Scott Grischow - Senior Director, Investor Relations and Treasury Joe Kim - President and Chief Executive Officer Tom Miller - Chief Financial Officer Karl Fails - Chief Commercial Officer.

Theresa Chen - Barclays Ben Brownlow - Raymond James Patrick Wang - Robert W. Baird Barrett Blaschke - MUFG Securities Mike Gyure - Janney.

Greetings, and welcome to Sunoco’s Second quarter 2018 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Scott Grischow, Senior Director of Investor Relations and Treasury. Please go ahead..

Thank you. Before we begin our prepared remarks, I have a few of the usual items to cover, a reminder that today's call will contain forward-looking statements. These statements are based on management's beliefs, expectations and assumptions.

They may include comments regarding the company's objectives, targets, plans, strategies, costs and anticipated capital expenditures. They are subject to the risks and uncertainties that could cause the actual results to differ materially as described more fully in the company's filings with the SEC.

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 this quarter's news release for a reconciliation of each financial measure.

Please note that SUN has moved the operating results, assets and liabilities of our operations that are part of our retail divestitures into discontinued operations. As such, the results presented on today's call are based on continuing operations, unless otherwise noted.

Also a reminder that information reported on this call speaks only to the company's view as of today, August 9, 2018. The time-sensitive information may no longer be accurate at the time of any replay. You'll find information on the replay in this quarter's earnings release. Last night, we posted an updated investor presentation to our website.

Certain slides in that presentation will be referenced on today’s call. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Tom Miller, Chief Financial Officer; Karl Fails, Chief Commercial Officer and other members of the management team.

Before I turn the call over to Tom, I would like to first review some of the partnership's accomplishments and activities since the end of the first quarter. On April 1, we completed the conversion of our 207 fuel outlets located in West Texas to commission agent sites.

Later in April, as part of FTC resolution, we converted an additional 59 retail sites to the commission agent channel, 26 of which were acquired from 7-Eleven, with the remainder being former Sunoco company-operated locations. Turning to our 7-Eleven fuel supply agreement.

The 15 year take-or-pay agreement began on April 1 and the commitment included the first step of the guaranteed growth volume component of 100 million gallons. Remaining annual growth components were phased in each April with growth of 200 million gallons in April 2019 and 100 million gallons in each of 2020 and 2021.

We are pleased with the 7-Eleven supply agreement and the stable source of income the agreement provides.

That said, I do want to note that while committed volumes are an essential metrics under the supply agreement, the timing and quantity of fuel deliveries are a product of the number of factors, which include 7-Eleven fuel strategy for optimizing gross profit through pricing and volume decisions.

As a result, it is important to keep in mind that de facto guarantee under the supply agreement is one of an annual minimum dollar margin, not a volume commitment.

In the second quarter, SUN made a total of $250 million in tax payments related to the 7-Eleven sale, and we anticipate two additional payments, one payment occurring in each of the third and fourth quarters. We believe that total 2018 tax impact will be approximately $480 million.

Next, in late July, we closed on an amended and restated credit facility. The maturity date was extended at five years to July 2023. The credit facility size remains at $1.5 billion and includes an accordion feature that provides flexibility to increase the credit facility by up to $750 million, subject to additional lender commitments.

We were also able to improve our margin pricing in the new agreement, which will help reduce interest expense moving forward. Turning now to our acquisition activity. We completed the Superior Plus acquisition in late April and closed on the Sandford Oil acquisition last week.

As a reminder, the Superior acquisition included a 200 million gallon a year fuel distribution business and three terminals with operations concentrated in the upstate New York market.

The Sandford acquisition is another example of the bolt on opportunities that we continue to see in the marketplace and includes a 115 million gallon a year field distribution business to exploration, drilling and oilfield service customers.

The acquisitions also bring material commercial and G&A synergies resulting in post-synergy multiples of between 5 to 6 times for the Superior acquisition and below 5 times for the Sandford acquisition. We funded both of these acquisitions with cash on hand and amounts available on a credit facility.

We expect both acquisitions to be accretive to our unitholders in the first year. Before I turn the call over to Tom, I want to highlight some changes we made to the reportable segments in our financials. We renamed the former Wholesale segment to Fuel Distribution and Marketing and renamed the former Retail segment to All Other.

