Greetings and welcome to Sunoco LP's Q1 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Scott Grischow, Vice President, Investor Relations and Treasurer. Thank you. You may begin.

Thank you, and good morning everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails, Chief Operations Officer; Dylan Bramhall, Chief Financial Officer; and other members of the management team. A reminder that today's call will contain forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the Partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. Actual results could differ materially and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. I will now turn the call over to Dylan to discuss the first quarter results.

Thanks, Scott. We delivered solid first quarter results in a challenging commodity environment. For the first quarter of 2021, the partnership recorded net income of $154 million. Adjusted EBITDA was $157 million, compared to $209 million in the first quarter of 2020. Volumes of approximately 1.8 billion gallons exhibited a normal seasonal pattern, with the sequential decline of approximately 4% from the fourth quarter. Year-over-year volume declines were approximately 8%. Fuel margin was $10.03 per gallon. The 7-11 makeup payment totaled $18.5 million this year and contributed roughly a penny of the total 10.3 CPG this quarter. Karl will elaborate further on our fuel margin in his remarks. Moving on to expenses. Our total operating expenses were $100 million in the first quarter, up slightly from the $96 million in Q4 2020, an increase of approximately 4%. These expenses are down approximately 30% from $143 million in the first quarter of 2020 and are largely a reflection of our cost reduction initiatives. As the year progresses and volumes improve, we expect some incremental expense related to this additional business. First quarter distributable cash flow as adjusted was $108 million, yielding a current quarter coverage ratio of 1.25 times and a trailing 12-month coverage ratio of 1.35 times. On April 22, we declared an $82.55 per unit distribution, same as last quarter, as we continue to maintain a stable and secure distribution for our unitholders. Leverage at the end of the quarter was 4.4 times, which we expect to decline toward our 4.0 target as the year progresses. Our 2021 full-year EBITDA guidance is unchanged from what we originally provided in December 2020. For the full year 2021, we continue to expect adjusted EBITDA of between $725 million and $765 million. We expect annual fuel margins between $0.11 and $0.12 per gallon. We also reiterate our annual guidance for fuel volumes in a range of 7.25 billion to 7.75 billion gallons, total operating expenses between $440 million and $450 million and maintenance capital of $45 million. Next I want to spend a few minutes on growth capital. Our original full-year 2021 guidance was for at least $120 million of growth capital. And today, we are providing a more precise full-year guidance number of $150 million, with approximately $40 million to be spent on the announced Brownsville terminal. Let me take a step back here and go into a little more detail on the Brownsville project. Earlier today, we announced an exciting milestone for Sunoco with the construction of our first stand-alone organic terminal project in Brownsville, Texas. We have historically framed our capital allocation process from a build versus buy perspective. In this case, we were able to develop an organic project that meets all our criteria for capital investment in a very strategic area for our partnership. Karl will give you all some additional insight on the strategic importance of this project. But first, let me wrap up with how we see this project fitting within our three-pillar capital allocation framework. First, upon completion, this project is expected to be immediately accretive to distributable cash flow, supporting pillar one of maintaining a stable and secure distribution and our target coverage ratio of 1.4 times. Second, the capital for this project is coming from retained cash flow and we expect to end the year right around our target leverage ratio of 4.0 debt to EBITDA. At this leverage level, we have no need to direct additional capital to debt pay down, which will improve in this pillar number two. And so, third, with the strong returns around this project, this fits the final pillar, which is to pursue disciplined investment in our growth opportunities. Sunoco remains on solid financial footing with a strong base business and exciting growth opportunities. With that, I will now turn the call over to Karl to walk through some additional thoughts on the Brownsville terminal, fuel gross profit, and expenses.

