Arko Corp. (ARKO) 2021 Q1 法說會逐字稿

Greetings, and welcome to ARKO Corporation's First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Chris Mandeville, Managing Director of Investor Relations. Thank you. You may begin.

Thank you. Good morning, and welcome to ARKO's First Quarter Fiscal Year 2021 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman 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 filed with 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 first quarter '21 financial information reported in accordance with U.S. GAAP 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, except, plan, intend, could, estimate and similar references to future periods.

These statements 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 today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31, 2020, and 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.

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 the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliations to the most directly comparable GAAP measures.

I'd also like to note that we are 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.

And now I'd like to turn the call over to Arie Kotler.

Thank you, Chris, and good morning, everyone.

On today's call, I will briefly review our financial highlights for the quarter ended March 31, 2021, and provide an update on our business. Don will then review our financial results in more detail before we take your questions.

We are very pleased to report strong results for the first quarter of 2021. The headline is that our adjusted EBITDA was $42.3 million, up 150% versus the prior year period, while our profitability increased 17.5% in retail fuel and 16.5% in inside merchandise for the quarter, showcasing a great balance between what is going on in store and at the pump.

As vaccination distribution continue to expand and consumer continue to show greater willingness to venture out and about, we view convenience and, more importantly, ARKO as squarely positioned to benefit from increased consumer mobility as we approach the summer holidays and driving season. We have seen and currently continue to see tremendous improvement in our merchandise same-store sales trends, while gallons have been steadily recovering.

Specific to our in-store performance, merchandise same-store sales grew 6% for the quarter, nicely ahead of the 4% plus quarter-to-date trends we spoke to on our Q4 call on March 25. The trend shows steady acceleration, due in part to increased consumer mobility and greater transaction counts. Excluding cigarettes, our results are even more impressive, with same-store sales of 9.2%.

Given that 2020 was a leap year, Q1 2020 had 1 additional day versus Q1 2021. Adjusting 2020 to eliminate that additional day, our same-store sales and same-store sales ex cigarettes would have been 7.2% and 10.4%, respectively.

Also trending positively is what we saw trend in higher-margin single-serve versus multipack serve in the packaged beverage and beer categories during Q1 versus prior year. In addition, we have seen favorable sales shift from lower-margin categories, specifically cigarettes and beer in Q1 2021 versus prior year. During the onset of the pandemic, consumer pantry loaded lower-margin items like beer and cigarettes. So we are seeing margin improvement in addition to top line growth.

While gallons sold were still down compared to a year ago due to the pandemic, fuel has been trending towards recovery as travel has picked up, with same-store gallons up 0.5% in March. Fuel margin expansion continued as the retail fuel margin increased 22% to $0.321 per gallon.

I will now take a moment to provide an update on our acquisition strategy. We are very proud of our dedicated M&A team with regards to its well-developed target diligence and transaction execution, while the entire organization's integration capabilities have also been impressive. Our industry is highly fragmented and ripe for consolidation as we believe that scale continues to become increasingly important and our priority continues to be deploying capital at very attractive returns.

On May 4, we announced that we received a $1 billion real property commitment from Chicago-based real estate investment firm, Oak Street Real Estate Capital. Under and subject to the terms of the agreement, Oak Street has agreed to purchase and lease to us underlying real estate associated with acquisition of convenience store brands and fueling station, while we will own and operate the related acquired businesses. We expect this partnership to enhance our financial flexibility and purchasing power and, as a result, should allow us to be more aggressive with our M&A strategy.

In March, we announced our planned acquisition of approximately 60 ExpressStop convenience stores in Michigan and Ohio, where ExpressStop is a highly regarded brand. The acquisition is currently on track to close soon.

The Empire acquisition we closed in October 2020 was a highly strategic combination that meaningfully increased our scale and included direct operation of 84 convenience stores and the supply of fuel to more than 1,400 independently operating fueling stations in 30 states in the District of Columbia. We have been very pleased with the acquisition, as evidenced by the 14 new dealer supply agreement that were signed in Q1. And we continue to realize anticipated synergies associated with this acquisition.

