Good day, everyone, and welcome to today's Arko Corporation Second Quarter 2024 Earnings. Please note this conference is being recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Senior Vice President of Capital Markets, Corporate Strategy and Investor Relations, Jordan Mann. Please go ahead.

Thank you. Good afternoon and welcome to Arko's Second Quarter 2024 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second quarter of 2024, as filed with the SEC, are available on Arko's website at www.arkocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2023. Before we begin, please note that all second quarter 2024 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our second quarter 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during the call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and Arko is under no obligation to update or revise forward-looking statements made on this call, whether as a result of new information, future events, or otherwise. On this call, management will share operating results on both a GAAP basis and on a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as operating income as adjusted, and adjusted EBITDA, and reconciliations for those measures to our results as reported in accordance with GAAP, are detailed in our earnings release, or in our quarterly report on Form 10-Q for the quarter ended June 30, 2024. Additionally, management will share profit measures for our individual business segments, along with fuel contribution, which is calculated as fuel revenue, less fuel costs, and excludes intercompany charges by GPMP. And now, I would like to turn the call over to Arie.

Thank you, Jordan, and thank you all for joining. We reported earlier today that we delivered adjusted EBITDA that excluded our second quarter guidance. These results reflect our ongoing effort to manage key lever pricing and our vendor partner relationship as we navigate a challenging microeconomic environment alongside our customers. We continue to see pressure on consumers as they struggle with inflation and elevated prices for everyday goods, especially in markets with a large percentage of lower-income consumers. Consumers have been hesitant in their spending, and their purchases have remained suppressed despite numerous summer promotions. As a result, during the quarter we saw lower same-store merchandise sales and retail volumes at the pump. However, our team worked hard and achieved merchandise margin rate growth while providing much-needed value to our customers. As we discussed on our last call, we believe we are prepared to navigate this near-term headwind as we continue to believe in the long-term opportunities for the company. Turning to our retail segment performance for the quarter, merchandise same-store sales decreased compared to the strong prior year period, remaining relatively flat on a two-year stack excluding cigarettes, reflecting a challenging consumer backdrop. Despite this quarter decrease, we saw significant merchandise margin expansion, which helped partially offset the sales decline as we continue to make progress with our key merchandising initiatives and deliver value for our customers. For example, we have seen great results in the value-oriented pizza offering that we launched in Q1 of this year. Relative to our old pizza program, same-store pizza sales this quarter increased approximately 19% and units sold increased 36%. In addition to the pizza program, we have expanded our food service offering with Nathan's Famous Hot Dogs, which are available hot and ready in more than 460 of our retail stores across the country. While this program only started in the middle of the quarter, we have seen a strong customer response with same-store hot dog sales up approximately 16% over the prior year quarter. All-in same-store food and dispensed beverage contribution dollars were up over 9% and over 400 basis points in margin rate compared to the prior year period. We plan to continue leaning into food service through offering value and bundles to further help our customers in this challenging microenvironment. As I mentioned previously, food and dispensed beverages are key components of our strategic plan, and I'm pleased with the progress that the team has made. Given the ongoing consumer pressure, we announced the return of our $10 sign-on incentive for newly enrolled members in our Fast Rewards loyalty program. For context, we added more than 365,000 enrolled loyalty program members during the third quarter of 2023 when we ran our promotion last year, and we expect the return of this promotion to continue to improve loyalty enrollment and accelerate traffic and spending across our stores as reflected by same-store loyalty sales, which were roughly flat year-over-year, but also deliver incremental merchandise contribution dollars. Turning to retail fuel, we delivered modest increases in fuel contribution dollars driven by gallons growth from our recent acquisitions and a fuel margin increase of roughly $0.02 per gallon, which more than offset continued declines in gallon demand. While we are working to improve same-store retail gallons going forward, our retail fuel trends are consistent with the industry and reflect broader economic pressure. As we have shared before, our fuel team prices to optimize fuel contribution dollars, factoring in competitive dynamics at the site level, and we believe rising cost pressure that continues to impact smaller operators will continue to support the strong retail fuel margin that we experienced in the second quarter. On our last call, I emphasized the importance of developing the right plans and platforms for organic growth within a retail store footprint in the context of a multi-year transformation plan. We are developing the details of this organic growth plan, which is expected to include significant capital allocation towards our retail stores, the conversion of a meaningful number of retail stores currently in our retail segment to dealer sites within our wholesale segment, and increased focus on pricing and procurement strategies across our retail stores. As part of this, we are advancing our new store design pilot. We have completed consumer research to guide the development of our prepared food assortment and store layout, and have selected seven stores within one of our regions to execute the pilot. After validating the results, we have a goal of a region-wide rollout before extending across our retail footprint. This initiative aims to enhance our customer value proposition and improve store operations with a significant focus on food service. We expect to begin implementing the new design in our pilot stores in the fourth quarter of this year. I would also like to update you on another element of the transformation plan, the conversion of retail stores to dealer sites within our wholesale segment. Last quarter, we shared that our portfolio review identified a meaningful number of retail locations that we believe will deliver more profitability as dealer sites within our wholesale channels, rather than continuing to operate them as retail stores. Conversion of identified stores benefits both our dealers and Arko. Dealers are able to leverage their scale by taking additional sites, while we can realize higher profits from ongoing fuel supply agreements and rental income than from continuing to operate these stores in our retail segment. This conversion also will allow us to focus and better prioritize future investments in our remaining retail stores. Our team has been working with multiple potential dealers over the last several months to advance this part of the transformation plan. To give you a sense of this in action, we already have approximately 40 retail stores that we expect to have completed by the end of the third quarter. Several of these have already been converted. We are still working through our multi-year transformation plan, and the details shared today are only intended to reflect high-level themes and preliminary efforts ahead of our upcoming Investor Day that we plan to hold in the fourth quarter. Additional details for the date and location will be shared in the weeks ahead. Lastly, as we continue to see opportunities for expansion, we have three new-to-industry stores that are in different stages of construction, with one scheduled to open in the third quarter. I will now turn the call over to Rob to review financial results for the second quarter and touch upon our expectation for the third quarter and full-year 2024.

