Greetings. Welcome to Arko Corp.'s Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jordan Mann, Senior Vice President, Corporate Strategy, Capital Markets, and Investor Relations. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to Arko's Second Quarter 2025 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 2025, 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 2024. Before we begin, please note that all second quarter 2025 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 2025 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 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, except as required by law. 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 adjusted EBITDA and reconciliations of 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, 2025. 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 our subsidiary, GPMP. And now I would like to turn the call over to Arie.

Thank you, Jordan, and thank you all for joining. Like many in our industry, in the second quarter, we continued to navigate a challenging macro environment marked by geopolitical events, persistent inflation, mixed consumer sentiment, and restrained personal consumption. Through it all, our team remained focused and executed with discipline, as reflected by our financial performance this quarter with adjusted EBITDA above the midpoint of our guidance. In this environment, we have seen more price sensitivity, greater reliance on loyalty-driven offers, and continued movement towards value-based purchasing. We stayed grounded by focusing on execution, merchandising discipline, loyalty-led engagement, and controlling expenses, including smarter labor scheduling and tighter cost management at the store level. We expanded merchandise margin by 80 basis points year-over-year, driven by category mix, effective promotions through the work our team is doing with our suppliers, and our continued optimization of assortment through back bar resets and loyalty target offers, all while being responsive to evolving consumer needs. We were pleased with improved performance in most of our core categories, and we believe performance reflects the effectiveness of our promotions and our focus on driving growth in key categories. While the second quarter reflected many ongoing pressures, we saw consecutive improvement from May to June, and we are seeing further improvement as we enter the third quarter. Through late July, early third-quarter trends in both same-store gallons and inside sales have been more favorable than what we experienced in Q2, with same-store sales growth for July, excluding cigarettes, up slightly year-over-year. Total merchandise same-store sales trend in July was 3 percentage points better than total merchandise same-store sales for the second quarter, which was the best comp performance we've seen in the last 18 months. It's still early, but we are encouraged by what we're seeing so far.…

Thank you, Arie. Good afternoon, everyone. Turning to the second quarter 2025 results. Adjusted EBITDA was $76.9 million for the quarter compared to $80.1 million in the year-ago period, with the decrease caused primarily by lower retail merchandise contribution. At the segment level, our Retail segment contributed operating income of approximately $80.4 million compared to $87.9 million in the year-ago period. Same-store merchandise sales, excluding cigarettes, were down 3% versus the year-ago period, while total same- store merchandise sales were down 4.2%. Same-store margin rate was up approximately 50 basis points versus the prior year. Same-store fuel contribution was down approximately $0.8 million with a 6.5% decline in gallons, mostly offset by an increase of $0.026 per gallon. Same-store fuel margin was $0.45 per gallon for the quarter. Same-store operating expenses were down approximately 0.8%. Turning to our wholesale segment. Operating income was $23.2 million for the quarter versus $21.3 million in the year-ago period. Fuel margin was $0.101 per gallon versus $0.09 in the year-ago period. Gallons were up 3.9% for the quarter, driven by our channel optimization program, which contributed more than 19 million gallons for the quarter or almost 8% of total wholesale gallons. Excluding channel optimization, gallons were down approximately 4.1% at comparable wholesale sites. We continue to be pleased with the impact of our channel optimization program, which has driven approximately $4.5 million in incremental profit contribution for the first half of 2025. As Arie mentioned, we continue to expect that at full maturity, this program will deliver in excess of $20 million in incremental operating income across our combined retail and wholesale segments. This outlook excludes additional G&A efficiencies we expect over time as we transition to a smaller retail segment footprint. Moving on to our Fleet segment. Operating income was $13.1 million for…

Thanks, Rob. I'm proud of the way our team continues to deliver in the face of ongoing challenges. We are deepening customer engagement. Our promotional efforts are yielding results, and we're making progress on our transformation road map. We are entering the second half of the year with clear priorities and a focus on creating lasting value. We will now open it up to questions.