The Fuel Distribution and Marketing segment includes all fuel sales previously reflected in our Wholesale segment. The majority of the rental income from the properties that we lease or sublease will also be included in this segment.

The All Other segment includes retail, fuel and merchandising sales from our remaining 76 retail locations, which includes our Hawaii business. Consistent with the former retail segment, the All Other segment also includes results from the partnership's ethanol facility, credit card services and franchise royalties.

I will now turn the call over to Tom..

Thanks, Scott, and good morning, everyone. Before I cover the financial results for the quarter, I want to reemphasize what Scott said regarding our recent acquisitions. Superior Plus and Sandford Oil demonstrate our willingness to make bolt-on acquisitions in a financially prudent manner.

Both acquisitions support our growth strategy outlined on Slide 10. In addition to the growth of our fuel distribution, the Superior acquisition provides the opportunity to buy terminals at an attractive multiple, while the Sandford acquisition expands our business in the attractive oilfield channels.

We manage our business as a portfolio of cash flows from our various channels. We see other M&A opportunities that fit within that approach. We will pursue those opportunities that deliver on our operational and financial parameters.

Turning to the second quarter results, the partnership recorded net income of $68 million compared to a net loss of $222 million a year ago. Adjusted EBITDA was a $140 million, which includes $7 million of transaction-related expenses. Our quarter-end leverage, as defined by the credit agreement, was 4.5 times.

Last year's second quarter leverage was 6 times. Distributable cash flow, as adjusted, was $106 million. DCF coverage for the second quarter was 1.24 times and 1.14 times on a trailing 12-month basis. Last year at this time our trailing 12 month coverage ratio was 1.03. On July 27, we declared $0.8255 per unit distribution, the same as last quarter.

Both coverage and leverage are materially stronger than last year as a result of the balance sheet restructuring afforded by the 7-Eleven transaction. As we look forward, we will manage leverage within a target ratio of 4.5 to 4.75 times and a distribution coverage ratio of at least 1.1 times.

Our liquidity remained strong with $1.2 billion available on our revolver. Our weighted average cost of debt is 5.1%. Looking at our operational performance, total fuel volume in the second quarter was approximately 2 billion gallons, a 6.5% increase over the first quarter.

We anticipate that volume will trend higher throughout the second half of the year, driven by growth in our organic fuel business, our recently acquired businesses and typical seasonality. For the second quarter, fuel margin was $0.099 cents per gallon and $0.098 cents on the trailing 12 month basis.

It is important to think about margins and volume together. We manage the business for long-term gross profit, not margin and volume separately. We’ve seen quarters where volume was down while gross profit was up, and vice versa. We expect to see that in the future.

That said, Slide 8 shows how annual fuel margins tend to be stable, muting any short-term volatility. Last December, we provided guidance for various expense items, and we continue to focus on controlling those expenses. If you look at Slide 5, we’ve provided updates for 2018.

During the second quarter G&A expense from continuing operations was $34 million, in line with guidance. When you remove transaction cost associated with closing out retail operations, we feel comfortable with $140 million in 2018 in continuing operations. Rents expense totaled $19 million. Our 2018 run rate guidance remains at $75 million.

Second quarter other operating expense was $86 million. Although this implies a higher-than-guidance run rate, the first half of the year had nonrecurring expenses associated with the move of retail sites, both West Texas and FTC sites to commission agent sites.

Excluding Q1 and Q2 operating cost, to run these sites, 2018 other operating expense run rate guidance remained unchanged at $325 million. We feel good with these estimates even considering the additional cost associated with Superior Plus and Sandford.

As we continue to make acquisitions, our G&A and other operating expenses will increase accordingly. In the first half of this year, we revamped our capital allocation and approval process. Because of this process review, our capital spending was atypically low for the first half of the year.

In the second quarter, we invested $13 million, $11 million of growth capital, $2 million of maintenance capital. For the remainder of the year, we will spend on a more normalized basis, which leads us to lower our 2018 estimate for maintenance capital by $10 million to $30 million and growth capital by $25 million to $65 million.

