Greetings, and welcome to the Arko Third Quarter 2022 Financial Results Call. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ross Parman, Vice President, Investor Relations and Government Affairs for Arko. Thank you. You may begin.

Thank you. Good morning, and welcome to Arko's third 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 third quarter 2022 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, 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 September 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. Please note that 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, crosstalk or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now I would like to turn the call over to Arie.

Thank you, Ross. Good morning, everyone, and thank you for joining us. Arko delivered strong results for the third quarter, highlighting the strength of our business model. We have continued to build long-term value for our stockholders. The company has excellent performance and execution across the business. Arko increased operating income by 20.1% to $65.7 million versus the prior year third quarter. Adjusted EBITDA was an all-time third quarter high for the company, increasing 24.1% compared to Q3 2021 to $99.5 million. We have had seven straight quarters of comparable quarter adjusted EBITDA growth. We announced two very important strategic and accretive acquisitions since the end of the second quarter, including the core acquisition, which closed in Q3, a portion of the purchase price for acquisitions announced in 2022, including two that have not yet closed was approximately $178 million. In return, we expect to generate using estimated forward-looking non-GAAP measures, approximately $57 million of adjusted EBITDA on an annual run rate, including synergies. This amounts to approximately 25% of adjusted EBITDA for the nine months ending September 30, 2022. We continue to add value to our business by pursuing a very active growth strategy. Upon closing, the Transit Energy Group acquisition will add approximately 150 convenience stores and expand our retail territory into Alabama and Mississippi. Upon closing our acquisition of Price Convenience Holdings, we will add 31 convenience stores plus a new-to-industry store that broke ground in July, expanding our New England territory into Massachusetts. Both Transit Energy Group and Price have a long-term presence in their communities. We believe that these businesses will benefit significantly from our core capabilities. We're very excited about introducing more consumers to our assortments, promotions, services and, of course, fast rewards. I'm very excited by the pace of our deal-making and with the performance of all areas of our business. In our stores, the company increased its market share, excluding cigarettes, underscoring how our many initiatives, favorable assortment, loyalty and marketing programs are resonating with customers. Merchandise margins increased 60 basis points to a company high of 31.2%. We have grown this important metric by 330 basis points since Q3 2020. Third quarter same-store merchandise sales, excluding cigarettes, increased 4.3% compared to Q3 2021 and 6.1% on a two-year stack basis. We also had a very strong quarter in fuel. Our strategy has been consistent. Last quarter, I noted that we believe our fuel strategy enables strong results as prices decline. This quarter underscores that belief. Total fuel profitability grew to $155.1 million, a 28.5% increase compared to the third quarter of 2021. From July through September, as fuel prices declined approximately $0.80 per gallon, same-store sales, excluding cigarettes, accelerated. Notably, same-store sales, including cigarettes, also grew. We are very strategic with our cigarette pricing. We believe that we have shown our strategy is capable of great results in a variety of price environments. Our balance sheet is very strong. We generated $57.6 million in net cash from operating activities this quarter. For the nine months ended September 30, 2022, Arko generated $139.8 million in net cash from operating activities. As a result of this and our record strong results, confidence in the business and desire to announce returns for stockholders, our Board of Directors increased our dividend by 50% this quarter to $0.03 per share. This is the company's fourth consecutive quarterly dividend. Our top priority is executing our strategy in stores, in fuel and in M&A. Disciplined, consistent growth is central to our strategy. Most of you know that we started with approximately 200 company-operated convenience stores in early 2013. Since then, we have acquired approximately 1,300 company-operated stores in total. The company's scale and resources allow us to pursue multiple opportunities at once. This is an advantage that we believe