Greetings, welcome to Arko Corp., Third Quarter 2023 Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets and Investor Relations. Thank you. You may begin.

Thank you. Good morning, and welcome to Arko's third quarter 2023 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 on Form 10-Q for the second quarter of 2023 as filed with the SEC and our earnings presentation are available on Arko's website, at arkocorp.com. During our call today, unless otherwise stated management will compare results to the same period in 2022. 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 third quarter 2023 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 reflects our current views as of today, with respect to future events and ARKO will not update or revise forward-looking statements made on this call, whether as a result of management -- of new information, future events or otherwise. On this call management will share operating results on both a GAAP basis and a non-GAAP basis. Description of those non GAAP financial measures that we use, such as adjusted EBITDA and reconciliations of these measures to our results, as reported in accordance with GAAP, are detailed in our earnings release and in our quarterly report on Form 10-Q for the third quarter 2023, or in our 2023 third quarter earnings presentation posted on our website. And now I would like to turn the call over to Ari.

Thank you, Jordan. Good morning, everyone. We appreciate you joining the call. As always, I would like to start off by thanking our dedicated team members for their continuous focus on improving the experience for our customers, their dedication to driving long term value to our stockholders, through execution of our marketing and merchandising strategies, and continued integration of our newly acquired businesses. I'm very pleased with our third quarter performance. This quarter, we navigated varying macro and economic environments. And we believe that our results compare favorably to what was a strong prior year quarter. You'll remember Q3 and Q4 of last year were strong quarters for us and the industry. I remain confident in our strategy and our team and believe we are well positioned to improve and unlock ever more value from our platform for our stockholders. Key point this quarter includes our execution and integration of our acquired businesses. The significant growth in our loyalty program and our continually expanding merchandise contribution margin. Our efforts in these three areas helped to offset lower organic fuel contribution driven by the prior year quarter's elevated cents per gallon and this quarter's industry wide lower fuel demand. We have had a busy last 12 months, closing on five acquisition since the beginning of Q3 last year, and adding approximately 720 location across our retail, wholesale and fleet segments. As was the case last quarter, our press release and public filing provides financial information and key metrics of our recently acquired businesses. We have delivered consistent and impressive growth in adjusted EBITDA, we can very proud of. As I said, we are very pleased with our performance this quarter with the adjusted EBITDA of $91.2 million compared to a record adjusted EBITDA of $99.5 million in the prior year quarter.…

Thank you, Ari. As our many initiatives continue to gain traction, the company has continued to record strong results. Our balance sheet continues to be strong. And we currently have a very good liquidity position. As of September 30, 2023, we had cash and cash equivalents of approximately $204 million. Our outstanding debt, excluding capital leases was approximately $828 million resulting in net debt of $624 million. For the quarter, net cash provided by operating activities was $32.8 million versus $67.6 million for the third quarter of 2022. This included higher net interest and tax payments in the quarter over prior year periods and technical delay in receiving approximately $12.1 million from a routine credit card processor, as well as the decrease in adjusted EBITDA. Getting into results for our convenience stores, MERCHANDISE revenue for the third quarter of 2023 increased to $506.4 million versus $445.8 million in the prior year quarter. Merchandise margin increased by 50 basis points compared to the prior year quarter to 31.7%. Total capital expenditures were approximately $25.6 million for the quarter. This is compared to capital expenditures of $27.7 million in Q3 2022. Retail fuel profitability, excluding intercompany charges for the third quarter of 2023 increased 3.2% this quarter to $121.3 million. This includes a decrease of $16.6 million in same store fuel contribution, excluding intercompany charges, more than offset by $21.7 million in fuel contributions from recent acquisitions. The company maintains a relatively strong retail fuel margin of $0.406 per gallon for the third quarter of 2023 compared to $0.449 per gallon on a same store basis in Q3 2022. Third quarter convenience store operating expenses increased by $30.2 million, or 17.2%, versus the prior year quarter, primarily due to $34.4 million of expenses related to recent acquisitions, offset by a decrease of…

Thank you, Don. We believe that we have a significant opportunity to increase our sales and profitability by continuing to execute on our organic and inorganic strategies, improving the performance of our current store to enhance offering to meet our customers' needs, and growing our store base in existing and continuous market through acquisitions. Now we will take your question.

Thank you. [Operator Instructions] Our first question is from Bobby Griffin with Raymond James. Please proceed.

