Scott Grischow - Senior Director of Investor Relations Joseph Kim - President and Chief Executive Officer Thomas Miller - Chief Financial Officer Karl Fails - Chief Commercial Officer.

Theresa Chen - Barclays Capital Jeremy Tonet - JP Morgan Patrick Wang - Robert W. Baird Michael Gyure - Janney Montgomery Scott George Wang - Citigroup Benjamin Brownlow - Raymond James Sharon Lui - Wells Fargo.

Greetings, and welcome to Sunoco Third 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 your host 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. A reminder that information reported on this call speaks only to the Company’s view as of today, November 8, 2018.

The time-sensitive information may no longer be accurate at the time of any replay. You will find information on the replay in this quarter’s earnings release.

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 review some of the partnership’s accomplishments and activities that took place during this very strong third quarter.

First, we completed the Sandford Oil acquisition on August 1st, which included a 115 million gallon a year fuel distribution business to exploration, drilling and oilfield service customers primarily access in Oklahoma.

Then on October 16th, we completed the acquisition of BRENCO Marketing Corporation’s fuel distribution business, which distributes approximately 95 million gallons of fuel per year across the network of dealer, commission agent and commercial account location in Central and East Texas.

Those acquisitions bring commercial and G&A synergies resulting in post energy multiples to the mid single-digit. We funded both of these acquisitions with cash on hand and amounts available on our credit facility. We expect both acquisitions to be accretive to our unit holders in the first year.

These acquisitions along with the superior acquisition in the second quarter are examples of the types of the opportunities we continue to see in a fragmented industry.

We maintain a robust pipeline of potential acquisition target and we will only pursue the most attractive opportunity that allow us to capitalize on our scale and to meet our financial goal. Moving on to an update on the tax impact of the divestiture of our retail operations to 7/11 earlier this year.

Through the end of the third quarter, Sunoco LP met a total of approximately $370 million in tax payments related to 7/11 sale. Our estimates for the total 2018 tax impact remains at $480 million with the final payment due in mid December.

Finally, I would like to wrap up my comments by addressing a new story that came out last week, regarding the Federal Circuit Court of Appeals ruling about Sunoco Inc. this Sunoco Inc entity is wholly owned subsidiary of energy transfer operating LP. As such, the court ruling is unrelated to and has now impact on Sunoco LP.

I will now turn the call over to Tom..

Good morning everyone. As Scott mentioned, last night we reported strong third quarter results building on a solid second quarter. In the two quarters since our exit from operating 1,200 retail sites, we delivered financial and operational result demonstrating our ability to execute our strategy.

We have controlled cost, made three roll up acquisitions, captured strong margins and surpassed our leverage and coverage target.

For the quarter, the partnership recorded net income of a $112 million and adjusted EBITDA of $208 million, which includes $2 million of transaction related expenses and a one-time cash benefit of $25 million from a settlement with the fuel supplier.

Even without this one-time cash benefit, the business performed extremely well this quarter with strong fundamental including healthy fuel margins and flat sequential operating expenses. These results grow of leverage as defined by our credit agreement down to 4.27 times, this was down from last year’s third quarter result of 5.59 times.

Distributable cash flow as adjusted was $149 million yielding a third quarter coverage ratio of 1.73 times and 1.24 times on a trailing 12 month basis.

Last year at this time, our trailing 12 month coverage ratio was 1.04, if you remove the one-time cash benefit of $25 million our coverage for the quarter would have been 1.44 times and leverage would have been 4.44 times an outstanding quarter no matter how you look at it.

On October 26, we declared an $0.82.55 per unit distribution the same as last quarter, we are confident and the sustainability of our distribution at this level. Overtime, we will manage leverage within the target range of 4.5 times to 4.75 times and the distribution coverage ratio of at least 1.1 time.

Our liquidity continues to be robust with $1 billion available on our five year revolving credit facility, which we extended in July. Looking at our operational performance, total fuel in the third quarter was a little over two billion gallons, a 1.4% increase over the second quarter.

