ARKO Corp.

Greetings and welcome to ARCO Corp's second quarter 2026 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Priya Trivedi, Investor Relations. Thank you. You may begin.

Thank you. Good morning and welcome to ARCO's second quarter 2026 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Galagher Jeff, Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second quarter of 2026 as filed with the SEC are available on ARCO's website at www.arcocorp.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 our second quarter 2026 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during today's call. All forward-looking statements made during this call reflect our current views with respect to future events, and ARCO 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 the non-GAAP financial measures that we use, such as adjusted EBITDA, and reconciliations of those measures to our results as reported in accordance with GAAP, our details in our earnings release, or in the quarterly report on Form 10Q for the quarter ended June 30, 2026. 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 our GPMP segment. Now, I would like to turn the call over to Arie.

Thank you, Priya, and thank you all for joining. Before we begin, I want to welcome Priya Trivedi, who recently joined us as our new head of investor relations Many of you will have the opportunity to connect with Priya and we are excited to have her on our team. Before turning to the detailed results of the quarter, I want to spend some time on yesterday's announcement by APC, our approximately 74% owned subsidiary, on signing an agreement to acquire the business of U.S. Petroleum Partners or USPP. We believe this planned acquisition is not simply another acquisition. It is a strategic step that accelerates APC's growth plan, expands scale in attractive markets, and demonstrates the earning power we believe can be created from the APC platform. As a reminder, in February, we publicly offered a minority interest in our subsidiary APC to give investors a clearer view of the strength and value of our all-sale, split-fueling, and GPMP businesses. At the time of the IPO, we outlined a clear strategy, compound stable fee-based earning through disciplined accretive acquisition while giving ARCO shareholders direct participation in the value created by APC. The USPP transaction is exactly the type of opportunity we build APC to pursue. This deal demonstrates each of the key pillars of APC's investment thesis. It deepens supplier relationships, expands APC's stable fee-based business model, utilizes the financial flexibility created through the IPO, builds on a proven acquisition track record, and accelerates APC's growth outlook. USPP is a sizable, vertically integrated fuel distribution platform and a highly strategic fit for APC. The pending acquisition is expected to add approximately 280 million gallons of annual fuel volume, increasing APC trailing 12-month gallons sold by approximately 14% by adding more than 400 dealer locations. Upon closing, the addition of the USPP business will not only meaningfully expand APC's scale and presence in the Great Lakes region, it will also add two fuel terminals on the Buckeye pipeline and a transportation fleet that currently handles more than 80% of USPP's distributed fuel volumes. By adding terminal and transportation capabilities, APC can participate In more of the refined products value chain, thereby potentially capturing incremental margin opportunities, string last mile logistics and add another source of stable fee-based earnings. The consideration at closing will consist of $205 million in cash plus the cost of inventory. At closing, APC will issue $30 million in Class A common stock to be held in escrow and be released to USPP subject to the acquired business achieving certain EBITDA-based financial targets in the first four fuel quarters after we close the transaction. This earn-out payment is subject to adjustment if the acquired business does not achieve $31.7 million EBITDA and $2.2 million EBITDA generated by certain fuel-related components. EBITDA is defined in the purchase agreement. Also, the earn-out may increase if the acquired business achieves results that are greater than these financial targets. We expect the transaction to close later this year to be accretive upon closing and to add approximately $30 million of annual adjusted EBITDA to APC and announces discretionary cash flow. This is a clear example of the strategic value creator APC, a growth vehicle with access to capital and attractive conversion of adjusted EBITDA to discretionary cash flow and a disciplined balance sheet supporting a dividend