Greetings, and welcome to the Arko Corp. Second Quarter 2022 Financial Results Conference Call. A question-and-answer session will follow the formal presentation. I would now like to turn the conference over to your host, Ross Parman, Vice President of Investor Relations and Government Affairs. Please go ahead.

Thank you. Good morning, and welcome to Arko's Second Quarter 2022 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 as filed with the SEC and our earnings presentation are available on Arko's website at arkocorp.com. Before we begin, please note that all second quarter 2022 financial information is unaudited. 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, project, and similar references to future periods. These statements speak only as of today and 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. Please refer to our press release, our quarterly report on Form 10-Q for the quarter ended June 30, 2022, and our other filings with the SEC, including our annual report on Form 10-K 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. On today's call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA, and adjusted EBITDA. 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 our financial information presented in accordance with GAAP. Please refer to our earnings press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we're 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. Now I would like to turn the call over to Arie.

Thank you, Ross. Good morning, everyone, and thank you for joining us. Arko's strong results for the second quarter highlight the resiliency and strength of our business model and our ability to execute our long-term growth strategy. Arko generated $31.8 million in net income, an increase of over 24% versus the prior year's second quarter. Adjusted EBITDA was an over-time second quarter high for the company at $79 million, marking comparable quarter year-over-year EBITDA growth for six straight quarters. Along with these strong results, we accomplished a lot during our first half of the year. Our performance and financial strength facilitated continued investment in our stores and hiring and retention programs, as well as the repurchase of common stock, which we continue to view as a great use of capital and a declaration of our third quarterly dividend. I'm extremely happy with the performance of all areas of our business. This quarter, we navigated historic volatility and inflation by remaining focused on executing our strategy in stores and in fuel. In our stores, we maintained total market share and grew total store dollar sales. Merchandise margin increased 170 basis points to 30.4% compared to 28.7% in the second quarter of 2021. Second quarter same-store merchandise sales, excluding cigarettes, were up 5.7% on a two-year stack basis. Our marketing team has done a great job managing for inflation in key categories. In particular, this quarter, we saw growth in frozen food, center store items, beer, and other tobacco products. Regarding the execution of our strategy, let me share a short case study: building out our frozen food offering was a strategic focus for us in prior quarters. The team moved quickly to implement this program and executed it very well. Sales of frozen fruit rapidly increased by 81.5% compared to the prior year quarter. We also had a very strong quarter in fuel; whether prices are high or low, our strategy remains consistent. We seek to manage margin and volume to optimize profitability while remaining competitive. Even during volatile price movements this quarter, we achieved great results. Total fuel gross profit was $130.8 million, a 15.1% increase compared to $113.7 million in the second quarter of 2021. As our in-store results show, we believe we can maintain cent per gallon growth while also increasing merchandise margin dollar growth. We delivered excellent results with higher fuel prices, and we believe that our fuel strategy allows for strong results even as prices decline, as they have done recently. I've been visiting stores throughout the summer, driving through Michigan, Virginia, the Carolinas, and many other states. I think it's important to get out and listen to customers and associates. I see how the communities around our stores are doing as well as our competition. Our stores continue to see customers buying essential items. We believe we are driving some of this demand with compelling Fast Rewards promotions, offering great discounts on fuel and in-store purchases. We have a very compelling offering and continue to implement key initiatives that resonate with our customers. One factor that makes this company successful is our ability to identify and deliver the right combination of initiatives. The company's scale and resources allow us to pursue multiple opportunities simultaneously. This is an advantage that helps us deliver great results for our stockholders. For example, we completed five store remodels this quarter. We also moved quickly to implement aspects of our remodel program across our footprint by investing in high-margin categories and foodservice, including converting delis to Sbarro locations in our stores and implementing an extensive bean-to-cup coffee program that