Greetings, and welcome to the Arko Corporation Fourth Quarter and Full Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. The 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 call over to Ross Parman, Vice President of Investor Relations and Government Affairs. Thank you. You may begin.

Thank you. Good morning and welcome to Arko 's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President, 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 furnished to the SEC this morning and is also available on the Investor Relations section of Arko's website at www.arkocorp.com. Unless otherwise stated, during our call today, we are comparing results to the same periods in 2020. All fourth quarter and fiscal year 2021 financial information is unaudited, and during 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, 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. Today's press release and the company's filings with the SEC include 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 the company expects to file its annual report on Form 10-K for the year ended December 31, 2021 on February 25th, 2022. Except as required by federal securities laws, Arko does not undertake to publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events, changing circumstances, or for any other reason. Please note that on today's call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA, adjusted EBITDA, and adjusted EBITDA net of incremental bonuses. While the company believes that 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 the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we are 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. On today's call, Arie will review the quarter and year ended December 31, 2021. Don will then review our financial results in more detail before they take your questions. And now, I would like to turn the call over to Arie.

Good morning, everyone. We are pleased to report strong results for the fourth quarter in fiscal year 2021. For the full year, adjusted EBITDA net of incremental bonuses was a record $256.6 million. Fourth quarter 2021 adjusted EBITDA net of incremental bonuses was $58.4 million, a 44% increase versus the fourth quarter of 2020. We have undertaken long-term strategic initiative in our convenience stores and in our ORSL division that we believe position us well for considerable long-term profitable growth. Inside the store, merchandise margin expanded 290 basis points in the fourth quarter to 30%. We continue to drive margin expansion broadly and in key categories. We also saw considerable margin growth in grab-and-go and frozen foods, a strategic pivot that has been a hit with our customers and currently continued to see substantial growth. In fuel, we were able to grow our retail margin to $33.5 per gallon for the fourth quarter, despite rising fuel prices. In May, we acquired 60 ExpressStop stores and gas station in Michigan and Ohio, in November, we acquired 36 company-operated Handy Mart convenience stores and gas station, lots of development sites all located in North Carolina. And during 2021, we rapidly integrated and realized significant synergies with Empire. For the year, these acquisitions added $36.8 million of merchandise contribution and $53.9 million in retail fuel profitability. We recently announced that we have agreed to buy the cardlock business and certain other assets of Quarles Petroleum. Quarles ' footprint is in prime locations along the northeast and southeast seaboard, our own territory. We start easily acceptable commercial side exclusively for fleet fueling of light industrial trucks and commercial vehicles. This is an exciting and unique deal that we believe will drive strategic growth with 185 cardlock sites, Quarles is the largest fleet fueling cardlock…

Thanks, Arie. It's great to be speaking with you all today about both our strong fourth-quarter and full-year 2021 results. Beginning with the quarter. Total revenue excluding fuel was $418 million, a 6% increase from the prior-year period. Merchandise margin dollars increased by $17.1 million versus prior year, while merchandise margin increased to 30% from 27.1%, largely due to our continued strategic efforts and high-growth categories such as frozen food and grab-and-go. Retail fuel profitability excluding intercompany charges for the quarter increased $16.6 million compared to the prior-year period, with Empire, ExpressStop, and Handy Mart accounting for $9.3 million of the increase, coupled with same-store fuel profits increasing by $7.5 million. Retail fuel margin in the quarter was $0.335 per gallon, versus $0.293 per gallon for the prior year. For the fourth quarter of 2021, wholesale fuel profitability excluding intercompany charges increased $7.6 million compared to the prior year, with most of the growth a result of the Empire acquisition. Fuel contribution from fuel supply locations grew by $5 million for the quarter compared to the prior year, driven by an approximate 15 million gallon increase in fuel volume, and a 2.1% increase in fuel margin per gallon for these locations versus the fourth quarter of 2020. Fuel contribution from consignment agent locations grew $2.6 million for the quarter, compared to the prior year, due to an increase in fuel margin cents per gallon of $0.65. Volume was flat compared to the prior-year period. Fourth quarter store operating expenses were up $20.7 million or 14% versus prior year due to incremental expenses related to the ExpressStop, Handy Mart, and Empire acquisitions, in addition to higher credit card expenses and increase in expenses at same-stores. General and administrative expenses increased $3.8 million or 13% for the fourth quarter, as compared to…

