Greetings, and welcome to the Sunoco LP's First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grischow. Senior Vice President, Finance and Treasurer. Thank you, sir. 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; Austin Harkness, Chief Commercial Officer; and other members of the management team. Today's call will contain forward-looking statements that include expectations and assumptions regarding the partnership's future operations and financial performance. 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. It has been a busy and exciting start to 2024 for the Sunoco team, and I'd like to begin my comments by reviewing some of that activity. First, on March 13, we completed the acquisition of 2 liquid fuels terminals located in Amsterdam, Netherlands and Bantry Bay, Ireland from Zenith Energy for EUR 170 million. Then on April 16, we completed the divestiture of 204 convenience stores across West Texas, New Mexico and Oklahoma to 7-Eleven for approximately $1 billion. And just last week, we closed on the acquisition of NuStar Energy in a transaction valued at approximately $7.2 billion. The completion of these strategic transactions will not only increase the partnership's stability but will also strengthen our financial foundation and position us for future growth. Now turning to our first quarter results for 2024. Sunoco delivered a record first quarter with adjusted EBITDA of $242 million compared to $221 million a year ago, an increase of 9%. As Karl will discuss later,…

Thanks, Scott. Good morning, everyone. This quarter continued the strong performance in our base business and highlighted the continued progress of our growth strategies. As we have stated many times, the key to our gross profit optimization strategy in our fuel distribution business, is to look at the combined fuel gross profit rather than evaluating volume or margin separately. This is important as we look at our Q1 performance. First, our volume is continuing to substantially grow. In the first quarter, there was a 9% increase compared to the same quarter last year. This period marks the fourth consecutive quarter where we surpassed 2 billion gallons. In terms of total U.S. gasoline and diesel demand, our growth continues to exceed industry averages, showcasing that our investments are yielding tangible results, while always keeping our gross profit optimization strategy front and center. Second, margins continue to be strong. From a market standpoint, we faced some fairly consistent upward movement in gasoline prices throughout the quarter, which provided the typical compression that happens during similar market conditions. Another factor impacting our overall margin is that some of our year-over-year volume growth has come in channels that have added incremental fuel gross profit and EBITDA, but at margins below our overall average. This is really an impact on our portfolio mix, not an indication of market conditions. Overall, higher breakeven margins and overall volatility continue to provide support to margins and we expect that to continue for the foreseeable future. When you put it all together, we had record first quarter EBITDA. Our fuel gross profit continues to trend upwards, and our outlook remains strong. Earlier, Scott mentioned the 3 transactions that we've closed in the last few months. Let me give you some insight into the West Texas and Europe transactions and…

Thanks, Karl, and good morning, everyone. Over the last 4 months, we completed a series of strategic transactions to strengthen SUN for the future. Let me provide some perspective on these actions and also talk about our business as a whole. Starting with our legacy business. We had a record first quarter, reporting the highest first quarter EBITDA and DCF results in the history of the partnership. Our legacy business is strong, and we're confident that it will remain strong for the foreseeable future. Obviously, the closing of the NuStar acquisition resulted in us revising our full year guidance. But I think it is important to note, if you back out the NuStar acquisition for this year, we fully expect it to deliver on the guidance that we've provided back in December of last year, even after the EBITDA loss resulting from the West Texas divestiture and the European terminal acquisition. Regarding the West Texas divestiture, we got a highly attractive sales multiple and added to our take-or-pay contract. The net proceeds after tax and other expenses is roughly $800 million. This is more than the $750 million that we noted in January. As for the NuStar acquisition, let me start off by publicly welcoming the NuStar employees to the SUN team. We're excited to work with all the talented people and also to add some great assets to our overall portfolio. When we announced the transaction in January, we detailed the strategic rationale and the highly attractive economics. 4 months later, we're even more confident that we have better positioned the company for the future. This acquisition makes us larger and more diverse while also providing more growth opportunities. Financially, it's highly attractive with a greater than 10% accretion in the third year following close. Regarding our balance sheet, we stated back in January that we expect to be at our long-term target leverage of 4x within 12 to 18 months. We're well positioned to deliver on this target. As for the recently announced 4% distribution increase, we're confident in the resiliency and growth potential of our business. A secured distribution is one of our capital allocation pillars and the decision to increase had to meet the following criteria: stay above our target coverage ratio, protect our balance sheet, remain a growth company. And finally, a clear path to additional distribution increases over a multiyear time frame. We're confident that the answer is yes on all of these factors. Let me wrap up. We entered 2024 from a position of strength and after a series of strategic moves, we're a stronger company going forward. We'll continue to execute on our strategic focus of improving stability, enhancing growth and maintaining a strong balance sheet, resulting in a more compelling investment going forward. 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 realize we're going to get a much more detailed look at the financial outlook later on. But I was hoping you could talk about how you see the crude oil assets in particular, fitting within your organization pro forma? And how you're planning to further commercialize them? And if there are any complementary or synergistic opportunities with ET's crude oil assets and how all that comes together?