enables us to deliver great results for our stockholders. Investments in well-established chains with brand equity and long-standing ties to their communities are key to our model and performance. We use our financial strength and financing ability with our agreement with Oaktree to our strategic advantage. Our industry continues to be highly fragmented. The overall deal pipeline today has many potential acquisitions. We expect to continue executing our acquisition strategy. When we pursue a deal, my team and I walk through the stores as part of the due diligence. We look for opportunities to enhance the value proposition of these local chains with our scale and expertise. For example, we have consistently gotten better merchandise and fuel costs than the chains we acquire. Our sophisticated assortment, promotion and pricing strategies are well advanced compared to our regional acquisitions. We usually retain the majority of employees in the chain we acquire, and I'm proud that our company creates jobs as we continue to grow. And of course, we have highly seasoned management who excel in their roles. This allows us to successfully close and efficiently integrate the businesses we acquire, which we believe creates significant value for Arko stockholders. I'd like to walk through the three key pillars of our marketing and store initiatives that have driven our strong in-store performance. The first key pillar is careful management of core destination categories, such as packaged beverages, candy, snacks and nicotine products to name a few. We invest in the assortment square footage allocated to merchandising and loyalty promotions for this category. The goal is to be the go-to convenience store in our geographic area and increase our market share in this in-demand category. Looking at the comments in this pillar, this quarter, we maintained total market share, including cigarettes, and grew market share by 10 basis points, excluding cigarettes. Coffee is an important initiative, and we have seen excellent results. The number of enrolled loyalty customers who made their first recorded coffee purchase in our stores increased 55.6% this quarter compared to Q3 2021. Additionally, unique customer coffee purchases by enrolled loyalty customers increased 57.1%, while their net total coffee spend increased approximately 51%, both compared to Q3 2021. We also had great performance in key center store categories like candy, packaged snacks, salty snacks, beer, wine and packaged beverages. Frozen food same-store sales increased 60% versus Q3 2021. The second key pillar is the fast rewards loyalty program. We're pleased by the continued growth in consumer response. A newly updated loyalty app is currently being tested prior to rolling it out chain-wide. The new app is designed to further enhance our personal relationship with our customers. Our goal is to drive increased frequency and total spend through order and delivery and relevant in-store and in-app personalized deals. One key point of differentiation is the ability for members to start rewards and save even more. We believe that this is a great feature for the over 1.2 million members. The new app we launched with a strong enrollment offer to encourage new customers to sign up for this great savings. We know that when our customers enroll, we have an opportunity to increase their trip frequency and total spend. Based on the data we've been tracking, when customers enroll in our loyalty program, we see incremental month-over-month growth in basket size. The third key pillar is food service. We are relatively new in this evolving, higher-margin segment in the convenience channel. We have a long runway for developing a high-margin food program that colors our stores. We continue to work on expanding our pizza offering and exploring many opportunities that we hope to introduce soon. Year-to-date, we've opened 13 Subaru pizza restaurants. We plan to open five more this quarter. We also have 377 stores with roller grill for hot dogs and tornadoes, 199 stores selling pizza by the slice, and 146 stores with fried chicken and hot breakfast sandwiches. I believe that we can become more of a food destination. We believe a strong food offering and value proposition can position us to compete even more in food service. Our investments in these three key pillars are leading to great in-store performance. We believe our core convenience store segment is well-positioned to continue to deliver great results. We also believe that there is a unique opportunity to continue to scale and grow our footprint with accretive acquisitions. This is our historic source of growth. We plan and act for the long term, and we believe our strategies will continue to create value for our long-term stockholders. With that, I will turn it over to Don.