Turning to our organic growth efforts and starting with our remodel program. As stated previously, we believe that we have significant embedded opportunity to optimize our store base and invest capital prudently to remodeling stores, and we remain focused on executing against this initiative. We completed our first remodel in Collinsville, Virginia in late February. Two more remodel projects, starting during the first quarter of 2021, one site in Richmond, Virginia, is expected to be completed in June; and the other site in Rock Hill, South Carolina is a raise and rebuild of a truck stop with an expected completion this September. The remaining 7 of the 10 remodeling projects planned for 2021 are to take place in the Richmond and Fredericksburg, Virginia markets.

We mentioned previously that in 2021, due to changing consumer preferences and desire to greatly expand their take-home food offerings, we intend to add approximately 525 new grab-and-go coolers, of which, approximately 63% have either been installed or in the process. Additionally, we intend to add approximately 650 new frozen food freezers, of which, approximately 62% have either been installed or in the process.

While it is too early to give a full ROI on both projects, we are already seeing the results of the new equipment coupled with the planogramming efforts. On a same-store basis, the retail grab-and-go category sales increased 35.4% versus Q1 2020, and the margin percentage has increased from 21.3% in Q1 2020 to 34.9% for Q1 2021.

Turning to the frozen food category. Sales increased 55.1% versus Q1 2020 and the margin percentage for Q1 2021 is 44.2% versus 29.1% for Q1 2020.

We discussed on our last call that we are announcing our loyalty program and focusing on customer engagement as we have added management depth to create a more customer-engaging, consistent and nurturing experience across our network. I'm proud to report that our loyalty enrollment has met our expectations. We remain laser-focused on having the right assortment at the right value for our customers through our strategic supplier partnership and planning process.

Our DoorDash delivery partnership also continue to scale. As of today, we now operate in over 625 sites or nearly half of all of our company-operated stores.

In conclusion, our robust results continue to demonstrate our strength and capabilities, and we believe we are extremely well positioned to move forward with our differentiated strategy.

I would like to now turn the call over to Don, who will walk you through our financial results.

Thanks, Arie. It is great to be speaking with you all today about our strong first quarter results.

Total revenue, excluding fuel, was $381 million, a 13.2% increase from the prior year period. This was a result of balanced contribution between strong same-store merchandise sales growth of 6% and the Empire acquisition, with Empire contributing 8.2% of the increase.

Merchandise margin dollars increased by $13.9 million versus the prior year, while margin percent increased to 27.4% from 26.1%, largely due to a shift from low-margin cigarette and beer sales to higher-margin center store and packaged beverage sales. Empire retail sites accounted for $6.8 million of the increase.

Retail fuel profitability, excluding intercompany charges for the quarter, increased $10.8 million or 17.5%. Empire accounted for $10.5 million of this increase.

We saw a strong year-over-year increases in fuel margin to $0.321 per gallon from $0.263 per gallon.

Same-store fuel volumes declined 13.8% due to lower traffic levels related to the COVID-19 pandemic, but traffic improved throughout the quarter, reflecting Arie's comment on increase in consumer mobility.

For the first quarter of 2021, wholesale fuel profitability, excluding intercompany charges, increased approximately $16.2 million compared to the prior year period, with the Empire acquisition accounting for approximately $16 million of the growth.

Fuel contribution from non-consignment agent locations grew by $8.9 million compared to the prior year due to a 176 million gallon increase in fuel volume.

Fuel margin cents per gallon for these locations decreased 9/10 of a cent versus the first quarter of 2020. The decrease in margin is due to the inclusion of Empire non-consignment sales, which includes spot market sales and longer-term contracts that are generally at a lower margin than our historical ARKO contracts.

