Q3 2022 Arko Corp. Earnings Call
Greetings and welcome to the Arco's third quarter 2022 financial results call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this call.
She is being recorded.
I'd now like to turn the conference over to your House Ross apartment, Vice President Investor Relations and government Affairs for Arca. Thank you you may begin.
Thank you.
Good morning, and welcome to Arco's third quarter 2022 earnings conference call and webcast on today's call are arty Cutler, Chairman, President and Chief Executive Officer, and Don Myself, Chief Financial Officer.
Our earnings press release quarterly report as filed with the SEC and our earnings presentation are available on Arcos website at Arco core dotcom.
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 could differ materially from those described in these forward looking statements.
Looking statements made today.
EBITDA and adjusted EBITDA, while the company believes these non-GAAP financial measures provide useful information for investors.
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 and now I would like to turn the call over to Ari.
Thank you Ross and good morning, everyone and thank you for joining us.
Strong results for third quarter highlights.
Highlighting the strength of our business model.
<unk> continues to build long term value for our stockholders.
Excellent performance and execution across the business.
Aqua increased operating income by 21% to $65 $7 million versus the prior year third quarter.
Adjusted EBITDA was an all time third quarter I want the company, increasing 24, 1% compared to Q3 2021 19.
$99.5 million.
We have had seven straight quarters of comparable quarter adjusted EBITDA growth.
We announced two very important strategic and accretive acquisition.
Since the end of the second quarter.
The colt acquisition, which closed in Q3, a portion of the purchase price for acquisition 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.
non-GAAP measure approximately $57 million of adjusted EBITDA on an annual run rate.
Energy.
This amounts to approximately 25% of adjusted EBITDA for the nine months ending September 32022.
We continue to add value to our business by pursuing very active growth strategy.
Upon closing the transit Energy group acquisition will add approximately 150 convenient stores and expand our retail territory into Alabama and Mississippi.
Upon closing our acquisition of price convenience all game will add 31 convenience stores, plus and knows the industry toward that broke ground in July .
Expand our new England territory into Massachusetts.
Both trying to energy group and Pri at the 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 so our assortment promotion services and of course fast reward.
I'm very excited by the pace of our dealmaking and if the performance of all areas of our business.
In our stores the company increased its market share excluding cigarette underscoring our many initiatives.
Bold assortment loyalty and marketing programs are resonating with customers.
<unk> margin increased 60 basis points the company high 31, 2%.
We have grown this important metric by 330 basis points in Q3 2020.
Third quarter same store merchandise sales, excluding cigarettes increased four 3% compared to Q3 2021.
And fixed points, 1% on a two year stock basis.
We also had a very strong quarter in fueling our strategy has been consistent last quarter. I noted that we believe that our strategy also enabled strong result as prices decline.
This quarter underscores that belief.
But your profitability grew to $155 $1 million or 28, 5% increase compared to the third quarter of 2021.
July through September as fuel prices declined approximately 80 cent per gallon basis.
Store sales excluding cigarettes accelerated.
Notably same store sales, including cigarettes or subgroup.
We are very strategically for a cigarette pricing.
We believe that we have Sean all our strategies capable of great result in a variety of price environments.
Our balance sheet is very strong.
We generated $7.6 million in net cash from operating activities this quarter.
For the nine months ended September 30 of 2022, our pro generated $139 8 million dollar in that cash from operating activities.
As a result of this and a record strong result confidence in the business and desire to enhance return for stockholders.
Both are direct or increased our dividend by 50% this quarter to three cents per share.
Company's fourth consecutive quarterly dividend.
Our top priority is executing our strategy in store and if you any M&A.
Disciplined consistent growing backdrop to our strategy.
Most of you know that we started to be approximately 200 company operated convenience store in early 2013.
Since then we have acquired approximately 1300 company operated stores in total.
The scale and resources allow us to pursue multiple opportunities that's one.
This is an advantage that we believe enable us to deliver great results for our stockholders.
Investments and a well established chain with grant equity and long standing ties to their community are key to our model and performance.
