Q2 2024 Arko Corp Earnings Call
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Operator: Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good day, everyone, and welcome to today's Arko Corporation second quarter 2024 earnings.
Speaker Change: Please standby your program is about to begin if you need assistance during the conference today. Please press star zero.
Speaker Change: Good day, everyone and welcome to today's Arco Corporation second quarter 2024 earnings at this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star and one on your telephone keypad you may withdraw yourself.
Operator: At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two. Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Senior Vice President, Capital Markets, Corporate Strategy, and Investor Relations, Jordan Mann. Please go ahead.
Jordan Mann: Thank you. Good afternoon, and welcome to ARCO's second quarter 2024 earnings conference call-in 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.
Jordan Mann: 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 statement 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 our call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and ARCA 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
Jordan Mann: On this call, management will share operating results on both a gap basis and on a non-gap basis. Descriptions of those non-GAAP financial measures that we use, such as Operating Income as Adjusted and Adjusted EBITDA, and reconciliations of these 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. Now, I would like to turn the call over to Arie.
Arie Kotler: Thank you, Jordan, and thank you all for joining us. We reported earlier today that we delivered adjusted EBITDA that exceeded our second quarter guidance. These results reflect our ongoing efforts to manage key levers, such as fuel pricing and our vendor-partner relationship, as we navigate challenging microeconomic environments alongside our customers. However, 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.
Arie Kotler: Consumers have been hesitant in their spending, and their purchases have remained suppressed despite multiple summer promotions. As a result, during the quarter, we saw lower same-store merchandise sales and lower retail volumes. In addition to the pizza program, 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 all sales channels rather than continuing to operate them as retail stores.
Speaker Change: Addition to the Pizza program.
Speaker Change: We have expanded foodservice offering with nathans famous hotdogs, which are available hot and ready in more than 460 of our retail stores across the country.
Speaker Change: While this program only started in the middle of the quarter, we've seen strong customer response, which same store hotdogs fills up approximately 16% over the prior year quarter.
Speaker Change: All in same store food and dispense beverage contribution dollars were up over 9% and over 400 basis points.
Speaker Change: And margin rate as compared to the prior year period.
Speaker Change: We plan to continue leaning into foodservice through offering value and bondholders to further help our customers in this challenging microenvironment.
Speaker Change: As I've mentioned previously four then dispense beverages are key component of our strategic plan and I'm pleased with the progress that the team has made.
Speaker Change: Given the ongoing consumer pressure, we announced the return of our $10 sign on incentive for newly enrolled members and a fast rewards and loyalty program for context, we added more than 365000 enrolled loyalty program members during the third quarter of 2023, and we ran our promotion.
Speaker Change: Last year, and we expect the return of these promotions to continue to improve loyalty and enrollment and accelerate traffic and spending across our stores as reflected by same store loyalty cell, which were roughly flat.
Flat year over year, but also deliver incremental merchandise contribution dollars.
Speaker Change: Spreads were down 4% versus the year ago period.
Speaker Change: Total same store merchandise sales were down just over 5%.
Unnamed Speaker: Thanks to our transactions, we're down close to 8% for the quarter, reflecting the challenging external environment. Bainstore operating expenses were down 0.5% for the
Speaker Change: Same store transactions were down close to 8% for the quarter, reflecting the challenging external environment.
Speaker Change: The decline in transactions was partially offset by an increase in average dollar sale.
Speaker Change: The impact of the sales decline was partially offset by continued margin rate expansion, which was up roughly 80 basis points to the year ago period.
Speaker Change: Same store fuel contribution was down approximately $3 3 million for the quarter with a decline in gallons, partially offset by stronger year over year fuel margin per gallon.
Speaker Change: Same store fuel gallon demand was down six 6% for the quarter, while fuel margin of 41, one cents per gallon was up 1.5 cents per gallon from the year ago period.
Speaker Change: Same store operating expenses were down 0.5% for the quarter.
Moving onto our wholesale segment operating income was $9 1 million for the quarter compared to $6 8 million in the prior year period.
Speaker Change: Adjusted operating income was $21 3 million for the quarter versus $19 7 million in the year ago period with a five 7% decline in gallons offset by the impact of higher fuel margin, which was $9.09 per gallon versus 9.2 cents per gallon in the year ago period.
Speaker Change: For our fleet segment operating income was $11 8 million for the quarter compared to $9 3 million in the year ago period.
Speaker Change: 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 W. T G acquisition, which closed in June 2023.
Speaker Change: Gallon growth with amplified the increased fuel margin, which was 45 nine per gallon for the quarter versus 41 seven per gallon in the year ago period.
Speaker Change: Total company general and administrative expense for the quarter was $42 4 million versus $42 7 million in the year ago period.