Fuel margin contribution from consignment agent locations grew $7.3 million compared to the prior year due to quarter-over-quarter increases in both volume of 32 million gallons and fuel margin cents per gallon of $0.028. Although volumes sold through consignment locations aggregated 17% of the combined total, fuel margin dollars realized accounted for 47% of total fuel margin dollar contribution from wholesale.

For the first quarter, store operating expenses increased $16.1 million or 12.5% versus prior year due to $18.7 million of incremental expenses related to the Empire acquisition, along with a slight increase in same stores, offset by savings at closed sites.

General and administrative expenses increased by $7.8 million or 41.4% for the quarter as compared to prior year, primarily due to expenses associated with the Empire acquisition, annual wage increases and stock compensation expenses.

Net interest and other financial expenses increased by $22 million to $28.6 million in the quarter due primarily to a noncash fair value adjustment during the quarter of $12.1 million related to our outstanding public and private warrants.

Additionally, during Q1, we redeemed all of our outstanding Israeli bonds ahead of schedule, which resulted in $4.5 million in additional interest expense for the early redemption, which was significantly less than the full interest that would have been paid through maturity in 2024. The remainder of the increase was due to additional debt incurred with the Empire acquisition.

The first quarter reflected a net loss of $14.7 million versus a net loss of $12.9 million for the prior year. Incremental earnings in Q1 related to strong fuel and merchandise results, which also benefited from the Empire acquisition, were offset by increased general and administrative, depreciation and amortization expenses, along with increased interest expense and noncash fair value adjustments, as just mentioned.

Adjusted EBITDA was $42.3 million, an increase of $25.4 million or 150% compared to the first quarter of 2020. The Empire acquisition accounted for $13 million of that increase.

Our balance sheet remains strong. On March 31, the company's total liquidity was approximately $457 million, consisting of cash and cash equivalents of $205 million, plus $31.8 million of restricted investments, and approximately $200 million of unused availability under our lines of credit. Outstanding debt was $674.3 million, resulting in net debt of $437.5 million. These numbers are after using approximately $79 million to redeem these early bonds.

For the quarter, net cash provided by operating activities was $11.3 million versus $23.9 million for the first quarter of 2020. Operating cash flow in Q1 2021 includes approximately $13.6 million of incentive payments for 2020 and a onetime cash payment of $5.2 million related to the early redemption of the Israeli bonds.

Q1 2020 included favorable working capital adjustments of approximately $16 million, which went away in Q3 2020. Capital expenditures were $17.5 million for the quarter compared to $12.1 million in the prior year.

We ended the quarter with 1,324 retail sites and 1,625 wholesale sites.

I am pleased that we have demonstrated our strength and capabilities through yet another quarter of solid financial results. We continued to execute as we navigated through a constantly changing consumer environment, and we believe we are positioned to take our business to the next level.

And with that, I will turn it back over to Arie.

Thanks, Don. Through all of this, we believe we are primed for growth through our strategic acquisition strategy and commitment to the customer experience, driving traffic and expanding margin at our existing stores. We are focused on aggressive growth and gaining market share.

I would be remiss if I did not mention and sincerely thank our over 10,000 associates company-wide for their dedication and commitment to customers throughout the quarter. We appreciate everyone joining the call today and your interest in ARKO.

I will now turn it over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from Bobby Griffin with Raymond James.

Congrats on a good start to 2021. I guess, first, Arie, I wanted to circle back on the Oak Street partnership and maybe just talk a little bit more detail what this partnership kind of gives you guys. Would it give you now the ability to look at larger acquisition targets than maybe you previously did? Or does this more give you just further ability to execute more transactions more frequently because of the additional financing flexibility?

Yes. Thank you, Bobby. Well, the Oak Street Capital agreement that we signed, a, give us more flexibility. As you can probably imagine, I mean the terms over here are much better than the terms that we had before, given our size and, of course, given our performance.

Yes, it's going to give us an opportunity to look on much broader and bigger acquisition, and probably, it actually makes us a little bit more aggressive and more attractive. But as I said, it's just -- it's a program that is already set. And given the amount of acquisition, and there is a lot of acquisition out there, a lot of activity in the marketplace right now. So this is just another step to help us be more competitive over here.

