Greetings. Welcome to Arko’s Third Quarter Fiscal Year 2021 Earnings Conference Call and Webcast. Please note, this conference is being recorded. At this time, I’ll now turn the conference over to Chris Mandeville, Managing Director of Investor Relations. Chris, you may now begin.

Thank you. Good morning, and welcome to Arko’s third-quarter 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. Before we begin, please note that all third-quarter 2021 financial information is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as will, may, expect, plan, intend, could, estimate, and similar references to future periods. These statements speak only as of today, are based on management’s current beliefs and expectations, and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today’s press release, the company’s annual report on Form 10-K for the fiscal year ended December 31, 2020, and the company’s other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. 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 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, crosstalk or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now I’d like to turn the call over to Arie.

Thank you, Chris, and good morning, everyone. On today’s call, I will briefly review our financial highlights for the quarter ended September 30, 2021, and provide an update on our business. Don will then review our financial results in more detail before we take your questions. To start, we report record merchandise revenue and net income for the third quarter. Our adjusted EBITDA, net of incremental bonuses, increased nearly 40% to $80.2 million for the quarter, driven by both profitable growth in-store and at the pump for our retail segment, as well as continued outperformance by Empire in our wholesale segment. In-store, we experienced another quarter of meaningful merchandise margin expansion where we generated merchandise margin in excess of 30%, with 270 basis points in merchandise margin expansion to 30.6%. This not only reflects our continued emphasis on leveraging analytics to purposefully and strategically drive greater sales of higher-margin categories such as packaged beverages, candy, other tobacco products, and grab-and-go, but it also highlights our efforts to optimize margin within key categories as well. Looking at our top 10 categories by inside sales, which account for nearly 90% of our total merchandise sales, we managed to deliver notable margin expansion through our strategic merchandising decisions, pricing, and improved purchasing economics. In light of certain COVID-related demand aberration in the prior-year period, I’d like to focus on our two-year stock same-store merchandise sales, excluding cigarette brands, as a more accurate indicator for the underlying health of our business, and a better barometer to evaluate our performance, given the company’s strategic focus in driving higher-margin sales. On a two-year stock basis, same-store merchandise sales, excluding cigarettes, increased 8.7%, with dollar growth most notably driven by strength in other tobacco products, packaged beverages, and candy. From a growth rate perspective, we have continued to see considerable gains in frozen foods, grab-and-go, and alternative snacks as our various process improvements and merchandising effort continue to pay dividends. In our retail fuel operation, gallons sold are up 15% versus the prior-year period, reflecting the addition of our ExpressStop and Empire acquisition. Fuel margin, excluding intercompany charges, was strong for the quarter, up $0.035 versus the prior-year period to $0.345 per gallon. The net result was that we delivered strong gross profit growth of over $21 million, or 28%, in retail fuel profitability for the quarter. Moving to some of our longer-term strategic growth initiatives, on our remodel and new store prototype initiative, we continue to make steady progress on what we believe is a significant opportunity to optimize our store base. We have completed two remodels and we expect to have our first 10 completed by early 2022. While our pace has been modest, it has been intentional. We are being very methodical to ensure that we have the right prototype to optimize profitability and provide our customers with an enjoyable shopping experience. However, as we have already begun engineering and redesign phases for 45 additional stores, we believe we can move quickly, accelerating growth, and unlocking additional value for our stockholders over the next several years. Regarding our fas REWARDS loyalty program, we remain pleased with the considerable progress we’ve made in so little time. Recently, we have grown over 0.5 million enrolled members, doubling our member base since the beginning of 2020. We have continued to see very positive responses from our engaged members, with our loyal customers showing a considerably higher rate of visiting our stores and with larger baskets. As we begin to plan for the coming year, we have identified several upgrades for our loyalty program which we believe will further strengthen both our analytical insight and the value we provide to our most loyal consumers. Turning to our inorganic growth opportunity, we remain focused on pursuing disciplined, high-ROI M&A. In fact, just yesterday, we acquired 36 company-operated Handy Mart convenience stores and gas stations, plus one under development, all of which are located in North Carolina. Of the total $112 million purchase price, plus the inventory and cash in the stores, Oak Street is paying $100 million for the real estate of 29 of the sites, and we are paying Oak Street $6 million per year to rent these sites from them. We paid the remaining $12 million purchase price using cash on hand. We also believe that there remains a robust pipeline of assets that are available for potential acquisition. As is always the case, we are actively exploring several opportunities, and our priority is deploying capital at a very attractive return. As such, we will remain highly disciplined in how we pursue any deal. Touching briefly on our two other deals we closed in the past 13 months, Empire and ExpressStop, Empire has continued to outperform our expectations, both from synergies and growth perspective, and we believe there remain considerable opportunities to extract additional value. In the last several months, we have pre-negotiated three major fuel contracts representing approximately 30% of our gallons, while we’ve also added 79 net new dealers since we acquired the Empire business, with 27 of those additions coming in the third quarter of 2021 alone, and an additional 13 contracts signed that we have yet to benefit our P&L. On ExpressStop, 41 of 53 stores have gone through merchandise resets to stand up planograms that we believe will increase sales and margins at these sites. Taken together, I’m very pleased by what we have accomplished year to date. I’m excited about the organic and inorganic opportunities that lie ahead to fuel our growth. And I’m committed to remaining a steward of capital, allocating funds based primarily on return on capital. I would like now to turn the call over to Don who will walk you through our financial results.

