Operator
Greetings, welcome to Arco Petroleum Corp. Report's third 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 during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Priya Trivedi. SVP of Investor Relations. Thank you. You may begin.
Thank you. Good afternoon, and welcome to Arco Petroleum Corp's third quarter, 2026 earnings conference call and webcast. On today's call are Ari Collard, Chairman, President, and Chief Executive Officer, and Jordan Mann, Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the third quarter of 2026 are filed with the SEC, are available on our website, 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 third quarter 2026 financial information is unaudited. During this call, management will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our third 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 the current views with respect to 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, discretion and cash flow, net debt, and the ratio of net debt to adjusted EBITDA and the reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings press release or in the quarterly report on Form 10-Q for the quarter ended September 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. And now, I would like to turn the call over to Ari.
Thank you, Fria, and good afternoon, everyone. APC delivered a strong third quarter. Adjusted debita was $41 million, up 9.4% year over year, and discretionary cash flow was $32.3 million, an increase of 22%. As you recall, in early August, we signed an agreement to acquire the business of U.S. Petroleum Partners, or USPP. USPP is expected to add, scale, support our fixed-margin and fee-based earnings profile, and advance-to-grow strategy outlined at the time of our IPO. We continue to work towards closing the acquisition. Our third-quarter performance and the expected closing of the USPP acquisition reinforce the strategy we outlined at the time of our IPO. Durable cash generation, disciplined capital allocation, and multiple paths to earnings growth. We are expanding our scale, deepening our supplier relationships, increasing our vertical integration, and putting our post-IPO financial flexibility to work in a disciplined manner. Now, turning to third quarter performance. The fuel environment continued to be volatile during the quarter. Regular gasoline ended the quarter at approximately $4.31 per gallon, about $1.32 above prior year. Diesel prices reached record level, surpassing $6.50 in September. Against this backdrop, APC's business model remained resilient. That resilience is evident in fleet fueling, where approximately 80% of our volume is diesel. Our fleet fueling customers are commercial operators that rely on fuel to keep their business running. As a result, even with diesel prices at record levels, demand remained relatively stable, while fuel contribution increased approximately 5%. Across APC, Stronger fuel margins and other revenues, including rental income from dealers, more than offset lower volumes, which reflected broader market trends amid elevated fuel prices. Adjusted EBITDA increased 9.4%, and discretionary cash flow increased 22% to prior year, demonstrating the durability of our platform, the stability of our cash generation, and our team's ability to execute effectively through a volatile market environment. In our all-cell segment, operating income increased 7% to $25.8 million this quarter compared to prior year, as lower gallons were more than offset by a stronger blended cents per gallon margin, which increased 11.4% year-over-year, supported in part by higher prom-pay discount in the elevated fuel price environment. Split fueling operating income was $13.3 million, up 8.9% year-over-year, driven by higher fuel margins. We are also advancing Cardlock growth. We added seven new Cardlock locations this year and currently have 16 sites in various stages of planning and development. We target mid-to-high teens returns with low capital investment per site and continue to develop the pipeline. The Board declared a quarterly dividend of $0.50 per share, consistent with our $2 per share annualized target for 2026, shared at the time of our IPO. APC's durable cash generation supports our dividend capacity, which will be ported-strength by the expected addition of USPP's approximately $30 million of annualized adjusted EBITDA. Before turning it to Jordan, I wanted to review why we believe the USPP business is such a strong strategic and financial feat for APC. USPP is a vertically integrated fuel supply and distribution platform serving customers throughout the Great Lakes region. Upon closing, the business is expected to add approximately 280 million gallons of annual fuel volumes across approximately 400 dealer locations, increases APC's trailing 12-month volume as of September 30, 2026 by approximately 14 percent. We expect UFPP to contribute approximately $30 million of annualized adjusted EBITDA with strong conversion to discretionary cash flow, creating a meaningful step-up in APC's scale and earnings power. The acquisition will also add assets including terminals in Novi, Michigan and Toledo, Ohio, plus a transportation fleet that delivers more than 80% of its distributed volume. These assets will expand our position across the fuel value chain and increase our relevance with major fuel suppliers. We continue to work towards the closing of the transaction, which is expected to occur during the fourth quarter of fiscal year 2026. In summary, for the third quarter, APC delivered year-over-year earnings and cash flow growth, maintained capital allocation discipline, and entered into an asset purchase agreement to acquire the business of USPP that is expected to meaningfully increase our scale and earnings power. Based on our year-to-date performance, our outlook for the balance of the year, and the expected closing of the USPP acquisition, we are raising our full year 2026 adjusted EBITDA guidance to a range of $156 million to $157 million. We are executing the APC Investment Thesis, Resilience Earnings, Durable Cash Generation Discipline, Grow, and Attractive Capital Return. With that, I will turn the call over to Jordan to review our third quarter financial results, balance sheet, and updated outlook in greater detail.