[Operator Instructions] Our first question is from Bobby Griffin with Raymond James.

I guess, Arie, first for me, I wanted to maybe dive into your comments on July. Pretty notable change there, at least through the 1 month of the new quarter. Curious if you can unpack it further on what's maybe driving that industry trends versus the channel optimization, some of the new programs coming on? Because to your point, I don't think we've seen ex-cigarette merchandise sales close to flat in a very long time, and even gallons seem to be getting a little bit better. Bob.

Yes, you are absolutely correct. I mean we saw improvement from -- basically from May to June, June to July, but this is probably the best improvement we've been seeing over the past 18 months. We don't know if this is just because all of a sudden, something turned around. But what I can tell you is probably that I think the value and the messages that we're sending out there with Fueling America, I believe our offering, our assortments, our promotions are very, very, very strong. And we see them driving trip frequency. I mentioned, for example, the loyalty trip frequency. So just to put dollars in sense, we are talking about going from $73.83 to $110, which is almost 50%. We're talking about trips up almost 3 trips basically per month between loyal members and non-loyal members. We see an increase in customers purchasing the qualified product of Fueling America's. And as you can imagine, all of those products are products that have a higher margin. I mean, I'll give you an example, just something that we're actually promoting this month. If you buy 2 candies for $6, you get $0.50 per gallon. I mean this is skittles and M&M, for example. I mean this is huge. Another one, if you buy Marlboro, 2 packs of Marlboro, $0.25 per gallon. So I hope that this is a result of what we've been doing over the past few months, but this is absolutely was very positive. And of course, we're going to take it.

And then, Rob, maybe just switching gears to the channel optimization, kind of a 2-part question. I don't think you guys want to give a full number of how many stores you think you can move the dealer. But maybe to help us think about it, are you identifying more stores today than you maybe identified 6 months ago? And if the program does run through '26, do you have to wait until '26, or do we have to wait until '26 to see some of the G&A savings start to flow out? Or can that start to flow out earlier, and you could view the program at scale sooner?

Yes. Thanks, Bobby. So no, I think the program store list, as we said, we're not putting out the full number yet, but it's been defined for a good period of time now, and it's now about execution. And Arie had in his prepared remarks what is under contract, and then there's a substantial amount still after. So I think we know what that number is. We've known what that number is, and we're executing on it. In terms of G&A savings, no, we already are seeing savings in G&A in the second quarter, you can see the total G&A number was down. That number is inclusive of a certain amount of the restructuring expense that is in. So we are seeing it already. So things that are directly related to stores, field leadership, things that are directly one-to-one related, we're going to see real time. Things that are like prepaid annual software licenses, we will see when we get into 2026. So again, that pace of G&A will accelerate as we continue, but we are seeing some of it already. I would estimate we're probably 25% to -- maybe 1/3 of the way through the first tranche of savings. And I do believe that there's going to be more. So again, this is just the first tranche that we see. And as we get deeper into the smaller footprint, we will continue to look for opportunities on that front.

And then lastly, for me, just CapEx, the 22 fee properties, I mean, we saw the absolute dollar number step up year-over-year meaningfully in and up sequentially. So any color just on how big of the 22 fee properties were and driving that? And just thoughts on exactly kind of what that is for the business, and help me understand that better.

You're referring to the 22 properties that we purchased?

Yes. Yes, just -- yes, on the CapEx. I'm just trying to understand -- I'm trying to kind of get at a run rate for core CapEx, and you had this quarter, it stepped up sequentially, but you also called out you purchased 22 properties. So just trying to better understand what's normal and what was part of that property purchase.

Bobby, that number for the property is about $22 million. So when we talked about at the beginning of the year, we kind of talked about the prior 2 years, full year CapEx was about $110 million to $115 million. And while we don't provide guidance for CapEx, if you back out that $20-ish, $22 million from where you are, you're kind of on that similar pace from the past 2 years. So again, that was -- those are opportunistic at good cap rates for us to buy, and we look for those opportunities as they develop. But that is kind of a one-time. We financed it with M&T. So again, it doesn't impact our cash position. We offset that with financing.