We use our financial strength and financing ability and agreement the Ox Street, so our strategic advantage.
Our industry continues to be highly fragmented the overall deal pipeline today as many potential acquisition, we expect to continue executing our acquisition strategy.
Let me pursue a deal my team and I walked through the doors as part of their due diligence.
We look for opportunities to enhance the value proposition of this local chain with our scale and expertise.
For example, we have consistently gotten better merchandise and fuel costs than the change that we acquire are sophisticated assortment promotion and pricing strategies are well advanced compared to our original acquisition.
We usually retain the majority of employees and change we acquire and I'm proud that our company great job as we continue to grow.
And of course, we have a highly seasoned management with sell in their roles.
This allow us to successfully close and efficiently integrate the businesses, we acquire which we believe creates significant value for our stockholders.
I'd like to walk.
Through the three key pillar of our marketing in store initiative that has driven our strong new store performance.
The first pillar is careful management of core destination category.
That's just packaged beverages candy snacks and equity and project debt.
Just to name a few.
We invest in the assortment square footage allocated for merchandising and loyalty promotion for this category.
What used to be the go to convenience store in our demographic and increase our market share of this in the mens category.
Looking at performance and the pillar this quarter, we maintained total market share building cigarettes and grow market share by 10 basis points excluding cigarettes.
Coffee is an important initiative and we have seen excellent results.
The number of enrollment that the customer who made their first recorded coffee purchase.
Store increased 55, 6% this quarter compared to Q3 2021.
And this quarter unique customer coffee purchases by enrolling that'd be customer increased 57, 1%, while they're nast total coffee spend increased approximately 51% both compared to Q3 2021.
Great performing center store category like can be packaged sweet snacks, salty snacks beer wine and packaged beverage and.
Frozen food same store sales increased 16% versus Q3 2021.
Our second key pillar is the fast rewards loyalty program. We're pleased by the continued growth and consumer response.
I know the updated Lewis.
Currently being tested prior to rolling it out chain wide.
The new App is designed to further enhance our personal relationship with our customers are.
Our goal is to drive increased frequency and total spend to order and delivery.
And rather than in store and in App Personalised deal.
One key point of differentiation is the ability for members to stock rewards and save even more.
We believe that this is a great feature but they all go 1.2 million members.
The new Optum, along with the strong enrollment over to encourage new customers to sign up for these great savings.
We know that when a customer in holes.
We have an opportunity to increase their trip frequency and total spend.
Here's an example, using data we have been tracking.
Tracking when customer enrolled in our loyalty program.
We see incremental month over month growth in basket size.
The third key pillar esports service.
We're relatively new in this evolving higher margin segment in the convenience channel.
We have a long runway for developing high margin wood program about quote of storms.
We are continuing to work on expanding our pizza offering.
We are also exploring many opportunities that we hope to introduce soon.
Year to date, we've opened 13 to borrow a pizza restaurant.
Thank you opened five more this quarter.
We also had 377 stores.
Grills for Hotdogs and tornadoes 199 store pizza by dislike and 146 stores, we fried chicken and hot breakfast sandwiches.
I believe that the historic could become more of a food destination.
We believe the strong food offering and value proposition and position us to compete even more in foodservice.
Our investment 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 acquisition.
He is our historic sort 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 we.
We've got I will turn it over to dawn.
Good morning.
Alrighty detailed in our most recently announced agreements to acquire the <unk> business and pride.
Our first year over year calls closed on July 22nd.
As already mentioned.
We are known for consistent disciplined investments in our growth and value enhancing initiatives.
But our strength and integrating those stores sites employees should not be overlooked.
We're also is a great example.
Systems personnel and operations have been rapidly integrated.
The team doing that work is done a great job.
We are very pleased with this acquisition and business.
It is important to understand how we view the reportable segments outside of our core convenience store business.
Also in 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.
The other segments are important for our capital allocation strategy.
We believe they give us stable ratable cash flows. So we can move quickly 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 we currently have a good liquidity position.
As of September 32022, we had cash and cash equivalents were approximately $283 million.
