Good day, everyone, and welcome to today's Arko Corporation Second Quarter 2024 Earnings. [Operator Instructions] Please note this conference is being recorded. I will be standing by, should you need any assistance. It is now my pleasure to turn the conference over to Senior Vice President of Capital Markets, Corporate Strategy and Investor Relations, Jordan Mann. Please go ahead.

Thank you. Good afternoon and welcome to Arko's Second Quarter 2024 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second quarter of 2024, as filed with the SEC, are available on Arko's website at www.arkocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2023. Before we begin, please note that all second quarter 2024 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 second quarter 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during the call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and Arko is under no obligation to 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 on a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as operating income as adjusted, and adjusted EBITDA, and reconciliations for those measures to our results as reported in accordance with GAAP, are detailed in our earnings release, or in our quarterly report on Form 10-Q for the quarter ended June 30, 2024. Additionally, management will share profit measures for 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 Arie.

Thank you, Jordan, and thank you all for joining. We reported earlier today that we deliver adjusted EBITDA that excluded our second quarter guidance. These results reflect our ongoing effort to manage key lever successful pricing and our vendor partner relationship as we navigate challenging microeconomic environment alongside our customers. We continue to see pressure on consumers as they struggle with inflation and elevated prices for everyday goods, especially in markets with a large percentage of lower income consumers. Consumers have been hesitant in their spending and their purchases have remained suppressed despite multiple summer promotions. As a result, during the quarter we saw lower same-store merchandise sales and retail volumes at the pump. However, our team worked hard and achieved merchandise margin rate growth while providing much-needed value to our customers. As we discussed on our last call, we believe we are prepared to navigate this near-term headwind as we continue to believe in the long-term opportunities for the company. Turning to our retail segment performance for the quarter, merchandise same-store sales decreased compared to strong prior year period, relatively flat on a two-year stock excluding cigarettes, reflecting a challenging consumer backdrop. Despite this quarter decrease, we saw significant merchandise margin expansion, which helped partially offset the sales decline as we continue to make progress with our key merchandising initiatives and deliver value for our customers. For example, we have seen great results in the value-oriented pizza offering that we launched in Q1 of this year. Relative to our old pizza program, same-store pizza sales this quarter increased approximately 19% and unit sold increased 36%. In addition to the pizza program, we have expanded food service offering with Nathan's Famous Hot Dogs, which are available hot and ready in more than 460 of our retail stores across the country.…

Thank you, Arie. Good afternoon, everyone. Before touching on our second quarter results, I would like to share a change we are making to how we report our non-GAAP financial measures. Starting with this 10-Q, we will now be including the non-cash portion of rent expense in our calculation of adjusted EBITDA. We estimate this adjustment will have the effect of reducing adjusted EBITDA by approximately $15 million for fiscal year 2024 at roughly $3.5 million per quarter. For this quarter, you will see both our historical methodology and our new methodology reported in our earnings release for adjusted EBITDA. We are providing both calculations this quarter to allow for an orderly transition to our revised approach. To minimize confusion, my remarks on the second quarter will use our historical methodology of excluding non-cash rent expense from adjusted EBITDA, which was the basis of our second quarter guidance. We want to make clear that this change does not reflect any change in our accounting practices or our results reported in accordance with GAAP. Turning to second quarter 2024 results, adjusted EBITDA was $83.8 million for the quarter compared to adjusted EBITDA of $86.2 million from the year ago period. Results were supported by retail fuel margin of $41.6 per gallon, which was considerably above the $38.5 per gallon midpoint of our guidance range. At the segment level, our retail segment contributed at approximately $73.8 million in operating income compared to $77.9 million in the year ago period. Adjusted operating income for the quarter was $87.9 million compared to $92.6 million in the year ago period. Total retail merchandise sales were down just over 2% for the quarter, while merchandise contribution was up 0.7%, a margin rate expansion of 90 basis points. Retail segment fuel gallons were down 3.4% to the…

Thanks, Rob. Before I wrap up, I would like to take a moment to talk about our full-year 2024 guidance and in particular, the range around our midpoint. We are operating in an unprecedented geopolitical environment and have seen significant swings in fuel margin over the past month. For the second quarter, fuel margin was below $0.38 in April and jumped above $0.43 for May and June. July just finished in the $0.42 to $0.43 range. So, we are broadening our CPG assumptions going forward, given the potential for continued volatility. I would like to close by reiterating our commitment to continue strong execution through this challenging microeconomic environment as we strive to enhance shareholder value. Thank you for your ongoing support and confidence in our vision for Arko. We appreciate your time today. With that, we will open it up to questions.

Thank you. [Operator Instructions] And we will pause for a moment to allow questions to queue. And we will take our first question from Bobby Griffin with Raymond James.

Good afternoon, everybody. Thanks for taking my questions.

Hey, Bobby.

Go ahead, Bobby.

