ARKO Petroleum Corp.

Greetings and welcome to the ARCO Petroleum Corporation fourth quarter and full year 2025 financial results. 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ashley McDermott, Vice President of Financial Reporting. Please go ahead.

Thank you. Good afternoon and welcome to ARCA Petroleum Corp's fourth quarter and full year 2025 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Jordan Mann, Chief Financial Officer. Our earnings press release and annual report on Form 10-K for the year ended December 31st, 2025 are filed with the SEC, are available on our website at www.arcopetroleum.com. During our call today, unless otherwise stated, management will compare results to the same period in 2024. Before we begin, please note that all fourth quarter 2025 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our fourth quarter and full year 2025 earnings press release There are 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 Petroleum Corp. 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, except as required by law. On this call, management will share operating results on both a GAAP and a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as adjusted EBITDA, discretionary cash flow, net debt, and the ratio of net debt to adjusted EBITDA, and reconciliations of these measures to our results as reported in accordance with GAAP, are detailed in our earnings press release or in our annual report on Form 10-K for the year ended December 31, 2025. 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 exclude intercompany charges by our GPMP segment. And now I would like to turn the call over to Ari.

Thank you, and good afternoon, everyone. I'd like to start our call today to thank all of you for joining our first earning call since our IPO last month, and to our all investors, for their trust and support. In our IPO in February, we issued approximately 11.1 million shares of our Class A common stock at a price to the public of $18 per share. We were and continue to be excited by the interest of all of the quality investors that participated in our IPO. The market has received us nicely. In fact, on March 5th, Our underwriters exercised their over-allotment option and purchased approximately 1.5 million additional shares. The IPO was a major milestone to our unique asset-light and cash-flow-generating business model. We applied the IPO proceeds to reduce debt and strengthen an already conservative balance sheet. Our IPO has provided support for a large, growing, and profitable oil cell fuel distribution and fleet fueling business, and we have financial flexibility and we're positioned to execute. This financial flexibility is extremely important in our industry. We are one of the largest fuel distributors in North America, distributing more than 2 billion gallons in the last 12 months, And despite that size, we have a roughly only 1% market share of fuel distribution markets. The balance of the industry remains highly fragmented, providing a substantial runway for growth, and we see strategic accretive opportunities to expand our platform. To that end, we are currently in due diligence and different stages of negotiation with two targets. One target in the west-south central region would present an opportunity to add approximately 38 million gallons across approximately 110 also locations. The second in the Midwest would offer an opportunity to add approximately 350 million in annual gallons to our platform. We continue to conduct due diligence on these transactions. We are excited about these potential transactions and our team continue to look for more opportunities. On the macro environment and Q1 2026 trends, no surprise to you, but events in the Middle East during the first quarter have presented extraordinary volatility in fuel costs and higher costs than was anticipated. Events like this highlight a couple of aspects of our business model. The vast majority of our gallon souls are on a cost-plus basis, which provide margin stability in times like this. While we could see softness in volume as cost increase, I will note that our business has a bit of a counterbalance embedded within. We generally receive approximately 1.25% prompt pay discount from our supplier partners, which increases our margin as the cost of fuel increases. As it relates to our non-cost plus gallons, fleet fueling and our consignment agent locations, which represent approximately 15% of our Q4 gallons sold, volatility generally provide an opportunity to capture more margin. As we continue to monitor these macro events, our team continues to execute pricing discipline to manage margin across the platform. On the GPMP side, related to fuel distributed to retail sites operated by our parent ARCO Corp, which we refer to ARCO retail sites, we had been seeing positive same-store gallons growth before winter storms at the end of January and beginning of February created some disruption. Turning to our fourth quarter results, consistent with the preliminary results disclosed in connection with our IPO, we ended the year on a positive trajectory. adjusted EBITDA grew approximately 4% as compared to the prior year, showing improved momentum and as we ended the year. In our wholesale segment, both gallons and cents per gallon, also referred to as CPG, continued to grow in Q4, resulting in a strong quarter with an increase in fuel contribution year over year. This results showed the benefit of dealerization, which is the conversion of ARCA retail sites to dealer sites in our wholesale segment. In 2025, more than 250 sites were converted from ARCA retail sites and supplied by our GPMP segments to dealer location in our wholesale segment, bringing our total number of conversions from the beginning of the dealerization efforts in the middle of 2024 to 409. Additionally, we have approximately 120 additional sites committed either under letter of intent, under contract, or already converted since December 31st, 2025. And we expect to complete those plus additional conversion by the end of 2026. As the margin profile in our oil sales segment is typically a few cents above the margin from our sales, to the ARCO retail sites, the continued conversion of these sites should improve our contribution overall. Additionally, we benefit from rental income from our dealers as those sites are converted to dealer locations. Our fleet fueling segments perform in line with the prior year, and we are very excited about the prospects of this business. As you are aware, we are the largest card lock operator in the Mid-Atlantic states and one of the largest in the nation. We are excited about the tremendous white space in this industry. Not only that this business generates attractive cash flow with minimal labor and maintenance capex, due to industry card lock location, are relatively inexpensive to build, easy to run, and support healthy diesel margins. We have a target to build 20 new to industry locations in 2026 and have already identified and are working on 14 of these locations. On these new builds, we are targeting mid to high teens returns on $1 to $2 million investments to build per site. Combined with our focus on accretive M&A in the wholesale segment, we believe these new card lock locations will provide us with tremendous Runway for Growth. On capital allocation, we are a dividend-oriented platform while maintaining the flexibility to deploy capital for growth. To that end, in March, the APC Board declared a dividend of 26 cents per share to be paid in April, which after prorating for the period from our IPO through March 31, 2026, is consistent with an annual dividend rate of $2 per share. We view this dividend as a very attractive yield that for illustrative purposes, based on the currently anticipated dividend rate, represents 11 to 10% dividend yield at a share price of $18.50 to $19.50 per share. Consistent with the strategies I noted before, we plan to deploy capital on accretive projects such as also M&A and building our new catalog locations. We expect that our strong balance sheet and availability under our lines of credit give us ample liquidity to execute on these strategies. With that, I will turn it over to Jordan to walk through our financial results and outlook.