Thanks, Dylan. Good morning, everyone. I want to start today by sharing some additional thoughts about our Brownsville project that we announced this morning. We're very excited about the opportunity and flexibility that this project gives us. The Rio Grande Valley is an important region of our business. As Dylan already talked about, we have begun construction on a terminal that will have 560,000 barrels of storage and throughput capacity of over 50,000 barrels per day. This project highlights the synergies between our fuel distribution and terminals businesses. We currently have a large fuel distribution footprint in the Valley and our new terminal will provide supply flexibility that will strengthen our existing domestic business, enable us to grow our domestic sales, and provide a platform for us to participate in the growing export fuels market into Mexico. As Dylan also mentioned, this project fits well into our capital allocation strategy. We expect our EBITDA build multiple on our $55 million project cost to be in the mid to high single digits. In addition, the project enhances the stability of our overall business and cash flows. Finally, we expect the terminal to be in operation less than 12 months from now. Next, I'll share some thoughts on our first quarter results. Dylan shared that our fuel volumes in the quarter were off about 7.5% from last year. With all the noise from COVID last year, comparing to 2020 volumes isn't as meaningful, so we plan on continuing to use 2019 as our benchmark as we go through the year. On that basis, we were down a little more than 9% from 2019 volumes, which is a little better than last quarter. We've seen even better volume performance in the beginning of the second quarter, as we're off around 7% relative to 2019 levels. As far as performance across our various geographies, we have seen general improvement throughout our entire network. A promising sign is that some of the areas linked to tourism and travel, like Florida, are doing even a bit better than our average. For the rest of the second quarter, we expect improved volume performance to continue and that the second half of the year will be better than the first. Now, turning to margins. First quarter was challenging with a continuation of what we saw over the last two months of the fourth quarter. An incredibly consistent climb in RBOB prices, with an increase of $0.75 per gallon from the beginning of the quarter to the peak in mid-March. This followed a nearly 40% per gallon increase during the last two months of the fourth quarter. The last time that RBOB prices moved over $1 a gallon in a four to five-month period was in early 2011. Last quarter, I shared that our floor margins in these types of environments will be higher in the post-COVID world due to higher breakeven margins. I cited a range of $0.095 to $0.10 per gallon being a reasonable floor, excluding one-time items. So, if we exclude the 7-11 catch-up payment, our base margins were near the bottom end of that range, which reinforces the resilience of our portfolio and the continuation of higher breakeven margins. As we look forward, I still feel confident that $0.11 to $0.12 per gallon fuel margin is appropriate for the full year 2021, as we expect more traditional volatility to return to the commodity environment. We've seen that happen since mid-March and margins have recovered off the Q1 lows. Before I turn it over to Joe, I'll just wrap up by stating that we continue to focus on what we can control, gross profit optimization, growth of our core business, and delivering on our expenses. With that, I'll turn the call over to Joe.

Thanks, Karl. Good morning, everyone. We delivered a solid first quarter. We saw our seasonally adjusted fuel volume trends continue to improve. On the margin side, we continue to have attractive margins even within a challenging commodity environment. The combination of higher industry breakeven with our ability to control costs and optimize fuel gross profit allows us to minimize the downside and also allows us to capture the upside when the commodity market supports it. Quarter after quarter, we have proven the durability of our business. Looking forward, the second quarter is off to a good start. RBOB prices continue to rise. However, with more normalized volatility as opposed to the first quarter. On the volume side, we expect fuel volume to continue to increase based on seasonality, along with an increase in economic activity. With the first quarter in the books and early readings to the second quarter, we expect to deliver on our full-year 2021 adjusted EBITDA guidance. Moving on to growth, we see attractive growth opportunities in both fuel distribution and midstream. Starting with midstream, the Brownsville terminal project is both strategically and financially attractive. The terminal is within a geography where we have a material fuel distribution network, thus creating financial synergies. It also provides us the capability to export finished products into Mexico. We expect Mexico to continue to be a major importer of finished products, and the Brownsville terminal is in a great location to capitalize. And finally and importantly, it meets our financial criteria. On the fuel distribution side, we continue to organically grow our business. We have put ourselves in a position to self-fund the vast majority of our organic growth. We’ll continue to look for acquisition opportunities in both fuel distribution and midstream. We will do this with financial discipline, protecting the security of our distribution while also protecting our balance sheet. Operator, that concludes our prepared remarks; you may open the line for questions.

At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Theresa Chen with Barclays. Please proceed with your question.

Good morning. Thank you for taking my questions. In terms of the Brownsville project, can you talk just a little bit more about the history of its development, why now? And as we think about the mid to high single-digit EBITDA multiple, what are the parameters in terms of execution risk around that? Will it be in any part underpinned by third-party commitments, for example?