Thank you, Ari. Good afternoon. We delivered strong third-quarter results and continue to work towards the closing of the USPP acquisition, which we expect will meaningfully increase APC's scale. We also raised our full-year outlook and remain focused on disciplined, accretive growth, and shareholder returns. Turning to our third-quarter results. Net income was $13.3 million for the quarter, compared with $10.1 million for the prior year period, reflecting continued operating discipline and the earnings power of our platform. Adjusted EBITDA was $41 million for the quarter, up approximately 9.4%, compared to $37.4 million in the prior year. Discretionary cash flow was $32.3 million, growing approximately 22%, reflecting strong cash conversion. Turning to our wholesale segment, wholesale fuel contribution increased 6.6% to $26.7 million from $25.1 million for the prior year period, despite a 4.3% decline in gallons. The volume decline reflected broader market trends as elevated fuel prices weighed on demand and was partially offset by incremental gallons from dealer locations added through ArcoCorp's ongoing dealerization program. Blended fuel margin increased to 10.7 cents per gallon from 9.6 cents per gallon in the prior year period, primarily reflecting the benefit of the higher prompt pay discount associated with higher fuel costs. Moving to our fleet fueling segment. Fleet fueling fuel contribution increased by 5.2% to $17.6 million for the quarter from $16.7 million last year. Fleet fueling gallons were $36.2 million versus $36.6 million last year. Blended fuel margin increased approximately 6.2%, or 2.8 cents per gallon, to 48.6 cents compared to the prior year period, more than offsetting modest volume declines. Moving to our GPMP segment, GPMP fuel contribution from related party locations, meaning ARCO retail sites, was $11.5 million versus $11.2 million last year. Discretionary cash flow for the quarter was $32.3 million, an increase of 22% to the prior year period. Net cash provided by operating activities for the quarter was approximately $21.6 million, compared to $25 million in the prior year period. Looking at the balance sheet, Our financial position remains a strategic advantage. As of September 30th, availability under our lines of credit was approximately $705 million. Total debt net was $188.9 million, and net debt was $338.4 million. The ratio of net debt to adjusted EBITDA was 2.2 times, and total debt net to net income was 4.5 times. As a reminder, at the end of the quarter, our average borrowing rate under the Capital One line of credit was approximately 6%. Based on borrowings outstanding at September 30, 2026, the recent 25 basis point increase in interest rates would have a modest impact on annual interest expense. Turning to our 2026 outlook. We believe that our year-to-date results reinforce the stability, consistency, and cash flow generation of our platform. We are raising our full-year adjusted EBITDA guidance. We now expect full-year adjusted EBITDA to be in the range of $156 million to $157 million. We remain confident in the stability of our platform, its cash flow generation profile, and our ability to deliver consistent earnings growth and attractive long-term shareholder returns. With that, I'll hand the call back to the operator to begin Q&A.
Operator
Thank you. We will 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 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 while we poll for questions. Your first question comes from Josh Silverstein with UBS. Please proceed with your question.