I will now turn the call over to Joe for closing thoughts..

Good morning, everyone. As Tom stated, we had a solid second quarter. The underlying business is strong, and we expect it to continue. Looking forward, the third quarter is off to a good start. In July, our margins were strong and our volumes continue to grow. Last December, we laid out a plan, and this year we executed on this plan.

We fixed our balance sheet and we will continue to show financial discipline. We expect to be within our guided leverage range. As per G&A, rent expense and OpEx, we expect to deliver on the guidance we gave back in December. We also stated a targeted coverage to be over 1.1. We’re well positioned to meet this target.

The acquisition of Superior Plus and Sandford Oil are two solid examples of delivering on our stated growth plan. We’re positioned for more. These immediately accretive acquisitions are the type of opportunities we will continue to pursue in a fragmented marketplace. I like to close by referencing a statement I made a couple of quarters ago.

I’ve stated that Sunoco LP is show-me story. As our plan continues to be proven out quarter by quarter, we will evolve into proven execution story. I remain confident in our ability to grow and deliver on our stated financial goals. Operator, that concludes our prepared remarks. You may open the line for questions..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] First question today will be coming from the line of Theresa Chen with Barclays. Please proceed with your question..

First, can you give us an update on how the current quarter margins are trending? The wholesale gasoline price has seen some volatility quarter-to-date and I think historically have been able to achieve good margins in this kind of environment, given your scale and branding, and just wanted to check that this is still consistent?.

This is Karl. Yes, it is consistent. As Joe mentioned in his prepared remarks, so far in the quarter both volume and margins are looking strong..

And in terms of the new segments, how ratable is the gross profit in that all other segment?.

If you look at our margins over -- we’ve restated them on the slide where we’ve shown them the margin itself on a trailing 12-month basis, it’s rather flat and we may see some volatility quarter to quarter.

But we believe over a long period of time the margin itself the CPG, and therefore, gross profit, as volumes move rather slightly upward, and we think that margins will remain stable..

Theresa, it’s Joe. Let me just download a commentary on that. When you think about the other income area, and I think you’re referencing the area that’s not fuel distribution, not rental income, but other side.

So if you think about that, it’s really made up of merchandise income, which is a moderate amount if you think about we only have our Hawaii operation and our turnpike operation up in New Jersey. So that’s a moderate amount. You don't see big fluctuations in that area.

Then you’ve credit card income, which is a fee on top of the number so that’s a very fixed type of number. And then we have our franchise revenue where the franchisor or stores, which is a royalty on top of that, again, that’s a pretty stable. Then there’s some miscellaneous other items out there.

So I think I feel comfortable telling you that is a pretty stable other income..

And regarding the comment about keeping distributions flat in the size, I am getting that excess coverage that we used to partly fund deals instead of coming to equity market, just curious on how much do you think you can do the acquisition front before needing equity?.

We feel very comfortable with where we are right now in terms of -- as we look forward with the Superior and Sanford that we don't need to issue equity this year and any -- I would be speculating if you want -- you said how far out we can go? It would depend on size and cash flow. But we don't see any of that right now. .

And in terms of your leverage, can you provide some color on what kind of adjustments can be made to EBITDA on the denominator just to give us a sense of how you plan to achieve your leverage guidance while still increasing borrowings to make that last two payments associated with the taxes -- with the 7-Eleven transaction?.

That’s a real fair question. For the rest of the year, we’re going to have adjustments associated with 7-Eleven, and as Superior and Sanford get added on a pro forma basis, we see that covering the $220 million going forward this year and instead within our leverage target..

Theresa, this is Scott. And moving forward additional and future acquisitions, we’re able to put our credit agreement able to add in on a pro forma basis the full year EBITDA contribution.

So as Tom said, we’ll get the benefits for the 7-Eleven field supply agreement as well as Superior and then moving forward, the Sanford acquisition will also be an adjustment that we were made to that EBITDA..

The next question is coming from the line of Jeremy Tonet with JPMorgan. Please proceed with your questions..