Yes. Thanks, Theresa. Appreciate the question. I mentioned in my prepared remarks that we've started to dive into those, and I can add a little bit more color to that, kind of on our initial thinking. So first is we like the stability and diversification that the crude business provides, specifically the Permian system that we just acquired is located on excellent acreage and it's fortunate to have a set of high-quality customers. And as we look at those cash flows going forward, we expect them to deliver a stable cash and returns going forward. As far as my comments on looking for how to unlock additional value, really, as we sit here today, all options are on the table including, but not limited to, the possibilities of joint ventures or other commercial arrangements. I think maybe the only option not on the table is contemplation of a sale. Like I said, we like the assets and the stability they provide. You asked about ET, clearly working with ET on creating additional value is an option. This work is still pretty preliminary and we don't have any additional details to share right now. But I think as Joe and I have talked and we've had questions on crude even from the first announcement, any changes or arrangements we make different than just us operating them as is will be because it adds additional value beyond what we've already assumed.

Our next question comes from Spiro Dounis with Citi.

I want to go back to the synergies quickly, if we could. When the deal was announced, I think it all talked about $150 million of run rate by the third year. Karl you just mentioned, I think, hitting $100 million or so of cost savings annually. So I was just hoping you guys could sort of reconcile those comments and whether or not that $100 million is kind of still on that sort of 3-year time frame?

Yes, Spiro. I think so if you dial back to what we initially said, we said $150 million, it would be a combination of expense and commercial, we didn't really break down initially what we thought that was. And then we said we'd achieve that by the third year. Our comments today are really, I think, the more clarity we're -- we've done enough work to be able to provide is on the expense side. As far as what the total number is and what the commercial is and any updates to our original cadence I think that's the evaluation that's ongoing that we hope to provide in the next couple of months. But again, the most important thing is everything we've dug into, we should be at or better than what we originally assumed.

Great. Second question, maybe going to M&A. Scott, as you had pointed out, very busy start to the year and certainly a lot of initiatives ahead of you from here. So curious maybe what your appetite is on future M&A from here either bolt-on or larger scale or maybe your focus at this point entirely just on extracting synergies and absorbing these deals?

Spiro, it's Joe. Obviously, a high priority is integrating and realizing the synergies and getting back to our leverage target for the NuStar acquisition, but equally, a high priority for us is optimizing and delivering on our legacy fuel distribution business. And the third high priority is continued growth, which includes M&A. Is it easy to do all 3? No. But that's how we're solving for growing unitholder value and we think we can do all 3.

[Operator Instructions] Our next question comes from Elvira Scotto with RBC Capital Markets.

Just going back to -- I know we'll get a little more on NuStar so I'll hold off on questions there. But on the Zenith acquisition, you did mention that you could see some future growth opportunities there. Can you provide any kind of additional detail there? Would these be growth opportunities, again, outside the U.S.? Or how are you thinking about that?

