ARKO Petroleum Corp.

Greetings, and welcome to the ARCO Petroleum Corp. Report's second quarter 2026 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 Priya Trivedi, Senior Vice President of Investor Relations. Maria, please go ahead.

Thank you. Good afternoon and welcome to ARCO Petroleum Corp's second quarter 2026 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer and Jordan Mann, Chief Financial Officer. Our earnings press release and quarterly report on form 10Q for the second quarter of 2026 as 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 2025. Before we begin, please note that all second quarter 2026 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 the second quarter 2026 earnings press release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. All forward-looking statements made during this call reflect our current views with respect to the future events, and Arco 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 non-GAAP basis. Description 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 in our quarterly report on Form 10-Q for the quarter ended June 30, 2026. Additionally, management will share profit measures for individual business segments along with Fuel Contribution which is calculated as fuel revenue less fuel cost and excludes intercompany charges by our GPMP segment. And now I would like to turn the call over to Arie.

Thank you Priya and thank you all for joining us today. Before we begin, I want to welcome Priya Trivedi who recently joined APC as our new head of investor relations. Many of you will have the opportunity to work with Priya directly and we are very pleased to have her as part of our team as we continue to broaden our engagement with the investment community. We are excited to report another quarter of strong execution and growing momentum across the platform. The second quarter once again demonstrated the strength, stability and cash generating power of APC's business model. At the same time, we announced the signing of the purchase agreement to acquire the business of U.S. Petroleum Partners or USPP, a highly strategic transaction that we believe represent a major step forward in the growth story we laid out to the investors at the time of our IPO. This is exactly why we took APC public. We accessed the public markets to solidify our balance sheet, increase our liquidity and give the company the flexibility to pursue high quality, accretive growth opportunities. Today's announcement showed that we are executing on that strategy. The U.S. petroleum partner business is complementary to APC's existing platform, and upon closing, we'll expand our scale, add new infrastructure capabilities, and bolster the long-term earnings and cash flow profile of the company. This transaction reinforces every major pillar of APC's investment thesis. It would deepen our supplier relationship, expand our stable fee-based and fixed margin business model, put our post-IPO financial flexibility to work, build on our proven acquisition track record, and accelerate our long-term growth outlook. Let me provide some details on the acquisition and the related compelling economics. U.S. Petroleum Partners is a sizable, vertically integrated fuel distribution platform. The acquisition will add approximately 280 million gallons of annual orsel fuel volume, increasing APC's fuel volumes by about 14% for the 12 months ended June 30, 2026. We believe this additional scale will deepen our relationship with major fuel suppliers, increase The acquisition will also include two fuel storage terminals along the Buckeye Pipeline system, located in Novi, Michigan, and Toledo, Ohio. These are long-lived infrastructure assets that provide meaningful storage capacity across the refined product spectrum, including gasoline, diesel, ethanol, and jet fuel. Importantly, this transaction will bring APC into the terminal business, adding a new infrastructure-based fee-generating income stream through third-party storage and throughput activities. It will also give us greater flexibility over fuel logistics and supply while creating multiple additional avenues for future earnings growth. We believe these terminals will enhance the profitability potential of our core fuel distribution business and increase our margin capture through greater vertical integration across the refined product infrastructure value chain. Additionally, the acquisition will include a fleet of trucks and trailers that support the last mile of our fuel logistic infrastructure. This will announce our current distribution capabilities, provide another source of earning, and further increase the vertical integration of the APC platform. We expect to close the transaction later this year. Following closing, we expect the acquisition to be accretive and to add approximately $30 million of annual adjusted EBITDA while announcing discretionary cash flow. We also expect synergies to begin in 2027 and see meaningful opportunities for additional operational efficiencies and value creation over time as we integrate the business into APC's platform. Additionally, as we continue to build the APC platform, we plan to work with the USPP team to evaluate opportunities within their existing acquisition pipeline. The consideration at closing will consist of $205 million in cash plus the cost of inventory. Additionally, at closing, APC will issue $30 million in Class A common stock to be held in escrow and to be released to the USPP subject to the acquired business achieving certain EBITDA-based financial targets in the first four quarters after we close the transaction. This Aeronaut payment is subject to adjustments if the acquired business does not achieve $31.7 million of EBITDA and $2.2 million of EBITDA generated by certain fuel-related components. EBITDA is defined in the purchase agreement. Also, the Aeronaut may increase if the acquired business achieves results that are greater than these financial targets. From a capital allocation perspective, this is the type of disciplined strategic acquisition we believe can create meaningful shareholder value. At quarter end, our leverage was 2.2 times net debt to adjusted EBITDA, well below our post-IPO target of 2.5 times, and we maintained significant liquidity. We intentionally positioned APC with the financial flexibility to pursue attractive growth opportunities and many others. This potential acquisition directly supports the investment thesis we presented to the market at the time of our IPO. We believe that it will expand our predominantly fee-based and fixed margin earnings profile, enhance our cash flow generation capabilities, support our dividend philosophy, and solidify APC's long-term growth platform. With a strong balance sheet, a proven management team, and a deep pipeline of opportunities, We believe APC is very well positioned to continue scaling the business and creating long-term value for shareholders through disciplined, accretive growth. Now let's turn to the second quarter results. APC delivered another strong quarter with a year-over-year adjusted EBITDA growth of approximately 4% and discretionary cash flow growth of approximately 12%. These results demonstrate the durability of our platform, the strength of our cash flow generation, and our team's ability to execute effectively to a volatile fuel price environment. In our oil cell segment, blended cents per gallon margin increased year over year, primarily benefiting from higher prompt pay discount on the higher cost of fuels. Our fleet fueling segments operating income was relatively flat this quarter compared to prior year. As planned, we continue to invest in this segment to add on what is one of the largest cowslug platforms in the country. We have identified 20 new cowslug locations for opening in 2026, of which we have opened three new locations thus far, and the remaining 17 are in various stages of development. We expect to continue adding to this segment as we like the low capital investment and meet to ITIN's expected returns per location. As announced this morning, we have declared a quarterly dividend of 50 cents per share consisting with our annual target dividend rate of $2 per share. We continue to believe APC combination of stable cash flow generation, disciplined capital allocation, and Attractive Dividend Profile differentiate us within the sector. With that, I will turn it over to Jordan to walk through our financial results and outlook.

