Greetings. Welcome to Sunoco LP's Second Quarter 2021 Earnings Conference Call [Operator Instructions]. Please note, this conference is being recorded. I will now turn the call over to your host, Scott Grischow. 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 are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic.

Actual results could differ materially and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release, as well as our filings with the SEC for a list of these factors.

During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP Web site for a reconciliation of each financial measure. I will now turn the call over to Dylan to discuss the second quarter results..

Thanks, Scott. In the second quarter, Sunoco continued to showcase the strength of its business model with strong financial results in a period of increasing commodity prices. For the second quarter of 2021, the partnership recorded net income of $166 million. Adjusted EBITDA was $201 million compared to $182 million in the second quarter of 2020.

Volumes were 1.93 billion gallons, a sequential increase of approximately 10% from the first quarter as the reopening trend in the US took off Q2. Year-over-year volumes increased approximately 28%. Fuel margin was $0.113 per gallon versus $0.135 per gallon in the second quarter of 2020, which Karl will hit on further in his remarks.

Total operating expenses in the second quarter were up slightly compared to the first quarter at $102 million versus $100 million and were up from $97 million in the second quarter of 2020.

Second quarter distributable cash flow as adjusted was $145 million, yielding a current quarter coverage ratio of 1.67 times and a trailing 12 month coverage ratio of 1.41 times consistent with our long term target of 1.4 times. On July 22nd, we declared an $0.8255 per unit distribution, the same as last quarter.

We continue to maintain a stable and secure distribution for our unitholders, which remains the number one pillar behind our capital allocation strategy. Leverage at the end of the quarter was 4.27 times, which we expect to continue to decline towards our 4.0 target as the year progresses.

Our 2021 full year EBITDA guidance remains unchanged from the original guidance, which we provided in December of 2020. For the full year '21, we expect adjusted EBITDA between $725 million and $765 million. Operating expense guidance is unchanged at $440 million to $450 million.

And while we expect higher second half operating expenses, we are trending toward the low end of the full year range. We continue to expect maintenance capital of approximately $45 million and target growth capital expenditures of $150 million in 2021.

Next, I'd like to spend a few minutes on the meaningful expansion to our midstream business that we announced yesterday. To recap, we announced two terminal transactions that will not only help diversify and strengthen our core fuel distribution business but will also provide a platform for growth in the markets served by these assets.

The new store assets consist of eight largely refined product terminals, seven of which are on the East Coast and one is just south of the Chicago. These assets have approximately 14.8 million barrels of storage and are accessed via pipeline, truck, rail and marine vessels.

We expect the $250 million purchase price to result in a sub 7 times multiple on expected EBITDA, including synergies and the second year of ownership. The Cato terminal is a gasoline and distillate terminal with 140,000 barrels of storage located in Salisbury, Maryland, and is accessed via truck and marine vessels.

We expect the $5.5 million purchase price to result in a sub-6 times multiple on expected EBITDA, including synergies in the second year of ownership. Both of these transactions are expected to be immediately accretive to unitholder value.

The second quarter's strong results and the announced acquisitions demonstrate our commitment to maintaining Sunoco's solid financial footing and increasing value to our stakeholders through our strategy of disciplined capital investment.

With that, I'll now turn the call over to Karl to walk through some additional thoughts on the announced acquisitions, fuel gross profit and expenses..

Thanks, Dylan. Good morning, everyone. I want to start today by giving you some more insight into our important expansion of the midstream business that we announced yesterday. As we shared in the past, our midstream growth strategy is to focus on opportunities that both diversify our operations and integrate effectively with our overall business.

During the past nine months, we've added a marine terminal in the Albany, New York area. We are making great progress on our greenfield brownfield terminal and are now adding nine more terminals to our portfolio.

The Salisbury, Maryland terminal that we are purchasing from Cato oil is in a niche market that fits well with our fuel distribution business. The NuStar terminals will be fantastic additions. Linden is the core asset. We're very excited to have a highly profitable operation in the New York Harbor market with great flexibility and connectivity.

The Baltimore and Jacksonville terminals will strengthen our business and facilitate additional growth in our fuel distribution business in these important markets. Andrew's Air Force Base and Virginia Beach are key assets that support our military. The Blue Island facility just south of Chicago will be our first terminal in the Midwest.

