Greetings, and welcome to Sunoco LP's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Grischow, Senior Vice President of Finance and Investor Relations. 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. Today's call will contain forward-looking statements that include expectations and assumptions regarding the partnership's future operations and financial performance. 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. The third quarter brought a continuation of Sunoco's strong financial performance throughout 2023. The partnership generated adjusted EBITDA of $257 million compared to $276 million a year ago. Fuel volumes for the quarter were 2.1 billion gallons, up 7% from the third quarter of last year. Fuel margin on all gallons sold was $0.13 per gallon compared to $0.139 per gallon a year ago. Total third quarter operating expenses were $141 million, an increase of $10 million from the same period last year. This year-over-year increase was attributable to the Peerless and Zenith acquisitions. During the third quarter, we spent $31 million of growth capital and $14 million in maintenance capital. Third quarter distributable cash flow as adjusted was $181 million compared to $196 million in the third quarter of 2022, yielding a current quarter coverage ratio of 2x and a trailing 12-month coverage ratio of 1.9x. On October 20th, we declared an $0.842 per unit distribution consistent with last quarter. As you may recall, we increased our distribution by 2% in the first quarter of 2023, and we will determine our next distribution increase next year in the first quarter. Turning to the balance sheet. At the end of the third quarter, we had $647 million outstanding on our revolving credit facility leaving approximately $847 million of liquidity. Leverage at the end of the quarter was 3.9x. In September, we completed an offering of $500 million of 7% senior notes due 2028. We used the net proceeds from the offering to repay a portion of the outstanding borrowings on our revolving credit facility. This notes offering not only improved our liquidity position, but it also allowed us to achieve savings in interest expense given the difference between the current cost of borrowing on the revolving credit facility and the fixed rate on the new notes. Finally, as a result of our strong performance year-to-date and our outlook for the remainder of the year, we are increasing our EBITDA guidance for the full-year 2023 to be above $935 million. This represents a $20 million increase to the top end of the revised guidance range we issued in May, further demonstrating our ability to continue to grow cash flow year-after-year in any environment. The reliability and free cash flow generation of our operations allows us to remain consistent in our capital allocation strategy and focus on our three pillars. First, to maintain a secure distribution with annual growth; second, to protect our balance sheet; and third, to pursue disciplined investment in growth opportunities. We are confident that this framework will continue to deliver strong returns to our unitholders. With that, I will now turn the call over to Karl to walk through some additional thoughts on our third quarter performance.