For the third quarter, fuel margin includes above the $25 million adjustment was $0.127 per gallon. Removing the one-time $25 million, our margin would have been approximately $0.11.4 per gallon, which is a very solid margin on its own. I would like to provide some context for how we view in manage fuel margin.

First, as we have mentioned in the past, we manage the business for long-term gross profit dollars, not margin as volume separately. We have added resources to optimize our gross margin and we are very pleased with the results so far. Second, we had an excellent quarter in all our channels.

We employ a multi-channel strategy that balances highly ratable income such as our 7/11 take or pay in our $140 million per year of rental income, with channels and geographies that give us the opportunity to capture robust margin. West Texas, Hawaii and East Coast markets have had strong margins, which we expect to continue.

Finally, our acquisitions of superior in Sanford had a positive contribution to our fuel margin. Moving on to expenses. Last December, we provided run rate estimates for several key modeling input. We are focused on controlling spending throughout the year.

We expect to be within our December expense guidance even with the addition of the three bolt-on acquisition. During the third quarter, G&A expense was $34 million in-line with our $140 million annual guidance and flat to the second quarter. Rent expense total $20 million also flat to the second quarter and within our annual guidance at $75 million.

Third quarter other operating expense was $86 million. Annualized this numbers above our $325 million run rate discussed last December. The nature and timing of certain expenses within the category will always result in quarter-to-quarter fluctuation. That said, we are very confident in our annual run rate of $325 million.

As I mentioned on last quarter’s call, in the first half of the year, we revamped our capital allocation process and this resulted in lower capital spend in the first two quarters. In the third quarter, we invested $30 million, $19 million of growth capital and $11 million in maintenance capital.

We expect annual capital spend to be approximately $30 million for maintenance capital and approximately $65 million for growth capital. In December, we intend to provide updates of the key financial modeling inputs for 2019. I will now turn the call over to Joe for closing thought.

Joe?.

Thanks, Tom and good morning, everyone. The third quarter has historically been our most profitable time period, and our results this quarter reinforced our earnings power. The underlying business is strong and we expected to continue. On October results were very encouraging and looking forward we expect the fourth quarter to be another solid quarter.

Last year, we outlined a plan and this year we are delivering on that plan. For 2018 we are either meeting or exceeding our guidance for first profit expenses and maintenance capital. As a result, our coverage is materially above 1.1 times and our leverage is below 4.5 times.

We remain confident in our ability to sustain our distributions while still having excess cash that can be used for growth opportunities. And most importantly, we expect this to continue into the foreseeable future. We are also delivering on our growth plan completing three accretive acquisitions since April.

Our pipeline remains robust and we will continue to deliver on additional accretive acquisitions. Let me close by stating that we are very optimistic about our future and our ability to deliver on our financial goals. Operator, that concludes our prepared remarks. You may open the line for questions..

Thank you [Operator Instructions] Thank you. Our first question comes from the line of Theresa Chen with Barclays. Please proceed with your question..

Good morning and great to see the very strong CPG in third quarter, even ex the onetime effect. And Joe, just following up on your comment about expecting a solid fourth quarter. So, when we look at the current period and precipitous decline in wholesale product prices.

Can you talk about what you are seeing in terms of margin trends currently? And should we expect the fourth quarter CPG to be even stronger than third quarter?.

Hi, Theresa. So, good question. First of all, as I mentioned in my prepared remarks, the third quarter has historically been the best the quarter for fuel distribution companies and for retail centric companies.

With that said, on a big way to look at it is, is look at our business on an annual basis where typically the third quarter is the best, the second quarter is the second best and the fourth quarter is the third best and the first quarter be the lowest margin period.

But if you look at that in fertility and you look back kind of recap base from our business over last four years, what you will find is and what I mean by recap is take the 7/11 agreement and push it back retroactive four years, what you will find is that our annual average over four years has been slightly above $0.9.5.

Then if you kind of look back over the last two years, our business has actually yield a more for expense. Then if you look at 2018, we are actually slightly above 2017 on a margin basis. And I think the key point is this is partially a very solid industry fundamentals but there also different proactive steps that we have taken.