We're looking forward to welcoming the employees from these acquisitions to our team. If you step back and look at the evolution of our business over the past few years, we have demonstrated that we are able to add terminal assets to our portfolio, operate them well, capture synergies and grow our fuel distribution business in the relevant markets.

Bottom line is with our combined fuel distribution and midstream strategy, we have proven that we can add value. Next I will share some thoughts on our second quarter results.

At a high level, our strong results were underlined by better volume performance, margin returning to our guidance range even with a generally unfavorable and rising market and continued discipline on expenses. Starting with volumes, we were up about 28% from last year, but the more relevant comparison continues to be performance relative to 2019.

Looking at it through that lens, we were down about 6% from 2019 volumes, meaningfully better than last quarter. We've seen similar volume performance at the beginning of the third quarter.

As we look at volumes through the back half of the year, it feels as though the pace of closing the gap to 2019 has slowed a bit but we remain optimistic as overall economic strength in the US continues. Turning to margins. The second quarter showed improvement versus the challenging first quarter.

Even though prices rose another $0.25 per gallon or so in the second quarter, the increased volatility, coupled with our continual margin optimization strategies, resulted in our margins rebounding and returning to our full year 2021 guidance range.

As we look forward, I still feel confident that $0.11 to $0.12 per gallon fuel margin is appropriate for the full year 2021 as we expect similar volatility to persist in the commodity markets through the back half of the year. The final piece of our strong financial performance was continued expense control and discipline.

As Dylan mentioned earlier, we expect second half expenses to be higher than the first half with full year expenses trending towards the lower end of our guidance range.

Some of the higher spending in the second half of the year is due to timing and some of it is related to our decisions to defer bringing costs back into the business with a challenging start to the year. As the margin environment has improved, we are more comfortable returning some of our expenses to a more sustainable level going forward.

Before I turn it over to Joe, I will wrap up by stating that we will continue to focus on what we can control and what drove this quarter's great results, gross profit optimization, growth of our core business and delivering on our expenses.

Joe?.

Thanks, Karl. Good morning, everyone. We delivered a very strong second quarter. Fuel volume grew roughly 10% versus the first quarter of this year, while our fuel margins remain very healthy.

The combination of higher industry breakevens with our ability to control costs and optimize gross profit allows us to minimize the downside while still capturing the upside when the commodity market supports it. Quarter after quarter, we have proven the durability of our business. Looking forward, the third quarter is off to a good start.

For the month of July, RBOB prices have been volatile. Within these volatile commodity environments, we have a proven history of delivering attractive margins. As for volume, the start of the third quarter has seen a moderation of volume growth as compared to the growth we experienced from the first to second quarter.

We still believe that there is upside. But as of today, we foresee similar volume in the third quarter to what we realized in the second quarter. With the first half of the year in the books and early readings for the third quarter, we expect to deliver on our full year 2021 adjusted EBITDA guidance. Moving on to growth.

We're very excited about the expansion of our midstream business through the two announced acquisitions. Strategically, these acquisitions help diversify and vertically integrate our business while providing a more enhanced platform for fuel distribution growth.

Financially, we executed these transactions at very attractive valuations, especially after adding synergies. In addition, the Brownsville terminal project is on budget and on time. We expect the terminal to be up and running in early 2022. On the field distribution side, we continue to grow organically. However, we'll also look for acquisitions.

For both organic growth and acquisitions, we'll continue to build on our history of maintaining financial discipline, which means protecting the security of our distributions while also protecting our balance sheet. Operator, that concludes our prepared remarks. You may open the line for questions..

[Operator Instructions] Your first question comes from Theresa Chen with Barclays..

Joe, I just wanted to delve a little bit more on the economics related to the terminal transactions. And completely understand that per prepared comments, you have specific EBITDA targets that you expect to achieve once everything is up and running and under your jurisdiction.

But looking back to pre-pandemic levels, what would it have been comparable to the sub 7 times for the NuStar terminals and sub 6 times on 2019 numbers?.

Theresa, definitely, if you kind of look at M&A activity, even if you go back to 2019 and 2020, the activity has definitely picked up this year. And I would characterize what we're seeing today, definitely a buyer's market versus a sellers market, which is obviously good for us.

