Good morning ladies and gentlemen and thank you for standing by. Welcome to Sunoco LP's 2020 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session fill follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Scott Grischow, Vice President of Investor Relations and Treasury for Sunoco. Thank you. You may begin.

Thank you and good morning everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails Chief Operations Officer; Dylan Bramhall Chief Financial Officer; and other members of the management team. A reminder that 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 website for a reconciliation of each financial measure. I'd like to begin today's call by reviewing the financial and operating results for the third quarter of 2020. For the third quarter of 2020, the Partnership recorded net income of $100 million. Adjusted EBITDA was $189 million compared to $192 million in the third quarter of 2019. Volumes have recovered materially off their mid-April lows with third quarter volumes of 1.9 billion gallons, up 22% from the second quarter. Strength in our fuel margins continued into the third quarter with fuel margin of $0.121 per gallon. Karl will elaborate on margins and volumes in more detail in his remarks. Lease income of $34 million was flat to last quarter. Non-motor fuel sales gross profit was $37 million, up from the $30 million we reported in the second quarter. Higher merchandise sales and credit card fees contributed to the sequential increase. Total operating expenses…

Thanks Scott and good morning everyone. Our third quarter results continue to demonstrate the strength of our business model and provide insight into the coming quarters. As Scott mentioned our third quarter volumes were down 12% compared to the third quarter of last year. Our volume recovery showed continued improvement relative to what we saw in the second quarter. To put our volumes in context, they were in line with the preliminary implied demand numbers published by the EIA and stronger than retail demand numbers published by OPIS. While the pace of continued recovery in fuel demand has slowed there are still encouraging signs that we see in our demand data. First, as I mentioned in last quarter's call, our normal seasonal pattern is for average daily volume to rise each month from the beginning of the year to a peak in August at the end of the summer. We saw this play out in our third quarter volumes. The second promising trend is that, our October volumes remain around 12% off of last year's volume numbers, even with a more difficult comparison last year. If you recall the J.C. Nolan pipeline started up in the third quarter of last year, and by fourth quarter volumes had ramped up considerably. The dramatic fall in crude prices in early 2020 resulted in a substantial reduction in drilling activity in the Permian Basin. While our diesel sales from volume shift on J.C. Nolan have recovered since the lows in the second quarter, they still remain below 50% of the levels at the end of last year. Taking out the J.C. Nolan impact on our total volumes, our October volume would be off around 10% from last year. Our geographic diversity helps us weather the larger impacts we have seen in West Texas…

Thanks, Karl, and good morning everyone. Let me start off by, welcoming Dylan to the Sunoco team as our new CFO. Some of you know Dylan, and are very aware of his wealth of experience. Adding Dylan to our already strong foundation of Scott and the team will make us even stronger. Now talking about our financial results. We delivered another strong quarter. Our third quarter performance highlights the top line resiliency of our business model, as well as the continued execution of our cost-reduction initiatives. Looking forward, the fourth quarter is off to a good start. Our base fuel volume excluding the impact of J.C. Nolan continues to steadily increase, while fuel margins remain very healthy. As a result, we expect full year adjusted EBITDA to be $740 million or above. As we look forward to 2021, we expect to have another strong year. We expect fuel volumes to improve year-over-year and we expect fuel margins to be above our previously guided range of $0.095 to $0.105 per gallon. As for expenses, a significant portion of our 2020 run rate reductions will carry over into 2021. When you combine our gross profit optimization and our cost management, we believe that we're well positioned in any volume margin scenario. As for leverage, given the demonstrated strength of our business this year, which we would believe will continue a long-term target around four time is appropriate and achievable. In December, we'll provide a more detailed 2021 guidance. Moving on to growth, we will continue to grow our fuel distribution business. The opportunity set remains robust and we expect these organic opportunities to remain for the foreseeable future. On the midstream side, as Scott mentioned, we completed a small acquisition at a very attractive multiple. We will continue to look for highly synergistic opportunities while remaining financially disciplined. Let me close by thanking our employees and our fuel distribution partners for their continued dedication in keeping Sunoco strong. Over the last few years, we have built a very resilient business model. We will remain proactive throughout the current challenge as well as any future challenges to ensure a stable long-term future. 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] Our first question is from Spiro Dounis with Credit Suisse.

Hi. Good morning, guys. Joe, I'd like to maybe pick-up on the last point around leverage down again, and already below that target you just mentioned and so what sounds to be a stronger year that you're heading into next year. So I guess, just wondering short of any use for the balance sheet is the plan to just keep delevering with free cash flow at this point? You land at a certain spot and then consider alternatives. You still have IDRs. Just wondering at what point does that become something you tackle next?

Hey, good morning, Spiro. So let me talk about -- more about kind of our capital allocation strategy. Our capital allocation strategy is really centered around three key areas. First is, obviously, maintaining a stable and secure distribution for our unit holders. Second, is protecting our balance sheet. And third, is really investing in our long-term growth of our business. The first one is obvious, right? We're committed to maintain a stable secure distribution. We've been through some various economic impact like COVID this year and some commodity cycles. And I think, we've shown that the level that we're keeping our free cash flow that we can generate over the past and going forward, we feel very good about keeping this a very secure level. If you look back at history a little bit, we were probably sitting at somewhere around 1.0x three years ago prior to the 7-Eleven acquisition. Now we're sitting around 1.5x and we think we're going to -- our businesses continue to generate free cash flow. I think we're going to be in a very good position. As far as -- the next area is really about protecting our balance sheet. Again, this goes back to the investments that we've made in the past and our cost reduction and the free cash flow we're generating. We're sitting already slightly below 4x. And like I said on the prepared remarks, I think, 4x is definitely appropriate and achievable going forward. And the final kind of area that we'll continue to do is invest in our business. Next year as an example, we believe that we can use our free cash flow to fund all of our 2021 growth CapEx.