Thanks, Arie. It’s great to be speaking with you all today about our strong third-quarter results. Merchandise revenue increased by 7.7%, primarily due to the ExpressStop and Empire acquisitions. Merchandise margin dollars increased by $20.3 million versus the prior year, while the margin expanded 270 basis points to 30.6%, largely due to a lower reliance on cigarettes and higher contributions from packaged beverage, other tobacco products, and other center-store items, as well as improved purchasing economics. The ExpressStop and Empire acquisitions added $12.7 million in merchandise contribution, while same stores increased by $8.7 million, which was offset by sites that we either closed or converted to other operated sites. Retail fuel profitability, excluding intercompany charges for the quarter, increased by $21.2 million or 28%, with Empire and ExpressStop accounting for $18.5 million of the increase, coupled with same stores increasing by $3.7 million. Retail fuel margin for the quarter was $0.345 per gallon versus $0.31 per gallon for the prior year. For the third quarter of 2021, wholesale fuel profitability, excluding intercompany charges, increased approximately $22 million compared to the prior-year period, with substantially all the growth coming from the Empire acquisition. Fuel contribution from non-consignment agent locations grew by $12 million compared to the prior year, driven by approximately 206 million gallon increase in fuel volume and a $0.005 increase in fuel margin per gallon for these locations versus the third quarter of 2020 due to an increase in the prompt pay discount related to the increased cost of fuel, along with increased rebates. Fuel contribution from consignment agent locations grew $10 million compared to the prior year, due to an increase in volume of 37 million gallons and an increase in fuel margin cents per gallon of $0.011. Third-quarter store operating expenses increased $32.7 million or 24.8% versus the prior year, primarily due to approximately $26.8 million of incremental expenses related to the ExpressStop and Empire acquisitions, in addition to higher credit card expenses. General and administrative expenses increased $7.3 million or 28.7% for the quarter as compared to the prior year, primarily due to expenses associated with the Empire acquisition, annual wage increases, incentive accruals, and stock compensation expenses. Net interest and other financial expenses increased by $4.2 million for the quarter versus the prior year, primarily related to higher interest expense from more outstanding debt, and fair value adjustments of $1.1 million. Third-quarter net income was $35.6 million compared to $17.2 million for the prior year. Incremental earnings in 2021 were related to strong contributions from the Empire acquisition, coupled with strong same-store merchandise gross margin and fuel margin, with partial offsets coming from higher expenses including credit card fees and depreciation related to acquisitions. Minority interest was almost eliminated versus the prior year, primarily as a result of the business combination with Haymaker in December 2020. Adjusted EBITDA, net of incremental bonuses, was $80.2 million, an increase of $22.9 million or 39.9% compared to the third quarter of 2020. Higher same-store merchandise and fuel margin contributions and approximately $23 million from the Empire acquisition were partially offset by higher credit card fees and higher general and administrative expenses, primarily related to annual raises and incentive accruals. Our balance sheet remains strong. In October, we completed a debt offering of $450 million and used the net proceeds to repay, in full, the $223 million term loan with our Ares Capital Corporation, and $200 million of our line of credit with Capital One. The remaining proceeds are intended to be used for general corporate purposes. On September 30, the company’s total liquidity was approximately $551 million, consisting of cash and cash equivalents of $275.2 million, plus $31.8 million of restricted investments, and approximately $244 million of unused availability under our lines of credit. Outstanding debt was $689.6 million, resulting in net debt of $382.6 million. As a result of our bond offering in October, our liquidity increased by $200 million due to the partial paydown of our Capital One line of credit. For the first nine months of 2021, net cash provided by operating activities was $119.5 million versus $126.5 million for the first nine months of 2020. The decrease was primarily due to working capital changes related to higher fuel costs and increased volumes. In addition, there were approximately $12.2 million of higher net tax payments and $16 million of higher net interest payments, including $5.2 million related to the early redemption of the Israeli bonds in the first quarter of this year. Operating cash flow was also impacted by approximately $13.6 million of incentive payments. Capital expenditures were $48.1 million for the nine months that ended September 30, 2021, compared to $28.8 million for the prior-year period, and included the purchase of certain fee properties. We ended the quarter with 1,379 retail sites and 1,674 wholesale sites. I’m pleased that we have demonstrated our strength and capability through yet another quarter of solid financial results as we continue to execute on our journey as one of the largest and most successful convenience store operators in the country. And with that, I’ll turn it back over to Arie.