So I'm not sure if I can tell you if this changed the turn or two, or whatever else. But I will say that the valuations for buyers like us, especially strategics that bring synergies to the table has definitely become a better environment for us.

And I think this project -- this acquisition for NuStar as well as the Cato indicates that, hey, we're buying it at an attractive multiple and then we're also able to bring it down another turn or two..

And in terms of thinking about bringing it down another turn or two, I think about this from your perspective.

Is the idea that previously these terminals were underwritten by third party shippers and now you're bringing in your own volumes and perhaps taking volumes off of someone else's system that you would have otherwise used? Is that how it's going to work going forward? And if so, what is the breakdown that you would expect between third party and your own captive operations?.

If you think about the kind of synergies that we bring to the table, it's a piece of exactly what you said where we're able to move our volumes into terminals that might not be as utilized as they were. There's some cost savings as we integrate into our broader network and optimize some of those costs.

As far as third parties, our model is we're happy to have third parties in our terminals and we think there's opportunities for us. In fact, we have many suppliers and customers in our current terminals and we expect that to be true in these NuStar assets.

The nice thing that we bring to the table is if for whatever reason we lose a customer we have our own volume to backstop that. And so the predictability of the income streams in some of these assets is even higher with us owning them..

And Karl, maybe if I can just turn to your existing operations and the third quarter outlook on volumes, in particular, it's interesting, I think the comment you made about the third quarter volume growth or volumes being flattish from where second quarter was. And in light of -- it seems that the broader macro economy continues to recover.

In light of this flattish expectation, is that a result of structural trends that you're seeing in terms of work from home or uncertainty related to the Delta variant? Can you just parse out like what underlies that volume expectation going to 3Q?.

I don't know that we have any specific insight into which variable is more prevalent or results in a change in demand more than other variables because there are lots of things happening.

The only other color I'd add is I think if anything, we saw stronger and quicker volume recovery in the second quarter than we probably anticipated going into the quarter. So going in our statement that third quarter might be flat to second is starting from a stronger position than we originally anticipated.

So you put those things together and we're still very comfortable with the full year volume guidance that we gave..

Your next question comes from Spiro Dounis with Credit Suisse..

This is Chad on for Spiro. Just one from me. I believe one of the assets you acquired in the transaction is located in the Midwest.

I was wondering if you could expand on the opportunities you see with that asset and maybe expanding the business in that region?.

We already have a good Midwest business from a fuel distribution standpoint and that's been an area of focus in the last, call it, three to four years of trying to find opportunities to grow there. A lot of our business is centered around Ohio. And this terminal is a little further west than that, closer to the Chicago market.

And Chicago is a nice fungible market. We can supply bulk product from local refineries or from the Gulf Coast. So having a terminal in that market we think adds additional flexibility and optionality for us to grow..

[Operator Instructions] Your next question comes from Michelle Kenel with UBS..

Just the cost front, I think you guys noted trends towards the lower end of the guidance for the year. But at the same time, there's kind of been a lot of pressure around inflation.

Just wondering how sustainable you see these course trends as we think about cost heading into next year?.

We have seen inflation, we're not immune just like everyone else, and we factored that into our comments on the guidance going forward. As Dylan and I both mentioned, we do expect the cost to be up in the back half of the year, a little bit relative to the first half of the year.

And as we sit right now, we think the -- minus the acquisitions that we announced yesterday, which you can adjust for that -- our cost level in the back half of the year should be closer to sustainable from a going forward basis..

And then just a quick question on kind of what was the drivers behind the increase in your non motor fuel sales results this quarter?.

On the non-motor fuel sales, typically, it's made up for us -- probably the biggest variable in that is we still have storage sales out of Aloha and of the New Jersey turnpike, and we also have credit card revenues. Credit card revenues is really a function of crude and gasoline prices.

So all things equal, the higher the price of commodities more credit card fees we have. So that's probably the biggest variable. And secondly kind of similar to what Karl mentioned on the second quarter ramping up a little bit quicker than we anticipated.

But overall, we think the year is going to play out the way we guided in December is that convenience store sales in Hawaii on the New Jersey turnpike have also increased at a good rate for us..

