Sunoco LP

Greetings and welcome to the SUNY COS LPs Q2 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grischow, Senior Vice President of Finance. Thank you, Scott.

You may begin.

Thank you, and good morning, everyone.

On the call with me this morning are Joe Kim, SNOCO LP's President and Chief Executive Officer, Carl Fales, 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 partnerships 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 reconciliation of each financial measure. Sunoco LP delivered record results for a second quarter that demonstrates the earnings power of our business. The partnership generated adjusted EBITDA of $250 million compared to $214 million a year ago, an increase of 17%. Fuel volumes for the quarter were 2.1 billion gallons, up 5% from the second quarter last year. The margin for all gallons sold was 12.7 cents per gallon compared to 12.3 cents per gallon a year ago. Total second quarter operating expenses were $137 million, an increase of $9 million from the same period last year. This year-over-year increase was attributable to the peerless and Zenith acquisitions. During the second quarter, we spent $35 million of growth capital and $15 million in maintenance capital. Second quarter distributable cash flow as adjusted was $175 million compared to $159 million in the second quarter of 2022, yielding a current quarter and trailing 12-month coverage ratio of 1.9 times. On July 25th, we declared an 84.2 cent per unit distribution consistent with last quarter. As you may recall, we increased our distribution by 2% last quarter and expect to evaluate future distribution increases annually in the first quarter. Turning to the balance sheet, at the end of the second quarter, we had $990 million outstanding on our revolving credit facility, leaving approximately $500 million of liquidity. Leverage at the end of the quarter was 3.6 times, unchanged from last quarter. Our results year-to-date support the strength of our business model and our firm belief that Sunoco LP offers a very compelling investment opportunity. Our consistent results over the past few years throughout a variety of operating environments demonstrate our financial stability. This performance has allowed us to both strengthen our balance sheet and maintain strong distribution coverage, underpinning a sustainable and growing distribution to our unit holders. Finally, we see a long runway of high-quality investment opportunities that will enhance our existing operations and generate attractive returns for our unit holders. With that, I will now turn the call over to Carl to walk through some additional thoughts on our second quarter performance and recent growth initiatives.

Thanks, Scott. Good morning, everyone. We delivered another strong quarter, demonstrating that our formula of profitably investing capital, gross profit optimization, consistent expense discipline, and solid operations across our business continues to deliver results. Volumes were up about 5% in the second quarter versus the second quarter of last year. If you take a step back and think about our volumes, there are a few points worth making. This quarter was the first quarter since the fourth quarter of 2019 where our volumes were above the 2 billion gallon mark for a quarter. One of the big contributors to that growth was our capital investments that we've made. both organic and through acquisitions. In addition, we have also seen some data points in the second quarter that are encouraging on gasoline demand for the country as a whole and inside our network as well. It definitely helps that retail gasoline prices were more than a dollar per gallon cheaper this quarter versus last year. We have capitalized on these factors and grown market share while maintaining strong fuel margins. With respect to margins, The margin performance of the last few years continued in the second quarter as we delivered margins of 12.7 cents per gallon. While the price of fuel fell slightly during the quarter, we continue to benefit from higher industry breakeven margins as well as continued volatility in the fuel markets. Once you layer in our margin optimization strategies and growing volumes, our gross profit performance continues to be strong. And the final point to remember is that our business is resilient enough to perform in various volume and margin environments. Turning to expenses. Controlling expenses remains one of our core strengths, and we continued to demonstrate this in the second quarter as our year-over-year expense increases were almost entirely attributable to our business growth and recent acquisitions. I also want to provide an update on our Zenith terminals acquisition. We closed on the 16 terminals from Zenith Energy on May 1st. and now have a few months of operations under our belt. Our midstream team has done a great job of quickly integrating these assets into our portfolio, including building relationships with new customers and welcoming new employees to our team. Overall, integration is proceeding as planned, and we expect to deliver on our expectations with the addition of these terminals to our asset base. By now, our track record should speak for itself on our ability to appropriately value acquisitions deliver synergies, and successfully integrate into our existing network. Finally, a comment on capital. We continue to efficiently spend maintenance capital on our assets as well as reinvest increasing amounts of growth capital back into the business. The end result is accretive growth from these investments, which leads to increased distributable cash flow, which we can then reinvest while preserving a strong balance sheet. Both maintenance and growth capital remain in line with our revised 2023 guidance we provided in May. Before turning the time over to Joe, I will wrap up by stating that we will continue to execute on delivering results for our stakeholders through our proven strategy of gross profit optimization, tight expense control, solid and efficient operations, and growing our business. Joe?