follows the successful rollout of freezers and grab-and-go open air coolers. I recently visited Store 30 in Richmond, where there was a line out the door for Sbarro Pizza. This Sbarro program is clearly a hit with customers. We opened four Sbarros this quarter and have a total of eight open for business, with five more under construction right now. I'm confident we are on pace to achieve our goal of opening 50 Sbarros by the end of the year. Over the last few quarters, we installed bean-to-cup coffee machines in a total of 548 stores, exceeding our goal of 525 store installations. This quarter, we increased iced coffee unit sales by almost 22%, and we believe we are competitively priced for cost-conscious consumers. My store visits confirmed that our bean-to-cup coffee machines, along with our new beans, consistently make high-quality top-of-the-line coffee. I am a serious coffee drinker, and I believe we've hit it out of the park with the quality of the beans and freshness these machines offer. I also want to speak about some other investments we are making. We are moving forward on adding new Dunkin' locations and plan to remodel two additional Dunkin' stores. One Subway was remodeled in Q2; we've remodeled six Subways this year, and we remain on track to commence engineering on our new-to-industry store in Atlanta, Texas. We're extremely pleased with the continued growth of our Fast Rewards loyalty program, with approximately 1.1 million enrolled loyalty customers. Out of this group, we are actively engaged with approximately 650,000 who we can directly communicate with to provide special offers. We're excited to roll out our announced loyalty app currently under development, which will enhance communication with these million-plus customers and enable us to serve them customized deals, as well as order and delivery functionality and many other features. Another factor fueling our growth and consistently benefiting our bottom line is our highly successful acquisition strategy. We've executed 21 acquisitions in less than 10 years, including the acquisition of Quarles Petroleum fleet fueling business, which closed in late July. Using estimated forward-looking non-GAAP measures, we expect the acquisition of assets from Quarles Petroleum to add approximately $17.5 million of adjusted EBITDA on an annualized basis. The acquired assets fit seamlessly into our footprint with card lock sites in prime areas in key territories. Importantly, we believe this acquisition presents opportunities for organic growth and expansion. I want to warmly welcome the approximately 100 Quarles employees who have joined our family of community brands in connection with the acquisition. They are seasoned operators who have earned the trust of Quarles's name over 80 years of continued operation. Regarding acquisitions, cost pressure has created opportunities for a large operator like Arko. It's essential to remember that the convenience store industry tends to be very resilient and has historically grown during recessions. Currently, there is a robust deal pipeline in the market. We believe that the company is well-positioned to leverage market conditions to our advantage, given our strong financial position. Arko's total liquidity as of June 30 was approximately $727 million, which includes cash and cash equivalents and short-term investments of approximately $282 million, with approximately $445 million available under our line of credit. In addition, we have a $1.15 billion real property commitment from our real estate capital available to us. We are also investing in areas we believe will have a positive impact on our stores in the long term. We are working on adding EV charging capabilities, and we just installed Level 3 fast chargers at Village Pantry in Marysville, Ohio. These fast chargers, deployed by ChargePoint, support all types of EVs. We previously announced that chargers will be installed at two stores in Colorado. We are in the early stages of our EV charging strategy, identifying grants and subsidies and exploring partnerships at the corporate level. Our ambition is to turn EV drivers into loyal customers as adoption increases within our store footprint. We also recently released our ESG policy and encourage you to visit our website to read it. We have made significant progress on this policy and look forward to sharing baseline reporting with our stakeholders later this year. I want to thank all associates for their excellent work. Every year, I visit many stores and am always struck by how willing they are to go the extra mile. One recent accomplishment was our all-in efforts throughout this quarter, where we partnered with JDC, a leading global humanitarian organization, to help alleviate the refugee crisis in Ukraine and neighboring countries. Our associates helped collect donations at the point of sale, and we also partnered with our supplier community, who matched dollar-for-dollar with a generous JDC donor. Together, we raised over $640,000. We are grateful for the support of our associates, customers, and supplier community. We have again delivered excellent financial results, and I truly believe Arko is well-positioned for continued success. I will now turn the call over to Don.

