Greetings and welcome to Sunoco LP's First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grischow, Vice President of Investor Relations. Thank you, Scott. 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's website for a reconciliation of each financial measure. I will now turn the call over to Dylan to discuss first quarter results and our outlook for the remainder of 2022.

Thanks, Scott. Before I walk through our first quarter results and accomplishments, I'd like to start by thanking our employees for their efforts in delivering excellent financial results this quarter against one of the most difficult macro backdrops in recent history. The team did an outstanding job of executing on our strategies in the face of a rapid increase in oil and gas prices which resulted in the partnership reporting one of its strongest first quarters on record. Moving on to M&A. We closed on our third acquisition in the past six months with the addition of the Gladieux Energy assets to the Sunoco portfolio on March 31, 2022. This acquisition demonstrates our continued commitment to expand our midstream asset base with low-risk, solid return capital deployment. As a reminder, we expect a sub 7x EBITDA multiple on this investment which, combined with our ability to finance with a mix of low-cost revolver borrowing and cash from operations, results in very strong accretion to our unitholders. Regarding guidance, the 2022 adjusted EBITDA of between $770 million and $810 million provided in early December, excluded the impact of the Gladieux energy acquisition and we remain confident in that range for the legacy Sunoco business. We are adding $25 million to this range to reflect the acquisition which results in updated guidance of $795 million to $835 million. Now shifting over to our first quarter 2022 results. The partnership recorded net income of $216 million. Adjusted EBITDA was $191 million compared to $157 million in the first quarter of 2021. Volumes were approximately 1.8 billion gallons, an increase of 1% versus the first quarter of 2021. Fuel margin was $0.124 per gallon versus $0.103 per gallon in the first quarter of 2021. Fuel margin results include the benefit of the 7-Eleven makeup…

Thanks, Dylan. Good morning, everyone. We delivered another strong quarter, supported by continued strength in margins and expense discipline. As Dylan mentioned, commodity prices in the first quarter were highly volatile. In addition, the dramatic rise in prices created significant headwinds for the first quarter. To put it in perspective, both gasoline and diesel futures reached all-time highs during the quarter and hovered around prices not seen since 2008. From beginning to end, gasoline futures were up $0.96 a gallon and diesel futures were up $1.36 a gallon. Despite these challenging market conditions, the first quarter again showed the resiliency of our business model. Volumes for the quarter were up about 1% versus first quarter of last year. As I mentioned in our last earnings call, there were some Omicron-related weakness in January with volumes returning in February. We saw some volume weakness in March but are starting to see early signs of seasonal pickup in demand in April. Looking at margins. In the first quarter, we delivered strong margins of $0.124 per gallon, even in the face of the record price increases across the quarter that I already shared. There are a few key contributing factors worth mentioning. The first is the 7-Eleven makeup payment that occurs annually in the first quarter; second, industry breakeven margins continue to stay elevated, especially in the face of rising inflation; finally, our gross profit optimization strategy continues to be part of our day-to-day business which particularly helps us in volatile market conditions. A few years ago, we introduced the hypothesis that our business model exhibited asymmetric risk to market movements. While we are not immune to market dynamics, this quarter continues to show that our optimization strategies are able to counteract some of the effects of challenging market conditions like rising prices.…

Thanks, Karl. Good morning, everyone. We delivered a strong first quarter. Dylan and Karl have walked you through the key details. However, there are a few items that I would like to further highlight. On the volume side, every quarter presents a unique set of challenges but this quarter had more than most. The volume recovery that we saw last year subsided at the beginning of the quarter due to a massive increase in COVID cases. As cases start to go down and volumes start to recover, a rapid and material increase in fuel prices became evident at every street corner. The short and long-term impact of higher prices is still to be determined. The pace of continued volume recovery will center around a few key questions: first, how long will higher prices remain; second, how is the overall economy performing; and finally, how many more workers will return to a more traditional pre-COVID commuter schedule. Even with all these questions, we do expect fuel volume to increase as the year progresses as a result of typical seasonality and we expect margins to remain healthy given higher industry breakeven. The key to Sunoco's earning power has been our ability to optimize fuel gross profit and control costs. This has allowed us to minimize the downside and also allows us to capture the upside when the commodity market supports it. Quarter after quarter, we have proven the durability of our business. And looking forward, we expect 2022 to be another strong year. Moving on to growth. We continue to strengthen our business by growing our midstream assets. With the addition of Gladieux and the start-up of the Brownsville terminal, we continue to vertically integrate and provide a more enhanced platform for fuel distribution growth. We'll continue to look for attractively valued midstream assets with material synergy opportunities. On the field distribution side, we will continue to grow organically and also look for attractively valued acquisition opportunities. Let me close by stating that our current and future growth plans will build on our history of maintaining financial discipline which means protecting the security of our distribution, while also protecting our balance sheet. Operator, that concludes our prepared remarks. You may open the line for questions.