Okay. And then maybe secondly for me, going back to the Empire side of things, recently closed, integration going well. Have you started to see some of the volume savings as you guys have basically doubled your fuel purchases when you acquired Empire? Have those start to show up in the retail fuel margins that we're looking at here for 1Q? Or is the contract still -- or the contracts still haven't meaningfully started to renew yet, I guess?

Well, from a fuel standpoint, a lot of the synergies already took place when it comes to the retail business, along with, of course, synergies coming from the merchandise sales. That's basically something that we already achieved and is taking place in terms of the 84 company-operated stores. We still have some room. And of course, always, negotiation going on basically on the fuel supply contract when it comes to the rest of the business over there. But the 84 stores already achieved our goals over here.

And as we continue to -- we just recently just basically changed planograms and moved -- basically and update the planogram in those Empire stores. So I'm assuming you're going to see some more results coming in the next -- in the near future over here.

Yes. I was more asking kind of in the sense of your prior existing large retail network, have you started to see the savings flow through on purchases of fuel because now you guys are buying 2 billion gallons roughly versus the prior 1 billion gallons? Just having a much more increased size of fuel purchases from the suppliers.

Sure. Yes. So the short answer is that this is still ongoing. I mean, some of them already achieved and some of them are just basically in an ongoing discussion as we speak.

Very good. Okay. And then lastly for me, I mean, Don, just quickly on the Israel bonds, buying them back early, I believe, at a little bit of a premium. Can you maybe talk about the kind of the reasoning behind why now and just help us connect the dots on that capital structure change?

Yes, sure. There's a couple of reasons. Number one, they had a pretty short maturity, until June of 2024, and they had a relatively aggressive amortization during those 3 years.

And also with there being -- I mean, the bonds themselves were very favorable interest, but because of the treaties between Israel and the U.S., that adds a little premium on to them. But it was more related to the maturity coming up and the amount of amortization that we had to pay that we felt that there was a better way to go finance that probably in the U.S.

It was great for us during our growth, it helped us tremendously. But given the short tenure, what's left on it, it was probably better to pay it off, and we paid a whole lot less interest in doing that.

Our next question is from Kelly Bania with BMO Capital.

Arie, just curious as you begin to kind of ramp up the remodels for this year, any -- any color on how the cost of those remodels are coming in, just given kind of a lot of the inflation in raw materials and wages? And just any update on what you're seeing there?

Sure. So -- and I think I mentioned that in our last call. The first store that we just did in Collinsville, Virginia, our cost was around $600,000, if I remember correctly, $650,000 to $675,000. And that was really everything from -- start from scratch to finish.

So when we talked earlier and mentioned that we average a store around $1 million, I think that we've just -- the last one that we just finished, I think that we're going to be in line between maybe even below the $1 million investment in those stores. So we don't see any basically major changes over here with increase of raw materials.

Okay. That's helpful. And just curious on CPG margins, particularly on the retail side, how that came in relative to your expectations? And if you -- if it's just a function of market dynamics that are driving those higher? Or if you think there's anything related to kind of wages and the wage pressure across the retail landscape. Are you starting to see competitors kind of offset that in retail margins? Or is that more of a function of just the dynamics of the first quarter?

I just think it's both. It's a dynamic of the first quarter, but at the same time, remember, I mean, price of fuel right now is at the $60 already. We are back to normal, probably as before the pandemic.

I think the concentration -- I mean, our team is doing a great job over here concentration going after also expanded margin in areas that you can actually expand. I mean, this is something that we've been doing all along since the pandemic started. And we continue to see support over here. And as long as we have the support, I mean, we're going to continue to go after margin dollars. And this is really what we're after. We are after margin dollars, as long as we see that this does not impact in any way the inside sales.