Thanks, Don. I’d like to close by thanking our over 10,000 associates company-wide. They are a driving force behind the success we realized in the quarter and have proven instrumental in our executing against what we believe remains a significant and exciting long-term growth outlook. Thanks for joining the call today and your interest in Arko. I will now turn it over to the operator for questions.

Bobby Griffin, Raymond James.

Good morning, everyone. I appreciate you taking my questions and congratulations on a strong quarter. Arie, I wanted to revisit the improvement in merchandise margins in retail and ask for some additional details. Also, was there anything unusual about the product mix this quarter that might not be sustainable going forward? Alternatively, do you consider the mix of items this quarter to be normal, suggesting that these margin improvements could be consistent or maintained?

Sure. Good morning, Bobby, and it’s a great question. I think it’s sustainable. And the reason for that, it’s really what we have discussed over the past few quarters since the beginning. If you are really looking over here on same-store sales and excluding cigarettes, we continued to perform exactly in accordance with our strategy. If you look at Q3 2020 versus Q3 2021, our concentration on cigarettes is actually down. I mean, right now, the concentration is that we are at 36% cigarette sales versus 37.9%. So, the strategy worked, which means that we are selling more items from the center of the store. In particular, if you’re looking at 90% of our merchandise sales, those are the ones that drove the margin over here. So, there is no question that the minute you concentrate less on cigarettes and concentrate more on other products, excluding cigarettes, the margin will expand. I think that’s what you see over here. I’m expecting margin to continue to grow as we move forward.

Okay, very good. And then I guess also I’ll maybe just touch on OpEx and where you guys are from the labor situation. I know we talked last time about some initiatives you’re working on from the hiring standpoint. Maybe just any updates around labor and how you are managing the OpEx expense side of that, going forward, would be helpful.

Sure. Don, would you like to take it?

Certainly. Our largest increase in operating expenses, on a same-store basis, was in credit card costs, largely due to rising fuel prices. We also experienced over a 5% rise in expenses related to salaries and wages, although this was slightly less than we anticipated. While we expect operational costs to continue rising, they haven't exceeded our predictions for the year. The labor market remains challenging, and we recognize the need to compete for talent. However, the primary factor driving our operational expenses this quarter was credit card costs rather than salaries and wages.