Our next question is from Daniel Guglielmo with Capital One Securities.

The first one, you all mentioned macro headwinds and shifting consumer spending in the press release, but the July commentary was positive. For the guidance next quarter and the full year, what type of macro and consumer spending environment are you all assuming? Just trying to get a sense of what's kind of built in there for your assumption.

Yes. So as we talked about in prepared remarks, we have the merchandise sales for the third quarter position -- same-store sales position down modestly. So again, this is on higher productivity stores. Again, the stores we're keeping higher productivity. But we do see, again, a macro, we are cautious, and we're at a negative modest same-store sales performance. We're not talking about the fourth quarter yet, Daniel. There's -- as we look sequentially on -- as Arie mentioned, we've seen since February, with the exception of a little blip in May, we've seen month-on-month sequential improvement in the comp sales trend on the merch side. And so that is a question in terms of does that continue going deeper into the back half of the year? Or does it stay where it is? That's something, again, we have a little more confidence near term in Q3 because we've seen July, we see where we are right now. Fourth quarter, we're going to see as we get deeper into the third quarter, what that looks like, and we don't really guide the forward quarter at this point.

And then the second one is on the transformational plan. We've seen it kind of drive down the site operating expenses line. And I know labor is a big piece of that line, especially kind of with demand increases in the summer. How have wages trended this summer versus last summer kind of when thinking about the business?

Yes. We've seen consistent wage performance up in that 3% range, and that's been consistent quarter-on-quarter for some time now, since we got clear of the pandemic. So that's kind of a baseline inflationary pressure that we're seeing about 3%. So as you think about the operating expense itself being down, the decreased hours as our field organization deals with lower top-line demand, we do reduce hours, and that is partially offset by the increased rate that we're seeing.

And then just as a follow-up to that, what you said, as you continue through the transformation plan, you kind of -- you're going at kind of low-hanging fruit, it feels like do you expect kind of less of a benefit as the kind of the later stores are taken out? Or how are you thinking about that?

I don't think we're expecting a lower benefit. I mean, Arie, I don't know if you have a point of view on that. I think each deal is different, depends on -- go ahead.

Yes. Let me jump in, if you don't mind. Listen, there is a direct expense associated with the stores that we are dealerizing. I mean I'll give you an example. When we dealerize 10 stores, by definition, you are eliminating discrete managers. And this is just one example, okay? We have people in the back office that do accounting work, let's call it, 2 per 10 stores, for example. We have -- when you get to 80 stores, you're eliminating all of a sudden a regional manager. So again, there is a lot of position tied directly with the operation. So as you remove stores, by definition, you're going to reduce G&A. That's part of the outcome.

And Arie, I think he's looking to tease out as we get deeper into the optimization program, do we see the deals getting less favorable? So again, I think we -- there's no reason to expect that.

No, no, no. No. We are sharpening our pencil all the time. I mean at the end of the day, if you think about it, the plan that we put together over here, we're talking about 500 stores in around a year to 18 months. I mean this is a big project. This is a big project for us. And I think the reason we are moving forward very successfully is because we have the second segment, which is the wholesale segment, which help us tremendously over here. But so far, like I said, so far, we are very, very pleased with the traction. And like Rob said, I mean, we expect to continue to see benefits just ramping up further over here.

Our next question is from Anthony Bonadio with Wells Fargo.

So I wanted to start out with fuel margins. I know you guys had another strong quarter on that front. But I think industry data has maybe been a little softer than one might think, just given breakeven dynamics and how soft gallons have been. So can you guys just talk a little bit more about what you're seeing out there competitively on the fuel side and whether you've seen any change there as the year has progressed?