Okay. That's helpful. And maybe just one more for me. Just in terms of gallons, I think if I heard you correctly, I think you maybe said retail gallons were slightly positive in March. Just curious how that's continued to progress. And should we assume that wholesale is on a similar trajectory?

Well, since people -- since vaccination took place, we see more and more people out there. People are out there, people are driving more. Remember, we are right now entering into the 100 days of summer coming Memorial Day weekend very soon. So we are expecting to see more and more people getting out there versus what happened last year. If you remember last year, from March to May, people were basically just at home. So we see people more -- driving more, taking more vacation. And we believe that gallons really increase as we're moving towards the summer right now. No question about that.

(Operator Instructions) Our next question comes from Mark Astrachan with Stifel.

Yes. I guess I wanted to first ask about the merchandise same-store sales. So it implies for the quarter a bit of an acceleration on a 2-year basis in March. I guess, one, how much of that was driven by stimulus? Two, any sort of thoughts on where we are in the June quarter? And maybe I'll just start there and then add a couple of follow-ups.

Sure. So I'll start with, as you remember, in March, when I was talking in March, I told everybody that our same-store sales are actually north of 4%. No question that we saw basically a big acceleration in March. And I think it's basically back to what I just told Kelly a minute ago, I think people are just getting out. People get more comfortable. People get vaccinated, getting out, driving more. People -- we start to see more and more events outside. So I'm assuming that we're going to expect to see increase in merchandise sales as long as people are going to continue to get out there and feel more comfortable.

Okay. So any color you're willing to provide on the June quarter so far?

We are not going to comment on June quarter. But what I can tell you is that there is a lot of initiative regardless regarding -- basically regardless the pandemic.

There is a lot of initiatives that are taking place within our stores. I mean, as an example, I just mentioned talking inside sales. So I just mentioned the installation of the freezers, the grab-and-go. We have a lot of initiatives going on in those stores. I mean, we actually have Dunkin' Donuts. We have 3 new Dunkin' Donuts stores that are actually being opened. We just talked about the expansion of the DoorDash delivery. I mean, we went from 300 stores to over 650 stores. We have the remodel stores that are actually taking place right now and expect to open in June our second store. We have -- we launched the fas REWARDS, and we have more and more activity and we see more enrollment on the fas REWARDS since we launched that.

So as I said, there is a lot of initiatives going on over here in order to make sure that our same-store sales continue to basically perform.

Okay. Got it. And then any sort of commentary you can provide on the events of the last week and how we should be thinking about impact, positive, negative on the business? Just more in totality, but also, I'm curious about presumably a benefit of people waiting on line for gas, on merchandise sales as well.

Sure. Sure. So I can't give you a full color, I can just tell you that, remember, we are operating in 33 states. And if you're really thinking about that, the area that really got hurt is the southeast all the way to Virginia. That's all really the areas that got hurt.

At the same time, just to remind everybody, we are mostly branded fuel. We are mostly branded fuel. And given our size and given our exposure and our, of course, relationship with the branded fuel, I mean, we were able to grab resources from areas that were not impacted.

The interesting thing that we saw over here actually is that area like Florida, for example, the product in Florida, it's a waterborne product, it's all coming from the Gulf. But the panic buying over here was unbelievable. I mean, people are staying in line in Florida, and I'm scratching my head, and I said, but there is no impact in Florida.

And we saw the panic buying, by the way, across many, many states that basically were not impact from that. So that's one way to think about that.

The second thing, as I mentioned, given that we are rebranded, as you can imagine, branded fuel, when the brand put everybody on allocation, you can assume that the unbranded guys actually going to be out there for a long period. I mean, they started -- they restarted the Colonial Pipeline yesterday night. So we're assuming that in the next few days, things will get back to normal. If not to normal, close to normal. But as I said, I mean, the resources that we were able to bring and pull from outside of those states help us tremendously over here.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Arie Kotler for closing comments.

Thank you very much. And again, we'd like to thank each and every one of you for participating this morning and looking forward to see you again on our next call after Q2.

Thank you, and have a good day, everybody.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.