Yes, good morning. This is actually [indiscernible] in for Jeremy. I was just curious if you could touch on comments from Kelsey last week. On the merger call, they had mentioned that they would like to see you use more of a pipeline of refined products business.

I was just curious how you think about those comments and how that would make sense for SUN?.

This is Joe. I think we have the first start talking about what our overall goal is. Our overall goal is to be a larger and more stable income MLP, and with that that means we’re going to have do some smart growth. And as we look for opportunities, we’re going to use financial discipline.

And in obvious areas that we would want to go into is anything to do with refined products. We are the biggest -- we’re one of the biggest markers of refined products out there, and that gives us insight and capabilities. So with insight and capabilities, there’s potential synergies.

But, yes, we want to become a more stable, more diversified MLP and we’re looking at some of the assets that Kelsey mentioned last week a sense for us. The bell have to be done with being smart growth and finding the right opportunity at the right price and making sure that we bring capabilities and synergies we’re able..

And then apologies if you’ve touched on this -- got on here a little late. Just looking at volumes year-to-date and you’re lining connecting any guidance may feel in.

I just kind of curious both on the second half there and expectations?.

This is Karl. I’ll add a few comments to what Tom made on his prepared remarks. First, our Q2 volumes rose seasonably from Q1, in line with our expectations. And the other biggest point to remember is that margin and volume are not independent variables.

I mean, as we look at our business and we manage it -- we’re managing it for both short-term and long-term gross profit dollars. So over the last half a year or so we’ve taken a fresh look at how we manage that margin and volume relationship and there’re some times and places where we’ve traded up volume for margin with overall positive results.

Specifically for Q2, as you think about it, we could have easily sold more gallons but then not put out the gross profit number that we did. But the last point I'll remind you of is that 25% of our gallons are sold to 7-Eleven. And as Scott mentioned in his remarks, our take-or-pay with 7-Eleven is based on gross profit dollars, not volume..

Next question comes from the line of Ben Brownlow with Raymond James. Please proceed with your question..

Just to be clear on your last answer, so that raise $0.09 to $0.10 per gallon, that’s really not indicative of a long-term expectations just the first half of this year? And as we think about 2019, it’s -- you are still kind of thinking more than $0.08 to $0.095 per gallon range and kind of balancing that with volume?.

This is Joe. That $0.09 to $0.10, I would say, obviously if you look back to the first half of the year and you use our recap number, it comes out to $0.0975. So I think we've achieved that for the first half. That is definitely looking out for the rest of 2018, and I foresee that continuing on and so.

At a certain point you always reevaluate the market, but we feel good with that $0.09 to $0.10..

And just curious -- and clarify on the financials. When you -- on $140 million adjusted EBITDA that includes the $7 million transaction expense. But there’s also some discontinued oscillators in their.

So is the -- is a number closer to $170 million mark when you exclude discontinue ops? Or just are there any other aspects of that we should be aware of?.

I think last quarter we took a -- we had a presentation that took you from 109 our reported number to 129. This time, we think you should just go from 140 to 147..

The next question comes from the line of Patrick Wang with Robert W. Baird. Please proceed with your questions..

Joe, moving back to your earlier comments, how would you characterize the refined product’s acquisition landscape compared to the consolidator role some has traditionally played in the more fragmented fuel distribution sector?.

as we bring in our scale and our buying power and our infrastructure, we think that we can do these at a synergized multiple in the mid-single digits and both of those are achieved. With that said, we think there we’ve a robust pipeline and we think there's more out there. The ideal situation would be that we’d like to do this on a more ratable basis.

And obviously, M&A and ratable don't necessarily go hand-in-hand, but we think our pipeline gives us a good possibility of continuing doing these smaller rollups where we think they’re going to be highly accretive.

On the other side of the refined product, that’s what I think Ben of earlier referring to, the multiples typically trade at a higher number than the fuel distribution sector. So this is where we’re evaluating opportunities and we have to find the right opportunity for us to take advantage of..

And then turning to the strong fuel margin you delivered this quarter, can you help us understand any of the puts and takes that were in that number and if writing one offs that we should be aware of? I am just wondering if there's any outsized performance in Aloha or any of those other assets? Or is this just reflecting the recurring wholesale business?.