You know we did those three bolt-on acquisition. The blended margins of these acquisitions is actually higher than our base business, but you are going to see an uptick on that.

Secondly, as Tom mentioned in his prepared remarks, we have gone through this volume margin optimization and as I have stated, previously as Tom’s stated the early results have been very encouraging given us the gross profit increase.

And finally, if you think back to December when we announced like our West Texas deal, we stated that we selectively picked out key markets that we want to have the ability to capture the full margin. And West Texas, Hawaii and the New Jersey Turnpike, they are three very robust margin areas and we proactively strategically pick these out.

These are niche markets really strong and we expect that to continue. You put that into totality, I think what you will see why our margins are so strong in the third quarter. I wouldn’t get overly caught up into quarter-to-quarter.

What I would really focus on is over a course of year, we delivered for the last four years over 9.5 and I think this year’s results makes a very compelling case that is going to be above that number..

Got it. And related to the settlement with a field supplier.

Can you just provide some history on context of how that came about?.

Sure, Theresa, this is Karl. The settlement really relates to fuel purchases from one of our major suppliers. As you think about our business, we have told the market that one of our strategic advantages is our scale and the fuel purchasing power that provide this.

We do a lot of things day-to-day to continue to ensure that we capture that purchasing power with our fuel suppliers. So that settlement is related to this year, we have resolved an open issue with one of our suppliers on fuel purchasing price and that settlement was finalized in the third quarter.

So if you retroactively apply that settlement across the last few years on our volumes, that would have increased our average margin by about a tenth of a cent per gallon. So last thought I would say is I would reiterate again what Tom said in his prepared remarks that even without this settlement, we had a very solid quarter..

Understood.

And given just very healthy coverage year-to-date, can you talk about what your plans are for the excess cash? Are you looking at potentially growing the distribution again? Or do you think the cash would be better spent reinvested into business?.

Theresa, its Joe. If you look at look at our access cash. First of all, our solid results are going to give us, I think we have targeted 1.1. But if you look at kind of market sentiment, I think the market is more leaning towards higher coverage versus an increase in distribution.

And if we didn’t increase our distribution, I don’t think it necessarily give us the lower yield results in a lower cost of capital. So as of right now, I think the opportunity for us is to take this excess cash and apply it to grow it or to our balance sheet..

Great. Thank you very much..

Our next question comes from the line of Jeremy Tonet with JP Morgan. Please proceed with your question..

This is good morning this is [Carl] (Ph) in for Jeremy. One, quick one for me is just thinking about Energy Transfer family and kind of everything is simplified there, no IDRs, is SUN going to request an IDR elimination. I understand that you are going to say that you talked energy transfer about that.

I’m trying to understand from your perspective, that is opinion the you are proactively pursuing?.

So first of all, I think no effort is being spent by neither SUN or Energy Transfer on IDR elimination. I think the second thing that you have to take into consideration is that we have put together an executable strategy to grow the company and to create value for both are LP and our and for GP.

And I think, you know you look back since the 7/11 transaction. I think we definitely have had two quarters, the second and third quarters showing that we can deliver on that. And as I said in my prepared remarks, I expect another solid fourth quarter and I stated I’m very optimistic about the future.

So, the fact that we are delivering, we did three acquisitions since April even with a very I would say a yield that I think just defines to be lower and yet we still did three accretive acquisitions.

I mentioned that we have a robust pipeline, I think what we are showing is that even with the high yield and with IDRs we are growing and delivering on our plan..

Great. Thank you. And then one more for me on expense savings. You have done a good job there, thinking and contacted the recent acquisitions.

Is there any foreseeable savings that you could capture maybe looking forward into 2019?.

Let me answer that two ways. We feel comfortable with the guidance we have given you for the remainder of the calendar. As for 2019, we are in the process of pulling together our budget and we will be sharing that with you in December.

Just one final point on that is, when we make the acquisitions, we would normally expect to be able to have some synergy..