Got it. Got it. Okay. That's helpful color. Thanks, Joe. The second question just wanted to ask about the 7-Eleven contract, and specifically about make-up payments. I remember in the first quarter this year you got a make-up payment from some catch-up volumes that hadn't moved. And so just wondering, if you're able to provide any color on how that's trending so far this year. And really what I'm trying to get at is how much of the sort of 2020 EBITDA related to that contract actually shifts into the first quarter of next year just due to the way that contract works?

Hi, Spiro, this is Karl. Yes, I think in your question you have, kind of, the components of our 7-Eleven deal correct in that it's really an annual contract and the make-up payments come in the first quarter. So we -- obviously for -- to protect 7-Eleven's business, we don't disclose or comment on the details of what their volumes are doing. But I'd say, if anything they're probably a little better than the kind of volume numbers that we disclosed for our overall business. So you could use that as kind of a proxy for figuring out how much we might get in the first quarter next year.

Okay. Got it. That’s super helpful. That’s it from me, guys. Thank you.

You bet.

Thank you. Our next question is from John Royall with JPMorgan.

Hi. Good morning, guys. Thanks for taking my question. So looking at your full year guide on EBITDA on the low end, I think, it implies about $160 million of EBITDA for 4Q. And this will be a decline from last year's 4Q. So just trying to square the 4Q guide with the fact that volume declines look pretty similar to 3Q margins are still strong. And then within the context of the cost you've also taken out it seems a little conservative to me. Not sure if there's anything there that I'm missing.

Hi, John, it's Joe. Let me start -- give you some more perspective on our 2020 numbers. Obviously, I mentioned we expect to have a very good year. We've got three quarters in the book. All three quarters were very good. And the guidance we gave for $740 million is that typically historically the fourth quarter has been the lowest-volume quarter and also on average the lowest-margin quarter on average. Obviously, there's exceptions. And I think what you mentioned earlier the fourth quarter of last year was a definite exception. If you look back I think commodity prices dropped very rapidly in the fourth quarter. And then we rode the tailwinds of increased margins. So not to say that won't happen this year or it will happen this year. I think -- what we're saying is that we expect fourth quarter to be very good and it's a question of to how good is really going to be based on the commodity environment. If we see a rapid drop in commodity prices, we'll ride that tailwind and I think we have upside. If that doesn't happen, let's say, the opposite happens and commodity prices goes up I think we have plenty of quarters of demonstrated results where commodity prices goes up and we still have a very solid quarter. So that's why we felt comfortable saying that $740 million as you said is really the lower side of that. And depending upon macro variables we have some upside.

Great. Thank you. That's very helpful. And then just another one on the balance sheet. Moving the target down to 4x, I mean, it sounds like that's an official move in the target. Correct me if I'm wrong. But given that the business has been performing with a lot of stability could you see it as another way of thinking that you were underlevered and you could do some things to get that leverage back up given you've had some stability in the business? So could you maybe talk through the decision there?

Yes. Us getting to 4x, there's obviously a bunch of ways now to get your leverage down. I think we did it the right way. We grew our top line and we're very consistent about keeping our expenses down and we didn't – and so the way that we look at it is that we think first of all our base business is solid and we're doing all the right things as far as cost management gross profit optimization to keep our base business strong. We're investing in the future on capital projects. We did a small acquisition. So we're growing the top line while keeping our debt flat. So that's the way that we're managing our leverage number.

Great. Thank you

[Operator Instructions] Our next question is from Gabe Moreen with Mizuho.

Hey, good morning, guys. A question on the M&A landscape. Finally got a deal under the belt it sounds like. Just wondering where you're seeing the opportunity skew whether it's on the midstream side or whether it's on the wholesale side. And if you could talk about I guess, pricing and multiples in the current environment and where you see – you've seen those trending.

Gabe this is Joe again. We're seeing it on both sides. We're seeing on the fuel distribution side and we're seeing it on the midstream side. Our approach to growth hasn't changed. We want to grow both in fuel distribution and we want to grow in the midstream sector, specifically the product terminal side and we want to do it both organically and M&A. So compared to half a year ago, we're definitely seeing some more activity, more kind of conversations with different companies contemplating selling. So I think from our standpoint, we want to grow both. We want to do it organically. We want to look at M&A opportunities. We're just – I think we put ourselves in a very good position with the financial position we're in right now where when the right opportunity comes up at the right price we'll take advantage of it.

Thanks, Joe. And if I could follow up with a little bit of a different question. Clearly you've seen a lot of refiners making more and more renewable diesel investments. I'm less familiar with how that distribution change works on the renewable diesel side. But is that something that you've looked at or Sunoco could get involved in?

Yes, Gabe. This is Karl. If you think about renewable diesel, it's a little bit different than biodiesel that's been around for a while. Renewable diesel is really a drop-in fuel, where it really meets most of the same specifications as your regular ULSD. So from a fuel distribution side, some of the diesel that we sell today already has some renewable diesel in it because it's in the system. And it's definitely something that we're going to be able to as that market grows take advantage of and participate in.

Thanks, Karl

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

Well, thanks again for joining us on the call today. As always, if you have any follow-up questions, please reach out to me to discuss. Have a great day and this concludes today's call.

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