from which ARCO Corp and our shareholders benefit. APC gives us second public platform for value creation while allowing ARCO to remain focused on transforming the retail business. Turning now to ARCO's results. We operated against a challenging consumer backdrop, a highly volatile fuel pricing environment during the second quarter. Consumer sentiment reached historic lows while prolonged higher fuel prices placed additional pressure on household budget and influence purchasing behavior. The national average for gasoline prices climbed from $4.24 per gallon in April to nearly $4.61 per gallon in May before finally easing to roughly $3.96 per gallon at quarter end. While trend held relatively steady throughout much of the quarter, the cumulative pressure showed up more visibly in June as retail demand softened. Trips to the pump actually increased as customers fueled up more frequently, but we saw pressure on both gallon stores and in-store spending. Despite these pressures, we closed out the first half of 2026 in a solid position We knew that as elevated prices persisted, a portion of that outsized fuel margin benefit would normalize. Through strong execution, we minimize the give back in the second quarter, delivering adjusted EBITDA of $72 million compared to $76.9 million in the prior year period. The year-over-year decline in the second quarter was largely driven by $3.3 million of increased credit card fees on a same-store basis associated with elevated fuel prices. Taken together, first-up adjusted EBITDA was $123 million compared to $108 million last year, up a strong 14% year-over-year. The consumer environment tested the model, and our results showed the benefit of scale, disciplined pricing, and more diversified earning base. We remain focused on what we can control, delivering clear value, maintaining disciplined pricing, managing expenses, and executing initiatives that improve the long-term productivity and cash flow profile of the business. Now, turning to the results by segments. In a retail business, trip to the pump increased 4% as customers fueled up more frequently. Though gallon sold remained under pressure and convenience store spending softened in June, same-store merchandise sales excluding cigarettes declined a modest 0.9%. At the same time, disciplined category management, vendor-supported promotions, market share gain in several key categories and dealerization programs drove merchandise margin to 34.7%, an expansion of 110 basis points versus last year, and delivered nearly flat merchandise margin dollars on a same store basis. In a pressured consumer environment, maintaining nearly flat same store merchandise sales, excluding cigarettes, while expanding margin by 110 basis points, it's an important proof point for the quality of our retail execution. Fuel remained an important earning stabilizer during the quarter, and we continue to balance competitive pricing and customer value while maximizing fuel gross profit dollars. Same store fuel contribution increased slightly compared to the prior year period, as an increase in same-store retail fuel cents per gallon margin driven by disciplined pricing and the benefit of our scale more than offset lower same-store gallons. We remain committed to using targeted fuel offers to drive traffic, loyalty enrollment, and profitable in-store engagement while recognizing Elevate fuel prices and associated credit card fees will continue to be Edwin. In Oldsville, cents per gallon margin increased year over year, primarily reflecting higher prompt pay discount while gallons declined due to higher retail fuel prices, partially offset by retail sites converted to dealer locations to our dealerization program. Fleet Fueling Operating Income was relatively flat year over year as margin compressed this quarter and the prior year period at a higher than average margin. Our value proposition remains central to driving traffic and engagement in a pressured consumer environment. We believe we have the best fuel discount program in the country. Through Fueling America's Future and Roll Fast Rewards members, can earn stakeable fuel discounts of up to $2.50 per gallon on as many as 20 gallons by purchasing qualifying items in our stores, which has saved our enrolled members more than $4 million since inception. This is not only a customer value program. It is a traffic, loyalty, and gross profit engine that strings our relationship with iValue customers. The data reinforce why we are so focused on loyalty. In the second quarter, enrolled members average monthly spend was more than two times higher than non-enrolled members. The numbers of visits and average basket size