Our outstanding debt, excluding capital leases was approximately $734 million.
Again 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.
The quarter net cash provided by operating activities was $67 $6 million versus $65 million for the third quarter of 2021.
After the expected closing of the T G and private 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.
Our margin percentage increased 60 basis points to 31, 3% our highest debt.
And still we believe that slightly higher margins may be sticky given credit card fees and 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 2020 to 21, 5% this quarter totaling $117 $5 million or $28 million increase versus Q3 2021.
The company increased retail fuel margin to $44.08 per gallon compared to $34.05 per gallon.
Higher year quarter.
Third quarter convenience store operating expenses increased $21 million or 12, 9% versus prior year.
Due to incremental expenses related to the handy acquisition, we closed in November of 2021.
And an increase in expenses at same stores, including an increase of 17, 4% or 10.3.
$10.3 million in personnel costs.
And $2 $8 million or 13, 9% increase in credit card fees.
The increase in store operating expenses was partially offset by underperforming retail stores that we closed our conversion 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 corals acquisition.
Fuel contribution from fuel supply locations increased pre buy.
$9 million, excluding intercompany charges compared to the prior year, primarily due to the gross acquisition greater prompt pay discounts related to higher fuel costs and greater appeal it.
Fuel margin per gallon for these locations increased to $6.09 per gallon versus 5.8 cents 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 margin per gallon for the proprietary card lock locations was 41.8 cents per gallon.
<unk> intercompany charges and 4.8 cents per gallon, excluding intercompany charges for third party card lock locations.
Fuel revenue was positively impacted by a high average price of steel and steel margin benefit 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 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. It was intended to streamline business operations and provide long term cost savings as a result, the company recorded a onetime noncash tax expense in the amount of approximately $8 $7 million in the third quarter 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.
Company recorded approximately $5 $5 million.
Capital expenditures were $27 $7 million for the quarter compared to $15 $5 million from the prior year quarter.
And the third cohort in the third quarter, the company repurchased a minimal amount of stock.
There are approximately $11 million remaining under our previously announced $50 million stock repurchase program.
As of November 4th they were approximately 121 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 Arcos Board of directors declared a quarterly dividend <unk> <unk> per share.
Common stock to be paid on December six 2020 to the stockholders of record as of November 22nd 2022.
We believe the company is in a strong position for continued long term growth I'll turn the call back over to art.
Thanks Dawn.
I would close by saying that we believe we have the right long term strategy in play as.
As well as execution capabilities that make me confident about delivering growth for the long term.
We believe that our business.
It has performed exceptionally well.
LNG 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 question.
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Our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.
Good morning, everybody. Thanks for taking my questions and congrats on a nice EBITDA performance.
I guess first question for me is just the M&A environment for you guys. Just picked up here in 2022 with a lot of announced acquisitions. So I'm just curious on 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 kind of 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 done on on the integration.
To be able to handle multiple acquisitions at one time.
Sure. Good morning, Bob you. Thank you for the questions over here.
I'll start first of all with the two acquisitions that we already reports are in queue. Basically Q2 Q3 are we already closed the first one which is calls a week.
Those the closed acquisition back in July and I can tell you right now that this company is fully integrated.
Within our company I mean, that's where the very very successful acquisition for us and you can probably see the results already.
Regarding to the other two acquisition that we just don't know.
Yeah, 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 and you know the idea over here is really to create another team on the top of the M&A team and the operating team we profession, that's going to be able to help us to eat great. You know all of those are companies that we actually put together.
Regarding your question in terms of you know opportunities in capacity if you're healthy.
A presentation that we published yesterday.
We still have around one point over $1.3 billion.
Dry powder between our cash line of credit.
And the Oak Street.
The agreement that we signed and this is after taking into account those two large acquisitions that we already announced so there was no question. You know remember. This is this is our key growth for the past eight years, we've been growing through acquisition. You know we closed on 21 acquisition already and you know this is really stopping.
With that I would say that probably had one of the best a team over here the marketplace. When it comes to our acquisition and integration of those companies.