Good morning. Arie detailed our most recently announced agreements to acquire the TEG business and Pride. Our first deal of the year, Quarles, closed on July 22. As Arie mentioned, we are known for consistent, disciplined investments in our growth and value-enhancing initiatives. But our strength in integrating new stores, sites and employees should not be overlooked. Quarles is a great example. Systems, personnel and operations have been rapidly integrated. The team doing that work has done a great job. We are very pleased with this acquisition and business. It's important to understand how we view the reportable segments outside of our core convenience store business. Wholesale fleet are accretive to our bottom line, but the bulk of our profit is derived from our retail segment where our self-operating convenience stores are located. The other segments are important for our capital allocation strategy. We believe they give us stable, ratable cash flows so we can move quickly to pursue opportunities and invest in our stores. These segments also give us more leverage with fuel and merchandise suppliers and superior rebates. Our balance sheet continues to be strong, and we currently have a good liquidity position. As of September 30, 2022, we had cash and cash equivalents of approximately $283 million. Our outstanding debt, excluding capital leases, was approximately $734 million, resulting in net debt of $451 million. Our $450 million bond issuance in October of last year, which locked in a 5.125% coupon looks increasingly beneficial as interest rates have increased significantly since then. We continue to realize excellent free cash flow. For the quarter, net cash provided by operating activities was $67.6 million versus $60.5 million for the third quarter of 2021. After the expected closings of the TEG and Pride acquisitions, there will be approximately $683 million remaining under our Oak Street agreement. We are well positioned to continue our long-term growth strategy and navigate an uncertain economic outlook. Getting into results for our convenience stores. Merchandise revenue for the third quarter of 2022 increased to $446 million versus $435 million in the prior year quarter, while margin percentage increased 60 basis points to 31.2%, our highest. In fuel, we believe that slightly higher margins may be sticky given credit card fees and the cost of labor. We believe our strategy of managing margin and volume while remaining competitive is key to optimizing profitability as a growing company. Retail fuel profitability, excluding intercompany charges for the third quarter of 2022 grew 21.5% this quarter, totaling $117.5 million or a $20.8 million increase versus Q3 2021. The company increased retail fuel margin to $0.448 per gallon compared to $0.345 per gallon in the prior year quarter. Third quarter convenience store operating expenses increased $20.1 million or 12.9% versus the prior year due to incremental expenses related to the Handy Mart acquisition we closed in November of 2021 and an increase in expenses at same stores, including an increase of 17.4% or $10.3 million in personnel costs and $2.8 million or a 13.9% increase in credit card fees. The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to independent dealers. Moving to wholesale for the third quarter of 2022. Wholesale fuel profitability, excluding intercompany charges, increased approximately $2.6 million compared to the prior year period, of which approximately $1 million was attributable to the Quarles acquisition. Fuel contribution from fuel supply locations increased by $0.9 million, excluding intercompany charges compared to the prior year, primarily due to the Quarles acquisition, greater prompted discounts related to higher fuel costs and greater fuel rebates. Fuel margin cents per gallon for these locations increased to $0.069 per gallon versus $0.058 per gallon in the third quarter of 2021, an increase of 19%. Our new fleet fueling reportable segment generated in the third quarter 2022 fuel revenues of approximately $121 million, and the fuel contribution from the fleet fueling sites was approximately $11 million, excluding intercompany charges. Fuel revenue was positively impacted by a high average price of fuel and fuel margin benefits from historically high rack to retail margins in the third quarter of 2022. Net interest and other financial expenses increased by $5.4 million versus the prior year quarter to $19.8 million for the quarter. Adjusted EBITDA was $99.5 million, an increase of $19.3 million or 24.1% compared to the third quarter of 2021. As we noted in the second quarter, the company executed an internal realignment of certain direct and indirect subsidiaries. This work was primarily conducted during the third quarter and was intended to streamline business operations and provide long-term cost savings. As a result, the company recorded a one-time non-cash tax expense in the amount of approximately $8.7 million in the third quarter of 2022. This contributed to a 30% decrease in net income. Net income was $25 million compared to $35.6 million in the third quarter of 2021, which included a tax benefit the company recorded of approximately $5.5 million. Capital expenditures were $27.7 million for the quarter compared to $15.5 million in the prior year quarter. In the third quarter, the company repurchased a minimum amount of stock. There are approximately $11 million remaining under our previously announced $50 million stock repurchase program. As of November 4, there were approximately 12.1 million shares of common stock outstanding. This has been another great quarter. As a result of our strong results and desire to enhance returns for stockholders, Arko's Board of Directors declared a quarterly dividend of $0.03 per share of common stock to be paid on December 6, 2022, to stockholders of record as of November 22, 2022. We believe the company is in a strong position for continued long-term growth. I'll turn the call back over to Arie.

