Greetings, and welcome to Sunoco LP's Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Scott Grischow, Vice President, Investor Relations and Treasury. 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. 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 will now turn the call over to Dylan to discuss the second quarter results and our outlook for the remainder of 2022.

Thanks, Scott. The second quarter brought a continuation of Sunoco's strong financial performance with the resiliency of our business more evident than ever. Sunoco's consistent financial results throughout commodity cycles and various macro environments have become the hallmark of our partnership, we expect the second half of the year will bring more of the same. The free cash flow generation of our operations allows us to remain consistent in our capital allocation strategy and focus on our 3 pillars. First, to maintain a stable and secure distribution for our unitholders; second, to protect our balance sheet through debt paydown when prudent; and third, to pursue disciplined investment in our growth opportunities like the recent acquisitions we've announced in the past few quarters. With leverage around our target level and strong distribution coverage, we are able to reinvest increasing amounts of capital back into the business through organic growth and acquisitions. The result is value accretion from these investments, which creates a positive feedback loop that leads to increased distributable cash flow and increase DCF per unit, all while preserving a strong balance sheet. Regarding guidance. In May, we added $25 million to our previous EBITDA range to reflect the acquisition of Gladieux Energy. We are reaffirming our updated full year 2022 adjusted EBITDA guidance of $795 million to $835 million, and we remain highly confident in our ability to hit these numbers. Now shifting over to our second quarter 2022 results. The partnership recorded net income of $121 million and adjusted EBITDA was $214 million compared to $201 million in the second quarter of 2021. Volumes were approximately 2 billion gallons, up 3% versus the comparable period of 2021. Fuel margin was $0.123 per gallon versus $0.113 per gallon, and total operating expenses were $128 million, up from $102 million in Q2 of last year. This increase was primarily driven by the NuStar and Gladieux acquisitions and some additional costs that we reinstated over 2021 that have been temporarily caught during the onset of the COVID pandemic. Second quarter distributable cash flow as adjusted was $159 million, yielding a current quarter coverage ratio of 1.83x and a trailing 12-month coverage ratio of 1.7x. On July 26, we declared an $0.8255 per unit distribution, consistent with last quarter. Leverage at the end of the quarter was 4.17x, a decrease from the first quarter as we work through the integration of the Gladieux acquisition and got down to a lower run rate inventory level. We expect to continue to work this number down closer to our long-term target of 4.0x as the year progresses. The second quarter's strong results demonstrate our continued consistent performance throughout any operating environment. Our belief is that Sunoco's financial stability and distribution yield make our equity a very compelling value proposition during these volatile times. With that I'll now turn the call over to Karl to walk through some additional thoughts on the second quarter performance and recent growth initiatives.

Thanks, Dylan. Good morning, everyone. We delivered another solid quarter supported by continued margin strength and expense discipline. Starting with the market. Commodity prices in the second quarter continued the extreme volatility that we saw in the first quarter. From beginning to end, RBOB gasoline futures were up around $0.50 a gallon, and from peak to trough, we're up over $1 a gallon. Diesel futures were even more volatile with a similar $0.50-plus per gallon rise through the quarter, but up over $1.50 a gallon from peak to trough. During the latter half of the quarter, RBOB and diesel future prices eased, which contributed to some much-needed relief to customers of the pump, which has continued into the third quarter. Just like the American consumer, Sunoco prefers a lower price environment. But despite the high prices and challenging market movements, the second quarter is yet another example of the resiliency of our business model. Volumes for the quarter were up almost 3% versus the second quarter of last year. If we go back to the beginning of the year, volumes were depressed in January due to the effects of Omicron but they improved compared to last year in the back end of the first quarter. Then with the run-up in prices, beginning with Russia's invasion of Ukraine, we started watching for demand impacts but we added volume with our Gladieux acquisition at the beginning of the second quarter that counteracted any losses. As we ended the second quarter and have started the third quarter, we continue to see some minor reductions in volumes consistent with other published data. While we obviously watch volumes closely, the last few years have demonstrated that regardless of demand trends, margins will adjust and we will deliver on our gross profit expectations. On the subject…