Thank you, Arie. Good afternoon, everyone. Before touching on our second quarter results, I would like to share a change we are making to how we report our non-GAAP financial measures. Starting with this 10-Q, we will now be including the non-cash portion of rent expense in our calculation of adjusted EBITDA. We estimate this adjustment will have the effect of reducing adjusted EBITDA by approximately $15 million for fiscal year 2024 at roughly $3.5 million per quarter. For this quarter, you will see both our historical methodology and our new methodology reported in our earnings release for adjusted EBITDA. We are providing both calculations this quarter to allow for an orderly transition to our revised approach. To minimize confusion, my remarks on the second quarter will use our historical methodology of excluding non-cash rent expense from adjusted EBITDA, which was the basis of our second quarter guidance. We want to make clear that this change does not reflect any change in our accounting practices or our results reported in accordance with GAAP. Turning to second quarter 2024 results, adjusted EBITDA was $83.8 million for the quarter compared to adjusted EBITDA of $86.2 million from the year-ago period. Results were supported by a retail fuel margin of $41.6 per gallon, which was considerably above the $38.5 per gallon midpoint of our guidance range. At the segment level, our retail segment contributed approximately $73.8 million in operating income compared to $77.9 million in the year-ago period. Adjusted operating income for the quarter was $87.9 million compared to $92.6 million in the year-ago period. Total retail merchandise sales were down just over 2% for the quarter, while merchandise contribution was up 0.7%, indicating a margin rate expansion of 90 basis points. Retail segment fuel gallons were down 3.4% compared to the year-ago period, while fuel contribution was up modestly due to recent acquisitions and higher cents per gallon, which more than offset continued declines in gallon demand. Same-store merchandise sales, excluding cigarettes, were down 4% versus the year-ago period, while total same-store merchandise sales were down just over 5%. Same-store transactions were down close to 8% for the quarter, reflecting the challenging external environment. The decline in transactions was partially offset by an increase in average dollar sale. The impact of the sales decline was partially offset by continued margin rate expansion, which was up roughly 80 basis points compared to the year-ago period. Same-store fuel contribution was down approximately $3.3 million for the quarter, with the decline in gallons partially offset by stronger year-over-year fuel margin per gallon. Same-store fuel gallon demand was down 6.6% for the quarter, while fuel margin of $41.1 per gallon was up $1.5 per gallon from the year-ago period. Same-store operating expenses were down 0.5% for the quarter. Moving on to our Wholesale segment, operating income was $9.1 million for the quarter, compared to $6.8 million in the prior year period. Adjusted operating income was $21.3 million for the quarter, versus $19.7 million in the year-ago period, with a 5.7% decline in gallons offset by the impact of higher fuel margin, which was $9.9 per gallon versus $9.2 per gallon in the year-ago period. For our fleet segment, operating income was $11.8 million for the quarter, compared to $9.3 million in the year-ago period. Adjusted operating income was $13.7 million for the quarter versus $11 million in the year-ago period, with total gallons up 13%, driven by the WTG acquisition, which closed in June 2023. Gallon growth was amplified by increased fuel margin, which was $45.9 per gallon for the quarter, versus $41.7 per gallon in the year-ago period. Total company general and administrative expense for the quarter was $42.4 million, compared to $42.7 million in the year-ago period. Debt interest and other financial expenses for the quarter were $21.4 million, compared to $20.2 million in the year-ago period. Net income for the quarter was $14.1 million, compared to $14.5 million for the year-ago period. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet, excluding lease-related financing liabilities, we ended the second quarter with $890 million in long-term debt, consisting of our 2029 senior notes, the outstanding balance on our Capital One line, and the remainder primarily related to real estate and equipment financing. Our $140 million ABL remains completely undrawn as we continue to manage working capital needs from operating cash flow. We maintain substantial liquidity of approximately $806 million, including $232 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Of this total liquidity, approximately $420 million is attached to our Capital One line, which is reserved for M&A activity. We remain comfortable that our balance sheet has more than adequate flexibility to support both ongoing organic growth initiatives and M&A. Total capital expenditures for the quarter were $19.3 million. Turning to our third quarter guidance, which now reflects the non-cash portion of rent expense in our adjusted EBITDA calculation, we expect adjusted EBITDA to be in a range of $70 million to $86 million. Our third quarter earnings outlook corresponds to an average retail fuel margin of $0.38 per gallon on the lower end and $0.44 per gallon on the higher end of our guidance. For full-year 2024, we are maintaining our adjusted EBITDA guidance. Inclusive of approximately $15 million in non-cash rent expense, full-year 2024 adjusted EBITDA is expected in a range of $235 million to $275 million. This range represents the guidance of $250 million to $290 million we shared at the beginning of the year under our historical methodology, minus the approximately $15 million in non-cash rent expense now included in our new methodology. For the back half of the year, our guidance corresponds to an average retail fuel margin of $0.37 per gallon on the lower end and $0.45 per gallon on the higher end. With that, I'll hand it back to Arie for closing remarks.