I'll start, and then I'll let Rob maybe finish with some remarks. So if you're looking on the industry in Q2, the national demand was down 4%. That's the national demand. I understand we were a little bit down than the national demand. We are very, very competitive, very, very competitive. I think the softwares and the systems that we have in place helping us to -- just to optimize and maximize gross profit dollars over here, making sure that we continue to be competitive. And as you can see, this particular quarter, we were basically trending close to basically $0.45. So I think we see an improvement in fuel margin. We see so far, July, the same thing goes to July. We saw improvement month after month, but July, we basically saw a decline that is basically half of what we saw in Q2. So not only that we were able to expand margin, we also see an improvement in -- basically in fuel gallons decrease in July. And we hope that's going to be sustainable. That's what we hope.

Anthony, the CPG can pop significantly when there's volatility. And I think we saw 1 month, specifically April in the second quarter, where we had a $0.07 increase year-on-year, and that drove significant profitability into April. And those things -- I mean, we're in an uncertain macro environment right now, geopolitically everywhere, and those sorts of things, those trends, even though there could be some pressure on gallons, that uncertainty certainly can be supportive of higher CPG.

So it sounds like people are sort of behaving rationally still.

Well, I think people have the same issues with trends. If you are 4% or 6%, you still have a trend down. And I think when you have trend down, people need to pay. The smaller guys are probably like everybody else, need to pay their bills. And in order to pay the bills, the only way to make it happen, you need to increase margin. And that's what we've been seeing. I mean, listen, the margin is up almost $0.035 in Q2. And we continue to see strong margin going into July, very similar margin going into July. So we expect or we hope that margin will stay strong for the remaining quarters.

And then I just wanted to touch on OTP or alt nicotine. I think there was some rhetoric out of the FDA recently on an increased focus on the illicit market. So can you just talk a little bit more about what you're seeing in that category? And just any thoughts on a potential crackdown there and how you guys might be positioned to benefit from that?

Yes. So if you remember, Anthony, at the beginning of the year, I made the big remarks regarding to our back bar refresh in basically in many of our stores in almost 1,000 stores. Since that, I can just tell you that OTP was a very, very strong, basically category for us in Q2. OTP was up basically 2.6% in sales. And at the same time, our margin was up 170 basis points. So this is a category that, at least for us, we are paying a lot of attention to this category. And I think the -- those crackdowns can only help us against competition. Some of the competitors, I can tell you, I've been seeing that for a long period of time that some of the competitors are selling some illegal OTP product. We're, of course, selling only illegal products. And I think it's about time that we start to see some enforcement over there. But regardless, like I said, OTP for us was a very successful story since we refreshed the back bar offer more variety. And like I said, I mean, it's a big success, and it's a big contributor to the gross profit dollars over here in Q2.

Just the OTP penetration is 10% of the total assortment versus cigarettes, and more in the 26%, 27% range. But the contribution margin from OTP was essentially equal to cigarettes. So as we continue to comp positive there, it's going to contribute more and more as we go forward to really mitigate some of the downside with cigarettes, the structural decline in cigarettes.

Our next question is from Benjamin Wood with BMO Capital Markets.

This is Ben on behalf of BMO and Kelly Bania. Just wanted to circle back on the dealerization and just try to understand, is the pace of dealerizations going in line with the original plan? I think you're targeting now more than 500 stores, but you mentioned dealerizations are expected into 2026. So is the message that the total number is consistent with the long-term or with the prior communications, but is this maybe a slower pace? Also just trying to understand is this total number, is that all part of the $20 million savings target? Or should we expect you to update that savings as you guys get deeper into this?

I'll let Rob discuss the $20 million, and then I basically give you my two cents regarding to the pace. We are very pleased with the pace, but I'll let Rob jump in.

Yes. Ben, the number that we shared in excess of $20 million is the fully executed program. So while we haven't shared the total store count, that is inclusive of all the stores. So again, in excess of $20 million, but you should not expect us to be updating that number. That's consistent with what we're seeing so far in terms of run rate, and that's where we expect to end up.