Good morning, everybody. Thanks for taking my questions. Ari, I guess my first question is on the gallon side of the business, particularly in retail. Are you seeing a divergence or separation between some of the legacy stores and some of the newly acquired stores. And the genus of the question is when I when I look at total gallon stores versus our estimates the comp gallons, underperformed or missed us by little, but the total gallons were actually pretty close to our model. So are you just seeing the newer acquired stores maybe perform at a little bit higher per store gallon basis, then legacy stores that are in your business?

Good morning, Bobby? No, I don't think so. I really think that our approach is not a macro approach. And we actually, if you think about our business, we price fuel location by location market by market. And our approach is really more relevant to how we compete. Our strategy is consistent with the legacy stores and with the stores that we just acquired. We are working really hard to optimize gross profit dollars. But if you really look every market is different. But I don't think anything is different between the acquisition we just acquired. And I think it's really all about footprints. I mean, different footprints different, gallons, and then some others.

Yeah, I guess -- okay, so maybe the follow up is, are the newly acquired stores in just different footprints where they generate more gallons per store than maybe some of the older footprints or not older, the legacy footprints that are in the comparable sales base.

It's a mix, it's a mix effect, because, we purchased stores, think about it, the Pride Stores are in the Northeast. And yes, in the northeast, I think the gallons per store are higher than the gallons per store that we see probably in the southeast. But I actually think that this is a good question and a good thing to point. And if you're looking on, in Fiji, for example, Fiji is in the southeast, and some of it, it's in the southwest, which is lower gallon than the Northeast. I think the other case is really, the Quarles acquisition, the Quarles acquisition, it's all about, the majority of that is actually [indiscernible business]. So I think that's probably the different mix between the others.

Okay, that's helpful. And I guess the second part of that is the industry has continued to face some gallon pressure here. You referenced OPUS data was down during the quarter. How do you think that is translating into just pure traffic to your business? Is that a challenge on the traffic side, when we kind of want to think about that as it relates to merchandise sales? Are you seeing, different traffic counts inside the stores and what maybe the gallon, the same store gallon showing?

Yes, so another great question. So back in the day, before COVID I used to assume that the traffic inside the stores is really based on basically the price at the pump. I actually think what happened actually after COVID, I think things change. And now I think it's the other way around. I really believe that the more offering you have inside the stores, and you see it, by the way, with the core destination categories that increased tremendously over here, as we continue to offer great, basically value inside our stores as we continue to add, basically food inside the stores. And as we continue to increase our loyalty members, I actually believe that will impact our gallons moving forward. So I don't think, losing gallons actually impact or insights of -- it's become the other way around.

Okay, and one last one for me, Don, on that $12 million delay from the credit card processor is that just a pure timing aspect where you'll get that 12 million back in the fourth quarter.

Yeah, we already received it the first week of October. It was an isolated event at a certain set of stores. And they were just changing their backend. And we already received it the first week.

Perfect. All right. I appreciate. Well, best of luck going forward, and I'll jump back in the queue. Thank you.

Thank you, Bobby.

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

Hi, good morning. Thanks for taking our questions. Also wondering if we could just talk a little bit more about the gallons. I think Arie, you mentioned, the OPUS data. But just wondering if you've done any more analysis on kind of market share in your region, both for your kind of retail segment and the same store gallon decline there. But also, as you think about how your dealer customers are doing. I think we're estimating gallons down maybe around high-single digit range on an organic basis. And just how you think about that going forward. Is that kind of a good run rate we should continue to use in terms of a gallon decline for those segments?

I don't have -- by the way, good morning, Kelly, I don't have a crystal ball, what's going to happen in the future. The one thing I do know is that, the gallons decrease are very close to basically the OPUS data that was reported. However, as you can see, we continue to concentrate on increased gross profit dollars in lieu of losing some of those dollars. And the one thing I don't believe for example, that demand, we'll be likely come back to the 2019 numbers, I think demand will continue to be a little bit soft. But I think this is something that we see across -- basically across our competitors as well. It's not something that's just related to ARKO, I think it's really related to our competitors. And as I mentioned earlier, when you're dealing with a lot of mom and pop stores in the market, I believe that those guys actually are facing the same issue, as we face over here. So again, I think we're going to see a little bit softness on gallons, but I think in exchange for that, we will actually see more increase of basically CPG because of that.

Okay, and can you also just talk about the fas REWARDS and investments that you made in the quarter? How we should think about the kind of annualized cost of that and what is the expected ROI of that total investment for the reward loyalty program?