Thanks, Don. I'd like to thank all over 11,000 team members for their exceptional efforts to exceed our customer's expectation. That's why we achieved these excellent results, we are excited to continue to execute drive growth and increased stockholders value. We believe that we are a unique business and differentiated market leader. And I'm pleased with the progress we have made so far. Thank you for joining the call today and your interest in Arko. I will now turn it over to the Operator for questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please while we poll for your questions. Our first question is coming from the line of Kelly Bania with BMO Capital Markets, please proceed with your questions.

Hi, this is Ben Wood on for Kelly. Thank you for taking our questions. First off, in light of guidance, could you explain some of the puts and takes in the model for 2021, maybe what came in better than expected or lighter than expected. Seems like Empire and fuel margins were a little better, but gallons, particularly same-store gallons, might have been lighter. Hoping you can help us think about how the model changed over the course of the year and then maybe where you see the most opportunity for upside going forward in FY '22?

Sure. I will let Don take over the question about the model.

Yes. Sure. And again, without looking at the specific numbers from BMO, and just looking at consensus, I think the beats were in wholesale fuel margin and retail. I think the takes were in SG &A overall. I saw those two as the biggest differences in the model.

Okay. Thank you. And then the fuel margin outlook for 2022, hoping maybe you could speak a little bit about that. We are thinking with the political environment in crude prices, they are pressuring margins recently. But is it reasonable to think that CPG margins could be flattish or north of 30 in 2022? And then if margins do rise with these higher oil prices, what impact of higher gas prices would we see on the consumer, whether it's trips or basket size? Thank you.

Thank you for your question. Well, if you're really looking on 2021 for a second and you're looking on the same-store gallons of 2021, the gallons were slightly down a little bit for the quarter. However, as you can see, the retail margin expanded to $0.335 per gallon versus the $0.293 last year, same time. I can't talk about the situation in Ukraine right now, I think it's too early to talk about any tax from the situation, but I just want to remind everybody that we do not any commodity position. It's very -- it's really remind me what happened in 2008. Similar situation when oil went from $60, $80 to $140 in a very short order. We saw very very high prices. But eventually, those prices actually settle down at the end of the day. And there is no question that the minute price of oil goes up, people maybe drive less, but that's in terms of fuel. However, when we're talking about the store, and especially in light of COVID-19, we already see that people are spending less time on the road. They're coming less time to the store wherever I mean, their basket is much large than the basket that we actually saw before. I don't have any reason to believe that anything is going to change. That's me. That's my belief right now. I don't think anything will change between 21 to 22 for the time being.

Okay. Thank you. That's helpful.

Thank you. Our next questions comes from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

Good morning, everybody, thank you for taking my questions. I guess, first, there's a lot of moving parts with gallons moving around with the variance breaking out on different things and then margins. But when you look at the year-to-date period of January and February of 2022 and then compare it to passed 4Q, are you starting to finally see some leveling out of the gallons from retail perspective? And maybe we're getting back to closer to normal, not back to '19 levels, of course, but we're starting to see less variability on a weekly basis or a monthly basis. Is that fair?

Bobby, I can't really talk about Q1, but what I can tell you is that you see the trend in Q4. And obviously, in Q4 you saw that basically our gallons are almost flat to the same basically Q of last year. So yes, I think people are driving more often versus, and I think as COVID continue to get lighter over here, there is no question that we see gallons coming back. The one thing I will refer to is that, yes, gallons are coming back, but as you can see, the margin continue to be very, very strong in light of those basically gallons coming back. So I think that's the only different probably from what we saw in 2021 first quarter to 2022.