Thanks, Rob. Before I wrap up, I would like to take a moment to talk about our full-year 2024 guidance and in particular, the range around our midpoint. We are operating in an unprecedented geopolitical environment and have seen significant swings in fuel margin over the past month. For the second quarter, fuel margin was below $0.38 in April and jumped above $0.43 for May and June. July just finished in the $0.42 to $0.43 range. So, we are broadening our CPG assumptions going forward, given the potential for continued volatility. I would like to close by reiterating our commitment to continue strong execution through this challenging microeconomic environment as we strive to enhance shareholder value. Thank you for your ongoing support and confidence in our vision for Arko. We appreciate your time today. With that, we will open it up to questions.

Thank you. And we will pause for a moment to allow questions to queue. And we will take our first question from Bobby Griffin with Raymond James.

Good afternoon, everybody. Thanks for taking my questions.

Hey, Bobby.

Go ahead, Bobby.

Hey. The first thing I wanted to hit on is just maybe on a high level, just curious where the business is today in procurement across kind of all the stores and the business segments. Any context you can put around that and maybe what some of the opportunities could be or kind of what you're working on over the near and medium term on the procurement side and really on fuel or merchandise. Just curious where that is from your point of view?

When you say it from basically from a segment standpoint, everything is operating under one system right now. So, maybe you can elaborate a little bit more about your question.

Yes, just more of like, sorry, just a lot of acquisitions over the course of the last couple of years. Just so, just curious, are we leveraging those across retail? Are we getting the full procurement benefit across those acquisitions? And then I'm just also, are we seeing the leverage across the different business segments that Arko has developed over the last couple of years as well?