were almost 50% higher versus non-enrolled members. These are not incremental differences. They represent a fundamentally more valuable customer relationship and a meaningful opportunity to grow repeat traffic, basket attachment, and margin over time. In June, we introduced the Tencent Tuesdays, offering Enrolled Members a few discounts on Tuesdays. Since launch, Enrolled Gallons sold on Tuesdays have grown double-digit Demonstrating strong engagement with the loyalty program and its compelling value proposition. We're also leveraging vendor-supported promotion with major vendors and consumer product partners which delivered a folder 6% in customer savings while protecting our merchandise margin. We took action in Q2 to win value-seeking customers adding more than 100,000 new members We will continue working with our supplier partners to help customers save on everyday purchases while driving profitable engagement for Arco. This engagement is already showing up in our financials. Enrolled sales grow and enrolled margin both increased 30 basis points in Q2 compared to Q1. With Loyalty, our focus is increasingly on the quality of the engagement, active users, repeat visits, incremental basket attachments, gross profit contribution, vendor funding, and measurable return on promotional spend. Behind Loyalty, we continue to invest in initiatives designed to modernize our retail offerings improve customers' experience and strengthen long-term store economics. During the quarter, we completed two remodels with 12 additional projects currently in progress, and we expect a total of approximately 25 remodels in 2026. Because stores generally stay open during construction, Temporary closure or portion of the sales floor create a modest headwind to comparable same-store merchandise sales. Completed remodels generated double-digit merchandise sales and gallon growth versus the pre-remodel period, reinforcing our confidence that targeted capital investment can unlock higher productivity from the existing store base. We also opened one new-to-industry retail store during the quarter. Our remodeled and new-to-industry retail location incorporates our fast-growing food and beverages offering, updated layout, and new technology and operating processes designed to improve store productivity. We are encouraged by the results we're seeing from the NTI Open so far. While several are still in ramp-up stage, We're seeing returns approaching 20%, which give us confidence as we look to accelerate the program in a disciplined way. To support the continued growth and modernization of the company's store and fueling footprint, we recently added to our real estate development team an accomplished vice president of real estate development with 30 years of industry experience, an extensive track record, A new store development, capital deployment, and strategic growth will support the execution of the company's remodel, new to industry store, and new Cardlock initiative. As planned, we continue to expand what is one of the largest Cardlock platforms in the country. We have identified 20 new Cardlock locations for opening in 2026, have opened three new locations thus far, and have the remaining 17 in various stages of development. We expect to continue adding to this segment because we like the low capital investment, attractive need to heighten expected return per location and recurring cash flow characteristics of this model. We now offer an announced food service offering in approximately 140 of our stores. and expect to expand that to additional locations this year. We remain deliberate in our pace of expansion, prioritizing the regions and store best position to maximize margin while incorporating learning along the way. Dealerization remains an important lever in ARCO's transformation. During the second quarter, we converted 21 additional retail stores to dealer locations bringing our total to 471 conversions since the program began in the middle of 2024. We also have approximately 70 additional stores committed under letter of intent under contract or already converted since quarter end. Each conversion moves us further towards a lower cost, more capital efficient operating model with stronger cash flow characteristics. While the fates of conversion moderated this quarter, our expectation for the program remained unchanged. Stepping back, I want to reiterate again, we ended the first half of the year in a solid position. We've adjusted EBITDA up 14% to last year. Our execution through the first half give us conviction in a full year outlook. With that, I will turn the call over to Galagher to review our second quarter results in greater detail.