Okay. Don, could you clarify whether your credit card fees are included in store operating expenses on the consolidated income statement?

Yes, it does. For management reporting, we don’t do that. But for GAAP reporting, it does fall into operating expenses.

Okay, perfect. Yes, I will note that. And then I guess just lastly for me, any comments on October? I mean, the fuel margins here this quarter were impressively very strong despite a rising oil environment. We’ve seen a little bit of a compression in the OPIS data for October. Just curious what you guys have seen over the last four or five weeks from a fuel margin perspective.

Well, we can’t really comment on October; we can only talk about everything related to Q3. But we can comment that if you look at what happened in Q3, you’ll see the same thing that you’ve been seeing quarter after quarter. We are very analytical. We are after gross profit dollars. That’s the name of the game over here. I mean, this is where we are concentrating. We are concentrating on increased profitability. At the same time, I want to touch on our renegotiated three of our supply contracts which represent around 30% of our gallons. Those things, of course, help us to increase our margin, and, at the same time, be very competitive. That’s what I can tell you about, at least our gross profit dollars and our increase in profitability.

Perfect. That’s helpful. I appreciate it, Arie. And congrats on getting those renegotiations done. Best of luck in the fourth quarter.

Thank you very much, Bobby.

Mark Astrachan, Stifel.

Yes, thanks, and good morning, everyone. I guess one sort of directional follow-up on the last line of questioning. How do we think about the benefit, if any, in your merchandise margins from pricing? I guess I’m thinking about it in terms of whether you’re raising list prices on products in-store to offset your own rising inflation pressures. And then the suppliers are obviously taking price up on just about everything. So do you benefit from that as well, meaning do they share some of that pricing with you all? Is that reflected in the merchandise margins as well?

Well, it’s an interesting question, Mark. Yes, the suppliers are increasing prices, and we are trying to be very careful with increasing prices. We are actually working in a competitive environment and this is something that we are facing. I think the margin increase is not because of supply chain or just the increase of prices; that’s not related to the increase in margin. The increase in margin is really related to the mix that we are seeing over here. We are just able to sell more product, less cigarettes, more products, more other tobacco products. For example, if you’re looking at other tobacco products, which you all know that the margin is around 30%. I mean, our other tobacco product business was up 7.7% quarter over quarter. I think that’s really the reason for the increase in margin over here. It’s concentrating less on cigarettes and being able to increase the basket for customers coming into the stores.

Okay.

Mark, I'd like to add that our sales figures are impressively high across various categories. Our frozen foods and grab-and-go items are performing exceptionally well, yielding high margins. We're also seeing significant growth in candy sales. This success isn't just from one single initiative; it's a collective result of multiple strategies. As Arie mentioned, while we're remaining competitive in the cigarette market, there's a noticeable shift towards other tobacco products. We believe this growth is sustainable, although the future is unpredictable. Our goal isn't solely about maximizing sales; we also need to stay competitive in the market.

Yes, that’s helpful.

One thing to comment, Mark, just one comment to mention here is you guys remember for the past two quarters, I have been talking about adding 680 freezers and 525 grab-and-go coolers. If you are really looking at our same-store sales, just in grab-and-go, our same-store sales are up 46.1% with an increase of margin. If you are looking at frozen foods, our same-store sales are up 72.5%. Everything that we’ve been talking about over the past two or three quarters, finally now you actually see the result. It takes time to install them. With the supply chain issues, we have been able to locate the product, bring in the product, and install the product. We see great results, and of course the increase in margin demonstrates that we are winning. We have a great team of people here that made sure that we follow the supply chain issue and were able to perform.

Yes, that's helpful. Related to that, you've mentioned a common theme we've been hearing, which is that beyond inflation, supply chain challenges seem to be affecting sectors like beverages and candy. Did this have any impact on the business? Additionally, has your improved relationship with your wholesale supplier contributed to mitigating some of those challenges?