Okay, that's very helpful. And then we continue so great progress on the merchandise margin. Another great quarter up close to 300 basis points within 290 basis points to be exact. Where are we in the journey? What you're working on there? I know there's multiple initiatives going on, but when we think about 2022 is it going to be a year, more modest improvement or can we still -- is there still a lot of low-hanging fruit where we could see the big step function changes in the merchandising margins?

First of all, it's a great question because as you mentioned and as I detailed earlier, if you're looking on our performance, this is not a one-time show, this is a long-term initiative. We started -- and I'm going to -- just going to use couple of example because I think it's very important to basically -- to mention them. So the first one is, if you remember all year 2021, I was speaking about our initiative of grab-and-go and frozen food. And if you're really looking on this category in Q4, we saw a 16% -- 1,600 basis points increase in frozen food in Q4 versus Q4 2020. We saw 580 basis points increase in grab-and-go in Q4 of 2021. And if you remember, we started this initiative at the beginning of 2021 and now we basically completed the initiative. We have 600 and -- close to 690 reserves that we added and 525 grab-and-go cases that we added. I think that's one of the key things that actually drives those margin substantially. The margin on frozen food for Q4 was 39.1% and the margin for grab-and-go was close to 39% in Q4. The same thing we see in some other categories. One of the best categories for the quarter was pack dev. We saw a margin increase of a 130 basis points and we saw a sales increase of 6.3%. Why? because people spend more time out, people are going out, basically, and increasing their purchases. As I said, I think those are really the categories that are here to stay. I don't need to tell you that nicotine is one of the areas that we like to concentrate. You see that consumption on cigarettes is going down quarter-after-quarter, year - over-year. However, if you're looking on our…

Okay. I appreciate that detail best of luck here in 2022.

Thank you.

Thank you. Our next question is coming from the line of Mark Astrachan with Stifel, please proceed with your questions.

Hey, guys, good morning. This is actually Chris Armes on for Mark. Just wanted to start off here on the cost side. Obviously in an inflationary environment here. So if you could just talk a little bit to success in passing through inflation in the store. And then maybe also comment on what you're seeing in terms of wage inflation?

Sure. I'll start with inflation. Obviously, everybody knows when you have a 7% inflation, this is -- of course, most of that is associated with increase of cost from effectors, and at the end of the day, what we have to do is basically to pass those costs to consumers. It also include phrase and supply chain issues that everybody is foreseeing including ourselves. I think we've been very, very successful remaining competitive, even though we are passing prices to the consumer, at the same time, we make sure that we are competitive on our prices, and at the same time, we're making our margin over here. And just to remind you, Chris, our strategy was always to maintain margin rates and penny profit. That was always the strategy. And again, we have no choice. This is the thing -- I think the one thing that I can talk about labor is that our labor model, I think, is a little a bit different than some of the competition. We can run -- our average storage, 2,500 to 3,000 square foot per store. and we can run some of those stores with one to two basically people to the extent we see a clench over here. And, no, there is no question that this is a very, very tight label market. In order to manage that, and we manage it very well, we have program to keep us competitive, we have sign-on retention bonuses, we have -- sell all kind of program in order to make sure that our stores will have the appropriate labor to run those stores.

Got it. Thank you. If I could just follow up on M&A, congrats on the acquisition. It does seem like the pace of the acquisitions is increasing or is that evidence of maybe market multiples are becoming more reasonable? And then also on the specific acquisition, primarily fuel play. How do you guys think about an acquisition like you announced today versus those with more of an in-store footprint.