Thank you, Arie, and good morning, everyone. As Arie noted, our second quarter results reflected softening in our retail business in June, while APC and Discipline Fuel Margin Management continued to support overall profitability. Augusted EBITDA was $72 million compared with $76.9 million in the prior year period. Net income was $9.4 million compared with $20.1 million in the prior year period. As a reminder, last year's second quarter included approximately $21 million non-cash gain related to a sale leaseback. Despite the softer retail demand, we continue to generate healthy cash flow. Manage expenses with discipline and preserve flexibility to invest in our highest return priorities. Looking at our retail segment, same-store merchandising sales excluding cigarettes were slightly down 0.9% the prior year period, while same-store merchandising sales overall were 1.7% below the prior year period. Cigarettes continued to decline as expected, but as Arie mentioned, We also saw consumer pressure impact our sales this quarter. We experienced pressure from lower SNAP EBT sales as certain states tightened eligibility rules around benefit purchases. While SNAP EBT accounts for less than 2% of our sales, lower EBT spend in the second quarter reduced same-store sales growth ex-cigarettes by approximately 75 basis points in the quarter. primarily across three states. We continue to focus on offering our customers value through our loyalty program, leveraging Fueling America's Future, Ten Cent Off Tuesdays, and targeted in-store pricing with key partners, working to win on value while protecting our margins. Merchandising margin in the quarter increased 110 basis points versus Q2 2025 to 34.7%. with same store merchandising margin also increasing to 34.7%, an expansion of 40 basis points compared with 34.3% in the prior year period. This reflected our dealerization efforts, discipline pricing, favorable product mix, and vendor supported promotions. On retail fuel, same store gallons were 5.7% below the prior year period, while same store fuel cents per gallon margin increased 6.5% to 48.7 cents per gallon from 45.7 cents. The same store fuel contribution grew in $97.8 million. Turning to expenses. Total retail site level operating expenses were $160 million compared with 176.6 million for the prior year period. The same store operating expenses were $156.5 million compared with $148.2 million in the prior year period, driven primarily by approximately $3.3 million of higher credit card fees associated with elevated fuel prices, along with slightly higher insurance, personnel costs, and rent. On a consolidated basis, G&A expenses were $43.7 million, Thank you. Thank you. Thank you. from $23.2 million in the prior year period. Gallons were 241 million compared with 252 million, and fuel margin increased 8.7% to 10.9 cents per gallon from 10.1 cents in the prior year period. In our fleet fueling segment, Operating income slightly increased 1.6% to $13.3 million from $13.1 million for the prior year period. Fleet fuel in gallons were $36.4 million, broadly unchanged from the $36.3 million in the prior year period, while fuel margin was $0.469 per gallon compared with $0.49 in the prior year period, primarily due to higher than average fuel margins in the prior year as well as margin compression during the second quarter of 2026 as index prices declined more quickly than our weighted average inventory cost. Cardlock location expansion remains one of our most attractive capital allocation opportunities given its return profile, capital efficient operating model and recurring cash flow characteristics. Our balance sheet remains healthy and provides flexibility to invest in our strategic priorities. During the quarter, we repurchased $38 million of our 5 1⁄8% senior notes for $35 million of cash. Following this, we ended the quarter with $246 million of cash and cash equivalents and total liquidity of approximately $1 billion. Subsequent to the quarter end, we increased the size of our GPM credit line with PNC by $74 million, bringing the aggregate capacity across our PNC credit lines to $214 million. This liquidity positions us well to fund high-return organic projects, support APC's growth strategy, evaluate additional senior note repurchases, and pursue other value-creating opportunities while maintaining a disciplined capital allocation approach. We ended the quarter with $675 million of long-term debt, excluding lease-related financing liabilities. a decrease of $29 million versus Q1. Capital expenditures were $33 million in Q2 compared with $45 million in the prior year period. The majority of our capital spending in Q2 continued to be invested in growth initiatives and our capital allocation framework remains consistent and returns focused. Our priorities are completing dealerization and capturing the associated cash flow benefits Investing in high-return remodels, retail NTIs, and new card locks, and growing food service. We also maintain balance sheet flexibility, which allows us to deliver our strategy and execute strategic acquisitions when they meet our discipline return thresholds, such as APC's planned acquisition of the business of USPP. We are focused on deploying capital only where we believe it can improve the durability, cash generation, and long-term value of the business. We are reaffirming our full year 2026 adjusted EBITDA guidance of $245 million to $265 million. Given the current operating environment, we are increasing our outlook for full year retail fuel margin to range between 45.5 to 47.5 cents per gallon, with higher margins expected to offset lower retail fuel volumes. Reaffirming guidance in this environment reflects our confidence in the earnings durability of the business and the controllable levers we're executing across retail-operated stores and APC. With that, I'll hand the call back to Arie for closing remarks.