Thank you, Ari, and good afternoon, everyone. I also would like to thank you all for joining. These are exciting times for APC and I was thrilled to meet so many of you while we were on the road during the IPO process. As the CFO of APC, I'm encouraged by the asset light, cash flow generation of the platform and look forward to the opportunity ahead of us. With that, let me walk you through our fourth quarter and full year results and then discuss the outlook. Turning to our fourth quarter and full year 2025 results. Net income was $8.1 million for the quarter. up from $7.5 million for the prior year. Adjusted EBITDA was $36.9 million for the quarter compared to $35.4 million for the prior year, an increase of approximately 4%. Net income was $32.7 million for the year compared to $40.2 million for the prior year. Adjusted EBITDA for the year was $143.5 million, up from $139.2 million in 2024. While total fuel gallons sold contracted in 2025, we benefited from a strong margin environment in our wholesale and fleet fueling locations. Dealerization has been providing the benefits we expected, with margin improvements and greater inflows from rental income on converted sites. Turning to our wholesale segment, wholesale fuel contribution increased 8% to $24 million in the quarter, compared to $22.3 million in Q4 2024. Wholesale gallons also increased by approximately 4% to 249 million gallons, and fuel margin was approximately 9.7 cents per gallon for Q4, up from 9.3 cents per gallon in the prior year. For the full year 2025, wholesale generated $94.5 million of fuel contribution, an approximate 5% increase from $90.4 million last year, with total gallons increasing approximately 4% to 989 million gallons and fuel margin cents per gallon of approximately 9.6, up from 9.5 cents per gallon in the prior year. Moving to our fleet fueling segment, fleet fueling fuel contribution was $15.9 million for the quarter compared to $16.3 million last year. Fleet fueling gallons totaled 34.9 million gallons compared to 36.1 million gallons and margin was 45.6 cents per gallon, up from 45.2 cents per gallon in the prior year. For the full year, fleet fueling generated $65.7 million of fuel contribution on 142.8 million gallons, with a margin of 46 cents per gallon, up from 43.2 cents per gallon in the prior year. This compares to $64.3 million of fuel contribution on 149 million gallons last year. Fueling margins remain strong and have continued to reflect the durable cash flow profile of this business. Moving to our GPMP segment. GPMP fuel contribution from related party locations, that is ARCO retail sites, was $10.2 million for the quarter compared to $12.3 million last year. GPMP-related party gallons totaled 204 million gallons compared to 246.3 million gallons in the prior year. For the full year, GPMP-related party sites generated $43.2 million of fuel contribution on 864.8 million gallons. This compares to $51.2 million of fuel contribution on 1 billion gallons last year. As a reminder, Margin in this segment was a fixed 5 cents per gallon through December 31, 2025, and is 6 cents per gallon thereafter. Further, our trends here reflect same-store gallon trends at ARCO and the impact of the conversion of 409 ARCO retail sites converted since the middle of 2024 to dealer locations, including 62 ARCO retail sites for the quarter and 256 ARCO retail sites for the year. Discretionary cash flow for the year was approximately $88.9 million, up from approximately $79.9 million in 2024. Net cash provided by operating activities for the year was approximately $79.6 million. Looking at the balance sheet, our balance sheet is strong. Following the successful IPO, We used $206.7 million of the net proceeds to reduce debt and enhance liquidity. The transaction positions us with stronger capital structure and greater financial flexibility to execute on our strategy as we enter 2026. As of the year end, our total debt net was $392 million, and our net debt was approximately $526.6 million. Our ratio of net debt to adjusted EBITDA was approximately 3.7 times. After adjusting for the reduction of debt from our IPO proceeds, our net debt was $319.9 million, and our ratio of net debt to adjusted EBITDA was 2.2 times. We remain comfortable with our leverage ratio and believe we have more than enough liquidity to deliver our strategy and continue to build momentum with our capital initiatives mentioned above. Turning to 2026 Guidance. Consistent with what we outlined in connection with our IPO, we continue to expect to deliver approximately $156 million in adjusted EBITDA in 2026 and discretionary cash flow of approximately $110 million. As a reminder, this includes one penny increase of fuel margin on gallons distributed by our GPMP segment. Our estimated gallons for the forecast period include an assumption that we will add an additional 50 million gallons of volume for the year ending December 31st, 2026, as a result of our acquisitions from third parties of businesses or assets in our wholesale segment, which we think will offset an expected decline in gallons from comparable wholesale sites consistent with historical trends. To summarize, we are executing our strategies and are excited for the year to come. With that, I'll hand the call back to the operator to begin Q&A.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Wade Suki with Capital One.