Hi, Theresa. Good morning, it's Karl. We've been contemplating this project for a while and felt like now was the right time to do it. The project is really based on three pieces of our business. The first one that underpins the foundation is our current fuel distribution footprint. We already sell a lot of fuel in that market, both direct to our customers and 7-11 has a lot of volume in that market, and adding in the additional supply flexibility of having our own terminal, where we can bring product in on the water, really provides a base for that fuel distribution footprint. That is the base of the economics for the terminal. As Dylan mentioned, we looked at this from a build versus buy perspective. There are obviously other terminals in that market, and we looked at the options of maybe acquiring some of those assets versus building ourselves, and the economics were just stronger for us to go this path. As you think about growth, I think Dylan and I both mentioned, we think there are opportunities for incremental domestic sales based on our added supply flexibility. We're also excited about the opportunity to build a business going into Mexico. By our estimate, there are about 1,000 trucks a day of product crossing the border from the Rio Grande Valley into Mexico today, and we're not really participating in much of that at all. So we think that's an opportunity to work with partners as well as sell direct into that export market.

Got it. And in terms of that specific market, what is your view on Mexico's recently passed fuel permit reforms, given their effort to curtail private foreign competitors in favor of strengthening their own state-owned enterprises?

Yes, obviously, that's something we've been watching quite a bit. For us, having a US asset on the border, supported by a strong US business, is a good way for us to have that support underneath and then still go into the Mexican market. We've talked to several potential customers already, Mexican companies as well as PMI, PEMEX themselves, to try to partner with them, and we think that's the best approach as we build out our business going into Mexico.

Theresa, this is Joe. I think one other thing to add to that is, anybody who is tracking kind of the evolving Mexican regulations about privatization versus kind of going in the other direction, we took that into strong consideration. The fact that we wanted a hard asset right on the border in Brownsville gives us the opportunity whichever way the regulations in Mexico go. If the legislation goes in a direction where we can take our trucks or rail or whatever into Mexico, we can do that. If regulation goes in a direction where that becomes increasingly more difficult, then we can easily partner with PEMEX or anybody else to pick it up on the border from us. So we like that optionality.

Makes a lot of sense. Thank you. And lastly, just in terms of the rising product prices for a portion of the first quarter and recently, clearly a lot of this likely has to do with the elevated RINs cost. And can you just remind us how RINs impact your business? Are you the blender of record for most of your volumes? And in light of the Supreme Court currently reviewing PRE-case, what do you think is going to happen with the 2021 RVO?

Yes, I'll take the last part first. I don't know that I have any crystal ball that's better than other market watchers on exactly what the RVO is going to be for this year, but I will reiterate, we've said in the past that RIN prices are really baked into wholesale margins. We've seen more volatility and movement in RINs over the last six months or so than we've seen for a number of years. But as we look at our results, we still feel that whether RIN prices are $0.40 or over $1.50 like they are today, we see that not having a large impact on our overall margin.

Thank you.

Our next question comes from John Royall with JP Morgan. Please proceed with your question.

Hey, good morning. Thanks for taking my question. So, on the 7-11 makeup payment, I know you won't get into specifics on the contracts, but just high-level, if the payment were about $13 million last year and really that only had COVID hitting volume at the end of March 2020. So, now we have a full year of COVID-related volume loss translating, and it's only $18.5 million on the payment. So, I guess, I'm just trying to figure out why that number isn’t at least double what it was last year, just given the magnitude of the loss in demand being so much larger this year.

Sure, John. The way that I would think about that is that clearly 7-11 volumes were off. The 7-11 volumes that we supply to them were off, consistent with everybody's volumes being off. But I think I stated in the last few quarters that we didn't see the volume we supplied to them off as much as the rest of our customers. So I think you're comparing the $18.5 million to the little under $13 million from last year. That's what I’d read into that, is that the volume we supply to them was not off as much as maybe the rest of our business.

Okay, understood. Thank you. And then, I wanted to see how the trends are developing on the J.C. Nolan pipe, as I assume you're starting to see those volumes come back with the rebound in prices. How much of an effect did that have on the overall volume declines in either direction?

Yes, you're right. As we've seen over the last couple of months and you can track this as well. You see some of the rig count coming up; I'd call it some slow and steady increase in our diesel business out there. It's that combined with our other business out there is still off more than the average of our entire portfolio, but we have seen steady progress. I think with crude prices, where they are, and looking like they've been there for a while now, and I think most people view them staying at least where they've been for a while longer, we'd expect that steady rise to continue.

Thank you.

And with that, there are no further questions left in the queue. And I would like to turn the call back over to Mr. Scott Grischow for the closing remarks.

Thanks again for joining us on the call this morning. As always, if you have any additional questions, please feel free to reach out to me. This concludes today's call. Have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.