Thank you, Galagher. We delivered a solid first off with adjusted EBITDA up 14% to last year. We maintained disciplined margin, continued to execute our transformation plan, and reaffirmed our full-year adjusted EBITDA outlook. Most importantly, the key pillars of our investment story are intact. APC is scaling as a public growth platform. Dealerization is improving the cash flow profile of the business. Loyalty is deepening customer engagement. and our balance sheet give us flexibility to pursue value creating opportunities. We're also excited about yesterday's announcement. The planned acquisition of the USPP's business, which we expect will add an annual adjusted EBITDA of approximately $30 million to APC, marks the next phase of growth for both ARCO and for APC. We believe it is a clear demonstration of the value we can create through discipline, accretive M&A as a public company. It adds scale, announced vertical integration, and reinforces why we believe APC can become an increasingly important value driver for ARCO shareholders. Our focus remain on execution, capital discipline, and the areas within our control. We believe that through a combination of operational discipline, iReturn, Grow Initiative, and our more diversified earning platform, ARCO is continuing to convert its large convenience and fuel network into a more resilient, higher cash flow business position to create meaningful long-term value for shareholders. Operator, please open the line for questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star 1 to register a question at this time. Our first question today is coming from Bobby Griffin of Raymond James. Please go ahead.

Good morning, everybody. Thanks for taking the questions and congrats on the deal announcement. I guess first for me, I wanted to understand a little bit more of the EBITDA guide. Is the deal in there? Because when I look at the second half, it implies down EBITDA year over year, but it seems like the fuel margin environment is healthy. You guys have made a little progress inside the stores, and then you have that deal as well. So I'm just trying to understand what the puts and takes are assumed in the adjusted EBITDA guide for ARCO consolidated for the rest of 2026. Sure. Go ahead.

Thanks, Bobby. This is Gallagher. I'll take that one. When we did the guide, we had plans acquisitions, but we really did not know the size or the timing of the acquisitions, which was part of the reason we had the $20 million range. So, based on the timing of close, we do expect some benefits this year, but we feel that's captured in the $20 million guidance. So, I think the fundamentals of the business are good, and we feel good about delivering that, and the timing of the close will help us for EBITDA, but it's not going to change our guide.

Okay. Galagher, what's the back half pressure then? You look at forward first half, EBITDA is up year over year, as you guys talked about, and then the back half at the midpoint implied down. What's the moving parts there?

Yeah, it's primarily uncertainty, Bobby. And we've seen fuel volatility. We've seen customer volatility. We're executing our programs. We're doing our part to drive customers into the stores, both for fuel and for merchandising and APC is delivering. We're just very uncertain now going forward. And month to month, it seems to change. So we didn't want to give too much confidence in some certain environment other than that we will deliver what we can.

Okay. Okay. Good enough. I guess also I want to ask on the fleet card segment, the down year-over-year margins, and I'm not as familiar in the weeds of this business versus traditional retail, admittedly, but what was the pressure point, especially on the third-party locations? Industry margins, it seems from peers, at least at retail, are really good in 2Q. What happened with the third-party locations being down pretty big year-over-year?

I'll take that one. So what happens in the fleet tooling with the card locks is many of our deals are Opus Plus pricing. So it's a fixed price when we sell the fuel. So in a falling environment, we end up paying more and lose margin in that situation because the price of the customer is fixed in Opus Plus, whereas our purchase price, you know, it could be days or a week before it was higher. So in a falling environment, that pressures those margins.

Okay, and then Arie, on the deal and adding on the significant amount of gallons, I thought the conversation about some of the other capabilities that are going to be brought to the ARCO enterprise as well as APC obviously were interesting. How do you think that helps back into the retail network? Is there synergy opportunities as we look at 27 and 28 from these additional gallons and capabilities of sourcing? that could offer some fuel benefits back into your retail ownership?

Well, I think the biggest one, Bobby, is economy of scale. If you think about that, this is a huge opportunity for us, not only from a gallon standpoint, also from a relationship with the major oil companies. You know, the USPP business brings 280 million gallons. We are currently selling 2 billion gallons. So as you can imagine, You know, efficiency and better cost of goods when you add another 280 million gallons, which is an extra 14% increase to the current gallons in an environment where everybody is trying to capture gallons. I believe that would be an opportunity for us.

Is there a time where your fuel contracts come up and they're up for renegotiation at a certain time? I agree with you on the economies of scale aspect, but I want to get ahead of ourselves on when that could actually play out.

Bobby, we always negotiate fuel supply contracts. This is not just about timing. Every time you grow, you go back. Remember, we have great relationships for many, many years with the fuel suppliers. That's one thing. The second thing Don't forget, we are bringing right now also some throughput opportunities for some of those major oil companies. Given that we have more than 50% available terminal capacity in this market, and we have a lot of business in this market in Great Lakes, that's just another meaningful opportunity for us to enhance basically our business. And I just want to remind you that we keep talking about retail, retail, but at the end of the day, APC and basically the retail should complement itself. At the end of the day, you know, the better capabilities you actually bring through the business that we are requiring right now that should provide, you know, additional cost of goods or better cost of goods, you know, for the overall margin across retail and across, of course, the wholesale business.

Okay. I appreciate the details. I'll jump back in the queue and turn it over to somebody else. Thank you, guys. Thank you, Bobby.

Thank you. The next question is coming from Daniel Guillermo of Capital One. Please go ahead.