Thank you, Arie. I also would like to thank you all for joining. As Arie mentioned, we delivered strong second quarter results while also announcing the signing of the USPP acquisition agreement this morning, as that transaction will enable us to continue to scale this platform. Together, these milestones highlight the strength of the platform we have built and the opportunity we see to continue scaling APC in a disciplined, accretive, and shareholder-focused way. Turning to our second quarter results, net income was $12.2 million for the quarter, up from $10 million in the prior year period, reflecting continued operating discipline and earnings power of our platform. Adjusted EBITDA was $39.8 million for the quarter, compared to $38.3 million for the prior year, an increase of approximately 4%. Just as importantly, discretionary cash flow grew approximately 12%, underscoring the strength of our cash conversion and quality of APC's earnings. Turning to our wholesale segment, wholesale fuel contribution increased 3.7% to $26.3 million in the quarter, compared to $25.4 million in Q2 of 2025. Fuel contribution dollars increased despite a 4.6 decline in wholesale gallons to 240.8 million gallons due to incremental dealer locations resulting from ARCO Corp.'s ongoing dealerization program. As already mentioned, the blended fuel margin was approximately 10.9 cents per gallon in Q2 compared to 10.1 cents per gallon in the prior year. primarily benefiting from higher prompt pay discounts on the higher cost of fuel, reflecting market dynamics tied to higher retail fuel prices. Moving to our fleet fueling segment. Fleet fueling fuel contribution was $17.1 million, a slight decrease for the quarter compared to $17.8 million last year. Fleet fueling gallons were slightly up at 36.4 million gallons compared to 36.3 million gallons last year. The blended margin was 46.9 cents per gallon, down approximately 2 cents from the prior year period, as this year's margins reflect a more normalized margin rate. We also experienced some fuel margin compression during the quarter, as indexed prices that we charge our customers declined more quickly than the cost of our weighted average inventory. Even with that dynamic, contribution remained healthy, reinforcing the durable earnings profile of this segment. We continue to invest in additional new card lock locations as we like the low capital investment and mid to high teens expected returns per location. Moving to our GPMP segment. GPMP fuel contribution from related party locations, that is ARCO retail sites, was $11.5 million for the quarter compared to $11.3 million last year. GPMP related party gallons totaled 191.4 million gallons compared to 225.3 million gallons in the prior year, which was primarily driven by the shift of gallons from ARCO retail sites to wholesale through our active conversion of ARCO retail sites to dealer locations. Discretionary cash flow for the quarter was approximately $27.1 million, up from approximately $24.2 million in the prior year. Net cash provided by operating activities for the quarter was approximately $10.4 million, as compared to $23.2 million in the prior period, primarily due to the increase in working capital resulting from the increase in the cost of fuel. Looking at the balance sheet, we believe that our balance sheet remains a strategic advantage and gives us meaningful financial flexibility with approximately $710 million in availability under our credit lines. Our IPO strengthened our balance sheet and positioned APC to pursue disciplined growth while continuing to support shareholder returns. As of quarter end, our total debt net was $184.7 million and our net debt was $324.2 million. Our leverage ratio of net debt to adjusted EBITDA was approximately 2.2 times. Total debt net to net income was 4.8 times. Following the USPP acquisition, we expect our pro forma net debt to adjusted EBITDA on an annualized basis to be in the range of 3 to 3.5 times, which remains comfortably within our communicated targeted leverage range of 3 to 4 times and reflects our disciplined approach to capital allocation. Importantly, we expect that APC's strong conversion of adjusted EBITDA to discretionary cash flow will support our dividend. fund growth, and drive long-term shareholder returns. Turning to 2026 guidance. As the team continues to execute through 2026, we are pleased with our first half results, which further demonstrate the stability, consistency, and cash flow generation of our platform. We believe these results reinforce the core attributes investors should expect from APC. Disciplined execution, visible cash generation, and a clear path to long-term growth. As Arie mentioned, we currently expect to close the U.S. Petroleum Partners acquisition later in the year. Based on our current expectations, the transaction is anticipated to contribute to our 2026 results in a manner that is generally consistent with the planning assumptions embedded in our guidance. As a result, we are maintaining our previously issued full-year guidance and continue to expect full-year adjusted EBITDA of approximately $156 million and discretionary cash flow of approximately $110 million. We remain confident in the stability of the platform, the strength of our cash flow generation and our ability to deliver consistent earning growth and attractive shareholder returns over the long term. With that, I'll hand the call back to the operator to begin Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad and a confirmation tone will indicate that your line is in the question queue. You may press star two if you would like 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. Our first question comes from the line of Josh Silverstein with UBS. Please proceed.

