ARKO Petroleum Corp. Q4 FY2025 Earnings Call

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 ARCO 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 meeting 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 for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and ARCA 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 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, how underwriters exercised their over-allotment option and purchased approximately 1.5 million additional shares. The IPO was the major milestone to our unique asset-light and cash-flow-generating business model. We applied the IPO proceeds to reduce debt and strain an already conservative balance sheet. Our IPO has provided support for our 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 distributor in North America distributing more than 2 billion gallons in the last 12 months and despite that size we have a roughly only one percent market share of fuel distribution market. The balance of the industry remains highly fragmented, providing a substantial runway for growth, and we see strategic equative 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 the diligence on this transaction we are excited about this 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 sold 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 percent prompt paid discount from our supplier partners, which increases our margin as the cost of fuel increases. Other, as it relates to our non-cost plus gallons, fleet fueling and our consignment agent locations, which represent approximately 15 percent of our Q4 gallons sold, volatility generally provide an opportunity to capture more margin. As we continue to monitor After 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 grow 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 oil sales segment, both gallons and cents per gallons, also referred to as CPG, continue to grow in 2.4, resulting in a strong quarter with an increase in fuel contribution year over year. These results show the benefit of dealerization, which is the conversion of ARCO retail sites to dealer sites in our all-sell segment. In 2025, more than 250 sites were converted from ARCO retail sites and supplied by our GPMP segment to dealer location in our all-sell 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 prospect of this business. As you are aware, we are the largest Cardlock 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 Cardlock locations 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 one to two million dollar investments to build per site. Combined with our focus on a creative M&A in the wholesale segment, we believe this new catalog location 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 31st 2026 is consistent with an annual dividend rate of two dollars 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 percent 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 Orsel M&A and building our new Cardlock 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. Suggested 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 $0.456 per gallon, up from $0.452 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. Lead 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, GPNP-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. After. 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 31, 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 Suckey with Capital One. Good afternoon everyone. I appreciate y'all

taking my question. Just first off, first and foremost, just knowing where some of you and your families live, given the situation, the region, I sincerely hope everyone on your end is healthy, safe, and otherwise doing well. But with that, maybe sort of along those lines, You know, 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. and 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.

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 rack minus, we sell at rack plus. So 85% of the contracts are actually at cost plus. And so volatility don't really mean a lot when it comes to add to the margin. When it means a lot, it's really in the prom pay discount. As you can imagine, price of fuel, since, you know, since the Iran strike start, price of fuel is approximately $1 more than it was probably at 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 percent cost plus that's across you know across the network so that's I think something that is very very positive for us when it's come to it. In addition to that on the 15 percent outside of the 85 percent 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 that. I call it the 15 percent. As you remember on the fleet business, you know, we're dealing with diesel, you know, diesel, 80 percent 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 switch gears a little bit, if I may, and just touch on sort of a dovetail on the last question. if the sort of all the volatility, uncertainty out there, what it might mean for M&A, does this 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 don't think – 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 between 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. So, again, I think it's too early. In the meantime, we have right now two acquisitions that I mentioned. We have two acquisitions. One of them is a small one with 38 million gallons that we are doing the diligent and working on already. and the second one is 350, so I think we have enough in the pipeline to start. In addition to that, you know, when we actually were on the road, as we went public, we were identified nine, you know, basically card lock location. We're already at 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.

Thank you again for taking my questions. I appreciate it.

Of course. Thank you.

Our next question is from Josh Silverstein with UBS.

Good afternoon, guys. I was hoping you could go into the 25% 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 uh good afternoon josh you mentioned 25 can you refer to the question again i'm sorry

i i think you were mentioning that you had like a like a margin enhancer opportunity or an ability to you know improve your margins um when the price of of gasoline was higher but was i understanding that correctly sure yeah yeah no that's on yeah that's on the 85 but that's on

the overall business. On the overall business, as you remember, we are basically, we are getting from our supplier vendors, we are getting 1.25 prom pay discount. So when prom 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% prom 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 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 gallon sold 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 um you know some kind a 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 pay discount. We didn't see any significant headwind 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, 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'll see a consumption decrease because of that. That's across basically the country. So at the moment, we don't see it, but I'm assuming going into the summer, if 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 prime discount probably will overpay that. Got it. Okay, that's helpful. And

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 to 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 mid to basically the digital return on them. So we have 14 already in the pipeline. You know, when we started, we had run 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 midst 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 color on that. 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.