Thanks, Carl. Good morning, everyone. We delivered a record second quarter Scott and Carl have discussed the key details. However, there are a few items that deserve some additional commentary. First, our strong year-to-date results have been driven by a holistic combination of the following key drivers. Volume growth, strong margins, disciplined expense management, and a growth program that is delivering expected returns. Second, given our performance in the first half of this year and the continued strength of our business model, we're well positioned for another strong year. Thus, we expect to be on the high end of our EBITDA guidance with the potential to surpass it. And finally, we remain in a position of strength to further build on our three capital allocation priorities, providing surety and growth of our distributions, maintaining a strong balance sheet, and capitalizing on growth opportunities. Bottom line, our business model continues to demonstrate resiliency and deliver on growth, and we expect this to continue. Operator, that concludes our prepared remarks. You may open the line for questions.

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 please while we poll for questions. Thank you. Our first question comes from Robert Mosca with Mizuho Securities. Please proceed with your question.

Hi. Good morning, everyone. So in your 23 outlook, you outlined $0.12 per gallon as kind of your base case for 23 on margins. And I know that might be more of a floor in the current year, but would you characterize your outperformance this year as a function of just lower volumes, or do you think this might be – you might be reaching some new sort of equilibrium margin just based on your performance year to date?

Yeah, this is Carl. If you look at our margins and we talked about our guidance at the end of last year, in the past, we'd given a guidance range on both volume and margin. And in December, we really gave 7.8 billion gallons and 12 cents. We thought that represented the fat part of the curve in terms of what was possible. Clearly, in the first half year, we've trended above both those numbers on both volume and on margin. If you look at the margin piece, I mentioned in my prepared remarks the big contributors to that. And if you break that down, you have higher break-even margins due to the overall inflationary environment. You look at the volatility in the fuel markets. And then the other factor that can impact margin is the overall movement of prices. And those first two factors, We don't see changing, and as we look into the near future, again, my crystal ball is not perfect, but I don't see anything that would change the path of those factors. Clearly, you look at the movement of markets, we had a little bit of a tailwind in the second quarter with prices falling. The beginning of the third quarter, you've had kind of the opposite effect with prices rising. That can impact margins as we've seen in the past, but the other two factors we think will carry forward into the end of this year and even into next year.

Great. That's helpful, Culler. And then for my follow-up, wondering if you could provide an update, and I know you touched on it in your prepared remarks, but just how the Zenith integration is coming along and maybe your overarching view on the market for midstream assets as an acquirer since transaction multiples seem to come down a little bit this year?

Yeah, I'd be happy to talk about Zenith. And one of the points I tried to touch on in my earlier remarks really gets to the point of properly valuing acquisitions, getting the deals done and closed, and then integrating them and delivering on on the financials, that's really just become a core competency of what the team does. And so Zenith is just another example of that. There's nothing, you know, outstanding to the upside or the downside of Zenith. It's gone well and delivering. But that can be true of the other acquisitions we've done, Peerless and Gladio and New Star and then others going backwards. So I'll let Joe talk about the market.

Hey, Robert. This is Joe. You know, I probably sound like a broken record, but the M&A environment for us in the field distribution and the refined product market, it looks the same as it looked two years ago, last year, and looks the same right now. It's definitely, you know, I would say a buyer's market. And especially with companies like Sunoco, that brings a history of delivering on synergies. So, you know, when the right opportunities come up, I think we're in a great position to capitalize on it.

Great. Appreciate the time, everyone. Thank you.

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

Thank you. Just kind of going back to the margin performance, and you talked about a couple of the drivers that you expect to see going forward. So, you know, my question directly is, Should we be expecting that to continue up higher and, you know, eventually get into the 13 cent plus range, 14 cent plus range as you look out over the next several years?

Yes, Selman. Again, I don't know that we're as confident in terms of what the absolute numbers are going to be. I think it's fair to say that of those factors, they'll probably stay steady or increase over time. And then you'll have some quarter to quarter variability that relates to the movement of prices. So that's probably a fair assumption.

Okay. All right. Thank you very much.

Thank you. Our next question comes from Ned Barimov with Wells Fargo. Please proceed with your question.

Hey, good morning. Thanks for taking the questions. Good to see quarterly volumes above the 2 billion gallon mark again. Can you maybe just talk about volume trends in the first month of the third quarter?