Speaker Change: Net interest and other financial expenses for the quarter were $21 4 million compared to $20 2 million in the year ago period.
Speaker Change: Net income for the quarter was $14 1 million compared to $14 5 million for the year ago period.
Speaker Change: Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA.
Speaker Change: Turning to the balance sheet, excluding lease related financing liabilities. We ended the second quarter with $890 million in long term debt.
Speaker Change: Price of our 2029 senior notes.
Speaker Change: The outstanding balance on our capital one line and the remainder primarily related to real estate and equipment financing.
Speaker Change: Our 140 million ABL remains completely undrawn as we continue to manage working capital needs from operating cash flow.
Speaker Change: We maintained 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.
Speaker Change: Of this total liquidity approximately $420 million is attached to our capital one line, which is reserved for M&A activity.
Speaker Change: We remain comfortable that our balance sheet is more than adequate flexibility to support both ongoing organic growth initiatives and M&A.
Speaker Change: Total capital expenditures for the quarter were $19 3 million.
Speaker Change: Turning to our third quarter guidance, which as a reminder, now includes the noncash portion of rent expense in our adjusted EBITDA calculation, we expect adjusted EBITDA to be in a range of $70 million to $86 million.
Speaker Change: Our third quarter earnings outlook corresponds to an average retail fuel margin of 38 cents per gallon on the lower end and 44 cents per gallon on the higher end of our guidance.
Speaker Change: And for full year 2024, we are maintaining our adjusted EBITDA guidance.
Speaker Change: Inclusive of approximately $15 million and noncash rent expense full year 2024, adjusted EBITDA is expected in a range of $235 million to $275 million.
Speaker Change: This range represents the guidance of $250 million to $290 million, we shared at the beginning of the year under our historical methodology.
Speaker Change: Less the approximately $15 million and noncash rent expense now included in our new methodology.
Speaker Change: For the back half of the year, our guidance corresponds to an average retail fuel margin of 37 per gallon on a lower end and 45 cents per gallon on the higher end.
Speaker Change: With that I'll hand, it back to Ara for closing remarks.
Ara: Thanks, Rob before.
Ara: Before I wrap up I would like to take a moment to talk about a 40 year of 'twenty 'twenty four guidance and in particular the range, Iran on big points.
Ara: We are operating in an unprecedented geopolitical environment and have seen significant swings in fuel margin over the past months.
Ara: For the second quarter fuel margin was below 38 cents in April and jumped about 43 cents for May and June.
Ara: July just finished and the 42% to 43% range. So we are broadening our CPG assumption going forward.
Ara: Given the potential for continued volatility.
Ara: I would like to close by reiterating our commitment to continued strong execution through this challenging microeconomic environment.
Speaker Change: Drive thru.
Ara: Shareholder value.
Speaker Change: Thank you for your ongoing support and confidence in our vision for Oracle.
Speaker Change: <unk> for your time today, we have that we would open it up to questions.
Speaker Change: Thank you and at this time, if he would like to ask a question. Please press the star and one on your telephone keypad you may remove yourself from the queue at any time by pressing star two and we will pause for a moment to allow questions to queue.
Speaker Change: And we will take our first question from Bobby Griffin with Raymond James.
Bobby Griffin: Good afternoon, everybody. Thanks for taking my questions.
Speaker Change: Okay.
Kibali Couric: Kibali Couric Bobby.
Bobby Griffin: Hey, the first the first thing I wanted to hit on is just maybe on a high level, just curious where the business is today and 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.
Speaker Change: And really on fuel or merchandise I'm, just curious where that is from from your point of view.
Speaker Change: When you say from basically from a segment standpoint, I mean everything is.
Speaker Change: Operating under one system right now so maybe you can elaborate a little bit more about your question Yeah Theres more of like already just a lot of a lot of acquisitions over the.
Kibali Couric: Sorry, my dogs Barking a lot of acquisitions over the course of the last couple of years. Just so just curious you know are we.
Speaker Change: Are we leveraging those across like retail.
Kibali Couric: Or we are getting the full procurement benefit across those acquisitions and then I'm. Just also is there are we seeing the leverage across the different business segments that Oracle has developed over the last couple of years as well.
Speaker Change: Sure sure sure.
Speaker Change: So just a corporate benefit that everybody else you know everything is basically centralize our back office.
Speaker Change: To be clear we have three different segment everything is centralized through our back office.
Speaker Change: Of course, our retail chain all of their marketing and merchandising initiative purchasing power everything is being and again, who are our centralized back office.
Speaker Change: Same thing goes to the fuel.
Speaker Change: Everything is consolidated under one roof.
Speaker Change: The retail segment, the wholesale segment and of course, the flip segment. So.
Speaker Change: I think you know from an opportunity standpoint, there's always opportunities as you continue to grow.
