Arko - Earnings Call - Q1 2021

Transcript

Speaker 0

Greetings and welcome to First Arco Corporation's First Quarter twenty twenty one Earnings Conference Call. At this time, participants are in a listen only mode. A question and answer session will follow the formal presentation. 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.

Speaker 1

You. Good morning, and welcome to Arco's first quarter fiscal year twenty twenty one earnings conference call and webcast. On today's call are Ari Kotler, Chairman and Chief Executive Officer and Don Bissell, 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 Arco's website at www.arcocorp.com. Before we begin, please note that first quarter 'twenty one 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 ks for the fiscal year ended 12/31/2020, 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, crosstalk 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 Ari Goller.

Speaker 2

Thank you, Chris, and good morning, everyone. On today's call, I will briefly review our financial highlights for the quarter ended 03/31/2021, 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 2021. Headline is that our adjusted EBITDA was $42,300,000 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, with new convenience and more importantly, ARCO is 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 four percent plus quarter to date trends we spoke to on our Q4 call on March 25. The trends showed steady acceleration due in part 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 twenty twenty had one additional day versus Q1 twenty twenty one. Adjusting 2020 to eliminate that additional day, our same store sales and same store sales ex cigarettes would have been 7.210.4%, respectively. Also trending positively is what we saw, trending higher margin single serve versus multipack sales 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 twenty twenty one versus prior year. During the onset of the pandemic, consumer pantry loaded lower margin item 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 travelers picked up with same store gallons up a half of 1% in March. Fuel margin expansion continue as the retail fuel margin increased 22% to $0.03 $21 per gallon. I will now take a moment to provide an update on our acquisition strategy. We are very proud of our dedicated M and 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 a very attractive returns. On May 4, we announced that we received a $1,000,000,000 real property commitment from Chicago based real estate investment term, 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 stations, 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 and A strategy. In March, we announced our planned acquisition of approximately 60 Express Stop convenience stores in Michigan and Ohio, where Express Stop 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 and the District Of Columbia. We have been very pleased with the acquisition and evidenced by the 14 new dealer supply agreements 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 through 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 twenty twenty one. One site in Richmond, Virginia is expected to be completed in June, and the other site in Rock Hill, South Carolina is a raze and rebuild of a truck stop with an expected completion this September. The remaining seven 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 our 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 twenty twenty, and the margin percentage has increased from 21.3% in Q1 twenty twenty to 34.9% for Q1 twenty twenty one. Turning to the frozen food category, sales increased 55.1% versus Q1 twenty twenty, and the margin percentage for Q1 twenty twenty one is 44.2% versus 29.1 for Q1 twenty twenty. Discussed on our last call that we are announcing a loyalty program and focusing on customer engagement as we have added management sets 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 to our strategic supplier partnership and planning process. Our DoorDash delivery partnership also continued to scale. As of today, we now operate in over six twenty five sites or nearly half of all of the 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.

Speaker 3

Thanks, Ari. It is great to be speaking with you all today about our strong first quarter results. Total revenue, excluding fuel, was $381,000,000 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 $13,900,000 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 $6,800,000 of the increase. Retail fuel profitability, excluding intercompany charges for the quarter, increased 10,800,000 or 17.5%. Empire accounted for $10,500,000 of this increase. We saw strong year over year increases in fuel margin to $0.03 $21 per gallon from $0.02 $63 per gallon. Same store fuel volumes declined 13.8% due to lower traffic levels related to the COVID-nineteen pandemic, but traffic improved throughout the quarter, reflecting Ari's comment on increasing consumer mobility.

For the 2021, wholesale fuel profitability, excluding intercompany charges, increased approximately $16,200,000 compared to the prior year period, with the Empire acquisition accounting for approximately $16,000,000 of the growth. Fuel contribution from non consignment agent locations grew by $8,900,000 compared to the prior year due to a 176,000,000 gallon increase in fuel volume. Fuel margin cents per gallon for these locations decreased 09% versus the 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 ARCO contracts. Fuel margin contribution from consignment agent locations grew $7,300,000 compared to the prior year due to quarter over quarter increases in both volume of 32,000,000 gallons and fuel margin cents per gallon of 2.8¢.

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 $16,100,000 or 12.5% versus prior year due to $18,700,000 of incremental expenses related to the Empire acquisition, along with a slight increase at same stores, offset by savings at closed sites. General and administrative expenses increased by $7,800,000 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 $226,000,000 dollars in the quarter due primarily to a non cash fair value adjustment during the quarter of 12,100,000 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 $4,500,000 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 $14,700,000 versus a net loss of $12,900,000 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 non cash fair value adjustments, as just mentioned. Adjusted EBITDA was $42,300,000 an increase of $25,400,000 or 150% compared to the 2020. The Empire acquisition accounted for $13,000,000 of that increase.