Great. Congrats on the quarter again..

Appreciate it..

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

Hi. Good morning, great to see these numbers. If we can look broadly at your M&A framework. What type of cost equity you assume when assessing potential transactions under that equity framework.

And then at what distribution yield would you believe you could achieve accretive M&A rather than entirely on the revolver?.

So, first of all I want to reiterate that we don’t see a need for 2018 equity. As we look forward to 2019, we are committed to maintaining the leverage targets to 4.5 to 0.75 over a long period.

As we look at the attractive acquisitions, we do look at it on a 50/50 capital basis and given right now where our yield is and we would probably be looking at a preferred to help fund the acquisition, we feel like that it’s just a better use of capital right now..

Okay. That make sense. Thanks for the detail. And staying on this topic, that deal look like something larger in the terminal area.

Is there anything sizable [indiscernible] that may require some equity or some preferred equity in long-term debt that is -?.

Yes. So, Patrick, it’s Joe. I think the way to look at our M&A is that it’s kind of two part, one part is there is a field distribution, I think we are starting to build a good resume of delivering on attractive multiples, accretive acquisitions.

On the midstream side, we are definitely looking at midstream assets and as far as giving specific color on a specific target, I think it’s way too early on that one, but I think what you can take away is that, that we are looking, when we find the right assets at the right financial fit, we will go after those assets..

Alright. It’s good to hear. Thank you very much..

Thank you. [Operator Instructions] The next question is from the line of Mike Gyure with Janney. Please proceed with your question..

Yes good morning guys. Can you talk a little bit about I guess working capital requirement and I guess in general for your conversion to the full wholesale model.

Do you think there is any benefits that you can sort of ring out of the working capital within the network or I guess how you are feeling about the working capital in general?.

The good thing about the wholesale side of the business is, it has a much more rapid cycle, where things are paid quickly. It is an area that we are looking at, we have been looking at it in great detail, we will be advancing that over the next couple of quarters. But it’s not real high on the priority list..

Okay. And then on the operating front.

Can you tell me, if you had any, I guess benefit or headwind from the hurricanes in any of your regions our markets this quarter?.

This is Karl. I would say there is no material impact either positive or negative from the storms this quarter..

Great. Thank you..

The next question comes from the line of George Wang with Citigroup. Please proceed with your question..

Hey guys congrats on the strong quarter. Just one to holding on the future roll off acquisitions.

So is this posted in the mid single-digit, kind of multiple still a firm guidance and the target you guys are looking at? Like just, I’m sure you guys are looking at different targets like, are you guys are still seeing a bunch of attractively valued acquisition target that you guys can roll off?.

George, this is Joe. Yes obviously, if we can continue to find assets that are synergized mid single-digits obviously those are a track to us and as I said we have built up a good pipeline of these type of fuel distribution targets. And what we will do is, we will take the best out of the accounts presented to us.

But secondly, I think this is a very important point. Our goal long-term is to become more diversified and become a larger, stronger MLP. And that means that we are going to also balance that out with some other traditional midstream targets that might trade at a slightly higher multiple.

And then the good news is that the same type of synergies that we bring to the table for field distribution is also applicable to some midstream assets, such as product terminal.

So the goal obviously is to purchase assets that have carried low multiple, but depending upon the quality of assets and how that enhances our overall portfolio, I think we will be looking at the whole range..

Got you, that makes sense. And are you guys still looking at four to five deals a year. I don’t know if you guys are still speaking to this quantity of guidance and since you guys have done kind of three deals so far.

I mean, do you think fair to assume you guys may still announce one to two deals this year?.

I don’t think the four deals will be - I think guidance might not be the right word.

But I think, if you put together a good pipeline, you build the capabilities, I think, although M&A is now ratable, I think we have put together a program, where we have really yielded three since April, which is I think a strong accomplishment and when the pipeline continues.

Our approach is really evolving away from necessarily building up the pipeline, we have a pipeline. Our path forward is making sure we pick the best of our pipeline and also enhance our fields distribution business with other businesses that can balance off our portfolio..