Good afternoon, everyone. I appreciate you all taking my question. Just first off and first and foremost, just knowing where some of you and your families live and given the situation in the region, I sincerely hope everyone on your end is healthy, safe, and otherwise doing well. But with that and maybe sort of along those lines, Ari, you had some comments in your prepared remarks. talking about sort of this rapid rise in fuel costs here in the last few weeks. I'm wondering if you might be able to elaborate a little bit more on what the impact might be, maybe across the business lines you talked about, maybe capturing some opportunities to capture margin. I think you mentioned fleet fueling and non-cost-plus contracts. Would that be sort of – being able to raise prices faster than your underlying inventory, just any kind of color around that would be great. Likewise, being an optimist, I'm thinking on the backside of this mess when things hopefully normalize, what that might look like with a material drop in prices.

Sure. First of all, thank you for the question, Wade. Good to hear from you. It was a long question, so we're going to try to remember every aspect of that. But first of all, let's start with basically with where we are in terms of our contract. So as you remember, 85% of our gallons are on cost plus, or as we call it, you know, fixed fee basis. So we buy at a rock minus, we sell at rock plus. So 85% of the contracts are actually at cost plus. And so volatility don't really mean a lot when it comes to the margin. When it means a lot, it's really in the prompt pay discount. As you can imagine, price of fuel, since the Iran strike started, price of fuel is approximately $1 more than it was at probably the end of February. So if you think about it, 1.25% on an additional dollar over there, that's an extra, I'll call it penny and a half, that's supposed to actually flow through margin. regardless of the 85% cost plus that's across the network. So that's, I think, something that is very, very positive for us when it comes to it. In addition to that, on the 15% outside of the 85%, as you remember, we have approximately 290 consignment sites. And, you know, with this kind of volatility, as you can imagine, you know, margin increase during this time, So there is some extra benefit on, I'll call it the 15%. As you remember on the fleet business, you know, we're dealing with diesel. You know, diesel, 80% of the fleet business is basically diesel. And at the moment, you know, you probably saw that the diesel prices are high as ever, I believe since 2007. So overall, as I said, I mean, you know, we see an impact on prompt pay discount when it's come to basically to the increase in price. But that's really, I would call it, the biggest impact that we probably see over here.

That's very helpful. Thanks, Ari. Just to switch gears a little bit, if I may, and just touch on sort of a dovetail on the last question, if sort of all the volatility, uncertainty out there, what it might mean for M&A, does the situation uncertainty cause people to maybe take a pause here, or is it the other way around where perhaps maybe people get a little bit more motivated to sell?