Thanks, Karl. Good morning, everyone. We delivered a very strong second quarter. Dylan and Karl have walked you through the key details, however, there are a few items I want to emphasize. We've seen record prices for both gasoline and diesel this year. Prices have retreated since the June high point, but it remains above the average price over the last decade. The demand recovery that we expected this year has been affected by higher prices. However, for the second quarter, we did see an increase versus last year. Looking forward, we expect fuel volume for the second half of this year to be similar to the first half. As I stated on our last call, the longer-term impact of higher prices is still to be determined. Fuel demand will center around a few key questions. How long will higher prices remain, how many more workers will return to a more traditional pre-COVID commuter schedule. And finally, how is the overall economy performing. Even with all these questions, we expect 2022 to be another strong year for Sunoco. Margins should remain healthy given higher industry breakevens and continued volatility, in addition, we'll continue to actively manage all aspects of our business to optimize for expected and unexpected conditions. Over the last 5 years, we've demonstrated our business can deliver consistent results and disciplined growth in evolving market conditions. At the foundation, our core business remains strong and resilient. And more importantly, we expect this to continue. Within various macro volume scenarios we expect to optimize gross profit and deliver attractive results. Also, we have prudently invested over the years and has resulted in EBITDA growth while growing coverage and lowering leverage. We expect our growth strategy to yield attractive return opportunities in the future, and we'll continue to build on our history of maintaining financial discipline, which means protecting the security of our distribution while also protecting our balance sheet. In uncertain times, we expect Sunoco to be one of the most resilient performers in the sector. Operator, that concludes our prepared remarks. You may open the line for questions.

[Operator Instructions]. Our first question comes from Gabe Moreen with Mizuho.

Congrats on managing all the volatility out there. I had a question on -- given that volatility whether you're seeing any other wholesale -- smaller wholesale distributors having a more difficult time navigating the environment, whether that may be shaking anything out from an M&A standpoint, as always, just curious on thoughts on M&A in general?

Gabe, it's Joe. Let me take those questions in 2 parts. As far as other wholesalers, I think that probably the thing to keep in mind is that we've mentioned on previous conference calls about higher breakeven. So the higher breakeven should be helping the overall industry as a whole with higher margins and whatever demand recovery trend line that we're seeing. With that said, I think it's like with any other industry, the more efficient operators are going to do better in those environments and the less efficient operators are going to do worse. And with our scale, we're definitely on the most efficient operator from a field distribution standpoint. So overall, for the sector, the higher breakeven is going to help everybody, but some people are going to win more than others. As far as on the M&A side, what we're seeing is something pretty similar to what we saw last year, both for fuel distribution and midstream. I still believe it's the buyer's market, especially for strategic separating synergies to the table, and for Sunoco, we're in a good position. So when the right opportunity comes up at the right price, I think we're in a very good position to act upon it.

And then maybe if I can have some discussion about reintroducing some of the investments that you made or cost that you may have scaled back due to COVID. I'm just wondering kind of where you are in that process over the current quarterly run rate on expenses ex a lot of the, I guess, fluctuations from credit card fees, whether that's a good run rate?

Yes, Gabe, this is Karl. And I think you hit the nail on the head that minus some of the costs that are generally passed through that might adjust with the market like credit card fees. Yes, I think we're at a good run rate. And one of the things that I think we've done well is we brought some of those costs back, but we've also added whether it's through growth capital or through acquisition, right? We've put a lot of money to work, right? So we still think even as we continue to grow that we'll be able to stay efficient, very efficient on the expense side.

Our next question is from Elvira Scotto with RBC Capital Markets.

I was wondering if you -- I know you touched a little bit on demand destruction. But maybe how does the July volumes look versus the year ago or maybe the previous month? And just sort of what you're seeing here at the start of the third quarter?

Elvira, it's Joe. So volume, I think I'm going to work a little bit backward on this because I think the path that we've been on this year is interesting is that if you look back to 2021, there was momentum on the volume recovery in the U.S then we enter into January, and then we have a COVID spread that happened in the U.S. Obviously, that depressed volume. Then after the COVID spread mitigated, we started to see year-over-year growth in volume. Then in March, the Ukraine war breaks out and then high prices enter the market, and we started seeing demand go back down again. So if you kind of put all that into perspective, the second quarter, our best estimate for U.S. demand, we think is probably down about 5% on the second -- in the second quarter. Heading into July and August, we're seeing that same trend line kind of play out on what happened in the second quarter. I think for Sunoco specifically, I think the thing to keep in mind is that regardless of how which demand recovery scenario plays out, I think our history has shown that we're going to deliver consistent gross profit. If demand goes up, we're going to enjoy the benefits of that, if demand goes down, breakevens are going to go up, and we're going to balance that off with higher margins. So that's kind of what we're seeing right now.

Great. That makes -- that's helpful. And then can you talk a little bit about labor. I know in the past that had been -- tightness in the market. But just curious if you're starting to see some loosening in the labor market and then specifically for Sunoco?

Yes, Elvira, this is Karl. I think I mentioned in my prepared remarks, we've made some investments in our people, and I think some of that is us starting even back -- going back into last year, making any changes whether it's in wages or targeting certain areas and beefing up our staffing to make sure that we dealt with that. Since we've made those changes, I think we're in a good position, and we're comfortable. I mean on the one hand, we think that we're a good employer and have a lot to offer to people come work for us. And we've been able to, I'd say, for the last 6 months or so, we've been in a good spot there.