Yeah, Ned, we agree. We think we're very happy with our volume performance and kind of crossing that 2 billion threshold was a big deal to us. I think really, if you think about our volumes, there are three factors that contributed in the second quarter and I think continue to contribute in the third quarter. First is acquisitions. On a year-over-year basis, you have really the peerless volumes coming in that were included in the second quarter this year and weren't included in the second quarter last year. There's also growth capital that we've spent. signing up new customers or renewing new customers or investing in our assets, the real estate that we own or control. But then the third factor, probably the smallest, but I also don't want to underweight it in that there have been promising signs of consumer demand. If you look at the industry benchmarks, Even the EIA data on a weekly basis might not be quite as reliable, but when you go back and look at the monthlies or there's opus reports or other sources of data, back in the first quarter, if you did a year-over-year comparison, volumes this year were still under volumes last year in the first quarter. That crossed over sometime in April, at least on the gasoline side. And so since April, we've seen volumes this year beat volumes last year, both from a countrywide, industry-wide standpoint, and also in our network. And then there's some even promising signs where maybe some of the maintenance capital or other investments that we've made in our assets where our volumes are actually performing a little better than some of the industry benchmarks. So I think we're happy with volume performance in all those areas.

That's great. Thank you. And maybe any update on additional growth opportunities around the Puerto Rico acquisition?

Yeah, I think I'd build off some of my comments, I think, last quarter, Ned. Again, in the overall portfolio of our company, that's a relatively small piece of our income, but it does represent that the kind of the strategy and the business model that we've put together in mainly the domestic U.S. works in other geographies, where this combination of midstream assets and fuel distribution, an intense focus on expenses, and spending capital intelligently and efficiently provides growth. So we've The team there had already been doing a good job for many years. I think we've brought more capital to bear and a little more process and scale. And so, again, nothing there is going to be material from the overall company performance, but from that asset, it's performing as we expected, and there are additional growth opportunities in neighboring islands and other parts of the Caribbean.

Great. Thank you. That's all I had. Thank you.

As a reminder, please press star 1 to ask a question at this time. Our next question comes from John Royal with JP Morgan. Please proceed with your question.

Hi, good morning. Thanks for taking my question. So we've seen volumes looking like they're recovering nicely, but we don't have all the visibility on the X acquisition side, let alone on the 7-11 side. So to the extent you're willing to disclose, my question is, are we out of the period of makeup payments for 7-11? Should we expect next March that there won't be a makeup payment, or is maybe it's a better expectation to just think about a smaller one year over year?

Yeah, as it directly relates to 7-11, I won't give too much detail on their volumes. I'll leave it to them. I think just given the pattern of where we are and where we've been the last few years, I think probably the idea of a slightly smaller makeup payment is where I'd probably put my money right now versus going the opposite way. As far as our overall volume performance, I think the only additional comment I'd make that I think applies maybe to all of our customers is it's really about the overall gross profit performance. We're in a good environment now where we've been able to deliver on both volume and margin. But I think, you know, my comments earlier is at least from our business model, regardless of what 7-Eleven volumes have with the take or pay or regardless of the path of volumes or margins going forward, you know, our business model will deliver.

Great. Thank you. And then my next one's on the guidance, and I don't want to read too much into anything, and maybe I am. But clearly, as you mentioned, you're tracking well ahead of both fuel metrics, and it would take a pretty bad environment to get either down to that point estimate. So understanding you moved up to the high end for EBITDA, but why not move the whole range up? Is there a realistic risk of hitting the low end or even hitting the midpoint for the full year?

To be honest, Joe, we give guidance on an annual basis because there's always going to be some level of quarterly variance. With that said, Last December, we gave guidance for the whole year, and the bottom line of that was we expected 2003 to be a very good year when we gave that guidance. And then, you know, you fast forward today, and I'm reiterating that Sunoco is going to have a very good year. Our practice has been whenever a material event happens, for example, last quarter we acquired Zenith, and we provided guidance update. And the situation that we're in today is that there is no material event. But our business model is performing highly effectively and delivering strong results, and we expect that to continue. So 2023 is going to be a really good year for us. Our practice is not to every quarter to provide guidance updates. Instead, the way we go about doing it is we expect to have a good year, we deliver on a good year, and whenever December comes around and and we provide guidance, you should expect us to have another good year. With all that said, you know, I was careful in my prepared remarks by saying that we expect to be on the high end of our EBITDA guidance with the ability to surpass it. So I think the takeaway from the market should be Sun's having a really good year, and we're really confident about our business on the back half of the year, and we're really confident about our business on a going forward basis.

Great. Thanks for clarifying, Joe.

No problem.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Scott for closing comments.

Well, thanks everyone for joining us on the call this morning. As always, feel free to reach out with any follow-up questions.

We look forward to talking to you soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.