Thank you, Arie, and good morning, everyone. We had excellent results this quarter, driven by increased merchandise contribution and fuel contribution at same stores, combined with a rise in field contribution in our wholesale segment for the best second quarter in company history. The 2021 acquisitions of ExpressStop and Handy Mart also contributed to these results. We're excited about the Quarles acquisition, which closed in late July. We are working with the highly experienced Quarles team on integrating our operations now. Quarles will become a fourth reporting segment for the company, making our financial performance easily accessible for all investors and analysts. With this acquisition, the company will also engage in fuel hedging positions to manage risk associated with an immaterial number of fuel transactions that carry price risk until fuel is delivered to the card lock, where several customers buy based on a formula tied to the current RAC prices on the date of sale. This hedging applies to only approximately 2 million gallons per month associated with fleet fueling operations. Regarding the results, merchandise margin dollars for the second quarter of 2022 increased by $9 million compared to the prior year, while the margin percentage increased 170 basis points to 30.4% from 28.7%. I want to reiterate that we recorded excellent results in an elevated fuel price environment, but we also believe our resilient strategy enables strong results as fuel prices decline, as demonstrated in prior quarters. Whether prices are high or low, we strive to manage margin and volume to optimize overall fuel margin dollars. Retail fuel profitability, excluding intercompany charges for the second quarter of 2022, grew 15% to $13.7 million versus Q2 2021. The company increased retail fuel margin to $0.413 per gallon versus $0.43 per gallon from the prior year quarter, marking an increase of 20.4%. For the second quarter of 2022, wholesale fuel profitability, excluding intercompany charges, increased by approximately $3.5 million compared to the prior year period. Fuel contribution from our fuel supply locations increased by $1.9 million, excluding intercompany charges, compared to the prior year period due to greater prompt-pay discounts related to higher fuel costs and greater rebates. Fuel margin cents per gallon for these locations rose to $0.072 per gallon from $0.056 per gallon in the second quarter of 2021, an increase of 28.6%. This quarter, the company also continued to realize strong margin dollar contributions from consignment locations. Fuel contribution from consignment locations grew by $1.6 million compared to the prior year quarter. Fuel margin also increased $0.69 per gallon, or 27.2%, to $0.323 per gallon compared to the second quarter of 2021, primarily due to greater prompt-pay discounts related to higher fuel costs, greater fuel rate dates, and improved RAC to retail margins. Volumes sold through consignment locations made up 16% of total gallons for wholesale but accounted for approximately 47% of total fuel margin dollar contribution for wholesale. Moving on, second-quarter store operating expenses increased by $23.4 million or 15.1% versus the prior year due to higher expenses at same stores, including increased personnel costs and credit card fees, a direct result of our 2021 acquisitions. In terms of hiring, we are seeing an improved applicant pool. While we still have a smaller than historical store opening pool, we are managing to keep up with the turnover inherent to our industry by taking additional steps to retain staff and fill vacancies through special incentives and recruitment marketing. In terms of additional results, net interest and other financial expenses decreased by $4.7 million versus the prior year quarter to $7.3 million for the quarter. During this current quarter, we recorded $7.3 million in favorable fair value adjustments, primarily associated with our public warrants. Adjusted EBITDA was $79 million, an increase of $3.3 million or 4.4% compared to the second quarter of 2021. Our net income was $31.8 million, an increase of nearly $6.2 million or more than 24% compared to $25.6 million in Q2 2021. As of June 30, 2022, we maintained our strong liquidity position, including cash and cash equivalents and short-term investments of approximately $282 million. Our outstanding debt, excluding capital leases, was approximately $714 million, resulting in net debt of $432 million. For the quarter, net cash provided by operating activities was $42.1 million versus $47.7 million for the second quarter of 2021. Capital expenditures were $24.5 million for the quarter compared to $15.1 million in the prior year quarter. The higher CapEx was driven by upgrades to fuel dispensers and investments in stores, including remodeling delis to facilitate our Sbarro expansion and installing bean-to-cup coffee equipment. Yesterday, in our earnings release, we noted that in the third quarter, the company initiated an internal restructuring that will include a change in tax status for certain subsidiaries, streamlining business operations to provide long-term synergies and other cost savings. We expect this to be largely completed by the end of the third quarter. Given the restructuring, we expect to record a one-time non-cash tax expense of approximately $8.5 million in the third quarter. Our Board of Directors declared a quarterly dividend of $0.02 per share of common stock to be paid on September 12, 2022, with a record date of August 29, 2022. In the second quarter, the company repurchased 3.1 million shares of common stock at an average price of $8.65 for a total of $27 million paid. We believe this is an opportunistic use of capital. There are about $11 million remaining under our previously announced $50 million stock repurchase program. As of August 5, there were approximately 12.1 million shares of common stock outstanding. The company continues to scale with 1,308 retail sites and 1,620 wholesale sites. As I turn the call back to Arie, I'll note that this has been another great quarter of financial results. We continue to execute as we navigate through this challenging environment.