Yes. And Ben, regarding to the pace, as I mentioned earlier, just think about it 500 stores in 18 months, this is unheard of. I mean, it's going in accordance to our plan. Like I said, we are very, very pleased with that. What sometimes take a little bit longer is just getting licenses and putting everything in place. I mean we want to make sure that all of the dealers that are taking over some of those stores, they are fully equipped and fully licensed. We don't want to be in a position that God forbid, they're losing a license and they're losing sales. For us, this is a long-term play, and we want to make sure that those guys continue to make money, and we want to make sure that they get all of their licenses in order to continue to operate from the minute that we stop operating.

And then could you just provide some details on this new store format for the NTIs and remodels? How does the square footage compare to the average store in your portfolio? And then what about the labor needed? How many employees will run it versus your store average? Trying to understand the complexity of it versus -- with this new food service versus kind of the other store-based you're running.

Sure. So most of -- we opened the first one last week -- sorry, last month, last month on June 25. And this particular store, we did not change any of the square footage that was a large enough store, over 3,000 square feet. So we basically just added beer cave and some other freezers. -- of course, in addition to that, all of the food service equipment. Over there, we added deli before. So we just converted the deli to our new concept. We remodeled the store from the inside and the outside. So in this particular case, we did not add any square footage. In the stores that we opened this morning, we were able to add additional square footage to the -- basically to the original store. So this is something that we did. In terms of labor, and we'll share some picture later on. But in terms of labor, we have a shared labor model, which means we need one person literally to operate the food service concept that we put in place over here.

So then is it kind of correct to assume that -- or maybe I'll ask you this is what percentage of the remaining store base after you've gone through this dealerization do you think would qualify for this kind of full remodel?

Well, the -- we are in a phase of structuring and engineering and -- but the stores that we are planning on keeping, we believe that the majority of them basically can fit. Remember, when we actually put this plan together, we put the plan together based on the fact that we have different types of stores, different types of square footage, and we want to make sure that we can customize in most of those stores the food service concept that we put together. So this is something. But right now, at the moment, we are -- we already identified another tranche of basically of stores. It's approximately 25 stores that were already identified in the same geography that we started. We started over here in the Virginia market, in the Richmond market. And the plan is basically to finish this tranche and continue. But again, we believe that the stores that we are planning on keeping as part of our retail segment, we will be able to customize in the majority of those stores, the food service concept and everything that we did in the last 2 stores, the last prototype that we just -- the new format that we just opened last month and this morning. Which, by the way, that was one of the decision of dealerizing some of the stores that we didn't feel will fit with this concept or with this new format that we brought to market.

Our next question is from Hale Holden with Barclays.

I just had 2 on other tobacco products. I was wondering, I did hear those comments at the beginning of the year, and I was wondering where you are in the bar rollout and/or how much more work you had to do to get the allocation space allocation to the product, or if you were fully built out at this point?

We are fully on the stores that we are keeping, and like I said, it's over -- it's around 1,000 stores that we have out there. We already invested and finished our work on the back bar. We completed this project. This project was completed by the end of Q1, beginning of Q2. So we are we're done. It's just a matter of adding additional assortment to the mix of the year.

And then on the store conversions that Ben was just asking about, any thoughts, Arie, on what would constitute a success in terms of either merchandise sales lift or same-store lift versus maybe where the control group is?

Sure. First of all, traffic. One of the reasons behind it, of course, is making sure that we increase traffic. Success will turn to be an increase inside margin because adding food service over here, by definition, the gross margin on food service is much higher than basically what we saw before. So the success for us will be increase foot traffic, increase the basket size associated with that, expand our food service. So far, we get very nice results. I can tell you that the store that we opened just last month on June 25, just in the month of July, sales excluding cigarettes in that particular store are up 6% compared to prior year. So that's for us. So far, we are very, very pleased on what we're seeing over here.

Great. I'd love to see some pictures in the next quarter deck. It's hard for me to see them from the satellite photos outside.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Arie for closing remarks.

Thank you for joining, everyone. We are focused. We are on track, and we are excited on what's ahead of us. Have a great evening.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.