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

I first wanted to ask about the near-term margin outlook. Understandably, you had very strong results in the first quarter despite the unrelenting upward move in wholesale gasoline prices for most of the quarter. Now that we move into second quarter and that pattern seems -- the pattern seems to be more normalized with volatility, some increases and decreases depending on the day. Would you expect the margin to be better than first quarter? Or how should we think about that?

Theresa, this is Karl. I mentioned in my prepared remarks, a few different factors that really contributed to our first quarter margin. And so the first is the 7-Eleven makeup payment. Second is really the -- our base gross profit optimization strategy that's really across the whole fuel supply chain. And really, as we've talked about before, volatility -- really our size and scale help us take advantage of that volatility and that's generally constructive. And then the third is the higher breakeven margins. As we look forward into the year, I think some of those pieces are so relevant and some of them maybe not so much. We're not going to have a benefit of a makeup payment from 7-Eleven in the second or third quarter. I think the trend on the breakeven margin is going to continue with inflation and other factors. And then the gross profit optimization and volatility, as you've said, I mean, it's going to be hard to mimic the volatility that we saw in March but April was -- had its own volatility and we're starting May with some movements. So my crystal ball isn't perfect in terms of what the market conditions are going to be. But I think our system and our ability to take advantage of that is going to remain. So which of those outweighs the other in terms of where the margin is? I'm not sure but those factors and our ability to take advantage of them is how we look at it through the year. And as we've talked before, margins are these things that we have guided to on an annual basis. There will be some quarters that are stronger than others but we think overall, the strength of our business will weigh out.

Got it. And I'm sorry if I missed this but what would the cent per gallon have been without the 7-Eleven payment in first quarter?

I don't have the math. I don't know, Scott, if you have it. I think it's probably around 70 points 60 or 70 points.

Got it. And just looking at the volume side of things, clearly, the demand picture has remained resilient, absent the impact of COVID per Joe's prepared comments. But going forward, as we're seeing the escalation in gasoline prices, are you seeing any softening as far as the demand response to higher prices? When do you think we'll kind of reach that inflection point of demand elasticity? And then similarly, are you seeing any substitution along the octane curve as a result?

Theresa, this is Joe. As far as -- let me answer the second question first. it's only been roughly about -- probably about 30 days or so. So it's still a pretty short period of time whenever -- when March -- when prices started hitting record gasoline prices. So I'll probably try to give you some insight by kind of looking backwards and put it in a crystal ball, probably look back at history and see if that's applicable on a going-forward basis. So if you kind of think back to 2008, gas prices were roughly sitting somewhere between $3.50 and $4. And when that happened, we saw demand destruction happen whenever prices hit that $4 mark back in 2008. And during that time period, what we did see, we saw some volume go down and we saw people trading down from premium down to regular unleaded. So I think if you use that as a kind of a point in time, I think it has some potential applicability going forward. One of the things to keep in mind about the 2008 prices sitting somewhere $4 and above. If you inflation adjust that, that's more like a $5.25 price in today's environment. And the one other factor you got to think about is if you think about inflation and you also think about the efficiency of cars have improved since 2008, if you let it kind of on a 20-year average of dollars per miles driven for an average American, we're sitting somewhere in the kind of midpoint of that average. The other big factor and I alluded to it in my prepared remarks, is the economy matters. In 2008, we saw high prices, coupled with the recession. And the recession and a combination of $4-plus gasoline and recession is what really had volume going down. So as I said in my prepared remarks, it's early. So the effects of high prices, the economy and I think the commuter schedule is also an important element. All those are playing out. But with all that said, I do believe that our volume is going to increase throughout the year. If you look at our most recent numbers, somewhere around mid-April through today, we have seen a volume increase that started happening around this time. So those are some encouraging signs.

Our next question comes from Spiro Dounis with Credit Suisse.