Sure, sure, sure. So, just for the benefit of everybody else, everything is basically centralized in our back office. Just to be clear, we have three different segments. Everything is centralized to our back office. Across the retail chain, all of the marketing and merchandising initiatives, purchasing power, everything is being handled, again, to our centralized back office. The same thing goes for the fuel; everything is consolidated under one group, the retail segment, the wholesale segment, and of course, the fleet segment. So, I think from an opportunity standpoint, there is always opportunity to continue to grow. But I think we are set up very well right now from an opportunistic standpoint. And again, I think that's part of the transformation plan will be to continue to actually more and more of those opportunities.

Yes, Bobby, I confirm what Arie is saying. I mean, everything is on a common procurement platform. But I think, as we've mentioned before, the transformation program will have components of both on the direct side and the indirect side. So, again, we have everything on a common platform, but certainly opportunities exist. And I think more on the indirect side. But again, it is part of both the direct and indirect plan going forward.

Thank you, Rob. Thank you, Arie. That's helpful. That's exactly what I was kind of looking for. And then, Arie, I appreciate the details about the potential opportunity on the retail network, dropping some of those into dealers and in the savings. I'm just curious, when you look at the fleet card business, as well as your wholesale business on a standalone basis today, are there opportunities to grow those sites, not including your own network? So is there opportunities to actually go out, grow wholesale sites that wouldn't be part of your own network to kind of further leverage the fixed cost of that infrastructure in the same way in the fleet card segment as well?

Sure. So, adding additional sites, which is something that is happening on an ongoing basis, it's always an opportunity. This is something that is happening as we speak. The same thing with the fleet business; if we have opportunities to increase the fleet business, we are looking into this, of course. And we're going to add more sites. Recently, we did it last year with WTG. If you remember, when we bought the Quarles acquisition, we were at 183 sites under our belt. And last June, when we acquired WTG, we added another close to 120 locations. So, today, we basically have 294 locations today, starting with 183.

Yes, that was achieved through mergers and acquisitions. Are there any opportunities to expand by adding locations organically, or does it have to come through a large-scale acquisition? I'm trying to understand the situation better.

There is always opportunity available, both organic and otherwise. In fact, we are currently exploring areas for expansion. However, I believe that substantial organic growth will primarily stem from acquisitions, as has been the case historically. This situation is no different from when we introduce new locations in the retail segment. Right now, we are actively adding three new locations. Whenever such opportunities arise, we will certainly pursue them.

Okay. And then, I guess, lastly for me and Rob, I don't know if you'll be able to answer this yet. I know more is likely coming on the Investor Day. But when you look through kind of the retail network, is there any way you can size out or parse how big is the performance gap on maybe merchandise or fuel comps from some of the lower quartile stores? And the reason I'm asking is, is there a better way to kind of get a sense of how maybe the Arko core stores you all's good performing stores are performing versus the industry versus some of the lower kind of lower quartile stores that could eventually end up dropping out of this retail network into more of a dealer base are performing?

Yes, Bobby, I think you're spot on. That'll be something we'll share more at Investor Day. But to your point, we have a lower quintile, as does everyone else. And as you might imagine, those are likely some of those stores that are targeted for dealerization where we can be more profitable with them as dealer run. We can focus our capital allocation toward the fleet that we want to drive. So, yes, we'll provide much more detail at that level. Yes, we've looked at it. But we're going to hold that one for Investor Day for detail.

Okay, understood. Thought I'd at least give it a shot, apologies again about the background noise.

Let me provide some clarity on that. We are in the process of converting 40 stores, with some already completed and the rest expected to finish by the end of the quarter. These stores are projected to increase profitability by roughly $2 million compared to their current performance. It's important to emphasize that our goal is to turn them into dealer locations, not because they aren't good stores, but because we see better opportunities to allocate our capital and prioritize our efforts. The intention is to enhance their performance, not diminish it. We plan to maintain control over our operations, ensuring we keep our gallon sales and collect valuable data. This approach is beneficial from a synergy and purchasing perspective, meaning we won't lose anything—in fact, we will gain. Additionally, we'll be able to reduce some general and administrative costs, as managing 40 stores is more expensive than running them as dealer locations. Overall, the anticipated improvement in profitability from those 40 stores is about $2 million more than their current results.