Hey. The first thing I wanted to hit on is just maybe on a high level, just curious where the business is today in procurement across kind of all the stores and the business segments. Any context you can put around that and maybe what some of the opportunities could be or kind of what you're working on over the near and medium term on the procurement side and really on fuel or merchandise. Just curious where that is from your point of view?

When you say it from basically from a segment standpoint, I mean, everything is operating under one system right now. So, maybe you can elaborate a little bit more about your question.

Yes, just more of like, sorry, just a lot of acquisitions over the course of the last couple of years. Just so just curious, are we leveraging those across like retail? Are we getting the full procurement benefit across those acquisitions? And then I'm just also, are we seeing the leverage across the different business segments that Arko has developed over the last couple of years as well?

Sure, sure, sure. So, just for the benefit of everybody else everything is basically centralized in our back office. Just to be clear and we have three different segments. Everything is centralized to our back office. Across the retail chain, all of the marketing and merchandising initiative, purchasing power, everything is being handled, again, to our centralized back office. The same thing goes to the fuel, everything is consolidated under one group; the retail segment, the wholesale segment, and of course, the fleet segment. So, I think from an opportunity standpoint, there is always opportunity that you continue to grow. But I think we are set up very well right now from opportunistic standpoint. And again, I think that's part of the transformation plan will be to continue to actually to get more and more of those opportunities.

Yes, Bobby, I confirm what Arie is saying. I mean, everything is on a common procurement platform. But I think as we've mentioned before, the transformation program will have components of both on the direct side and the indirect side. So, again, we have everything on a common platform, but certainly opportunities exist. And I think more on the indirect side. But again, it is part of both the direct and the indirect plan going forward.

Thank you, Rob. Thank you, Robert. That's helpful. That's exactly what I was kind of looking for. And then, Arie, I appreciate the details about the potential opportunity on the retail network, dropping some of those into dealers and in the savings. I'm just curious, when you look at the fleet card business, as well as your wholesale business on a standalone basis today, are there opportunities to grow those sites, not including your own network? So is there opportunities to actually go out, grow wholesale sites that wouldn't be part of your own network to kind of further leverage the fixed cost of that infrastructure in the same way in the fleet card segment as well?

Sure. So, adding additional sites, which is something that is happening as an ongoing basis, it's always an opportunity, always an opportunity. This is something that is happening as we speak. The same thing with the fleet business, I mean, if we have opportunities to increase the fleet business, we are looking into this, of course. And we're going to add more sites. Recently, we did it last year with WTG. If you remember, when we bought the Quarles acquisition, we were at 183 sites under our belt. And last June, when we acquired WTG, we added another close to 120 locations. So, today, we basically have 294 locations today, starting with 183.

Yes. And that was through M&A. Is there an organic opportunity just where you can add sites? Or does it have to come with a big, large scale M&A? I'm just trying to get a sense of what --

No, no. There is always opportunity. There is organic opportunity. As a matter of fact, we are looking on some areas that we can expand. But again, I think the large organic growth will come from acquisitions. That's always. But again, this is no different than new to industry in a retail segment. When we actually add new to industry locations, you see what we're doing this time. We are actually adding three locations as we speak. So, those opportunities always become -- when they become available, we, of course, are going to tackle them.

Okay. And then, I guess, lastly for me and Rob, I don't know if you'll be able to answer this yet. I know more is likely coming on the Investor Day. But when you look through kind of the retail network, is there any way you can size out or parse, like, how big is the performance gap on maybe merchandise or fuel comps from some of the lower quartile stores? And the reason I'm asking is, is there a better way to kind of get a sense of how maybe the Arko core stores you all's good performing stores, are performing versus the industry versus some of the lower kind of lower quartile stores that could eventually end up dropping out of this retail network into more of a dealer base are performing?

Yes, Bobby, I think you're spot on. That'll be something we'll share more at Investor Day. But to your point, we have a lower quintile, as does everyone else. And as you might imagine, those are likely some of those stores that are targeted for the dealerization where we can be more profitable with them as dealer run. And we can focus our capital allocation toward the fleet that we want to drive. So, yes, we'll provide much more detail at that level. Yes, we've looked at it. But we're going to hold that one for Investor Day for detail.

Okay, understood. Thought I'd at least give it a shot, apologies again about the background noise.

But let me jump in. Maybe I'll jump in and give you maybe a little bit of a color on that. Just we mentioned the 40 stores that we are in basically in the middle of conversion. Some of them were converted already and the rest will be converted at the end of the quarter. We're talking about roughly $2 million on those stores that will do better in profitability versus what they're doing right now. So, I just want to be very, very clear over here.

Okay.