First question is on M&A, actually. Just thinking about funding future deals for the rest of the year. If you look at your liquidity, I think you guys are fine there, no issues. But leverage has been ticking up kind of after these last few deals. And Dylan, I know you mentioned sort of a natural path of delevering as the year goes on. But just curious, is your expectation that you would prefer to sort of delever first before getting more active again? Or is that not necessarily a gating item yet?

Yes. I think it's more the latter at this point. I'll never take anything off the table. I would say you're absolutely right. In the prepared remarks, I mentioned that we expect some deleveraging through the year. I think if you look at our -- look at the guidance and then with -- depending on what happens with commodity prices, that could be a bit of a tailwind as well. And then we expect to probably lower inventory levels a little bit from where they are today. So all that's going to lead to lower leverage. I will say that right now, when we look out at M&A, we're probably going to be a little bit more critical in our analysis, a little more selective there. But for the right deal, I don't think where we're at from a leverage standpoint or a liquidity standpoint would keep us out of the market.

Got it. Okay. That's helpful. Second question, just looking for an update on J.C. Nolan and how that's running. It sounds like demand has kind of been moving higher in that basin but we're also seeing more competition to move fuel there as well. So just curious how you're thinking about the performance of that pipeline and the competitive dynamics going forward?

Yes, Spiro. I've talked about before how our West Texas business and our diesel demand has lagged the recovery in the rest of the country. And I'd say in the last three to four months, there's been some catching up out there, as you'd expect with these higher oil prices. Activity in drilling and fracking has increased and we've seen that in the pipeline volume. So I wouldn't say we're quite back to where the pipeline was in the first -- if you remember, that pipeline started up at the end of 2019 and it was just ramping up in the first quarter and kind of in full operation in the first quarter of 2020. And then the COVID demand impact occurred. We're not quite back to those volumes but we've had a few days and we expect to those volumes. So it's been promising.

Our next question comes from Gabe Moreen with Mizuho.

I know this didn't really have much of a bottom line impact but just curious what sort of the income tax stuff flowing through the DCF line was? It seems like it was related to a prior transaction.

Yes. This is Dylan. Absolutely. It's related to the 2018 return that included the divestiture of the retail asset to 7-Eleven. So in the first quarter, we filed an amended federal and state income tax returns related to that 2018. And with these updated returns, we had some increase in tax basis, it resulted in about a $40 million refund. And so what you're looking at there on the DCF reconciliation is that refund -- that cash tax refund but since that related to the M&A transaction, that's where you see that line item that you don't normally see where it backs -- that back out. So we're not taking credit for that in DCF. The only other place we see that showing up is on the balance sheet. That's part of the increase there in the current asset line as well as we have a receivable on that and we'll expect to receive that cash in later this year.

Got it. And then maybe if I could just ask one broader question on industry breakevens. I mean -- and also just related to that, Karl mentioned there were costs. Costs are increasing throughout, some you anticipated some of you didn't. Can you talk about kind of what you did and didn't anticipate in what you're seeing? Some unexpected pressure whether it's passed through or not? And then I assume -- look, relative to smaller wholesalers, Sunoco clearly has cheaper cost of capital but I'm just wondering if you're seeing -- you think there's pressure on others with these high commodity prices and -- is that -- there's a potential to raise industry breakevens as a result if gasoline stays where it currently is at?

Yes, Gabe, I'll give you an example of some of the cost pressures that we anticipated, things like wage increases and/or increase in some of our services partners. I mean, we baked that into our assumptions and we haven't seen anything there that's -- that we did not anticipate. An area of costs that we didn't necessarily have baked into our original guidance would be credit card fees. So obviously, we pay for credit cards to be processed. Some of that is passed through with our customers, our wholesale customers but we pay that for the 70 to 80 sites that we company operate, right, on the New Jersey Turnpike in Hawaii. We pay those fees; now those are generally going to be covered in margins. But those are often based on the absolute price of the fuel, since it's a percentage fee. And so we didn't necessarily anticipate that we were going to have the retail prices that we have this year. All things being equal, we prefer the prices be lower than they currently are. So that's an example of an expense that we didn't anticipate in our guidance but that will be passed through and that impacts higher breakeven margins. And then building on to your second question, yes, we think our size is -- this is another example of our size and scale that where it benefits us is we are able to withstand inflationary pressures or periods like this where capital gets tight. The working capital requirements based on the higher prices are higher and we're able to withstand that where maybe some smaller competitors in the marketplace struggle with that and that will put upward pressure on the breakeven margins.