Hey, guys. Great to see the acquisition come through and good use of the balance sheet here. I was hoping you could talk a little bit more about the synergies that USPP brings to the aqua footprint and, you know, how you guys might be able to benefit and kind of integrate the transport and terminal infrastructure offerings that they have.

Sure.

Without further ado, Josh. Good question.

So first of all, the USPP business is a complementary business, you know, to our business. We have, as you can imagine, we have major relationship with the major oil companies. And while we have major relationship with major oil companies, you know, they have 280 million gallons, we have over 2 billion gallons over here. My point is that everything that we're buying over here, which is adding another 400 dealers to basically to our platform, increasing basically our business to 2,500 dealers, it's absolutely complimentary. Those guys also have a fleet of trucks that actually delivering fuel to some of their dealers, approximately 80% of their business. So, you know, all of those things are just complimentary to the business that we are in right now. In addition to that, of course, the terminal, as you can imagine, we are pulling product to our dealers from some different terminals, and that should be an opportunity for us to basically pull product for our own dealers from a terminal that now we basically own and control.

Got it. And then how should we think about the CapEx needs versus the $30 million of EBITDA that you forecast? I'm trying to get a sense of the free cash flow generation from this and then how you plan to allocate those funds. Does it go to the balance sheet and deliver or is this the support for more dividends?