Yes, Elvira, this is Karl. If you think about how we've talked about the terminals in Europe and then maybe even if you go back to our acquisition we made a little over a year ago in Puerto Rico, really, the criteria we use to look at that is, do they have stable cash flows, are they a strategic fit? What kind of synergies do we think we could extract with our base business or kind of what kind of right to win do we have with our existing fuel distribution business and then potential for growth. So Puerto Rico hit on that. We feel confident that these 2 assets that we closed on couple of months ago in Europe fit that. We are open to additional international expansion if it meets that criteria. Now with that possibility of growth, you can expect us to continue to have the same level of discipline that we've applied, either -- whether it's on the M&A side or on the organic growth capital side.

Our next question comes from Selman Akyol with Stifel.

This is Tim on for Selman. I appreciate the color on the West Texas divestiture to 7-Eleven. So just curious, as you look out at the rest of your footprint, do you see any more similar opportunities to make these sort of transactions?

Tim, this is Joe. I think Karl did a really good job on his prepared remarks talking about how the divestiture fit into the bigger picture of us moving forward. But I'll reiterate what he said. We're a growth company. This was a unique opportunity for us to do a highly attractive acquisition with NuStar and have a very defined path to get our leverage down to the right level. So I don't see any other divestitures in our future.

Got it. Understood. And then shifting to the distribution growth, 4% was a nice step up. But just wondering how you guys think about this longer term with NuStar. And just curious if the was made with or without NuStar in mind?

Yes. Let me try to answer that in 2 parts. I guess, first and foremost, we're confident about the resiliency and the growth potential of our business on a going-forward basis. And that's evident by the 2% increase we did last year and the 4% we did this year. As far as establishing a number on outward years, I think it's too early. We have the flexibility -- we like the flexibility to assess market opportunities and we'll properly allocate our capital using the same strategy that we have right now. And obviously, your last question was NuStar contemplated in us with our 4% distribution. The answer is, of course, yes. That's part of our business going forward. We like the accretion. I think any time you're talking double-digit accretion, that's a big number, and we're confident we're going to deliver on that.

Our next question comes from Robert Mosca with Mizuho Securities.

Just wondering if you could talk about the puts and takes around your -- the margin expectations. It sounds like there might be a couple of drags in the form of more low-margin volumes in the West Texas sale. Just want to check whether the $0.125 guidance still holds or whether we should think about it more holistically in terms of volume and margin?

Yes. This is Karl. I talked in my prepared remarks, that really we look at it from an overall fuel gross profit. So I'm going to hand it over to Austin Harkness, our Chief Commercial Officer. He can dig a little deeper there.

Robert, in terms of macro view, as Karl shared in his prepared remarks, we haven't seen any fundamental shift in the volume or margin picture, right? So our view going forward is, from a macro standpoint, volumes for 2024 are going to continue on the trend that they've been on recently, which is roughly flat for refined products. And the margin picture remains elevated, right? So breakevens remain high. We continue to see volatility and flat price, all of which paints a fairly constructive picture for the margin environment. If you take a step back and look at our first quarter results, as a reminder, we manage a portfolio of income streams across different sales channels. And the way to think about our first quarter results is the market gave us an opportunity to sell more fuel above our historical run rate volume at a pool margin that was below our historical run rate margin, all resulting in a fuel gross profit number that ultimately allowed us to deliver a record first quarter EBITDA. And as Karl mentioned, we really do optimize around fuel gross profit versus solving for any volume or CPG margin number independently. So as you think about the future and going forward, there's a couple of things I would share. One is, we manage the business on a long-term basis, right? So we take a 12-month view recognizing there's going to be volatility on a quarter-to-quarter basis, whether it's impacting to volume or margins independently. Separately, as Karl mentioned in his prepared remarks, the West Texas divestiture accounts for about 50 points of enterprise margin, right? So you have to account for that along with the fuel gross profit associated with it. I would reiterate Joe's comments that it's a deal that we're very happy with, given the multiple that we were able to transact at and our ability to quickly redeploy that capital to highly accretive M&A. All that said, fundamentally, we're a growth company. And I think our track record and our forward view is very much that we will continue to grow fuel gross profit in the long run multiple years in the future.

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

Thanks, everyone, for joining us on the call this morning. As I said before, it's been a busy, exciting and strong start to the year for the partnership. Please feel free to reach out if you have any questions or want to discuss anything. Thanks, and have a great day.

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