Got you, understood. My last question is let’s talk about post synergy.

I’m not sure if you can give more color just around how do you think you guys can achieve five to six times multiple after yield conclusion?.

Yes. This is Karl, I would say obviously it depends a little bit on the individual acquisition, but in general a good rule of thumb is that in year one, we will capture 50% in the synergy and by year two we will be at run rate.

I think about the deals we have done so far this year, our superior has been our portfolio about six months, and I would say we are tracking maybe even a little ahead of that on our synergy. And then Sanford and Branco are both pretty recent so, I would say it’s too early, but those integrations are on plan.

The other thing I would add is, as we do these we get better at them as well as, so I would expect if anything that our ability to capture those synergies and integrate them will accelerate..

Cool. Sounds good. Thanks a lot..

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

Hi. Good morning. Thanks, I appreciate all the color around you provided a lot of detail around the drivers on the fuel margin. And you made one comment around one element of that driver was the added resources to optimize fuel margin.

Can you give any specifics of that driver or what that entails?.

Sure. This is Karl. I can provide a little more guidance. The basic idea behind our price optimization and resources we have put on it is you look at both margin and volume impacts when you set the price not just one of those two. So I will give you an example.

So, in a lot of our locations that in our - where we set a prices at an individual site, we have developed individual location-by-location elasticity curves, so that when we set a price on a daily basis, we are taking into account what the anticipated volume impact of that is and so we can look at the overall gross profit.

I guess the other color I would say is we are adding more data analytics around choosing competitors and how we make that choice in local market. So, the underlying principle is really putting more data more analytics with real business responses to drive those decision..

Great, that is very helpful. And just one more for me a minor modeling question. Within the wholesale segment, can you give some color on the quote-on-quote other categories that was around $7 million gross profit. So it is a small contributor relative to the fuel category. But it so fell off relative to sequentially from second quarter.

So just trying to understand some of the movement there?.

Right. The second quarter well, first of all, what is in other income. Yes, the other income that tends to be credit card, merchandize, food services, lotteries and things like that, things from the running the stores.

And we think that you probably should use this quarter as a run rate going forward as appose to last quarter which had some adjustments..

Okay, great. Thank you..

The next question comes from the line of Sharon Lui with Wells Fargo. Please proceed with your question..

Hi. Good morning. I was just wondering if you could maybe provide some color on volume trends. Q3 was up about 1% sequentially, but I thought it might have been higher given the acquisitions of Superior and Sanford. Maybe if you could just talk about I guess volumes this quarter and where you see volumes trending next quarter..

Sure. Hi, Sharon, this is Karl. You pointed out right our Q3 volumes did rise seasonally from Q2 and from our acquisitions. I would say that is in the area of our expectation and so a few points to give color on that. One remember that our volumes with 7/11 really that is protected by our taker pay on an annual gross profit arrangement with them.

We have also stated in prepared remarks and even in our Q&A this gross profit optimization strategy where there are some trade-offs between margin volume, so you should think about that. And then the last point I would make is really our strategy is to continue to grow gross profit and to get a bigger piece of the pie, right.

Whether that pie is shrinking, or growing, whether it’s staying the same. And so I think really our gross profit delivery is really the focus and that is what we did this quarter and that is what you should look at going forward..

Okay. And then just housekeeping item. The income tax expense was a little higher this quarter, I think because of discontinued ops.

What is a good run rate number for cash taxes going forward?.

Right. You know we have talked about $12 million in the past. We think that is a good run rate. If you recall last quarter, it was negative factors. A couple of things this quarter, when you make money in your C Corp, which we did and we had a good quarter there. You pay more tax and where we had again we sold one of our non-core asset..

Thank you..

You bet..

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

Well thanks everyone for joining us this morning. Please feel free to reach out to me if you have any follow-up questions. This concludes today’s call..

Thank you. Today’s conference has concluded. You may now disconnect your lines at this time. Thank you for your participation..