Sure. Sure. Sure. Good question. So first of all, as you saw in 2021, we completed the Empire acquisition at the end of 2020. So I would say that we spend a lot of time to make sure that we synergize the two companies and we make sure that we capture those synergies, after doing such a large acquisition at the end of 2020. At the same time, we did two acquisitions, 60 stores in May. The Express Stop acquisition in the Midwest, we completed another acquisition in November. Thirty six stores, great stores, and the merge brand over a 100 years, brand being the color lineup. And while we're doing that, we start working on the Quarles acquisition. The interesting -- this is a very unique deal that we believe will actually drive strategic growth for us, the team did a great job of the year and you know what's interesting about this particular deal is that this is the largest cloud look operator on these costs as I mentioned. And remember, the east coast, I'm talking Virginia, North Carolina, this is really our own territory. So they would think about this business is that this is a very attractive diesel and gasoline mix. Approximately 80% of those stores, actually, those locations are actually selling diesel. To basically to large trucks. It's a lot of -- basically the largest east coast fleet business that is actually there and it's like to be very, very difficult to replicate that. So that's something that we felt can help us to actually boost our business in respect to basically to Empire. From a multiple standpoint, I think I mentioned it almost on every call. It's not the amount of acquisition, it's basically the quality of the acquisition. And as I refer on the call, we are adding $17.3 million. When everything is said and done, we are adding $17.3 million of adjusted EBITDA and we end up paying $40 million when everything -- after rent, after re-utilizing the line from Oak Street, we're paying $40 million. If you are really looking on an EBITDA multiple for us, pre -synergies, you're talking about a little bit over 2.3, 2.4 times. And I think that's the one thing that's different between us and some others. We know or we do a lot of equity deals to basically enhance our profitability over here. So I don't think anything has changed in terms of what details, I just think that -- like every year, the beginning of the year, there is a slowdown in acquisition and I think after Q1, usually the beginning of Q2, people basically start to basically think about selling and we see a lot of more opportunities coming in the second and the third quarter. That's usually what we saw in the past.

Chris, if I could add one more thing to what Arie said, and it is the unique acquisition and you've probably passed a lot of these cardlock offer all throughout Richmond when you've been driving around, but again, as Arie said, 80% diesel. While we are making efforts on EV as you heard Arie talked about, we're doing two in Colorado and we believe we're going to jump on EV wherever there is. We believe that the trucking side of this is going to be a later adopter of EV, so we think of this strategically as a good move for us because obviously there's more trucks on the road with things being ordered online, big fleet business. So we think there's less risk here, although we're not ignoring it. So we think it's a good strategic move for us.

Just to finish on this -- on this line Chris, remember this is a 24/7 business and all of those locations are unmanned locations. So going back to what we discussed earlier about labor and inflation, I mean, that's one of the thing we like about that. That the -- those locations are actually unmanned facilities, and they built specifically for commercial fleets and light industrial vehicles that actually visit those locations.

That's helpful. Thanks, guys.

Our next question is coming from the line of William Reuter with Bank of America, please proceed with your questions.

Good morning. I just have two. The first is I don't think I saw a capex expectation for fiscal year '22. Do you have an estimate of what you expect to spend this year?

We don't put projections for 2022, but we can refer if you want. Don can refer to basically to 2021, what we spent in 2021 if that's going to be helpful for you?

I think the best way again, because we don't put up projections and you've heard our initiatives and what we're doing. So I would just look at our trend and just go from there. There's nothing specific we're going to put out as in terms of projections of capex, but you've heard of efforts, we're doing is already outlined with the Sbarro's, also outlining what we're doing on the remodels we have scheduled the new to industry and the -- and also with the raze and rebuild. And again, one of the things I want to point out to in our, and this is not something we specifically said, but we did have a significant, not a lot, but roughly about $10 million of our capex last year was spent on EMV, which we project we'll probably spend again this year, but that's not something that's going to be going on and on and on. You have different things going back and forth, we also spend about $9 million on just purchase of land. And we're opportunistic where we have rights of first refusal, we'll take them. So I think we're looking at capital allocation going forward. I will tell you roughly about 1/3 of our capex of the 73 was for maintenance. The rest were from investment.

