ARKO Petroleum Corp. Q1 FY2026 earnings call

• Overall Q1 2026 Performance

  • Delivered an 18% year-over-year increase in adjusted EBITDA to $36.4 million, compared to $30.9 million in Q1 2025, with net income rising to $8.1 million from $4.5 million in the prior year period.
  • Approximately 85% of distributed gallons have a stable cost-plus margin profile, and the company captures negotiated prompt pay discounts on higher-cost fuel that further boost margins. The team maintained pricing discipline for the 15% of non-cost-plus gallons during fuel cost and Middle East market volatility, delivering strong results.
  • The successful February 2026 IPO capital raise allowed the company to meaningfully reduce debt, resulting in a net leverage ratio of 2.1x adjusted EBITDA as of quarter end, below the prior expectation of below 2.5x. Total liquidity is approximately $731 million, providing significant financial flexibility for expansion.

• Strategic Growth Initiatives

  • Wholesale segment: 41 ARCO retail sites were converted to dealer locations in Q1 2026, bringing total conversions since mid-2024 to 450. An additional 75 sites are already committed, and all planned 2026 conversions are expected to be completed by year end. Converted sites carry higher margins than remaining ARCO retail sites and generate additional rental income, acting as a sustained tailwind for the business.
  • Fleet fueling segment: The company is on track to meet its target of 20 new-to-industry locations in 2026. One location opened in Q1, 17 additional sites are already in development, and the segment benefits from low capital requirements and attractive expected returns per location. Diesel makes up approximately 80% of segment gallons, and pricing discipline during market volatility delivered strong margin expansion this quarter.
  • M&A: The IPO increased the company's market exposure, growing its pipeline of potential accretive acquisition targets in the wholesale segment. The company's strong balance sheet is a competitive advantage in the highly fragmented wholesale and fleet fuel distribution markets.

• Capital Return and Balance Sheet

  • The company paid an initial pro rata dividend of 26 cents per share in April 2026, consistent with an annual target dividend rate of $2 per share. The Q2 2026 dividend is expected to be $0.50 per share, representing a 10% to 11% dividend yield at current share prices between $18.50 and $19.50.

ARCO Petroleum Corp operates three product segments, with the following Q1 2026 performance: 1. Wholesale segment: Fuel contribution increased 14.2% year-over-year to $22.9 million (compared to $20 million in Q1 2025). Wholesale gallons distributed grew 2.8% to 233.9 million gallons, and fuel margin rose to 9.8 cents per gallon from 8.8 cents per gallon in the prior year. 2. Fleet fueling segment: Fuel contribution increased 9.4% year-over-year to $16.7 million (compared to $15.3 million in Q1 2025). Fleet fueling gallons decreased 3.2% to 34 million gallons from 35.1 million gallons, but margin expanded 5.7 cents per gallon to 49.3 cents per gallon, fully offsetting the volume decline. 3. GPMP segment: Fuel contribution from related party ARCO retail sites was $11 million in Q1 2026, up from $10.6 million in Q1 2025. GPMP related party gallons totaled 182.7 million gallons, down from 211.7 million gallons in the prior year, reflecting the ongoing conversion of ARCO retail sites to dealer locations in the wholesale segment plus a decline in gallons at remaining ARCO retail sites. The segment margin is fixed at 6 cents per gallon as of January 1, 2026, up from 5 cents per gallon prior to that date.

• Management maintains the full year 2026 guidance originally disclosed in March 2026, with no upward or downward revision despite strong Q1 2026 performance.
• Full year 2026 adjusted EBITDA is expected to be approximately $156 million, and full year discretionary cash flow is expected to be approximately $110 million.
• The 20 new-to-industry fleet fueling locations planned for 2026 will require capital investment in 2026, with the majority of revenue and earnings contributions from these new locations expected to be realized in 2027, in line with original plans disclosed during the IPO.

• Sustained fuel prices above $4.50 per gallon through the 2026 summer driving season could lead to a decline in total gallons sold, though management notes that any demand decline would be largely offset by higher prompt pay discounts the company receives on higher-cost fuel.
• The operating environment continues to face significant volatility in fuel costs and geopolitical uncertainty related to events in the Middle East, which creates ongoing pricing and margin management challenges.
• New fleet fueling locations require time for licensing, planning, and customer ramp-up, which delays the realization of expected returns on these investments.

Q: With rising and volatile fuel prices in Q2 2026, have you seen any pullback in customer demand or changes in customer behavior? / A: Management says the small Q1 gallon decline was driven by poor winter weather, not price volatility, and demand has improved since February. Customers are visiting fueling locations more frequently to fill up smaller quantities per trip, but this has not led to a material overall decline in gallons sold to date. If fuel prices stay at ~$4.50 per gallon through summer, a modest demand decline is possible, but it would be offset by higher prompt pay discounts.

Q: What is the timeline for opening the 20 planned 2026 fleet fueling locations, and when will they contribute earnings? / A: One location opened in Q1, 17 more are in development, and most new openings are expected to occur in Q3 and Q4 2026. Licensing and planning work takes time, so the majority of earnings contributions from these new locations will be realized in 2027, which aligns with the original plan disclosed during the IPO.

Q: How has the current volatile commodity environment changed seller expectations for acquisition targets, and what is your current M&A outlook? / A: Management says no material changes to seller expectations have occurred so far, as the volatile price environment has only lasted roughly 60 days. The company's post-IPO liquidity and public status has increased seller interest in the company, growing the M&A pipeline, and the firm remains actively pursuing accretive deals.

Q: How long does it take a new fleet fueling site to ramp up to target expected economics, and what is your long-term annual target for new site additions? / A: New locations typically take 6 to 12 months to ramp up to full expected performance, with a 9-month average timeline. The company is committed to its 2026 target of 20 new sites, and as of early May, 18 sites have already been identified for 2026. Management would be open to accelerating to 40 new sites per year longer term if the pipeline supports it, but 20 per year is the current committed target.