Speaker Change: But I think you know where I think we are set up very well right now.
Speaker Change: Opportunistic standpoint, and again I think that's part of the transformation plan will be to continue.
Speaker Change: Two it's actually going to get more and more of those opportunities.
Speaker Change: Yes, Bobby it confirmed what already is saying I mean everything is on.
Speaker Change: On a common procurement platform, but I think as we mentioned.
Speaker Change: Before the transformation program will have components of both on the direct side and the indirect side. So 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 planning going forward.
Speaker Change: Thank you Rob that that's helpful. That's exactly what I was kind of looking for it and then are you I appreciate the details about the potential opportunity on the retail network dropping some of those into dealers and the savings.
Speaker Change: 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 that work. So as there are opportunities to actually go out and grow wholesale side. So it wouldn't be part of your own network to kind of further leverage the fixed cost of that infrastructure and the same way.
Speaker Change: In the fleet card segment as well.
Unnamed Speaker: Sure. So, you know, adding additional sites, which is something that is happening on an ongoing basis, it's always an opportunity.
Speaker Change: Sure so.
Speaker Change: Adding additional sites, which is something that is happening on an ongoing basis.
Speaker Change: It's always an opportunity.
Speaker Change: Always an opportunity. This is something that is happening as we speak the same thing.
Speaker Change: I mean, if we have opportunities.
Speaker Change: To increase the plate business, we are looking into this of course, and we're going to add more sites. I mean, we did recently we did it last year W. D. G. If you remember.
Speaker Change: When we bought the <unk> acquisition, we were at 183 sites under our belt and last June when we acquired <unk>, we added another.
Speaker Change: 100 close to 120 locations. So today, we have you know we basically at 294 locations today, starting with 183.
Speaker Change: Yes.
Speaker Change: Through M&A is there organic opportunity just where you can add sites or does that have to come a big large scale M&A I'm just I'm just trying to get a no no.
Speaker Change: There is there is.
Speaker Change: There is always opportunity there is organic opportunity as a matter of fact.
Speaker Change: We are looking on some areas that we can expand.
Speaker Change: There are but again I think the large organic growth will come from acquisition.
Speaker Change: Always.
Speaker Change: But again this is not different than new to industry in our retail segment.
Speaker Change: We actually added between dislocation C. What are we doing this time, we are actually I think relocation as we speak.
Speaker Change: So those opportunities.
Speaker Change: Always become they become available we of course are going to tackle them.
Speaker Change: Okay, and then I guess last one for me and Rob I don't know if you'll be able to answer this yet I know more is likely to comment on the investor day, but like when you look to kind of the retail network is there any way you can size out or parse like how big is the performance gap on baby merchandise or our fuel comps from some of the lower quartile.
Speaker Change: Stores and the reason I'm asking is this is there a better way to kind of get a sense of how maybe the Arco core stores you know you're always good performing stores are performing versus the industry where 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.
Bobby Griffin: Yes, Bobby I think you're spot on and 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 the dealers nation, where we can be more profitable with them as dealer dealer run and we can focus our capital allocation toward the fluids that we want to drive.
Speaker Change: Yes, we will 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.
Speaker Change: Okay understood thought or at least give it a shot I apologize again about the background noise.
Speaker Change: Okay.
Speaker Change: And maybe maybe maybe I'll jump in and give you maybe a little bit color on just we mentioned the 40 stores that we are in the basically in the middle of a conversion some of them were converted already and the rest would be converted at the end of the quarter.
Speaker Change: We're talking about roughly $2 million on those doors that would do better in profitability versus what they're doing right. Now so I just want to be very very clear over here.
Speaker Change: Goal is to convert them to dealer location, but not because they're not great. If you're just because we see opportunities in some other areas where to actually allocate capital where to prioritize our time and where we see more upside. So in some of those doors. The idea is actually to convert them to do more and not the other way around and I want to be clear.
Speaker Change: It's actually making more money on one hand on the other and keeping the gallons I remember everything is under our control we're going to keep the car loans, we're going to collect rent.
Speaker Change: So from a from a synergy standpoint and from a basically a buying power standpoint, we don't lose anything as a matter of fact, we gain.
Speaker Change: And now not only are we going to make more money and we also are going to be able to so basically to cut some G&A and some of those areas. Because you can imagine to operate 40 stores, it's more expensive than basically to run them as dealer location, but just you know just the D b.
Speaker Change: The better profitability on those 40 doors is going to be the benefit is going to be approximately $2 million better than what they are doing right now.
Unnamed Speaker: Thank you, I appreciate that additional detail, appreciate you guys answering my questions, and best of luck here for the remainder of the year.
Speaker Change: Thank you I appreciate that additional details.
Speaker Change: You guys answering my questions and best of luck here.