Great. And then just my last one. I know you talked about some of the things that you've been -- some of the changes behind the scenes such as fine-tuning your strategy and sales channel. Can you provide a little more detail around those comments?

Yes, Elvira, I mean, we've talked about this in the past that we really operate a portfolio of income streams and through our different sales channels, it's really an opportunity for us to look at and optimize maybe be -- have a higher weighting in some geographies in one sales channel than another. We would actually love to share a lot more detail about our sales channel, but we think that how we manage those is one of our competitive advantages and one of the reasons why we don't provide more detail on individual volumes and margins in those channels. So I don't know that I can give you a lot of number and specifics, but I can give a couple of examples. We control a lot of properties ourselves. And so one of the things we do is we work with our customers. And we have various, whether it's a dealer operation or we've talked about our commission agent model. And so that's the one example of we'll work with our customer and maybe change from one of those to another that's mutually beneficial. So those are the kind of things that I mean when we talked about sales channel optimization. There are others where maybe it might make sense for us to move from a dealer model to a distributor model, those are a couple of examples.

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

I just had a follow-up on the inflation and OpEx side. I know you've spoken to it a little bit, but 2Q looks like pretty modest amount of growth over the first quarter, given how much volume growth you've had and an acquisition being layered in as well. So just wondering if there are some efficiencies that you've captured or anything else you can speak to on the OpEx side, just expected a little bit more growth in 2Q than what we actually saw?

Yes, John, thanks. Good question here. No, the -- really from 1Q to 2Q, that amount is really entirely going to be related to the acquisition. In fact, a little bit more than that. So you are seeing some benefits there of just a little bit of optimization and efficiencies are running through there as well. Like Karl said, I think as we've gotten to this point here. Integration is going great on both the acquisitions and then we're seeing the efficiencies we hope to see there. And I think we are, like you said, absent some of these items like credit card that may run with volumes and pricing at a pretty good run rate here now for the second quarter numbers.

That's really helpful. And then just looking at your balance sheet leverage, it's ratcheting down relatively quickly. It seems like it could continue to, if the environment stays strong, you don't have any major M&A. Can you just talk about how your strategy might change when you get to the 4x? I don't think you have much desire to raise the distribution. So how do you think about the uses of cash once you're at your leverage target?

Yes. I think right now we're leaning into growth at the leverage target and with strong coverage. As I said in the prepared remarks, we have increasing amounts of capital to redeploy into organic growth and M&A. And the returns that we're able to see right now in the market both from what we're seeing in the M&A market as well as the organic opportunities we have are providing really strong returns. And so I think that's where we lean into is that we see that providing the best benefit and the best value long term to our unitholders.

Next question is from Ned Baramov with Wells Fargo.

You reaffirmed your growth CapEx guidance for 2022, and it seems like this is after a fairly light spending in the first half of the year. Could you maybe talk about the cadence of CapEx in the second half of the year?

Yes, you bet, Ned. If you look back at our last probably 2 or 3 years, we've been back weighted on both our maintenance and our growth capital. And I think that due to two reasons. One, it's intentional on our part. We think it's prudent for us to have more capital in the back part of the year. That really was to our advantage in a year like 2020 when something very unexpected hit, it was very easy for us to control our capital. We didn't have too much overly committed and we were able to adjust that spending. So that's one. It's just kind of a management preference that will back weight our capital. And then two, part of it is just the nature of our business in the cycle. When you think about on the organic side -- on the growth side, sorry, a lot of our capital is spent to sign up new customers on 7- to 10-year contracts. And just that natural cycle often leads to us spending more money in the third and fourth quarters than in the first and second quarter. So we're still comfortable that we're going to hit those numbers that we shared.

That's great. And then a question on some of the acquired NuStar assets. I think you previously noted they could be potentially trending lower than your original expectations given the higher exposure to storage, which does not fare well during periods of backwardation, could you provide an update on your expectations there?

Yes, Ned, I think we are really still happy with our NuStar assets and don't see us trending below those expectations. Yes, the storage market is tough and a backwardated market like we have, but we have really good assets. We have a really good commercial team. And so we're -- yes, we're still feeling really good about those assets.

Ned, this is Joe. I'll go even stronger than Karl. We're very happy with the -- we had high expectations for the NuStar assets, and we're delivering on it. And I actually see more upside than downside even based on our original -- what's to call, economics that we put out.

We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Scott Grischow for closing comments.

Well, thanks, everyone, for joining us on the call this morning. As always, if you have any questions, feel free to reach out, and we'll talk to everyone soon. Have a great day.

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