The goal is (a) to convert them to dealer location, but not because they're not great. It's just because we see opportunities in some other areas where to actually allocate capital, where to prioritize our time and where we see more upside. So, in some of those stores, the idea is actually to convert them to do more and not the other way around. I want to be clear. It's actually making more money on one end. On the other end keeping the gallons, remember, everything is under our control. We're going to keep the gallons. We're going to collect trends. So, from a synergy standpoint and from a basically buying car standpoint, we don't lose anything. As a matter of fact, we gain. And now not only are we going to make more money, we're also going to be able to basically to cut some G&A in some of those areas, because as you can imagine to operate 40 stores, it's more expensive than basically to run them as dealer location. But just the better profitability on those 40 stores is going to be -- the benefit is going to be approximately $2 million better than what they're doing right now.

Thank you. I appreciate the additional details. I appreciate you guys answering my questions and best of luck here the remainder of the year.

Thank you, Bobby.

Thanks, Bobby.

Thank you. And we will take our next question from Kelly Bania with BMO Capital.

Hi, good evening. It's Kelly Bania here from BMO. I was wondering just if you could clarify some assumptions here on your outlook for 2024, seems like some of the key changes to the underlying outlook here assume maybe a higher fuel margin. You talked about some of the factors there in recent months, but is that offset by a lower same-store sales outlook or are there any other major kind of puts and takes? And I guess within that was surprised to see the acquisition of CBQ in here, so I was just curious what the annualized EBITDA contribution of that is and what that added to your full-year outlook?

Yes, so Kelly, you're spot on with the key full-year assumptions. So, again, we are seeing structurally higher cents per gallon. We've seen it May, June, and July now, and so therefore we're taking our midpoint of our guide up to kind of that $0.41 range in the middle of what we shared for the Q3 guide, so that is the increase there. And then on the other side, we are seeing some pressure in the merge sales. We've kind of taken that down for the year to be more consistent with trends, so kind of down low to mid-single for the year, so those are the major changes there. On CBQ, look, it's 21 stores on over 1,500. It's not a big number. It was factored into our high-level view at the beginning of the year, so again, not a major impact there to the business. It's a nice tuck-in. We're going to drive synergies there, but again, this is not a larger deal that's going to significantly move our guidance number.

If I may jump in, Kelly, if you don't mind, I just want to add a couple more things to the context over here. I just want to remind everybody that 70% of the industry, this is a very resilient industry. We are talking about 150,000 convenience or gas stations in the U.S. 70% of it is mom-and-pop. One of the reasons that we believe we're going to see some elevation in CPG, as we saw over the past three months, and, again, as I said, I mentioned, July just finished between 42% to 43%, is everybody's facing the same microeconomic pressure. It's just something that we see across the industry, across almost every industry right now, and we believe, no different than what we saw during COVID and no different than what we saw in the past. When there is pressure, the only place that you can actually push margin very, very quickly and make changes very, very quickly is only outside. And when we see decline of inside sales, traffic, and gallons, the only way to basically to make it back somewhere else is only outside the pump. So, finishing July, August with $0.42, $0.43, we believe that we're going to continue to see operators just elevating their margin outside the box until things will actually come back to normal.

Okay, that's helpful. And just on the dealer conversion process, so 40, I think you said, converting by the end of the third quarter. I guess two questions. What are the key characteristics? What are the key things that you're looking for? Is it really just kind of culling this bottom quartile, or maybe can you give us more color on what this might look on a multi-year basis in terms of what the mix of the business could be between retail-operated stores and the dealer network?

So, this is something that is still ongoing, as I mentioned. We started to explore that a few months ago. This is something that is still ongoing. I think the one thing that we're looking, when we actually make decisions, of course, the number one thing, of course, is profitability. But at the same time, we want to make sure that some of those stores, do we really have the opportunity and upside if some of those stores. And if we feel that the capital that we are going to allocate towards those stores or the investment that we are going to allocate, it's not going to fit the criteria or the return that we are looking to achieve over here. We feel that we'd rather just move them to our wholesale segment. The wholesale segment is a very great segment for us. As you can see the results, it's technically flat year-over-year. And as long as we, as I said, as long as we keep control on those sides and we can figure out the way out to convert them to something a little bit more profitable, this is basically the plan. We don't have a number right now. We don't have a particular brand, geography or transaction on the table right now. But as I said, as we continue to evaluate them with the big transformation plan that we have that we're actually developing and develop, we're going to continue basically to share more information with you guys. And we felt the first time we brought it up was last quarter. As I said, this quarter we already have 40 that we identified that we're in the process of converting. Some of them are already converted. And we're going to continue to update you guys on an ongoing basis, on a quarterly basis.

Thank you. It appears that we have no further questions at this time. I will now turn the program back to Arie Kotler for any additional or closing remarks.

Thank you, Madison. We'd like to thank everyone for the great call. Thank you for joining us today and have a great evening.

Thank you. This does conclude today's Arko Corporation second quarter 2024 earnings. Thank you for your participation. You may disconnect at any time.