Yeah, thanks. Good afternoon, guys. Good to see the cash flow uplift here. I was curious on a couple things, maybe just first on how you're thinking about maybe a normalized margin environment as we go into next year. You know, as we do have, you know, the potential for gasoline prices to come down, do you expect that to be offset by gallons sold? I'm just trying to get a sense as to, you know, maybe what's kind of, you know, temporary in terms of some of the margin profile versus what's kind of, you know, can stick around. And obviously, as you're going and doing more of these, you know, dealerization, you know, conversions and everything, that's certainly helping you guys, too.
Sure. Good afternoon, Josh, and thank you for the questions. Well, as I said before, we saw an increase in margin given that gallons were down, given the price of fuel. I have to be honest, if you don't have a crystal ball for next year, I can only follow what happened over the past few days, and yes, price of fuel are down in the last few days, but at the end of the day, we believe that this is really elastic. I mean, if price of fuel will drop, we believe that gallons will increase. And what you're going to see, you're going to see an offset between prom pay discount to an increase in basically in consumption of gallons. I really believe at the end of the day that that's going to be one against each other offset over here. And again, this is something that we've been seeing all along, you know, over the past seven months, you know, as price of fuel increase. People, you know, seem to be driving less. And because of that, we actually increased the margin. So that's basically, I believe, what we're going to see going into next year. I think this is a very, very stable model at the end of the day. We're talking about with the price increase of almost 40%, 50%, you're talking about an 11% increase in fuel margin. And at the end of the day, we're talking about only a penny. So I hope I answer your question.
Yeah, and then maybe just a question on, you know, discretionary versus, you know, free cash flow for you guys. It seems like, you know, because of rising fuel expenses, there's been some headwinds on the working capital side. Do you expect that to normalize as well as prices come down, or will that continue to be a bit of a headwind, you know, as long as we're at the same prices?
No, I think we're going to actually have, you know, a decrease in working capital because of that, you know, at the end of the day, as price of fuel rise by, you know, 40%, you know, since 40, 50% since February, especially on diesel, if you think about diesel. I mean, diesel went from mid-3s to mid-6s. So there is no question about that, that when price of fuel will decrease, if price of fuel decrease, I'm not so confident about that, but if price of fuel will decrease, I think that's going to ease the working capital as well, and, you know, we're going to see more cash on balance sheet because of that.
All right. Thank you, Josh.
Operator
Thank you. Your next question comes from Wade Suckey with Capital One. Please proceed with your question.
Good afternoon, everyone. Appreciate you all taking my questions. I think I asked this probably last quarter, maybe even the quarter before, so we'll just make it a tradition here on M&A. I wonder if you could kind of just speak to sort of what you're seeing out there, pipeline bid ad spreads, any motivational changes from sellers, any color there that you could give would be great. Thank you.
Sure, sure, Wade, and good to have you over here. Thank you for the question. I don't think a lot changes. I mean, this is, you know, the M&A continue to be active. You know, I don't think there is any different from basically from the prior quarter. There is no question that with price of fuel increases, you know, many operators, small operators are in a need for additional working capital just because price of fuel increase. Some of them may not take the prompt pay discount or just, you know, basically will not capture the prompt pay discount because of that. But again, I think that the M&A market continue to be, you know, very, very active, as we saw in the past, basically, few years. So not a lot of changes on that end.
Okay, great. Thank you. Maybe switch gears just a little bit, and we might be front-running tomorrow's ARCO call, so I apologize, but kind of similar, maybe you could speak to what you're seeing on the customer side behavior to get some good comments on both ARCO and the APC call last quarter. So anything you could speak to there would be great. Thank you.