Hi, everyone. Thank you for taking my questions. You've talked about the retail store investment with Fast Craves and F&B Offering. And the F&B Offering, as that's had more time to develop, can you give us a sense of any learnings that you've had there? are there certain FMV products that are performing better than others? Anything additional would be helpful.

Well, Daniel, that's a good question. And as you can imagine, you know, we started with a menu and we continue to reaffirm our menu. I'll call it, you know, day over day, month over month. I think what you see in the results when we're talking about increasing results and increasing margin to 34.7, It's clearly basically the additional food service offering that we actually add here. There is no question that food service pushed the margin with all of the additional high margin items over here. So I can point you to specific items, but I can just tell you that we, on a regular basis, we're trying to improve our menu. Don't forget right now with the customer's pressure that we see in the marketplace right now, it's not only the menu, it's also basically the value. I'll give an example. This morning, loyal members can basically purchase a chicken sandwich plus a Coca-Cola drink and wedges for $5. I don't think you have any kind of offering like this in the country today. So, I mean, the goal is not only the menu, the goal is also the value creation that we actually bring to customers, especially now when there is so much pressure out there.

Just to add on that, Arie, Daniel, we're still in a very test and learn phase as we roll out food. But one thing we're very happy with is the customer response. We've seen double digit growth and and all those stores, both for merchandising sales and in fuel gallons when we remodel. So we're very happy with that. One thing we continue to work on is the operations. As I already mentioned, make sure the menu is right, make sure our cost model supports that sales growth that we're seeing. So we will go faster. This year is really about testing and learning from the menu and right now the customer response is really strong.

Okay, awesome. Yeah, that's all really helpful. Appreciate that color. and then you had mentioned you know some retail customer wallets kind of being stretched volumes down a little bit and so just you guys are like a national brand now right lots of different states as kind of we've progressed are you seeing any kind of softness in particular areas or is it kind of a broad based yeah just slight softness yeah I think it's a broad base

It's a broad base. It's not one particular area versus the other. But, you know, I think that's, again, that's, you know, our goal or basically what we are trying to do over here, given our size, is to make sure that we're providing value to our customers. I mean, you know, I mentioned Fueling America just for your benefit and everybody's benefit, Daniel, is that Fueling America is Thank you for joining us today. you can get up to $2.50 saving basically with those offerings and you can stack that and you're talking about a $50 basically discount for purchasing fuel and those are the things that we need to do and in some areas of course where some areas that are more low income we probably see people taking more advantage in addition to that the $0.10 Tuesday for example as we mentioned since we launched that, we doubled our gallons over there. So we just need to do all of those things in order to help our consumers to go through this time that everybody's under pressure. And hopefully when price of fuel will come back to normal, I believe we're gonna see the trend coming back to normal.

Great, thank you so much. Thank you.

Thank you. The next question is coming from William Reuter of Bank of America. Please go ahead.

Good morning. I just have two. The first, there was a little bit of a deceleration of the dealerization program this quarter. I guess, is there anything that that speaks to? And can you remind us the target of where you ultimately hope to get to in terms of the number of company operated in our own stores? Sure, sure.

So there is no deceleration. You know, remember when we started, we started almost two years ago in August, 2024, when we started, we have a large group of stores that we had to dealerize. It's, you know, up until now we dealerize 471 stores. So the amount of stores that we have under letter of intent right now, purchase agreement, are in process are a much smaller amount. We're talking about 70 locations right now. So like I said, when we started with a large amount of stores, it was just a large portion of them that just turned on a quarterly basis. We're basically getting right now to a smaller amount of stores. We have, like I said, around 70 left. Some of them already closed during the queues. So it's just a matter of how many stores are out there.

We never put a target.

But like I said, I think that right now with those 70 stores, we're going to reach close to a little bit over 500 stores that we're going to dealerize.

Got it. And then the second question for me, I believe this is the first time you've repurchased the five and an eighth percent notes in the open market. I guess, you mentioned in your capital allocation and a portion of the prepared remarks that this is something you'll continue to evaluate. How are you thinking about those additional repurchases over the next couple quarters versus other uses of capital?