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

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

Good morning. Thank you for taking my question and congrats on your strong EBITDA performance. I guess, Arie, first question for me is just the M&A environment for you guys has picked up here in 2022 with a lot of announced acquisitions. So, I'm just curious about the capacity of the business to further integrate acquisitions as we head into 2023? Do you still see opportunities that you could take on additional acquisitions if they're available? Or do we need to take a pause to integrate the ones that have been announced? And as a second part of that, can you maybe talk about some of the investments or capabilities that you guys have made in the integration to be able to handle multiple acquisitions at one time?

Sure. Good morning, Bobby. Thank you for the question. I'll start, first of all, with the two acquisitions that we already reported in Q2 and Q3. We already closed the first one, which is the core acquisition back in July. And I can tell you right now that this company is fully integrated within our company. I mean, that was a very, very successful acquisition for us, and you can probably see the results already. Regarding the other two acquisitions that we just announced, yes, we have the capacity. We have an M&A team. I can tell you, as a matter of fact, we are putting another integration team in place right now given the amount of opportunities that we see in the marketplace. The idea over here is really to create another team on top of the M&A team and the operating team with professionals that are going to be able to help us integrate all of those companies that we actually put together. Regarding your question in terms of opportunities and capacity, if you notice in our presentation that we published yesterday, we still have over $1.3 billion in dry powder between our cash line of credit and the Oak Street agreement that we signed. So, there's no question that this is our key growth strategy for the past eight years. We have been growing through acquisitions. We closed on 21 acquisitions already, and this is really something that I would say we have one of the best teams in the marketplace when it comes to the acquisition and integration of these companies.

Thank you. My second question is just around the fuel volume trends for retail. As we saw prices come back down a little bit at the pump, did you see any type of behavior change in volume? Or was the volume fairly consistent throughout the quarter?

No. So, if you remember in Q2, I specifically mentioned that when the price hit $5, we saw a double-digit decline in fuel volume. We continued to see that during the month of July, where our gallons were down around 12.5% in that month. Then all of a sudden, when prices decreased towards $4 and below $4, we saw a shift in gallons, which were down around 8%. In August and September, there was an improvement of almost 50% in the decline of gallons. The gallons were down around 8%. But I think the very, very interesting story here is that during July, when gallons were down 12.6%, the same store sales, excluding cigarettes, were down 2.4%. However, in August, our same-store sales were basically 1.2%, and excluding cigarettes, were up 4.4%. In September, as prices continued to decline, that was a big story for us. Same-store sales were up 3.6%, while same-store sales excluding cigarettes, which is the most important thing because that drives the margin, were up over 7.4%. I can tell you right now that we see the same trend in October going into November. So as prices continue to decline at the pump, our gallons improved, and at the same time, our most important categories, which are same-store sales excluding cigarettes, are continuing to perform strongly.

Thank you, Arie. I appreciate the details. Best of luck here in the fourth quarter.

Thank you very much, Bobby.

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

Good morning, guys. So, I just wanted to talk about merchandising margins a little bit more. Taking a step back, and I commented on this in your remarks, but we're running about 400 basis points added from where we were in 2019. You've obviously made some changes to the business during that time frame, along with a number of acquisitions. But is that 30% plus rate that we're running at now the right way to think about the business going forward? And then where do you think that can go over time as you continue to chip away at strategic efforts inside the store?

Sure. The increase in margin, Anthony, and good morning, by the way, is largely due to the diversity of products that we are selling right now. A lot of it stems from the initiatives that we started since the beginning of 2020. We see a decline in cigarette sales year-over-year while we see an increase in all of the key categories for us. For instance, candy is up 8.5%, and frozen food, a big initiative that we started a bit into the pandemic, is up 60%. The same applies to packaged beverages, salty snacks, alcohol, and other tobacco products. These are really the categories that drive the margin. Our excellent merchandising team is focused on putting the right product on the shelf and concentrating on the fast rewards loyalty program to ensure that our loyal customers continue to increase their basket sizes. I believe we will continue to see an increase in margin as we add more food offerings into our stores.