Our balance sheet remains strong. On March 31, the company's total liquidity was approximately $457,000,000 consisting of cash and cash equivalents of $2.00 $5,000,000 plus $31,800,000 of restricted investments and approximately $200,000,000 of unused availability under our lines of credit. Outstanding debt was $674,300,000 resulting in net debt of $437,500,000 These numbers are after using approximately $79,000,000 to redeem these early bonds. For the quarter, net cash provided by operating activities was $11,300,000 versus $23,900,000 for the 2020. Operating cash flow in Q1 twenty twenty one included approximately $13,600,000 of incentive payments for 2020 and a one time cash payment of $5,200,000 related to the early redemption of the Israeli bonds.

Q1 twenty twenty included favorable working capital adjustments of approximately $16,000,000 which went away in Q3 twenty twenty. Capital expenditures were $17,500,000 for the quarter compared to $12,100,000 in the prior year. We ended the quarter with thirteen twenty four retail sites and sixteen twenty five wholesale sites. I am pleased that we have demonstrated our strength and capabilities through yet another quarter of solid financial results. We continue 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 Ari.

Speaker 2

Thanks, Don. Through all of this, we believe we are primed for growth to 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 customer throughout the quarter. We appreciate everyone joining the call today and your interest in Arco.

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

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, Our first question comes from Bobby Griffin with Raymond James. Please proceed with your question.

Speaker 4

Good morning, everybody. Thank you for taking my questions, and congrats on a good start to 2021. I guess first, Ari, I want to circle back on the Oak Street partnership and and maybe just talk a little bit more detail what this partnership kinda gives you guys. This 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?

Speaker 2

Yeah. Thank you, Bobby, and good morning. Well, you know, the off street capital agreement that we signed, a, give us more flexibility as you guys probably 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 gonna give us an opportunity to look on a much broader and bigger acquisition and probably actually make us a little bit more aggressive and more attractive. But as I said, it's just a program that is already set. And given, you know, the amount of acquisition and, you know, there's a lot of acquisition out there, a lot of activity in the marketplace right now. So, you know, this is just another set to help us be more competitive over here.

Speaker 4

Okay. And then maybe secondly for me, going back to the Empire side of things, you know, 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 in Empire? Have those started to show up in the retail fuel margins that we're looking at here for one q, or is the contract still or the the the contract still haven't meaningfully started to renew yet, I guess?

Speaker 2

Well, from a fuel standpoint, a lot of the synergies already took place when it's come to the retail business along with, of course, synergies coming from, you know, the merchandise sales. That's that's basically something that we already achieved and is taking place, you know, in terms of the 84 company operated stores. We still have some room and, of course, always negotiation, you know, going on basically on the fuel supply contract when it's come to the rest of the business over there. But the 84 stores already achieved our goals over here. And as we continue to you know, we just recently just basically changed planograms and move basically and update the planogram in those Empire stores.

So I'm assuming you're gonna see some more results coming in the next you know, in the near future over here.

Speaker 4

Yeah. I was I was more asking kind of in the sense of your your prior existing large retail network. Have you started to see the the savings flow through on purchases of fuel? Because now you guys are, you know, buying 2,000,000,002 billion gallons roughly versus the prior 1,000,000,000 gallons, you know, just having a much more increased size of of fuel purchases from the suppliers.

Speaker 2

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

Speaker 4

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

Speaker 3

Yeah. Sure. There's a couple reasons. Number one, they had a pretty short maturity until June '24, And they had a relatively aggressive amortization during those three years. And also with there being, I mean, the bonds themselves were very favorable interest, but because of the treaties between Israel and The US, that adds a little premium onto 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 It was great for us during our growth. It helped us tremendously. But given the short tenure of what's left on it, it was probably better to pay it off. And we paid a whole lot less interest in doing that.

Speaker 4

Thank you. I appreciate the details and the time here. Best of luck here in the second quarter.

Speaker 2

Thank you.

Speaker 0

Our next question is from Kelly Bania with BMO Capital. Please proceed with your question.

Speaker 5

Hi, good morning. Thanks for taking our questions. Ari, just curious as 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, you know, kind of a lot of the inflation in raw materials and wages and just any update on on what you're seeing there.

Speaker 2

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, if I remember correctly, 650 to $675,000. And that was really, you know, everything from, you know, start to from scratch to finish. So, you know, when we talked, you know, earlier and mentioned that, you know, we have a register around a million dollar, I think that, you know, we've just the last one was that we just finished.