I'll take that one. So thank you. And good question, William. We are very return focused in our allocation of capital. There's really two uses. One is growth, which primarily is the new stores, the remodels, and the card locks. The other one is opportunistically looking at things like the bonds. And when we're able to get a discount on the bonds, it makes a lot of sense to retire those when we can. So We are working to actively manage our balance sheet to ensure that it just helps drive our growth. And we will continue to look at that. So we'll take advantage of growth opportunities and buy down bonds when we can. But we actually want to maintain enough flexibility to keep our strategy executed.

I would like just to jump in, William. And as Galagher mentioned, we are very, very opportunistic on one end. On the other hand, you know, as we basically bought those bonds, we were able to basically to receive an increase in our line of credit from PNC. We just increased that, you know, a few days ago. So we just want to make sure that on one end we maintain liquidity, but on the other end we continue to be opportunistic when it comes to our, basically to our capital and to the return on investment on the things that we're doing over here.

Got it. I guess maybe it's just one quick follow-up on that. Does it make sense for there to be high-yield bonds in your capital structure going forward, or do you feel like using your line of credit is kind of the way that the company will finance itself in the future?

Listen, when we raised the bonds five years ago, interest rate was close to zero. We raised the bonds at 5.18%, and if you think about it today, basically you can get those rates today. So I think it's very attractive rate and we like it. So, you know, it's part of the capital structure. It's been part of the capital structure for the past five years. And, you know, we actually think that this is, you know, this is just something that, you know, very attractive for us from basically from a pricing standpoint.

Got it. Okay. I'll pass to others. Thank you. Thank you.

Thank you. The next question is coming from Karu Martinson of Jefferies. Please go ahead.

Good morning. When you talk about June retail demand softening, as gas prices have come down, have you seen that rebound? And kind of how is the consumer handling the kind of the up and down that we've been seeing on gas prices?

Sure. So, you know, this is a very, very volatile year. Very, very volatile year. You know, we saw – I'm going back to January just to remind everybody – January was a very, very good month from an inside sales standpoint in gallons. Then everybody got hit with the weather during February, and then the war started, and we start to see some pressure probably in April going into May. June was probably the softened month since everything started, but we start to see some bounce back in July, okay? Who knows, you know, where price of fuel is going, you know, next week. But at least as we see price of fuel easing a little bit at the end of basically the quarter, we start to see some relief, you know, at the beginning or at the month of July so far. But again, it's too early to tell who knows where price of fuel will be tomorrow. You know, the one thing I can tell you, when price of fuel goes above $4, the consumer gets more pressure. and that's why Fueling America and all of those promo with Tencent Tuesday, all of those things are so important, you know, basically, you know, for our customers and for us. And you see it, you see it through the margin. I mean, we lost only 0.9% on, you know, sales excluding cigarettes, but we were able to actually capture margin and increase margin by 110 basis points, which explained to you that the consumers are coming more frequently to buy gas. They're coming inside the stores. Our loyal members taking advantage of those promotions. And at the end of the day, if you think about it, I mean, we actually finish, you know, our gross margin, basically our gross profit on inside sales, you know, is actually flat.

Okay. And then looking at the U.S. Petroleum Partners, just not being familiar as much with the fuel supply and distribution platforms that are out there, I mean, are there other platforms Platforms of this scale that you could be looking at? What are the opportunities in that? Or do you feel that you have the scale now necessary?