Thank you. I appreciate the additional details. I appreciate you guys answering my questions and best of luck here the remainder of the year.

Thank you, Bobby.

Thanks, Bobby.

Thank you. And we will take our next question from Kelly Bania with BMO Capital.

Hi, good evening. It's Kelly Bania here from BMO. I was wondering just if you could clarify some assumptions here on your outlook for 2024, seems like some of the key changes to the underlying outlook here assume maybe a higher fuel margin. You talked about some of the factors there in recent months, but is that offset by a lower same-store sales outlook or are there any other major kind of puts and takes? And I guess within that was surprised to see the acquisition of CBQ in here, so I was just curious what the annualized EBITDA contribution of that is and what that added to your full-year outlook?

Yes, so Kelly, you're spot on with the key full-year assumptions. So, again, we are seeing structurally higher cents per gallon. We've seen it in May, June, and July now, and therefore we're taking our midpoint of our guide up to kind of that $0.41 range in the middle of what we shared for the Q3 guide. So that is the increase there. And then on the other side, we are seeing some pressure in the merch sales. We've kind of taken that down for the year to be more consistent with trends, so kind of down low to mid-single for the year. So those are the major changes. On CBQ, look, it's 21 stores on over 1,500. It's not a big number. It was factored into our high-level view at the beginning of the year, so again, not a major impact there to the business. It's a nice tuck-in. We're going to drive synergies there, but again, this is not a larger deal that's going to significantly move our guidance number.

If I may jump in, Kelly, if you don't mind, I just want to add a couple more things to the context over here. I just want to remind everybody that 70% of the industry, this is a very resilient industry. We are talking about 150,000 convenience or gas stations in the U.S. 70% of them are mom-and-pop. One of the reasons that we believe we're going to see some elevation in CPG, as we saw over the past three months, and again, as I said, I mentioned, July just finished between 42% to 43%, is everybody's facing the same microeconomic pressure. It's just something that we see across the industry, across almost every industry right now, and we believe, no different than what we saw during COVID and no different than what we saw in the past. When there is pressure, the only place that you can actually push margin very, very quickly and make changes very, very quickly is only outside. And when we see decline in inside sales, traffic, and gallons, the only way to basically make it back somewhere else is only outside the pump. So, finishing July, August with $0.42, $0.43, we believe that we're going to continue to see operators just elevating their margin outside the box until things will actually come back to normal.

Okay, that's helpful. And just on the dealer conversion process, so 40, I think you said, converting by the end of the third quarter. I guess two questions. What are the key characteristics? What are the key things that you're looking for? Is it really just kind of culling this bottom quartile, or maybe can you give us more color on what this might look on a multi-year basis in terms of what the mix of the business could be between retail-operated stores and the dealer network?

So, this is something that is still ongoing, as I mentioned. We started to explore that a few months ago. This is still ongoing. I think the one thing that we're looking for when we actually make decisions, of course, is profitability. But at the same time, we want to make sure that some of those stores, do we really have the opportunity and upside in some of those stores. And if we feel that the capital that we are going to allocate towards those stores or the investment that we are going to allocate, it's not going to fit the criteria or the return that we are looking to achieve over here. We feel that we'd rather just move them to our wholesale segment. The wholesale segment is a very great segment for us. As you can see the results, it's technically flat year-over-year. As long as we can maintain control over those sites, and we can figure out a way to convert them into something a little bit more profitable, this is basically the plan. We don't have a number right now. We don't have a particular brand, geography, or transaction on the table right now. But as I said, as we continue to evaluate them with the big transformation plan that we have that we're actually developing, we're going to continue to share more information with you guys. And we felt the first time we brought it up was last quarter. As I said, this quarter we already have 40 that we identified that we're in the process of converting. Some of them are already converted. And we're going to continue to update you all on an ongoing basis, on a quarterly basis.

Thank you. It appears that we have no further questions at this time. I will now turn the program back to Arie Kotler for any additional or closing remarks.

Thank you, Madison. We'd like to thank everyone for the great call. Thank you for joining us today, and have a great evening.

Thank you. This does conclude today's Arko Corporation second quarter 2024 earnings. Thank you for your participation. You may disconnect at any time.