Thank you My second question is just around the the fuel volume trends for retail you know as we saw prices come back down a little bit at the Palm did you see any type of behavior change on volume or was the volume fairly consistent throughout the quarter.
No. So if you guys remember Bobby in Q2, I, specifically mentioned the minute price. It's $5. We thought that was back in June we saw a double digit decline in fuel volume.
Iran, 12% to one 6% in the month of July and then all of the southern when price decrease towards the four and below the four toward the tree. We all of the sudden so shifting Golan and you know the gallons were down around 8% Youre really looking on our September I'm, sorry August and September .
But same store sales are not including cigarettes were down two 4% excluding.
We're basically one 2% and excluding cigarettes were four 4% and in the month of September when prices continue to decline that was a big story for US I mean same store sale.
As prices continue to decline at the pump.
Thank you very much Bobby.
Hey, good morning, guys.
You're talking about merchandise margins, a little bit more I'm, taking a step back and you kind of commented this in your remarks, but.
This is where we see the English and margin and all we see a decline in cigarette sales.
That's really putting the right products on the shelf concentrating on the fast rewards loyalty program to make sure that customers continue to come in and increase their basket and I think everybody's continues to see increasing margin based on this trend I don't have any reason to believe why we shouldn't see.
Also wanted to touch on our interest rate. So I know you guys have a largely fixed rate debt exposure with the senior notes I'll have Don commented on but you've also got almost $300 million in floating rate debt plus some exposure to cap rates.
On your stores. So can you just talk about how youre thinking about the impact to the P&L as rates continue to rise.
Before I, let Don jump in and maybe explore more just to be clear you mentioned cap rates are cap rates are fixed, but we don't have any variable rates when it comes to rent.
You know for the next debt seven years I think we are in a very good position on those unsecured notes and the same thing goes to basically do all it does is actually jetblue to everybody right now that some time you know, especially in this environment when you add interest rate rising dramatically.
So those those interest rates really don't don't affect us that much and again a lot of our debt. The majority of it is fixed at 5.125, but you know the market is also give us a great opportunity now to take our cash and invest it where before when you could only get 20 basis points.
Great. Thanks, so much guys. Good luck.
Yeah, Thanks, and morning, everyone wanted to ask about a contribution to the in store merchandise comp from pricing that the suppliers are taking in that you're passing through maybe you can just talk directionally about that and then more broadly on the same subject.
There's obviously 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 in store.
Elastic and kind of how you think about pricing as you move through 'twenty, three and the potential benefit from.
Higher promotional activity anywhere just reduced pricing that'd be helpful. Thank you.
Sure.
The price increase you know there is no question that you know almost every vendor.
So they did not feel you know those price increases maybe like some of the others I think in terms of you know.
More resilient than some others and I think the proof of that is what we see right now I mean I just as I mentioned earlier as we continue to see interest rates are basically continue to hike.
For you now, but whatever we toward the soils inside the stores of all of those are you know essentially categories continued to increase but can you drink with its amazing I mean, you know we so wondering I mean 75 basis point increase in September we sold 75 basis points increase.
And our goal is going to be you know continue to grab more and more customers, making sure that they have there that basically the cards in their hand, and make sure that they're able to so basically enjoy all of those valuable promotion.
Because you know there's no question in my mind, we need to be very very sensitive, especially with price increases and especially with interest rates rising over here.
The stores that you've added.
Electronic charging capabilities any sort of commentary around the bump that you are getting on.
Visitation as well as what's going on in the stores would be helpful.
Sure. So let me start with Foodservice you mentioned Barbara So tomorrow. Its only one one item out of many others you know as I said since its value.
And our goal is really to continue to extend that we have a lot of stores that you know we have 377 stores that sell you know hot dogs are underwater grill, and tornadoes and I think especially in this environment we must.
Stick and must find a way to offer food to our customers.
Probably 50% higher.
So those guys in order to continue to extend that that's what's going to drive by the way the margins going back to the margin question.
And then basically the margin on cigarettes for example.
Thank you.
You know as we are heading towards the holiday season.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.