First of all, yes, of course. We are restructuring our agreement with Core-Mark, which has helped us tremendously to increase margin. But I really think the big thing here is that retail requires attention to detail. When everything is great, everyone operates proudly. When things are a little shaky, you’ll see what kind of operator we are. We’re deep into the details, thinking ahead, and we are able to get those products in stores, at least for seasonal items. Our team is working tirelessly, both from a merchandising and fueling perspective, to produce results. That’s why you see those results. It shows that we have a strong operating team and an effective marketing team managing merchandise and ensuring product availability. It’s not easy, but we are able to execute effectively because of the team we have.

Yes, okay, thank you. And then just lastly on a completely unrelated topic. The Oak Street relationship is interesting beyond the acquisition overnight, but also the disclosure in the release about that they had purchased and leased to you $150 million of real estate. Is there more opportunity to do that? I guess to the other, broader question, why then do you get a reduction of rent versus whoever else is owning that? Is that because of the relationship? Because you are working with them going forward, that they are giving you more favorable terms? Maybe just talk about that, as well as the opportunity for that in the future.

First of all, yes, of course, given the size of the commitment, we got better terms, given the $1 billion commitment. As you guys remember, we have all kinds of rights offers, and we have opportunities to buy the real estate. When we do these things, we are thinking ahead. The bigger you get, the better terms you get at the end of the day. What we executed this quarter was we were able to take offer on these options from different sellers and buy the real estate for a better cap rate. Because of that, we saved $2.3 million in annual rent moving forward. This is only on $150 million of real estate. We are going to continue to execute on that. We started with the big ones right away, but this is an ongoing opportunity for us to reach out to landlords and try to either buy the properties or get better terms. You are spot on: at the end of the day, some may decide to sell, others may choose to reduce our rent because we become bigger and better.

Yes, to expand on what Arie mentioned, we were aware that this was happening but couldn't disclose it until it was finalized. In addition to lowering rent, we acquired several properties outright, which has increased our overall fee store base. This is entirely beneficial. I believe there were many questions when people heard about the $1 billion commitment; what are we going to do with it? We have numerous options, and this is one way to positively influence the business.

Yes, that’s helpful. Thanks, guys.

Kelly Bania from BMO Capital Markets.

Hi, good morning. Thanks for taking our questions. I just wanted to ask about same-store sales, obviously a focus on less on cigarettes and more on the higher-margin categories, and maybe also some dynamics of cycling some stronger cigarette trends last year. Just curious if you could talk a little bit about your outlook there on the same-store sales front. Should we expect a similar dynamic to continue for the next couple of quarters, or even longer term, with this deemphasis on the cigarette category?

Sure. Good morning, Kelly. Our strategy has always been to increase sales while excluding cigarettes. We launched a loyalty card over a year ago, anticipating that our initiatives, such as adding grab-and-go items and frozen foods over the past two quarters, would help us shift sales away from cigarettes. I believe this trend will continue moving forward. We are completing the rollout of our remaining freezers and grab-and-go options, and we have seen significant increases in same-store sales since introducing those coolers and freezers. I expect sales, excluding cigarettes, to rise in the upcoming quarters. That’s my belief.

Yes, and Kelly, just to reemphasize what we’ve always said. We are very competitive on cigarettes. It’s not that we are trying to say we don’t want the cigarette buyer; we do. However, there have been numerous price increases this year. There’s talk of increasing the federal excise tax. I hear some of that has come back, and it puts a crunch on the consumer’s pocketbook. You see the increase in other tobacco products. We don’t have definitive data saying this person switched over, but we are seeing our increase in other tobacco product sales versus cigarettes. We just know, as a category, that cigarette sales are declining. We are trying to remain competitive to keep that consumer coming into our store while also making sure we offer alternatives in other tobacco products and appealing options to encourage people to come in. By no means do we want to discourage cigarette consumers from coming to our store. We want to be very price conscious about our offerings while also giving them more things to buy when they come in.

That’s very helpful. Also just wanted to ask again about gallons and how you think you performed from a gallon perspective maybe in your markets, and how that compared to peers, both at retail and wholesale. And just maybe help us understand gallons on a pro forma basis relative to 2019. Where do you stand, both at retail and wholesale, and when you think you’ll get back to that 2019 level?