And I think it's very important to point over here -- sorry to jumping in. I think it's very important to point that if you're really looking on the net-net capex dollars that we spend of $73 million, only $26 million was really for maintenance capex and the rest of it was investment capex including purchasing some pieces of real estate, the remodels that we mentioned over here, the coolers and freezers. And so I think those are the things to think about it. So in terms of capex, we follow the initiative, we at least laid down for 2022. I'm talking about 525 B2 cup coffee machine and additional $50. Those are not the big, big investments that they, you will see when you actually do a raze and rebuilds.

On the topic of raze and rebuild, I -- when you guys did your high-yield offering, that was certainly one of the initiatives you guys were pretty excited about. So I guess right now you have six plan for the first half of FY '22, will you evaluate the performance of those and then think about the pace with regard to the second half of the year?

The answer is yes, this is -- what we had to do is recalls. I don't need to tell you, across-the-board, there's been a lot of shortages of material, construction increase, and we want to make sure that we continue to do what we said we're going to do, which is actually looking on return on capital. We finished the first two stores which -- those are really the, I'll call it the blueprint for the stores moving forward. We finished the two. We had the one store that we opened. And if you guys have access to our presentation that we published today, the first page of the presentation, the picture, this is a big raze and rebuild that we actually just completed in 2021. the results so far are very, very promising. The store looks terrific, the results are great. And to answer your question, what we're doing because of that, we are completing the six stores, we're going to learn from those six stores, but at the same time we're not waiting until we're going to finish the six stores. That's the reason we decided to basically move forward with the 50 Sbarro. An investment -- it's basically -- this is part of the remodel as you know is QSR. So we felt that this is a great opportunity for us to continue to expand our remodel. We have basically additional 50 Sbarro's that we actually going to build in, and of course, some other initiatives as well as after, of course, increased profitability and increased margin.

Okay. And then just lastly for me -- sorry, I said I only have two, but the share repurchase authorization was a little surprising to me. I view this as a growth story with lots of organic opportunities to invest as well as potential M&A that you've consistently pursued. I guess -- what is the thought process on repurchasing shares versus some of these other initiatives that probably have or may have higher IRRs.

Sure. Basically, just for your benefit. Over the past two years, we've generated over $300 million in cash from operations. This is something to make sure that you are aware of that, everybody aware of that, and in lieu of that, our liquidity is well over $700 million right now. So nothing is really going to change from an basically growth strategy or this is not something going to change. What with all of the remarks that I made earlier, and of course, you saw the results for 2021, we are performing very, very well, we show great results, and with our cash flow right now at this current price, we believe that we have a good opportunity, as simple as that. That's not going

to take away any of the other initiative or any on the team that we actually say last year and this year, we're going to continue to do that, but we have plenty of liquidity out there between over $700 billion in liquidity and over $750 million on the commitment with Oak Street. We felt that the price is just -- it's a great price for us and we would like to, of course, utilize this opportunity.

Understood. Alright, thank you.

Of course. Thank you.

Thank you. [Operator Instructions]. There are no further questions at this time. I would like to turn the call back over to Arie Kotler for any closing comments.

Thank you very much, everybody, for participating, and I'm very excited. This is just the beginning of the year, and as you can see, we are just in February, the end of February. Just announced today in the morning the Quarles opportunity, great opportunity for us. I'm very, very proud of the progress that we made over here so far, and I'm looking towards the future, of course. And in my opinion, this is a very exciting time for Arko moving forward. We have a lot of initiatives that I mentioned over here, the remodel of the six stores, the NTI that we are planning on breaking ground in basically in Atlanta, Texas in Q4, the 50 Sbarro stores that we are planning on opening this year Along the rest of the initiatives being to carp and of course, continue with the grab-and-go and freezers and the only thing I can tell you is that this is going to be a great year for us. I mean, the [Indiscernible] deal is a very unique opportunity that we just got into and we'll of course, we'll continue to pursue strategic acquisitions. And then the convenience stores and in the also basically business as we did over the past eight years. So thank you, everybody for your time today, and I wish you all the best.

Thank you. This does conclude today's teleconference, we appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.