upgraded app, the fast rewards app. We're actually testing it right now and getting ready to launch it companywide. And our goal is going to be continue to grab more and more customers, making sure that they have basically the cards in their hands and make sure that they're able to basically enjoy all of those valuable promotions because there is no question in my mind, we need to be very, very sensitive, especially with price increases and especially with interest rates rising over here.

Got it. That's helpful. And then just lastly, I know it's probably a bit granular in terms of size. But can you if you could provide some update on the benefits you're getting from strategic partnerships with third parties like the Sparrow relationship or even the stores that you've added, electronic charging capabilities. Any sort of commentary around the bump that you're getting on visitation as well as what's going on in the stores would be helpful.

Sure. So, let me start with foodservice. You mentioned Subaru. So, Subaru is only one item out of many others. As I said, since value proposition is very, very important over here. We have 199 stores that actually sell pizza by this slice. And our goal is really to continue to extend it. We have a lot of stores that we have 377 stores that sell hotdogs on the roller grill and tornadoes. And I think especially in this environment, we must stick and must find ways to offer food to our customers that one of the key elements over here is to try to be below $3 a slice, even though the price of cheese and the price of -- basically all of the food elements are increasing. I mean, we are trying to actually figure out a way how to format our cells based on -- basically on what happened in this change of environment. Coffee, for example, I spoke about coffee. We are actually heading right now into the coffee season. And I can tell you that just on coffee, our loyal customers are able to buy coffee, cup of coffee for $0.99. And I mean if you're really looking at the marketplace, I mean, the cost of cup of coffee is probably 50% higher versus the price that we offer to our loyal customers. So again, we're trying to make sure that we become a destination to all of those loyal customers and to provide very, very valuable prices to those guys in order to continue to extend. And that's what's going to drive by the way, the margin. Going back to the margin question, that's what is going to drive the margin over here. The food service margin, everybody knows, is much higher than basically the margin or cigarettes, for example. Now this is where our focus is in right now.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kotler for any final comments.

Thank you very much, Melissa. And thank you, everyone, over here for joining us. As we are heading towards the holiday season, I would like to take this opportunity and wish each and every one of you and your families, of course, happy holidays.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.