Go ahead, Don.

Kelly, we don't believe we'll return to the 2019 level. We've observed that the anticipated return to work hasn't materialized. Our wholesale dealers are performing well, and we expect diesel to continue to thrive, but this remains uncertain because a significant number of workers still haven't returned. It's challenging to make accurate projections and no one can say for sure. However, we think it will be difficult to reach the 2019 level unless we see more people going back to the office, which is still uncertain.

Yes, and, Kelly, just to be clear, our customer base and our store base is more rural and in secondary markets. The second point is that we are absolutely competitive. I’ve been telling you from the beginning of the pandemic that people are driving less and buying fewer gallons, but the margin expands because of that. I think the minute we see a shift in gallon increase, we might actually see a small decrease in the customer price because of that. The consumer today is less confident about store prices than in 2019. In 2019, people would drive an extra 5 miles just to grab five pennies, and that’s not what we see right now.

That’s very helpful. I know it might be early for 2022, but remodels ramping up next year is a significant part of the plan as I understand it. I would like to hear an update, if possible, about your expectations for that acceleration in remodels, the costs associated with those remodels, and the equipment. Is that trajectory in line with your expectations?

Yes, so we are on target in terms of opening our third store. This is a 5,600 square-foot store just off Highway 77 between North and South Carolina. This store is scheduled to open in the next couple of weeks. We are on target with that. As I mentioned, we are going to complete the 10 stores that we mentioned. We may have a slight delay of a couple of months. Everything is because we are learning a lot and we are price-engineering. But in terms of the rest of the stores, we have 45 stores right now that we are already planning for 2022. We also ordered equipment to ensure that we don’t face any supply chain issues. Everything we are doing over here is deliberate. We want to ensure that when we price-engineer and when we use those prototypes, we can duplicate them in a very efficient way. So, far nothing has changed in terms of our planning.

Yes, and Kelly, just a little more detail on that. I think where the concern in the market is for the supply chain; we still believe we will be able to do this. The question will be how the supply chain reacts over the next two to three quarters. Obviously, that’s a concern. We will have to monitor that. But at the same time, we are able to look at our plans, and as we said, we’ve got 45 sites already under engineering and design. What will hold up in the supply chain as we go through? We will have to look at that. But again, we see this as a temporary issue due to the supply chain. The whole concept itself is still very viable, and we are pleased with what we’ve seen so far. We will react as the supply chain allows us to. But we are not slowing down; we are getting the designs done, at least 45 of them right now.

Great, that’s very helpful. Just one more question for me. Can we get an update on how you view staffing levels at your stores, turnover rates, and the overall wage environment, as well as your outlook on that moving forward?

Well, I can’t comment on turnover right now. But what I can say is that we are very competitive. We are operating our stores. We’re not closing stores. If you’re looking at some areas where others are closing early, we don’t face those situations. We had areas where we offered $500 for people to sign up and work for five hours, and, in some areas, we had to increase that to $1000 to keep people in place. It’s a competitive environment. I believe things will settle at the end of the day. This is a temporary issue that everybody is facing right now. Things will normalize.

Yes, Kelly, I think the biggest thing that helped us through all of this was adding 10 full-time resources for recruiting. We found that people have so many opportunities for offers that we wanted to be able to make the offer on the spot. Waiting too long results in losing candidates. That has been a real plus for us, putting those resources in place. We did that early in the summer, and I think it’s paid dividends.

And just to comment on that, Kelly, remember that’s one of the reasons we decided to go with grab-and-go and frozen food over opening big kitchens. That’s exactly one reason for our direction, because we can operate our stores with a limited number of associates.

Thank you.

Thank you.

At this time, we have reached the end of the question-and-answer session. I now turn the call over to Arie Kotler for closing remarks.

Thank you to all participants on the call today. I would like to wish you a wonderful day.

This will conclude today’s conference. Thank you for your participation. You may now disconnect your lines at this time. Have a wonderful day.