Your next question, John Royall with JPMorgan..

So this is a relatively big bite on the terminal acquisition relative to your acquisition activity over the past couple of years.

So I was just wondering, ultimately, how large you envision the midstream business growing relative to the distribution business? Do you have a targeted split in mind between the two or is it really more dependent on kind of the opportunity set that exists?.

John, I think you captured on the back side. I think it's going to be driven on the opportunities that exist. We want to grow both our business. And I think the right way to think about it is not separately but together. It's not an ease or decision for us.

It's really an integrated strategy for us where by adding terminals what we're really doing is vertically integrating and capturing a bigger portion of the field distribution margin. And I think an important thing that Karl mentioned, I think, it’s worth reiterating is they work together.

By having terminals and field distribution business, we can keep our terminals full whenever we lose a third party customer, we can fill it with our own volume. And conversely, by having terminals like in the Midwest, it gives us more points of supply where we can grow our fuel distribution business.

So we look at it as one kind of combined strategy, it's really on a geographic by geographic level.

So the way that we'll grow is it's going to be really dictated by a kind of a combination of valuation and realizable synergies is acquisition opportunities or any growth opportunities come out where the valuation is right and we have a lot of synergies then we're probably going to be in a really good position to create value by doing it..

And then the rest of mine were answered. So I just had one that's more housekeeping. So just to clarify the 4 times leverage target.

Does that include the effect of the acquisitions? Is that pro forma for the pre-synergies EBITDA and the cash out for the acquisition?.

I think as we look out and we look at the funding for this acquisition here, clearly we have ability to put it on our revolver, use revolver and operating cash flow. But we are evaluating some other alternatives as well, not being too specific to make this acquisition kind of leverage neutral on its own.

I will say though there are no plans to issue common equity to fund any of this acquisition..

Your next question, Elvira Scotto with RBC Capital Markets..

Quick question, I know you touched on the inflation question.

But are you seeing anything in terms of labor issues, labor shortages?.

Again, like I said earlier, we're not immune to inflation. We haven't been immune to some of the labor challenges that we've all seen and heard about. So we have our own trucking fleet. We have some of our own employees that staff the New Jersey turnpike and convenience stores in Hawaii.

So yes, we've seen some of those same challenges and then I think even in our professional staff. And we're looking at options, and we've already pulled the trigger on some changes to make sure we are fully staffed and meet our strategy.

And I think the important point for a company like ours, Joe and I have talked about before, as you factor in inflation and what that does is we have some rising costs. The end result of that for us in our industry is breakeven margins go up.

So in reality, companies like us are able to take those increased costs and it ends up increasing the breakeven margin. So we stay covered. And in fact, a large company that has a scale that we do generally ends up on the favorable end of that because those breakeven margins are set by smaller and less efficient operators..

And then my next question is just around M&A.

So it looks like you've done a few acquisitions on the terminal side, but can you talk about what you're seeing on the fuel distribution side? What does the M&A market look like in that area?.

The market really hasn't changed that much. You rewind back to, let's say, '17 or '18 where we did, I think, four or five during that time period, and you look at what the market looked like in '19. And 2020 was obviously not an appropriate kind of run rate market but the opportunities that we see today is very similar to '17, '18, '19.

The only difference from Sunoco's perspective is we still have a good pipeline of organic opportunities. So we're going to continue down that path of doing organic project that we've been very happy with the results. At the same time, we're definitely looking at fuel distribution acquisitions.

And most likely, like I mentioned earlier to a previous caller that it's going to be an integrated strategy. So now we have more terminals. And if there are organic opportunities around these terminals, obviously, we're already looking at that.

If any M&A opportunities pop up around these terminals then that might be an additional factor for us to accelerate that. But bottom line, the valuations, our synergies from a few years ago, remained exactly the same. I think the opportunity as far as the quantity remains roughly the same. But we're more focused on organic.

And at the same time, we will look into fuel distribution acquisitions if the valuation is right in the right geography..

I will now turn the floor over to Scott for closing remarks..

Thanks, everyone, for joining us on the call today. Feel free to reach out to me with any questions. This concludes today's call. Have a great day..

Thank you for your participation. You may now disconnect your lines..