Sure, for sure. So as I mentioned, we started in a -- this year is all about fas REWARDS, making sure we have the right assortment. It's all about value -- providing value to our customers. So in -- on May 17, we basically launched a $10 enrollment, which means that any customers that have a valid email address and a telephone number and would like to enroll with us, we will actually give him $10 in fas cash back. We saw a huge increase in Q2, especially in Q3, as you can see, I mean, the increase in loyal customers in Q3 was over more than 50% in Q3 2022. And the goal over here is to continue basically to increase that. If you're looking on basically on the loyal customers, the loyal customers, basically purchase 19.3% of our basically inside sales over there. So this $10 is very, very impactful, no question about that. Our goal, as I mentioned, is to increase loyal members, up to 3 million members by the end of 2024. And yeah, there is no question that when you give $10, that's going to impact your sales. That's the reason the same store sales were 0.1. But if you really naturalize the impact of approximately $2 million, same store, sales will probably, added another 0.4%. And on the same store sales, excluding cigarettes, which I think that's the best metrics to measure our business, it would probably add another 0.6%. So again, it's an investment, it's a long term investment. But if you look in Q after Q, the concentration of loyal members in Q3 2021, from inside sales was around 13.6%. We grew it to 16.7% in Q3 2022. And now we are at 19.3% in Q3 2023. And one thing to notice is that we keep increasing margin, even though, we are, basically giving tremendous value to those loyal members that come in more often, we actually were able to increase margin again by 50 basis points compared to Q3 2022.

Just a couple follow-up questions there. If you get to 3 million members by '24 what percent of your sales or customer base will that represent? And maybe just in terms of the $10 enrollment program, I mean, is that going to continue at that level? Or in how do you think about cycling that next year? Should we expect that could impact traffic or just trying to think about how we cycle this promotion, as we get to Q2, Q3 next year?

Sure. So I can tell you that as of November 1, we have -- we paused that in September '19, for a little bit, and as of November 1, we started it all over again, because we saw a huge impact, based on that. Again, it's not a big dollar amount, but I think the impact is tremendous over here. Those customers are coming more often. We see more trips, we see more trips over here. And the longer the member is with us, the more they expand inside the store. And I just want to be just maybe be very clear about that, I mentioned four trips, and $41 per month. The reason for that is that a lot of those members actually enrolled, just close to the end of the quarter. And it takes some time for basically those members to start to get offering from us. I mean, we are providing offering to those members on a regular basis. Almost on a daily basis, they get great offering. And this is what we are counting on. And this is by the way, a long term investment. When I say long term investments means that we are investing in the short term, because we believe that as we continue to grow our loyalty member base, I believe that we're going to increase inside sales because of that. And that's going to drive by the way customers to the pump as well, because we have actually offering inside the store that will send customers with nice cents per gallon off, basically when they come to actually to purchase fuel at the pump. So I think that's basically going to impact that as well in the future.

Okay, thanks. Just one more for me, Arie on operating expenses, the same store personnel expenses, nearly flat, I think you called out a reduction in overtime hours. Maybe can you just give us an order of magnitude how that is impacting the overall OpEx, when it starts to cycle and what you're seeing just in terms of wages and wage rates in the market today.

So I'll Don answer this question if that's okay with you Kelly?

Thank you.

Yeah. Hi, Kelly. So the way we're looking at it is, is we're switching hours from overtime to regular hours. So it's not necessarily the difference in hours being worked. More of those hours are being worked at a regular rate versus an overtime rate. And the other thing I think we mentioned is last summer, we did a promotion for all employees sort of like an incentive for the 100 days of summer. And this year we have obviously rates have gone up and we have now not had to do that kind of incentive. So yes, you do have rising labor wages. But what you're seeing a reduction in is the incentives that have been out there, and that we've offered in the past. So net-net, you get sort of this flat, increase. And so rate rates are increasing but they're not increasing at the rate that we saw earlier. And that's why we're happy to see almost a flat personnel. It's really how you're spending your money, and we're putting more into the wage rate rather than just incentives.

Perfect. And can you remind us when you kind of get back to normal in terms of the overtime -- cycling the overtime?

Could you please clarify your question? I'm not sure what you're asking?

Well, I'm just trying to understand from a comparison standpoint, when the overtime hours start to get back to normal. Are you still shuffling increases for the next couple of quarters?