Thanks, Scott. Good morning, everyone. We delivered another strong quarter, supported by continued strength in margins, volume growth, expense discipline, efficient operations, and accretive acquisitions. When you step back and look at our business, it continues to perform quarter-after-quarter. The fundamentals are sound. We have put ourselves in a solid financial position, and we have the strategies to take advantage of market opportunities. Our volumes this quarter were up about 7% versus the third quarter of last year. The continued growth in volume relative to prior years comes from the contribution from our capital deployed, both organic and through acquisitions, as well as demand growth in some geographies. This quarter marks the highest volume quarter in our history and the second consecutive quarter where our volumes were above the $2 billion gallon mark. When you compare this to various reports on U.S. demand, it is clear that we are outpacing the sector and picking up market share. Another sign that our growth is delivering tangible results. This is all occurring as we grow in our existing geographies and enter new markets. As we look to the end of the year, we expect that volume in the fourth quarter would see a normal seasonal decline sequentially, but our relative position in the market will remain strong. With respect to margins, the strong margin performance over the last few years continued in the third quarter as we delivered margins of $0.13 per gallon. There is no extraordinary story to share for this quarter. The continued combination of increased market volatility, higher breakeven margins, and our gross profit optimization strategies delivered strong margins even with some rising prices in the first half of the quarter. Looking forward to the fourth quarter, we expect the same fundamental factors to remain in place. However, just like with volume, our margins are often seasonally lower when compared to the third quarter. Even with some variability quarter-to-quarter, as we have said many times, when you look at our business over a full-year period, we continue to deliver strong and growing results. I want to briefly touch on the devastating wildfires experienced on the island of Maui in August. We have three sites that were impacted by the fires, and clearly, there has been some additional business impact as a result of reduced travel to the island. Though overall, it is not material to our results. More importantly, we are very grateful that all our employees are safe, though many of them experienced dramatic impacts to their homes and families. We are extremely proud of our team in Hawaii and how they have been able to pivot from worrying about the impacts on their own lives and livelihoods and find ways to help their neighbors and contribute to the community response. Thank you to all of them. Turning to expenses. Consistent discipline in managing our expenses remains one of our core strengths, and our third quarter results firmly demonstrate that as they were basically flat to the second quarter. Even with the increase in our EBITDA guidance for the full-year, we expect our expenses to be in the range that we shared in May. Moving on to maintenance and growth capital. Both of these also remain in line with our revised 2023 guidance we provided in May. If we look at our overall growth profile, we have deployed approximately $1.3 billion of growth acquisition and working capital since the beginning of 2021. Our growth strategy has been focused on adding fuel distribution in midstream assets. On the acquisition side, we've been able to identify businesses that fit into our strategy and execute on those results. We find businesses where we can add value to the fuel supply chain, grow volume, reduce supply costs, or expand margin. We optimize expenses and utilize our balance sheet and capital discipline to invest in the acquired businesses in ways that unlock value. We look at integrating our fuel distribution business with midstream assets, even where that might appear to be a step out like our Transmix or Puerto Rico acquisitions, at the core, the strategy is the same. I already talked about how we are growing our fuel volume. We are also now one of the largest refined product terminal operators in the United States and the largest Transmix operator. These represent high-quality infrastructure assets that will continue to have value for decades to come in any energy transition scenario, while also supporting our growing fuel distribution portfolio. Simply put, our acquisitions and subsequent operational results speak for themselves. Before turning the time over to Joe, I will end on this. Sunoco remains a growth company. I talk a lot about the stability of our base business, the strong market foundation, our expense discipline, and gross profit optimization. Ultimately, those are all tools that both deliver results in our current business and enable us to continue to grow. We will do that through investing in high-return organic projects and focusing on making accretive acquisitions at attractive transaction multiples, which will deliver immediate results for our stakeholders and ultimately drive continued appreciation in our unit price.

Thanks, Karl. Good morning, everyone. We delivered a very strong third quarter. Although 2023 is not quite over, I want to provide some perspective on this year as a whole. On a macro level, fuel distribution has remained highly attractive within the energy sector. The combination of higher breakeven margins and commodity volatility has supported strong earnings for select companies that can optimize gross profit and manage expenses. Obviously, this is what Sunoco does well. In addition, our growth in the terminal business has enhanced our overall portfolio, providing further stability and growth opportunities. As a result, we're on pace for another record year. As Scott mentioned, we increased our EBITDA guidance for the full-year 2023. We expect more of the same in 2024. This December, we will provide a new investor presentation, which will include our formal 2024 guidance and business outlook. I'd like to preview a few key themes. We expect to grow and have another strong year in 2024. We expect industry fundamentals to remain supportive, and we expect the continuation of our proven track record of optimizing our business in various macro environments. Regardless of one's outlook on fuel demand, inflation, recession risk, and geopolitical uncertainty, we expect our stable portfolio to deliver strong results in various environments. With our increasing cash flow, we expect to grow both organically and through acquisition, the opportunity set remains ample and attractive. And finally, we're in a position to increase our distribution again next year, all of this while maintaining strong coverage and leverage ratios. Operator, that concludes our prepared remarks. You may open the line for questions.

Thank you. At this time we'll be conducting a question-and-answer session. Our first question comes from Theresa Chen with Barclays.

Good morning. Thank you for taking my questions. I wanted to go back to the comments about Sunoco being and remaining a growth company. Karl, to your comments about gaining market share in these tumultuous volatile markets. Can you talk about if this is primarily driven by the acquisitions? Or how have you been able to organically grow market share?

Yes, thank you for the question. When we look at the factors contributing to our market share growth, you've highlighted the two main ones. The most significant change in volume this quarter compared to the same quarter last year is our acquisition of Peerless at the end of last year. Additionally, we've made investments in growth capital and working capital to expand our business. This includes signing long-term agreements with new customers and capitalizing on market demand through supply consolidation and various wholesale channels, along with increasing our branding efforts with growth capital. It's truly a mix of both factors, leaning slightly more towards acquisitions, but we cannot overlook the growth from our investments in capital.