Sure, sure. So first of all, it's a very good question. And I know I say a lot over the call, but I would like maybe to reiterate something and make it very, very clear. I'm very, very excited about this opportunity. This is a very, very important opportunity for APC. That's the first large deal that we're doing after IPO. We've been telling the market about that. And remember, APC become a very, very, very important component of basically of ARCO. So maybe I can just walk you through and walk everybody through maybe the biggest highlight of this deal of US2P. I mean, this deal is, you know, highly complementary to our business model. I mean, not only that we're adding over here fee-based and fixed margin earning, you know, earning to our profile over here, I mean, this business have very low working capital requirement. This business, you know, basically, you know, add additional 280 million gallons to basically to the ARCO APC business. The business have more than 50% available terminal capacity. which is very, very meaningful given our relationship with the major oil companies. If you think about that, when we buy fuel, we buy fuel and we pull the fuel from different terminals, so that's become an opportunity for us to actually bring our APC volumes through our own terminal right now. It's also going to expand APC's participation across the fuel value chain. and it's going to provide, you know, not only basically margin expansion, it's also going to provide some logistic and storage opportunities for the overall, you know, business that we have out here. So again, the bottom line, the bottom line from all of those things that I said and I said a lot is that this deal create a huge share of order actually value over here. It's very creative. to adjust the DBDA. As I mentioned, you know, we're expecting $30 million on annual adjusted DBDA increase, and that's going to help our discretionary cash flow. It's going to support our dividend capacity and longer, basically, shareholder return. It's going to maintain the balance sheet very, very flexible, and as I mentioned earlier, After this deal is set and done, we're talking about being between three to three and a half times net debt to adjust the dividend. So we have plenty of availability to support additional growth. And I think the bottom line, I mean, this deal is going to enhance cash flow generation through basically additional fee-based earning streams that will support basically our shareholders. In terms of opportunities, Just to finish, in terms of opportunities, like I said, this is only the beginning. We have over $700 million of liquidity. We are using $205 million of this liquidity right now in order to increase EBITDA by almost 20%. And that's going to be a big driver for us. And there are plenty of opportunities out there.

Thank you very much. Appreciate it. Thank you.

Thank you. Our final question today is coming from Ian Sofrino of Oppenheimer. Please go ahead.

Hi, Grace. Thank you very much, and I appreciate you guys taking my questions. And I know you talked about kind of the consumer environment and what you're doing as it relates to the consumer environment, but what does the competitive landscape look like in this environment? I know you mentioned some of the initiatives you're taking to attract customers, but what are you also kind of doing as far as maybe countering what some of the competitors are doing, or maybe just kind of talk about the competitive environment in general? Thanks.

Sure. So as you know, Ian, Office reported, I believe last quarter, minus 5.8% or 5.5%, but it's in the high fives. and everybody is actually feeling the pressure. You know, this is a pressure across the country when it's come to fuel and everybody is basically looking for ways to basically to get gallons. Everybody's struggling, everybody's trying to get gallons even though gallons are done dramatically. Fueling America, like I said, I think it's the only promotion in the country and again, and I'm very certain about that. I don't believe any competitor is providing $2.50 off with 70 different offerings inside the store. Everybody is trying, you know, you asked me about the competitors, everybody is trying to come up with, you know, we came up with Tencent Tuesday, some other competitors coming up with... you know 10 cents maybe Monday or Tuesday or Wednesday or whatever but I think that none of them actually have such a big offering when it's come to basically to fuel and then again we're just going to continue to tweak it we're going to continue to be competitive we're going to come up with continue to come up with food offering and in a special value meal to basically to ease our consumers everybody is trying to do that I just don't believe anyone in the country is providing up to $2.50 off and up to 20 gallons, which is equal to $50. I don't believe anyone is doing that.

Okay, thanks. And then, you know, as far as APC, how are you just looking at that in general? You know, I know you have still a very large stake. Is this something that you think you'll continue to keep at these levels? Is it something that you might use as a source of, How do we kind of think about that holding there? Thanks.

Yeah, so it's a good question. So as Galagher mentioned earlier, you know, the company is very liquid. If you're looking on ARCO on a consolidated level, we're talking about a billion dollar in liquidity. The cost of capital at APC is very, very attractive. Cost of capital today is around 6.75%. So Our goal is going to continue to basically pursue acquisition, very, very similar to this complementary acquisition that we just announced yesterday, that I'm very excited about that. If you think about it, we are increasing, we're expecting to increase the EBITDA of APC by around 20%. We are going to increase gallons by approximately 14%. So as long as we can continue to grow and pursue attractive opportunities, with our very attractive cost of capital, we're going to continue to do so. There is really no reason for us to issue equity or to sell equity at that level and make sure that our current shareholders at APC and at ARCO will enjoy the benefit of what we created and are going to create over here.

All right, great. Thank you very much. Appreciate you taking my questions. Thank you. Thanks, Ian.

Thank you. At this time, I'd like to turn the floor back over to Mr. Kotler for closing comments.

Thank you very much, Donna, and thank you again for joining us today. We hope you enjoy your summer, and we look forward to update you on our progress next quarter. Have a great day, everybody, and a great weekend.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.