Thanks, Don. I will close by saying that we believe we have the right long-term strategy in place along with the execution capability that makes me confident about delivering growth in the long term. Our business has performed exceptionally well in a challenging environment. Our model is very resilient, and we're well-positioned to deliver future value to our stockholders. We are very excited about the second half of this year. We will now take your questions.

Our first question comes from Kelly Bania at BMO Capital Markets.

Hi, Arie and Don. This is Ben Wood on for Kelly. We wanted to start with the retail gallon same-store sales decline. How did that come in relative to your own internal expectations for the quarter? And could you give us a cadence of same-store gallon sales over the quarter? We are trying to get a sense of how peak gas prices may have impacted gallons.

Sure. Thank you. As I mentioned on the call, higher prices did lead to lower volumes. There is no question about it, especially in the market that we currently operate. But as I always mention, our strategy is to optimize margin. That's precisely what we did. We remained competitive in our market. When prices go to $5, which I've never seen in my entire career, obviously, people drive less and come to the store more often by driving less, which really led to that lower volume. But as you can see, the overall results at the end of the day increased profitability while remaining competitive.

That's helpful. Following up on that, the wholesale side also seemed to face challenges. What opportunities do you see for growth in wholesale? Does that coincide with retail?

Those wholesale accounts, most of them are mom-and-pop establishments. The challenges we saw in retail, especially when prices hit $5 at a national level, they sold the same thing. As you can see, their gallons are likely down by the same percentage that ours were. However, we last saw $5 in mid-June. Since the beginning of July, prices have dropped significantly, almost $1. Now we see trends moving in a different direction with volume increasing as fuel prices decline. I think these wholesalers will benefit similarly to what we are experiencing on the retail side.

Okay, that's helpful. If I could sneak in just one more question on the merchandise inside the store side, I'm wondering if you could comment on inflation during the quarter and its impact on prices. Were you able to pass through all price increases? Are you seeing more coming down the line from suppliers?

There's no question that during the last quarter, we experienced price increases, and we certainly continued to remain competitive, although we had to increase some prices in certain cases. What we achieved was increasing promotions with our loyal customers to ensure great prices for everyone. That's why we've seen an increase in loyal customers. As we continue during this inflationary period, we see a distinct difference between loyal customers and non-loyal customers. Loyal customers are spending over $90 more than those who aren't loyal, and I believe that trend will continue as we navigate through inflation.

Our next question comes from the line of Bobby Griffin with Raymond James. Please proceed.

Good morning, everyone. Thanks for taking my questions. First, Arie and Don, regarding retail gallons, I am curious—looking at the strategy to maximize fuel gross profit dollars, is there a certain level of gallon decline that you think starts to negatively affect the inside store business from a traffic perspective? Any insights you can provide to help us understand how you balance gallon decline against GP would be appreciated.

Sure. As I mentioned, the $5 mark is unprecedented, aside from those in California. We monitor this carefully. We maintain our in-store market share based on IRI data, and we are diligent in ensuring we remain competitive. So, regarding gallons down in lieu of increasing profitability, it's not that we lost market share. The markets we operate in resulted in people driving less due to decreased discretionary income. This situation does not impact our in-store visits. As I mentioned, we have managed to increase profitability inside stores despite gallons being down because we see customers coming in more frequently, albeit making smaller purchases. Our initiatives ensure we have the right products and promotions in place to remain successful during these times.

That's very helpful. Don, regarding the increase in store operating expenses, I think you mentioned $8.4 million related to personnel costs in the press release. Is that solely due to higher hourly costs, or are there more hours being worked in stores right now? Looking for clarity regarding labor costs on a per-hour basis versus the number of hours worked.

Great question; it’s a combination of a few factors. Firstly, the average wage we’re paying has gone up, as is common across the market. Additionally, there are more hours being worked as our applicant pool has improved. We’re also offering incentives; for instance, we provided a $500 bonus for every 500 hours worked for employees who were there as of Memorial Day. So the increase encompasses those three aspects, with higher hourly wages being the most significant contributor.

Lastly, regarding the realignment and streamlining, do you have early expectations about the savings you could gain from that over a multiyear period? Anything to help us understand the potential benefits once everything is completed in the third quarter or into 2022?

Yes, we expect, at a minimum, over $0.5 million per year in savings from this initiative, although it could be considerably higher. But at a minimum, that’s our starting expectation.

I appreciate the details, and best of luck in the second half. Thank you.

Our next question comes from the line of Anthony Bonadio with Wells Fargo. Please proceed.

Hey, good morning, guys. Congrats on the beat. I wanted to quickly ask about fuel margins. The OPUS data continued to accelerate into July as prices declined, which aligns with historical patterns. Is that what you've been seeing in the first five weeks of Q3? And what should we consider a sustainable margin level once gas prices stabilize?