Got it. And on the M&A landscape, can you talk about what you're seeing as far as evolution of valuation assets coming to market that you're interested in? How is that changing? And particularly to Midstream assets outside of wholesale distribution on the infrastructure side, are there opportunities where it makes sense to invest along with your parent?

Hi, Theresa, this is Joe. Assessing the M&A landscape, I would probably put it this way. I know for probably the last two or three years, I've said pretty much the same thing that the opportunities out there look robust. Looking forward, probably to this year and to next year, I would expect it to be exactly the same or maybe even better. So the situation that we're in right now is I think people like Sunoco with a strong balance sheet, we bring synergies to the table. I think we're very well situated whenever opportunities come up. And trying to separate out between fuel distribution and midstream. We like both sectors. And some of the acquisitions we've done actually is not one or the other, it's actually both. So we're equally interested in both. I think if there's an opportunity that pops up, Sunoco alone or with Energy Transfer, we're in a really good position to take advantage of that. And when the right opportunity comes up, we'll take advantage of it.

Thank you.

Our next question comes from Spiro Dounis with Citi. Please proceed with your questions.

Thanks, operator. Good morning, team. Joe, I want to come back to your comment around the distribution increase. You sound pretty constructive once again as we head into next year. And so just wondering if you could remind us some of the factors that you and the Board will be looking at when you determine what the right size of that distribution increase could be?

Hey Spiro, this is Scott. I'll address that question and Joe may add to it if needed. There are three main factors we focus on when considering distribution and future increases. First, we want to adhere to our capital allocation strategy to ensure the reliability of the distribution. Second, we aim to protect our balance sheet and maintain our long-term leverage target. Third, we need to remain positioned to grow the company. These are the key considerations. Additionally, we want to keep exploring growth opportunities for the distribution, ensuring that each year we can assess potential increases. As Joe mentioned, with our announcement in 2024, we'll be discussing another distribution increase. I can confirm that you should expect something at or above the 2% increase we announced earlier this year.

Helpful, thanks for that, Scott. Second question, maybe just on Peerless, just curious if you guys can update us on any potential opportunities coming out of that asset. I think you've owned it for almost a year now, and it sounds like you're pretty excited about what you'd be able to sort of string out of there under your new ownership. So one, any update there? And as we think about the size and magnitude, whether it be CapEx or EBITDA contribution, how should we be thinking about that?

Yes, this is Karl. When we acquired that asset, its EBITDA was approximately in the range of 10 to low teens. We have already managed to increase that by utilizing working capital, optimizing our supply chain, and investing some capital. We've also launched the Sunoco brand on the island, and we're pleased with the results we've achieved, thanks to the team's efforts in aligning with our strategy and balance sheet. From a company-wide perspective, even doubling that business isn't significantly impactful, but it illustrates our approach to sustained growth as we explore new regions. Our goal is not just to settle with an acquisition; rather, we intend to use it as a stepping stone for further expansion. While I can't share a specific growth plan that will dramatically alter our presence in the Caribbean, we definitely aim to keep growing and exploring opportunities, whether through acquisitions or ongoing capital investments.

Got it. Helpful color guys. Thanks for the time.

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

Hi, good morning. Thanks for taking my questions. So my first question is you started the year with a $0.12 view on fuel margin. and you're tracking much closer to $0.13 now and maybe a little bit ticking down in 4Q. But your commentary at the time when you put out the guidance was understandably about the relationship between margin and volume. If you were higher on margin, you'd probably be lower on volume. And clearly, you're a good amount higher on both. So my question is just high level. What do you think has led to the better-than-expected environment in margin? And how much of it do you think is sustainable such that maybe we should expect sort of closer to a $0.13 level going forward, for example?