Right, right. And a lot of it to break out Kelly, a lot of it was wage increases that we're doing, I think this has been a -- it has really going to be cycled more as we get toward the end of the year. It's been an effort that we have done all year, by bring in temporary resources to do that. So this has been an ongoing effort. So we've really -- in terms of cycling, it would really be done by the end of this year, because this has been a major focus from operations is to really cut down those overtime hours, give people a better quality of life, and then also raised -- to say raise the hourly wage, and also use some temporary services to fill in for things that we can give people relief on.

Got it? And just maybe last one, for me any thoughts on just how you're planning CapEx for 2024, that we can start to think about incorporating into our model?

Don, would you like to answer that?

Sure. I mean, our maintenance CapEx will stay -- I think this is the last big year that we have of our EMV conversions, which I think we talked about was somewhere between $10 million to $12 million a year that we have. But we will have some again, without giving out specific guidance, we have a lot of projects that will require CapEx going forward. But in looking at total, if you look at our total CapEx, roughly about two-thirds is maintenance, one-third is investment. So that may be a guideline for you. But there will be projects that will be coming up that will require CapEx, but a lot of those will be CapEx with a significant ROI too.

Thank you.

Thank you, Kelly.

Our next question is from Alok Patel with Stifel. Please proceed.

All right, this is Alok on for Mark. My first question is on quarter-to-date trends, any notable changes in foot traffic given the macro conditions and resumption of student loan payments? And then if you can kind of frame the answer around whether you're offering more, we're seeing higher demand for private label? And if so, which categories?

Yeah, so I'll start maybe with the second question related to basically, we're where we focus and what we see. So as I mentioned earlier, the majority or a large portion of our sales actually happened in the core categories. So in those core categories, for example, we see an increase in particular categories, for example, candy. Candy, this quarter, was almost 4.8%, more than basically prior year quarter. Beer, for example, it's another strong category 2.8%. Salty snacks 4.1%, above prior year quarter. So I think what we see over here is that this is coming back to the members that I mentioned earlier, those loyal members, taking advantage, of basically of the offering and the value that we have inside the stores. And because of that, I think we see an increase in those categories in particular. Regarding your question, regarding to traffic and trends, so I think the inflation impact now, it's actually eating all customers. I mean, there is no question about that. And I think this is the reason why we need to be very, very competitive and make sure that we have the right offering inside stores including not only the core categories, including the rights offering when it comes to food service. People have less dollars to spend and because of that they're going to, I believe, visit more the convenience store. And I think they're going to look for things that are very, very valuable for them. And this is where we need to spend our time and money. And I think our team is doing a terrific job. We saw that in Q3. But again, I can touch something in particular, when it comes to basically two trends. The only thing I say is that the core categories trend is up almost quarter- after-quarter. And we say that quarter-after-quarter for the past, basically three years.

Got it. So as a quick follow-up, within the core destination categories, which categories are the drivers, sales growth for the balance of the year and into 2024? And then if you can kind of discuss the drivers supporting the great strengths that you've realized in those categories, that would be great. And it'd be awesome if you can also provide the year-over-year numbers for packaged beverages.

Yeah, so I'll start with the six categories. Okay, the six -- you broke up a little bit, so but I'm going to try to -- I hope I hear the right question. So I started with the six categories. The six categories are really alternative snacks was up 1.6% this quarter, Candy was up 4.8% beer was up 2.8% pack bev was up 1.5% this quarter, packaged sweet snacks was up 2.2%. And we end with salty snacks it's around 4.1%. And if you remember, we are cycling a very, very strong Q3 2022. But those are really the core categories. And if you really looking at those two categories, not only that they continue to perform very well for us and aligned with our strategy, over the last three years, if you really looking on, the contribution from these categories expended approximately 570 basis points, total merchandise contribution from these categories, which is approximately 17% compounded annual growth rate. So I think that's basically what we see from those six categories that for the past three years.

Got it. Thanks. I'll pass it on.

Appreciate that. Thank you.

Our next question is from Karru Martinson with Jefferies. Please proceed.

Good morning. This is kind of a big picture question. Why is the fuel demand down when we look at the overall industry, and ultimately more people are going to work more days in the office? What's driving the broader category?