Yeah, well, I think, first of all, it's too early. It's a good question, but I think it's too early because everybody expects that this impact will end within four to six weeks. As you can see, we are already going into week number five, and at least I don't see anything over so fast. Um, so again, I think it's too early in the meantime, you know, we have right now to acquisition that I mentioned, uh, we have two acquisitions. One of them is a small one with 38 million gallons that, uh, we are doing the diligent and, you know, working on already. Uh, and the second one is 350. So I think we have enough in the pipeline to start. And in addition to that, uh, you know, when we actually were on the road, as we went public, uh, we were identified nine, uh, you know, basically catalog location. We already had 14. since we actually become a public company. So we continue to work on our end. Nothing really changed on our end at the moment, but there is no question that high prices of fuel in the U.S. may create some pressure on some small operators, and I think that should be an opportunity for us.

Wonderful. Thank you again for taking my questions. Appreciate it.

Of course. Thank you.

Our next question is from Josh Silverstein. with UBS.

Hi. Good afternoon, guys. I was hoping you could go into the 25 percent margin enhancement that you were just referring to, Ari. Is this in all of your cost plus agreements? Does it get triggered at a certain price point? Like, I'm just curious how long that lasts and how quickly you can implement that. Thanks.

Sure. Good afternoon, Josh. You mentioned 25 percent. Could you refer to the question again? I'm sorry.

I think you were mentioning that you had like a margin enhancer opportunity or an ability to improve your margins when the price of gasoline was higher. Was I understanding that correctly? Sure, sure. Yeah, that's on the 85.

That's on the overall business. On the overall business, as you remember, we are basically getting from our supplier vendors, we are getting 1.25 prompt pay discounts. So when prompt pay discount, you know, when the price of fuel was $2 a gallon, that's our cost. And if you think about it, $2 at the 1.25% prompt pay discount is different. Now the cost is above $3. So if you add another dollar over here on the overall business, you know, time 1.25%, you're talking about around one and a half cents per gallon extra that you're actually making on all gallons that you're selling over here. That's what I meant on the 15%, which is outside of the 85%. This is, we have 290 consignment sites over there. And, you know, in this environment with this volatility, you know, margin is a little bit higher. So you're also getting some, you know, some benefits from basically from the consignment side, given the volatility. Okay.

Got it. Okay, that's helpful. And then maybe just within the outlook as well, are you assuming that the higher prices are a headwind to get unsold? I know there's kind of a, you know, standard kind of low single-digit number, but maybe that was based on the prior number. Now that we're a dollar higher, is there any sort of, you know, some kind of greater headwind there?

I think it's too early to tell because, like I said, at the moment, you know, we get the benefit at the moment, you know, given the prompt rate discount. We didn't see any significant, Edwin, when it comes to, you know, consumption. I mean, so far consumption, you know, consumption is down a little bit, but nothing significant. So we don't see a consumption decrease. You know, in my, you know, talking about history from what I know, you know, over the past, doing it for the last 20 years, when price of fuel is above $3, usually you see a consumption decrease because of that. That's across basically the countries. So at the moment, we don't see it, but I'm assuming going into the summer, the price of fuel will be in the areas that we see them right now. I believe we're going to see some consumption decrease, but I think the benefit of the 1.25 prompting discount probably will overtake us.

Got it. Okay, that's helpful. And then can you provide any sort of thoughts around total capex, given the opportunities you kind of outlined within... you know, the fleet fueling opportunity, the 20 opportunities there, maybe what you're seeing from an M&A opportunity?

Thanks. Well, on the fleet fueling, we didn't really change anything. As I mentioned, it's around $1 to $2 million. That's the cost to build each and every one of them, and we're targeting basically the digital return on them. So we have 14 already in the pipeline. You know, when we started, we had around nine. Now we have 14. And with respect to M&A... it's not something that we are prepared to disclose at the moment. As I mentioned, we are in the middle of due diligence right now, so as we continue to conduct due diligence and as we're ready to sign them, we will, of course, provide more information and call on that. Got it. Thank you. Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Ari Kotler for any closing remarks.

Thank you. So before we disconnect here, I want to speak directly to our employees. As we embark on this next phase of Grow as a public company, we are grateful for your continued devotion and commitment to driving the business forward and serving our customers. For that, I thank you. To our shareholders, we are excited to partner with you and thank you for your support. It was a privilege to meet you over the past few months to tell you our story We are encouraged by the level of interest and excitement about the future. We are committed to maintaining transparency and working diligently to meet your expectation as we move forward together. As we add into 2026, we are well capitalized to execute on our growth plan and look forward to delivering value and returns to our shareholders. We appreciate everybody joining us today. Have a great evening.

This concludes today's conference. We thank you again for your participation. You may now disconnect.