Yes, John, thank you for your question. It's certainly something we consider and is worth emphasizing regarding our results. Reflecting on last year, when we established our guidance, we linked volume and margins together, focusing on gross profit. We believed that particular segment represented the optimal part of the curve. Transitioning to our current situation, I still see that connection holding true. However, if we delve deeper, it supports a point Joe raised in his remarks about certain companies leveraging specific market conditions. The connection between volume and margin is indeed a market-driven factor. When volume is stagnant or declining, it leads to higher breakeven margins, and elements like inflation and supply chain issues, which have been prominent recently, further influence those margins. This trend has persisted this year — market data indicates that overall demand is flat or even slightly below last year's figures, which continues to support margins. Our size enables us to benefit from this elevated breakeven margin. Additionally, we have exceeded our original growth guidance from last year. As I mentioned previously, the question concerning our growth and market share pertains to how we attained that increase. Our heightened volume isn't merely a result of favorable market conditions; it's primarily due to our capital investments and expansion efforts, allowing us to leverage that higher breakeven margin to excel in both respects.

Great, thank you. And Karl, you answered my second question without even getting asked, so I will turn it over. Thank you.

You bet.

Our next question comes from Selman Akyol with Stifel. Please proceed with your questions.

Thank you. I wanted to follow up on Spiro's questions regarding the return of capital. I have a couple of questions. First, Scott, you mentioned some considerations on this topic. I'm curious whether you or the Board have a target or what you consider to be the appropriate coverage ratio for operating this business.

Yes. Selman, we've talked as part of our capital allocation strategy to be at or above 1.4x on the coverage ratio. So that's the general area that we're kind of targeting for the long-term and where we'd like to see the coverage and how we think about any distribution increases.

Got it. And then also within there, when you guys talk with the Board, is there consideration of any repurchases?

Buybacks have obviously been a part of a return of capital discussion. I think we see a lot of options to create unitholder value. But view distribution increases as providing flexibility to our unitholders and ensuring confidence in the future. It doesn't mean we haven't contemplated buybacks in the past. As you know, we did do one as part of the 7-Eleven transaction proceeds back in 2018. So they have entered the discussion, but we see distribution increases as providing the biggest return, and I think the most confidence in our growth ability.

Hi Selman, this is Joe. I'll add one other thing to what Scott said is also, we like our growth potential. Obviously, this is a balanced approach between secure and growing distributions and maintaining a really strong balance sheet. But just as important as the other two is that we look at the landscape and we see growth opportunities, both from acquisition and from an organic capital standpoint. And we think that we can do that at a reasonable value with significant synergies. So we think we can create value for our stakeholders in that particular area.

Got it. Let me ask this: if I review your balance sheet and go back to 2021, you consistently had cash below $100 million. Looking back further to 2015 and over the last several quarters, your cash position has been well above that, ending this quarter with $250 million. Your receivables have also increased nicely. Is there a reason you want to retain more cash? Is something changing in the business? What are your thoughts on the amount of cash on the balance sheet?

Yes, Selman, I'll take that. This is Scott. That cash balance that you saw at the end of the third quarter, and I think at the end of the second quarter was also around $240 million. Those were booked cash balances. They were not bank cash. So there is obviously a timing element there. We obviously manage cash to the lowest level possible, redeploying that towards debt pay down on our revolving credit facility and obviously reinvesting in the business and acquisitions. So that cash is not being trapped or held for the long-term. It's being put back to the balance sheet or to growth.

Okay, thank you very much.

Our final question comes from Ned Baramov with Wells Fargo. Please proceed with your question.

Hey guys, good morning. Thanks for taking the question. Given the resilience of your business and the well-documented interplay between volumes and margins, is there a thought to provide a longer-term base forecast on EBITDA and/or distribution growth as opposed to your typical one-year forward update that you provide in December?

Yes, it's Joe. That's a great question. We're planning to release a December investor presentation, where I will clarify some of the themes mentioned in the prepared remarks. Over the past five years, our business has shown improvement in our balance sheet, coverage, and EBITDA on a year-over-year basis. Every time we've provided formal guidance in December, it has indicated growth. However, this December, we aim to express our confidence in 2024 and also discuss the long-term industry fundamentals and how Sunoco can position itself to excel in those areas moving forward. If you can be a bit patient, December is approaching quickly, and we will provide thoughtful insights regarding 2024 and beyond.

That's great. Thanks for that. I'm looking forward to the update in December.

We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Scott Grischow for closing comments.

Well, thanks, everyone for joining us on the call this morning. Please feel free to reach out with any follow-up questions, and we'll talk to everyone soon. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.