Well, we're going to release ARCO tomorrow, but what I can tell you is that the increase in fuel prices, no question, put pressure on consumers, and that's the reason we see a decrease in, you know, basically in consumer driving. So, like I said, on the other side, the prompt pay discount, you know, increased the margin. And as you can see, the margin over here is up from prior year, you know, from basically from 9.6 cents per gallon to 10.7 cents per gallon. So, overall, consumption is down on gallons, but gross profit is basically up, you know, given the high prices over here. But again, this is just, again, this is, this is not an ARCO or APC. You know, basically, this is a market environment that, you know, this is a very broader market environment right now. Everybody's facing the same, you know, the same thing. In terms of gallons, everybody see, you know, a decrease in gallon consumption, and everybody, you know, is in a need to basically to figure out a way how to make their gross profit dollars. And like I said, that's why we're seeing, you know, an increase in profit. And this is a very dynamic market over here. So it's a it's a macro issue.
Understood. Thanks so much. Appreciate it.
Operator
Our last question comes from Gabe Maureen with Mizuho Securities. Please proceed with your question.
Hey, good afternoon, Ari and team. How are you guys doing?
I want to. Yeah, I hear you. Can I ask about capital allocation, specifically organic CapEx? It seems like you're still. Pretty confident on terms of the card lock development outlook. Can you maybe just speak to that a little bit more in the current environment? And are there any other areas organically where you may be evaluating or re-evaluating internal capital development commitments?
Sure, sure, absolutely. So in terms of the call look, as we discussed, as we basically mentioned at the time of the IPO, we're targeting, you know, 20 call looks a year. We open basically seven already this year. We have another 16 in the works. So we are, you know, in terms of, you know. So making our numbers, we're going to make our numbers over here. We already have 23 in, you know, different type of between, you know, some approvals that we're looking for and development. Nothing really changed price-wise, you know, from a cost standpoint. I know we've been talking about basically, you know, low cost to build a card lock. It's probably no more than $2 million to build a card lock. So we are in between this range and maybe even a little bit lower. So nothing changed on that end. From a capital allocation standpoint, most of our capital is actually, you know, being targeted, you know, after acquisition, as you can see over here and over the, you know, the acquisition of USPP. This is really where we're going to put our, you know, balance sheet availability to work. You know, this business, it's, you know, it's a very, very low capex business. You know, so most of the capex is really going towards basically growing the business, and as I said, on the card lock, you know, we're targeting mid to ITN return, and on those acquisitions, as you can see, those acquisitions are very accretive acquisition, you know, again, you know, versus our cost of capital.
Thanks, Ari. And then maybe I could just follow up and maybe put a finer point on the guidance range. It seems like you're expecting USPP to close sometime in 4Q. Is that potentially a material contributor in 4Q or any other puts and takes you'd guide us to kind of the rest of the year?
No, I think given our performance so far and given that, if you remember, you know, Gabe, at the time of the IPO, you know, we were looking, you know, we basically told the market that we will actually bring an acquisition in Q4 and this acquisition will deliver approximately $5 million, you know. You know, to get to the $156 million, given that, you know, I believe we are, you know, working towards closing of the USPP acquisition, and given where we are with our results for the nine months, we felt, you know, that we will be able to achieve our $156 million plus, and that's why we raise our guidance over here.
Thanks, Arik. Appreciate it.
Thank you very much, Gabe.
Operator
That concludes our Q&A. I will now hand the call back over to Ari Kotler for closing remarks.
Thank you, operator. APC is delivering on the strategy we outlined at the time of our IPO just nine months ago. In the third quarter, we generated stronger year-over-year earnings growth, We have demonstrated the resilience. of our predominantly fixed margin business model, enter into an asset purchase agreement and are working towards the closing of this highly strategic acquisition that is expected to meaningfully expand our scale and infrastructure, and we are raising our full year 2026 adjusted EBITDA guidance. We believe that USPP acquisition will further increase our earning power and cash flow profile, expand vertical integration, and create additional opportunities for operating efficiencies, margin capture, and long-term growth. We remain focused on converting earnings to cash, maintaining leverage within our target range, and allocating capital to the highest returns opportunities. That disciplined framework allow us to invest in growth, support an attractive dividend, and create sustainable long-term value for our shareholders. I want to thank our team for their hard work and the execution, and to our shareholders for their continued confidence in our strategy. Thank you all for joining us today. We look forward to updating you on our progress next quarter.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.