I can’t comment on Q3 specifics. However, I can say that as fuel prices decline, we see an increase in gallons sold; this is historically true, with people driving more when prices drop. Importantly, we don’t rely solely on fuel margins. If you analyze our inside sales, excluding cigarettes, our business remains strong, boasting a 170 basis point increase in-store. This is with the higher fuel prices; you can imagine the results when fuel prices drop more than a dollar.

That's helpful. To follow up on merchandise margins, it appeared mix was a key contributor. Can you help us understand how much of the 170 basis point increase came from mix versus other factors? Also, how are initiatives like grab-and-go coolers and the new coffee machines impacting margins?

Sure. The primary drivers this quarter were frozen foods, which increased by 81.5% with over a 7% margin increase; sweet snacks increased over 17.8% with a 7% margin lift. Alcohol sales, particularly beer, are also up. We see a trend where, due to inflation, consumers may opt for smaller packages, such as buying 12-packs instead of 24-packs, but overall, we see an increase in alcohol and OTP sales. While cigarette sales decline, OTP has increased another 1.6%, with a margin gain of 4.22%. Those categories are the main drivers behind the margin increases, and I expect this positive trend to continue.

Thanks so much, guys. Good luck.

Our next question comes from the line of Mark Astrachan with Stifel. Please proceed.

Thanks, and good morning, everyone. I have two quick questions. First, Arie, could you discuss the general drivers of the heightened retail fuel margins that we're continuing to see today compared to pre-pandemic levels? Secondly, on the same-store sales and traffic into stores, could you help us understand the relative magnitude of impact from rising fuel costs in June?

I had trouble hearing all of your questions, Mark, as the line was a bit noisy. To address your second question, we experienced high fuel prices in the second quarter—historically, when prices rise, people tend to drive less due to decreased financial flexibility, which was evident this past June when fuel went to $5. This didn’t impact our in-store sales but did cause a shift in consumer behavior toward smaller purchases. With gas prices now decreasing, we're optimistic that customer visits will increase as they remain price sensitive. I don't anticipate our in-store visits being negatively impacted by price increases, assuming prices don't rise above $5 again.

To add to that, it's important to note that while margins are elevated, credit card costs have also surged significantly, rising $4.1 million due to higher retail prices. Much of our fuel is purchased with credit cards, so when evaluating margin increases, we also need to account for that. Additionally, increased operational costs due to inflation have affected us. Everyone in the industry is experiencing these cost pressures. We're currently benefiting from elevated margins, but we must keep in mind the associated costs, including labor and credit transactions, which have escalated since the pandemic.

Our next question comes from the line of Karru Martinson with Jefferies. Please proceed.

Good morning. Historically, the industry has managed to maintain or even expand margins as gas prices decline. Given the unprecedented spike we experienced this summer, do you feel these dynamics are still holding, or is this a different situation?

Yes, I do believe the dynamics remain intact. Volatility in fuel pricing is advantageous. Historically, when fuel prices fall sharply, which was witnessed most recently in early July, margins tend to stabilize or improve. This correlation between a significant decrease in price and consumer behavior is fundamental to our pricing strategy.

Looking ahead, recognizing you just completed your 21st acquisition, how does the current landscape look for possible tuck-in acquisitions or even a more transformative deal?

That's an excellent question. I can affirm that our pipeline is extremely active right now, particularly because many small to midsize chains are finding it difficult to operate in the current environment. Having been savvy operators over the past decade, we are in a great position to capitalize on this. We have sufficient liquidity and transaction capabilities, and our strategic partnership with Oak Street will help us immensely over the coming months as we pursue these opportunities.

Our next question comes from the line of Hale Holden with Barclays. Please proceed.

Good morning. On the topic of M&A, do the higher financing costs and the above-normal fuel cost spreads change how you assess valuations, or have you seen sellers adjusting their expectations?

Sellers remain firm in their valuations, as you might expect. Everyone has big expectations given the current transactional activity. We believe our strategy of pursuing reasonable valuations will continue unchanged. We aren’t going to overpay for deals, as indicated by our track record over the past 21 acquisitions. Seller expectations are one thing; the market will ultimately dictate outcomes. With interest rates rising, we have a solid commitment from Oak Street totaling $1.15 billion available over the next year. Combined with our liquidity and favorable rates from our capital sources, we are well-positioned in this space.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back to Arie Kotler for any closing remarks.

Thank you, operator. Again, thank you to everyone for joining us today. I would like to wish you all a wonderful summer. Enjoy the rest of the day, and while you're doing that, please stop by one of our stores to try one of our excellent iced coffee offerings. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.