[Operator Instructions] Our next question comes from John Royall with JPMorgan.

So just back on the OpEx, just looking at your guidance, 1Q looks like it's about 1/4 of the high end of the guidance range. And I know there's a variable component with volumes moving up throughout the year and then you've also got this acquisition that you bumped up the EBITDA guidance but you didn't move the OpEx. And as well as the pressures you're talking about. So am I interpreting this correctly that maybe that OpEx guidance is biased upwards but it could be offset elsewhere with the margin? Is that kind of what the message is? Because I know you didn't move the guidance numbers for anything with EBITDA, so this point -- I want to make sure I understood that.

Yes. So you're right. We did not move any -- we did not -- we only updated the EBITDA guidance. And so the OpEx guidance is now stale. That said, I think as we look at it, obviously, there's going to be some OpEx related to Gladieux. I think -- you pointed to some of the seasonality. I think some of the seasonality that we see in OpEx we've taken out of the business a little bit. We've done some things to smooth out some things with some changes in how we accrue for items so that we don't get some of the lumpiness there. And then the last one I'd touch on really is what you hit there. You noted is that some of it's more of a pass through to margin and things like credit cards which Karl talked about there. And so from -- we kind of -- put that all together and like I said, we're not updating guidance but I think that should -- that hopefully gives you a little bit of clarity in how we're looking at OpEx going forward.

Yes. Understood. And then just wondering the 7-Eleven makeup payment. Your payment this year, I think, was smaller than last year. Some volumes -- you've got volumes kind of headed in the right direction. And I think we all hope that it continues that way. So I guess the question is -- and I know you won't get too granular here because it has to do with the contract. But just trying to think through how much growth we would need to see from here for that contract to kind of not be under one or anymore and to be thinking about these payments anymore? Are we sort of getting close there? Or are we still -- have a little bit to kind of dig out?

Yes. Here's how I think about it and you already touched on it. I probably -- I'm not going to give you a clear answer. And here's why is it's really at 7-Eleven's discretion and choice on how they manage that. Overall, our relationship with 7-Eleven remains as good as it's ever been and they're a great partner and we really like the contract. But one of the things we got out of that contract is a guaranteed gross profit on an annual basis. And one of the things they got out of the contract is some flexibility to manage that volume the way that it makes sense for them and their business. And so some of that makeup payment is really driven by the choices that they're making. I wouldn't necessarily give it as a read-through on industry-wide volumes. So I would expect we're going to be in a similar to slightly smaller range. But again, I don't want to take any of the flexibility or give too much guidance on what 7-Eleven's plans are.

Understood. And if you don't mind, if I could just sneak a third one in there. You guys are just such a huge player in gasoline. I just wanted to get your view on the waiver of the E15 summertime band. Do you expect that to be have any real impact on your business? Or is that just maybe not as impactful as politicians -- they want us to think it is?

Yes. E15 is a product that is going to continue to grow in demand but it's starting from a really low base. If you dissect the 1-pound waiver, it's really only available in conventional gasoline market. So that already says that, that limits it to a certain geography. And then I think there have been some retailers and wholesalers that have offered E15 with some success and there are others who have offered and it hasn't really taken off as much. And then the other thing, with today's prices, one of the things that E15 -- that makes it interesting is that even when you adjust for the lower BTU content, it's still a cheaper fuel which in today's market is -- makes it more attractive but we still haven't seen a huge demand pickup for that. And then from our perspective, it's not clear whether the margins on that are going to be any better or maybe even worse than the E10. So that's how we're looking at it. From our view is even though it's a pretty small base, we're looking at ways that we can sell and offer more E15 for our customers. And as that demand picks up, that will become a bigger part of what we sell, it's just not material right now.

Our next question comes from Ned Baramov with Wells Fargo.

You reaffirmed growth CapEx guidance for 2022 and this is after a fairly light Q1 spending budget. So maybe if you could just talk about the cadence of CapEx for the remainder of the year? And go over some of the larger items that could bring CapEx above the $150 million threshold?

Yes, Ned, I'd say -- I wouldn't read through anything in particular. Q1 has traditionally been a lighter capital quarter for us for a multitude of reasons. And we still are comfortable with the $50 million of maintenance and $150 million of growth capital. If you look at the larger projects, I mean, we're finishing up the back half of the Brownsville project, is a component of that growth CapEx. And then the vast majority of the rest of the growth is on us signing up new field distribution customers.

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

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

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