I think that we're gonna be in line between maybe even below the $1,000,000 investment of those stores. So we don't see any any, you know, basically major changes over here with increase of raw materials.

Speaker 5

Okay. That's that's helpful. And just curious on 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?

Speaker 2

I just think it's it's both. It's a dynamic of the first quarter, but at the same time, remember, I mean, of fuel right now is at the $60 already. We are back to we are back to normal probably as before of the pandemic. I think, you know, the concentration I mean, our team is doing a great job over here. Concentration going after, you know, also expanded margin, you know, in areas that you can actually expand.

I mean, this is something that we've been doing, you know, all along since the pandemic started, and, you know, we continue to see support over here. And, you know, as long as we have the support, I mean, we're gonna continue to go after margin dollars. And this is really what we after. We are after margin dollars as long as we say that this is not impact in any way the inside sales.

Speaker 5

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's on a on a similar trajectory?

Speaker 2

Well, you know, since people you know, since vaccination took place, you know, we see more and more people out there. People are out there. People are driving more. Remember, we are right now entering into the hundred day of summer coming Memorial Day weekend very soon. So, you know, 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 you know, driving more, taking more vacation, and, you know, we believe that gallons will increase as we're moving towards the summer right now. No question about that.

Speaker 5

Thank you.

Speaker 0

Our next question comes from Mark Ostrachan with Stifel.

Speaker 6

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 two year basis in March. I guess, one, how much of that was driven by stimulus? Two, any sort of thoughts on on where we are in the June quarter? And and maybe I'll just start there, and then a couple of follow ups.

Speaker 2

Sure. So I'll start with, you know, 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, you know, basically a big acceleration in March. And I think it's basically back to what I just told Kelly a minute ago. I think, you know, people are just getting out.

People get more comfortable. People will get vaccinated, getting out, driving more. People, you know, start to you know, we start to see more and more events outside. And so I'm assuming that, you know, we're gonna expect to see, you know, increase in merchandise sales, you know, as long as people are gonna continue to to get out there and feel more comfortable.

Speaker 6

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

Speaker 2

We we are not going to comment on the June, but, you know, what I can tell you is that there is a lot of initiative regardless, you know, regarding basically, regardless the, you know, the pandemic. There is a lot of initiatives that are taking place, you know, within our stores. I mean, an example I just mentioned, you know, talking inside sales. So I just mentioned, you know, the installation of the freezers, the grab and go. You know, we have a lot of initiative going on in those stores.

I mean, we just you know, we actually have Dunkin' Donuts. We have three new Dunkin' Donuts stores that are actually being opened. We just talked about the extension of the DoorDash delivery. I mean, we went from 300 stores to over 600 and, you know, 50 stores. We have the remodel stores that are actually taking place, you know, right now and expect to open in June, our second store.

You know, we have you know, we launched the past rewards, and, you know, we have more and more activity and received more enrollment on the past rewards since we launched that. So as I said, there is a lot of initiative going on over here in order to make sure that our same store sales, you know, continue continue to basically perform.

Speaker 6

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, you know, just more in totality, but also I'm curious about presumably a benefit of people waiting online for gas on merchandise sales as well.

Speaker 2

Sure. Sure. So, you know, 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.

Those are 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 and giving our size and giving our exposure and our, of course, relationship with the branded fuel, I mean, we were able to, you know, grab resources from areas that were not impact. You know, the interesting thing that we saw over here actually is that area like, you know, Florida, for example, you know, the the the project in Florida, it's a waterborne project.

You know? It's all coming from the gold. All coming from the pot. The panic buying over here was unbelievable. I mean, people are staying in line in Florida, and I'm not scratching my head.

And I said, but there's no impact in Florida. And, you know, we saw the panic buying, by the way, across many, many states that basically were not impact from from that. So that's, you know, that's one way to think about that. The second thing, as I mentioned, given that we are rebranded, as you can imagine, you know, brand, you know, branded fuel, you know, when we when when when the brand put everybody on allocation, you can assume that the unbranded guys actually gonna 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, you know, will get back to normal. If not to normal, close to normal. But as I said, I mean, the the resources that we were able to bring and pull from, you know, outside of those states help us tremendously over here.

Speaker 6

Got it. Okay. Thank you.

Speaker 2

We

Speaker 0

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

Speaker 2

Thank you very much. And, again, would like to thank each and every one of you for participating this morning. Looking forward to see you again on our next call after Q2. Thank you, and have a great day, everybody.

Speaker 0

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