This is Karl. I can make a comment on that. I think, as you look at our fuel distribution margin, one of the ways we talk about is that we have a portfolio of various channels. I think we list those on Slide 8 of our presentation, and none of those channels are an outsized portion of our fuel gross profit.

So we typically don't break out the performance of any one sector. So I don't have one necessarily in the quarter that we can highlight, but I think the graph we have on Slide 8 shows that even with some puts and takes that might happen in one of those channels in a quarter that on that recast basis, we have a lot of stability in our margin..

This is Joe. Let me add one other additional comment on top of Karl’s. If you look at that slide that Karl is referencing, we have -- we take a multichannel strategy in our fuel distribution business. And if you break out the different channels that we have out there, no one income segments on a gross profit basis is greater than 15%.

If you pick up the biggest point, it’s actually our rental income, which is incredibly the most stable one out of our group.

So we have -- we’ve always said we take a multichannel fuel distribution strategies because we don't want to be overweight in one particular channel, and as we do organic growth and M&A growth, we’re highly conscious of keeping this balance so that we can keep stability on an ongoing basis..

[Operator Instructions] The next question is from the line of Barrett Blaschke with MUFG Securities. Please proceed with your question..

Just kind of a quick question.

As we’re looking at sort of a longer-term picture, 4 to 4.75, is that the goal for leverage over the longer term, or is that more of a near-term goal given that we’ve sort of seen the whole group shifting their leverage targets lower?.

Right now, I think you said 4. It’s actually 4.5 to 4.75. That’s a long-term goal that we want. We’re going to try and stay in it quarter by quarter, but that could change based on strong margins, weak margins in any given quarter. But when we look over the long period, we see that quite achievable..

And then one follow-up, and that’s just any immediate impact you see to the -- from the rollup of the ETP and ETE? They done a lot of your units and [indiscernible].

Is there anything we should be looking out for there?.

there are stronger entities. We have a very supportive and a very financially stable parents, they own, there are GP, they also own about a third of our LP units. So I think they have highly incentivized and were aligned that they want to grow GP value along with LP values.

So I think we’re highly aligned we have -- we get the benefit of having them, and we feel very good about our long-term future as a separate entity..

Our next question is from the line of Mike Gyure with Janney. Please proceed with your question..

Can you talk a bit longer term about some of the growth capital expectations? I think your guidance is for $65 million this year.

How should we think about that going forward? You think that’s kind of relatively the level with this new strategy? Or do you think that number is going to increase significantly? I guess, how you’re looking at that?.

This is Joe. Let me kind of walk you through this year and then try and give you some better insights I think that will help you look at on an ongoing basis. So Tom mentioned in his prepared comments that one of the things that we did at the beginning of the year is we took a hard look at all our maintenance cap and our growth capital.

And put in, I would say, a far more rigid process to ensure that we’re getting down on a maintenance capital basis. So we have to do. Is there a better way to do? Is there a cheaper way to do it? So that’s what slowed down our program. I think we’re very happy with the process that we have now. Same thing with the growth capital.

As a new transformed organization, we take a look at our gross capital in the projects we’re doing and making sure that we have these types of returns that we’re going to be satisfied with. With that said our new guidance for both for the rest of the year is 30 million for maintenance and 65 million for growth.

On an ongoing basis, on the growth side, we think for the same reasons that we bring synergies to the table with life Sanford Oil and with Superior, that same logic plays out with growth projects too, as far as signing up new customers.

So our intent is to have that number grow year after year, and we would like to get to the point especially in the fuel distribution sector, where M&A might not be as ratable but our growth capital from organic growth starts -- there’s an inflection point, where the inflection point passes up to M&A side, and we have that costs in organic growth on a going forward basis.

As we get on the later half of this year, we known provide more clarity of what that number might look like in 2019 and beyond..

Thank you. Ladies and gentlemen, now we’ve reached the end of the question-and-answer session. I would now like to turn the call back to Scott Grischow for closing remarks..

Well, thanks everyone for joining us on this quarter’s call. As always, feel free to reach out to me with any follow-ups. And this concludes today’s call..

You may now disconnect your lines at this time. Thank you for your participation..