Speaker Change: Vendor of the year.
Bobby Griffin: Thank you Bobby.
Speaker Change: Thank you and we will take our next question from Kelly Bania with BMO capital.
Speaker Change: Hi, Good evening, it's Kelly Bania here from from BMO.
Kelly Bania: I was wondering just if you could clarify some assumptions here on your outlook for 2024 seems like some of the key changes.
Speaker Change: Underlying outlook here to 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 <unk>.
Speaker Change: So I was just curious what the annualized EBITDA contribution of that is and what that added to your full year outlook.
Speaker Change: Yes, Hi, Kevin.
Speaker Change: Yes, so Kelly youre spot on with the key full year assumptions. So again, we are seeing structurally higher cents per gallon, we've sort of seen it may June and July now and so therefore, we are taking are our midpoint of our guide up to kind of that 41% range in the middle of what we shared for the Q3 guide so that is the increase there.
Speaker Change: And then on.
Speaker Change: 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 downloaded mid single for the for the year. So those are those are the major changes there.
Speaker Change: <unk> look at its 21 stores on over 500, it's not a big number. It was it was factored into our high level view at the beginning of the year.
Speaker Change: So again not a major impact there to the business. It's a nice tuck in we are going to drive synergies there, but again this is not a larger deal that's going to significantly move our guidance number.
Speaker Change: Okay, and then if I may.
Speaker Change: If I may jump in Kelly, if you don't mind, just want to add a couple a couple of more things.
Speaker Change: Next over here just want to remind everybody that 70% of the industry. This is a very resilient industry. We are talking about 150000 convenience store gas station in the U S.
Speaker Change: 70% of it its mom and pop and one of the reason that we believe we're going to see some elevation in CPG as we as we saw over the past three months and again as I said I mentioned July just.
Speaker Change: Finished between 42% to 40% is everybody is facing the same micro economic pressure.
Speaker Change: Is that something that we see across you know across the industry across almost every industry right now.
Speaker Change: We believe no different than what we saw during COVID-19 and not different than what you're trying to past when there is pressure.
Speaker Change: The only place that you can actually.
Speaker Change: <unk> margin very very quickly and make changes very very quickly.
Speaker Change: On the outside and when we see decline of inside sales traffic and gallons the only way to to basically to make it back somewhere else, it's only outside so.
Speaker Change: No.
Speaker Change: Finishing July August to be 40 to 40 degrees then.
Speaker Change: 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 norm.
Speaker Change: Okay. That's helpful and just one on the dealer conversion process. So 40, I think you said converting by the end of the third quarter.
Speaker Change: I guess two questions what are the key characteristics what are the key things that you're looking for or is it really just kind of.
Speaker Change: Calling the bottom.
Speaker Change: Core tile or maybe can you give us more color on what this might look on a multiyear basis in terms of what the mix of the business could be between retail operated stores and dealer and the dealer network.
Speaker Change: So this is something that is still ongoing as I mentioned you know we start to explore that a few months ago. This is something that is still ongoing and I think the one thing that we're looking at what do we actually make decision.
Speaker Change: Of course.
Speaker Change: Then I have a lot of people of course these profitability, but at the same time.
Speaker Change: We want to make sure that some of those stores do we really have the opportunity.
Speaker Change: Upside if some of those stores and if we feel that the capital that we are going to allocate towards those stores or the investment out. There. You know we are going to allocate its not going to feedback repair you or they returned.
Speaker Change: Looking to achieve over here.
Speaker Change: We feel that it would be rather just move them.
Speaker Change: Two our two hour sales segment. The olefins segment, it's a very great segment for US is that as you can see the result of generally technically flat year over year.
Speaker Change: And as long as we you know as I said as long as we keep controlling those side and we can figure out the way out to convert them to something a little bit more prompted the basically the plan. We don't have a number right now we don't have that particular brand geography or a transaction on the table right now, but as I said as we continue to evaluate that with the big.
Speaker Change: Transformation plan that we have that the extra the developing and developed.
Speaker Change: We're going to continue basically to share more information with you guys. Then we felt the first time, we brought it up with last quarter.
Speaker Change: I said this quarter, we already at 40.
Speaker Change: We identified that were in a process of converting some of them already converted and we're going to continue to update you guys on an ongoing basis on a quarterly basis.
Speaker Change: Thank you.
Speaker Change: It appears that we have no further questions at this time I will now turn the program back to Ari kotler for any additional or closing remarks.
Speaker Change: Thank you Madison.
Speaker Change: To thank everyone, who was a great call. Thank you for joining us today.
Speaker Change: And have a great evening.
Speaker Change: Thank you. This does conclude today's Argo Corporation's second quarter 2024 earnings. Thank you for your participation you may disconnect at any time.
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