Got it. That's very helpful color. And I also wanted to touch on the interest rates. I know you guys have largely fixed-rate debt exposure with the senior notes, as Don commented on, but you've also got almost $300 million in floating rate that puts some exposure to cap rates via the leases on your stores. So, can you just talk about how you're thinking about the impact on the P&L as it continues to rise? And then does that have any effect on how you're prioritizing capital moving forward?

Yes. Before I let Don jump in and maybe expand more, just to be clear, you mentioned cap rates. Our cap rates are fixed. We don't have any variable rates on our rent. Our rates on the notes are fixed at 5.125%. I think you will agree with me that for the next seven years, we are in a very good position on those unsecured notes. The same applies to our leases. The only increase in rent is between 1.5% to 2% a year, which is much below the CPI. So, I think we are very well positioned. But I'll let Don elaborate more.

Yes. Great question, and I know this is a concern. So, two things: a lot of our leases are structured where it's CPI up to a certain amount, usually like 1.5% to 2%. So, if CPI goes up 8%, we're capped at where it can go. Those interest rates really don't affect us that much. Again, the majority of our debt is fixed at 5.125%, but the market has also given us a great opportunity to take our cash and invest it, whereas before we could only get 20 basis points for income, we're now able to invest our excess cash and offset some of that. So, we don't see this as a real big issue, especially with the majority of it being fixed and the ability to invest the free cash flow to get a nice return that offsets interest expenses.

Great. Thanks so much, guys. Good luck.

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

Thanks, and good morning, everyone. I wanted to ask about the contribution to the in-store merchandise comp from pricing that the suppliers are taking and that you're passing through. Maybe you could just talk directionally about that? And then more broadly on the same subject, there's a lot of talk about elasticities being lower than historical levels on pricing going up. Obviously, your business is slightly different in terms of being more impulse-driven in-store. But if you could talk directionally about which categories are more or less elastic and how you think about pricing as you move through 2023 and the potential benefit from higher promotional activity or reduced pricing, that would be helpful. Thank you.

Sure. I'll start with the price increase. There is no question that almost every vendor had to push a price increase this year. We try to be very careful. Given our size and promotion activity, we aim to move very carefully to create value for our customers. As prices continue to increase, we have been pushing forward our fast rewards loyalty program with our loyal members. We have over 1.2 million members, and we are trying to provide them with valuable promotions so they don't feel those price increases as much as others might. In terms of moving forward, as interest rates rise and we move toward a potential recession, our industry appears to be more resilient than some others. I think the proof is what we see right now; same-store sales for essential categories are continuing to increase. We are currently testing our upgraded fast rewards app and getting ready for a companywide launch. Our goal is to grab more customers and ensure they have our cards in hand to enjoy all the valuable promotions. We need to be very sensitive to price increases and the rising interest rates.

Got it. That's helpful. And lastly, I know it's probably a bit granular in terms of size, but can you provide some update on the benefits you're getting from strategic partnerships with third parties like the Subaru relationship or even the stores that you've added electronic charging capabilities? Any sort of commentary around the bump that you're getting on visitation as well as what's going on in the stores would be helpful.

Sure. Let me start with food service. You mentioned Subaru. Subaru is only one item out of many others. As I said, since the value proposition is very important, we have 199 stores that sell pizza by the slice, and our goal is to continue to extend it. We have a lot of stores featuring 377 stores selling hot dogs on the roller grill and tornadoes. I think especially in this environment, we must find ways to offer food to our customers, trying to keep prices manageable—below $3 a slice, even though cheese and other food elements are increasing in price. For coffee, for instance, we are heading into coffee season. Our loyal customers are able to buy a cup of coffee for $0.99, which, if you look at the market, is almost 50% lower than the average price. We are striving to ensure we become a destination for our loyal customers by offering valuable prices to drive the margin. The food service margin, as everyone knows, is much higher than the margins from cigarettes, for example. This is where our focus is right now.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kotler for any final comments.

Thank you very much, Melissa. Thank you, everyone, for joining us. As we are heading towards the holiday season, I would like to take this opportunity to wish each and every one of you and your families happy holidays.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.