Sure. You mentioned CapEx. So just for your benefit, this is a very low CapEx business. The terminal business is really a storage unit out there. So that's not required basically a lot of CapEx, very minimal CapEx. The next question comes from the line of Gabe Maureen with

Mizuho Securities. Please proceed.

Good afternoon, everyone. Congrats on the transaction. I wanted to ask just in terms of contract length here, also sort of the margin determination, cost plus, is it a mix here and how it may compare to APC's base volumes?

Hello, Gab. Very similar business. They have 400 accounts. The majority of those accounts are on fixed fee, similar to 85% of our business, which is also basically a fixed fee of cost plus. And that's, like I said, that's the majority of their business over here, and that's the majority of the EBITDA over here.

Great. And then if I think about kind of the $30 million in EBITDA that you disclosed in the press release versus the EBITDA you'd need to hit for the earn-out, the sellers would need to hit for the earn-out provision. Can you just talk about, Arie, maybe what's your baseline EBITDA here? Is that earn-out provision a stretch goal? What could get you there? I'm just curious kind of how to reconcile those two numbers in the release.

Yeah, no, the $30 million is the expected EBITDA for the business, for the current business right now that we're buying. This is on an annualized basis. There is few components over here. that can just increase EBITDA above the $30 million. And that's why we put $30 million of Class A common stock in escrow for the next 12 months for the benefit of them basically achieving some of those goals in order to basically release those shares to them. And I'm very confident that they're going to do their best, of course, to get there. And I'm very confident that they're going to do so. But like I said, the base business that you need to take into account, Gabe, it's the $30 million, expected $30 million adjusted EBITDA. And, you know, anything above that, it would be great.

Understood. Thanks, Arie.

Thank you.

The next question comes from the line of Solomon Accio with Stiefel. Please proceed.

Thank you. Good afternoon and congrats on the deal. Let me just ask you this. You're acquiring some assets that historically you haven't had in terms of your footprint. And I'm thinking in particular the terminals and the trucks. And so as you look forward, would you be wanting to add more assets into sort of the business model? Or is this something we should expect to just be sort of unique to this acquisition and going forward, future acquisition will probably be more along the asset line.

Sure, sure, sure. So let me just maybe provide a couple of corrections, if you don't mind, Solomon. First of all, we are in the Great Lakes market. So we have a lot of dealer accounts in this part of the country. So that's absolutely complimentary. We're adding another 400 to a large count of dealer account that we have in this part of the country. With respect to transportation, just for your benefit, we currently have around 80 trucks already. Most of them are in the Carolina. So we are running basically transportation. The unique thing about this business is that the concentration of the dealer business that we're buying over here are mainly in the Great Lakes location. And given that there is a concentration of dealer business over there, It's great to have the trucks that basically supply fuel to 80% of those dealers. So you're trying to capture every penny that you can capture over here. And like I said earlier, each one of those components is complementary. The same thing goes to the terminal. Those are two terminals. But if you think about the terminals, I always call it simple, but it is a simple business. It's basically a storage unit. We don't own the 97% of the product in the terminal, basically owned by the major oil companies, and we are just collecting a fee for storage. So, you know, it's just another, basically another piece to add over here that is absolutely complimentary for our business. and now it's like I said instead of you know buying products from the major oil companies and going to different terminals you know when we have a terminal and we can pull our own products from a terminal that we collect a fee from the major oil company will be absolutely you know basically complimentary for us and you know will expand our participation across the fuel value chain over here. Got it.

Thank you.

Thank you. Thank you. Ladies and gentlemen, this concludes the question and answer session, and I'd like to turn the call back over to Arie Kotler for closing remarks.

Thank you. Before we conclude, I would like to thank our dedicated employees whose hard work and commitment enable us to deliver another strong quarter while bringing strategic acquisition to signing. It is their daily execution, focus on our customers, and commitment to operational excellence that continues to drive APC forward and position us for the next phase of growth. I'd also like to thank our shareholders for their continued support and confidence in our strategy. As demonstrated by today's announcement, we are executing on the commitment we made at the time of our IPO, maintaining a disciplined balance sheet, pursuing accretive growth opportunities Thank you again for joining us today. We hope you enjoy your summer and we look forward to updating you on our progress next quarter.

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