If I had the right answer, I will probably give you the answer. But again, we are relying on OPUS data, we are relying on OPUS data. And as you can see OPUS data shows a decline in volume nationwide of approximately 3.49%. That's one thing. The second thing is I want to remind everybody our footprint, it's rural footprint. We have a lot of stores, I think 40% I think I mentioned that a couple quarters ago, 40% of our stores are in town that is basically less than 20,000 people. And when you operate in some of those rural town, people are not driving probably like in some other areas. We don't say our stores are not located on major highways, for example. So I think that's one of the reasons that you basically see that. And that's consistent by the way with other competitors in the market, in the basically the market, that we basically do business. So it's -- I think it's worth noting that other public companies, everybody's similar metrics, by the way in those markets. So…

So okay, when you talk about seeing sustainable strong, margins on fuel, are we still looking at in this stable environment being able to maintain kind of over $0.40 per gallon?

It's a good question. Again I don't have a crystal ball what's going to happen with if we can keep the $0.40. I think the one thing I can say, we are today the sixth largest operator in the country, and we are competing with some of the large chain and we are competing with a lot of basically the small chain, and the mom and pop. As you can basically appreciate, 70% of the industry, almost 100,000, 98,000 convenience stores, gas stations, are chain with 50 stores or less, 50% of that it's Mom and Pop and I think every one of those guys are facing -- basically facing higher expenses, insurance, electricity, higher fixed expenses that they have prior [ph], And I think because of that, we believe that structurally higher margin will remain in place over here. But again, that's just my assumption based on being in the business for so many years.

And then what are we seeing on the inflationary front when it comes to inside the stores on merchandising? Are you still seeing pressure there? And kind of where are you on your pricing?

Well, I think the results speak for themselves. That's the reason I mentioned, if you're looking on sales, excluding cigarettes, I think that we see the results over here. And I think at the end of the day, it's very, very important for us to provide value to our customers. This is very, very important for us. And I think as long as we continue to provide value to our customers, I think they're going to continue to come. And that's the reason loyalty is a very, very important component when it comes to it.

Thank you very much. Appreciate it.

Thank you. [Operator Instructions] Our next question is from William Reiter with Bank of America. Please proceed.

Hi. My first is on the merchandise margin expansion. You mentioned marketing. And then you mentioned merchandising. Is this largely based upon mix and having more food and consumables and those six major categories of growth? Or what are some of the bigger contributors to expansion?

I think the mix is absolutely very important, going back to the three key pillars that I mentioned on the call. The core categories are very, very important. They're driving margin, of course, tremendously. The other piece, of course, is food service. Food service is something that will help us to continue to grow margin. And this is an area that we continue to invest. I mentioned those six categories, if you want, I can go through them again. But those basically six core categories, led by candy are this category that basically drives the majority, basically, of our sales over here. If you're looking on those basically, core categories, there are up 2.4% on the same sort of sales pro basis, Q3 versus Q3 2023 versus Q3 2022. And again, it's all driven by those, basically by those three key pillars that I mentioned.

Got it. And then I think when you were talking about M&A, I think you mentioned that there are four that are in the pipeline, I guess, that are in some sort of active discussions. Number one, did I hear that correctly? And number two, I guess, is there any way you can dimensionalize how large these are?

You didn't hear that correctly unfortunately, that we did four -- we closed on five acquisition since July 2022 until basically at the end of this quarter, we closed on five acquisition. And it's basically we closed on Quarles, which was the fifth [ph] business that was in July 2020 great opportunity that we execute. Now we are over 14 months, 15 months after closing. After that we closed on Pride. Pride was 31 locations in the Northeast, great location. Since then, we opened another store within Pride. And then we had the TEG, TEG and WTG. And just recently, during Q3, we closed another acquisition, acquiring seven stores from one of our dealers.

Okay. Just lastly, for me a question on the $10 program, I guess would it be possible for customers to create new email addresses each time? And is there any way to address this? Are you able to track to make sure that they're not doing this just each time creating a new one?

The answer is yes. There is an opportunity for people. We have some measurement and we have some -- I'll call at some -- we have compliance -- and can someone take advantage? Absolutely. But I don't think it's something that actually go to the extreme. And we have -- yes, we have, basically compliance in place and in some cases, if someone tried to dispute, we try to figure out the way how to catch them, but again this is not the concentration. The concentration need to be on how do you increase the base because we see what is happening with those loyal customers. I mean, we will concentrate on basically on targeting them and making sure that we execute versus just watching our customers and making sure that no one is taking advantage.

Understood. Okay. All right. That's all for me. Thank you.

Thank you.

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

Thank you once again, for joining the call this morning. And for your great questions. It was really a lot of great questions this morning. I'm very pleased with our results this quarter. As we navigate from comparison to the back half of last year. I remain very excited about the many achievable opportunities in front of us. And I thank you again for your questions and for the time you spent this morning.

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