Q3 2023 Sunoco LP Earnings Call

[music].

Greetings and welcome to Sunoco Lp's third quarter 2023 earnings conference call. At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Scott Vishal.

Senior Vice President of Finance and Investor Relations. 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.

Hillenbrand Hall, Chief Financial Officer, and other members of the management team.

Today's call will contain forward looking statements that include expectations and assumptions regarding the partnerships future operations and financial performance.

Actual results could differ materially and the partnership undertakes no obligation to update these statements based on subsequent events.

These 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 Snapple LP website for a reconciliation of each financial measure.

The third quarter brought a continuation of sonoco strong financial performance throughout 2023.

Partnership generated adjusted EBITDA of $257 million.

Compared to $276 million a year ago.

Fuel volumes for the quarter were $2 1 billion gallons up 7% from the third quarter of last year fuel margin on all gallons sold was <unk> 13 per gallon compared to $13 nine per gallon a year ago.

Total third quarter operating expenses were $141 million, an increase of $10 million from the same period last year. This year over year increase was attributable to the peerless and zenith acquisitions.

During the third quarter, we spent $31 million of growth capital and $14 million in maintenance capital.

Third quarter distributable cash flow as adjusted was $181 million compared to $196 million in the third quarter of 2022 building a current quarter coverage ratio of two times and a trailing 12 month coverage ratio of one nine times.

On October 20th we recorded an 84.2 cent per unit distribution consistent with last quarter. As you may recall, we increased our distribution by 2% in the first quarter of 2023, and we will determine our next distribution increase next year in the first quarter.

Turning to the balance sheet at the end of the third quarter, we had $647 million outstanding on our revolving credit facility, leaving approximately $847 million of liquidity.

Leverage at the end of the quarter was three nine times.

In September we completed an offering of $500 million of 7% senior notes due 2028, we used the net proceeds from the offering to repay a portion of the outstanding borrowings on our revolving credit facility. This notes offering not only improved our liquidity position, but it also allowed us to achieve our savings and interest expense.

Given the difference between the current cost of borrowing on the revolving credit facility and the fixed rate on the new notes.

Finally, as a result of our strong performance year to date and our outlook for the remainder of the year, we are increasing our EBITDA guidance for the full year 2023 to be above $935 million. This represents a $20 million increase to the top end of the revised guidance range. We issued in may further demonstrating our ability to.

You need to grow cash flow year after year in any environment.

The reliability and free cash flow generation of our operations allows us to remain consistent in our capital allocation strategy and focus on our three pillars first to maintain a secured distribution with annual growth.

To protect our balance sheet and third to pursue disciplined investment in growth opportunities we.

We are confident that this framework will continue to deliver strong returns to our unit holders with that I will now turn the call over to Karl to walk through some additional thoughts on our third quarter performance.

Thanks, Scott good morning, everyone.

We delivered another strong quarter supported by continued strength in margins volume growth expense discipline.

Fishing operations and accretive acquisitions.

When you step back and look at our business it continues to perform quarter after quarter.

The fundamentals are sound.

We have put ourselves in a solid financial position and we have the strategies to take advantage of market opportunities.

Our volumes this quarter were up about 7% versus the third quarter of last year.

The continued growth in volume relative to prior years comes from the contribution from our capital deployed both organic and through acquisitions as well as demand growth in some geographies.

This quarter marks the highest volume quarter in our history, and our second consecutive quarter, where our volumes were above the 2 billion gallon Mark.

When you compare this to various reports on U S demand. It is clear that we are outpacing the sector and picking up market share.

Another sign that our growth is delivering tangible results.

This is all occurring as we grow in our existing geographies and enter new markets.

As we look to the end of the year, we expected volume in the fourth quarter would see a normal seasonal decline sequentially, but our relative position in the market will remain strong.

With respect to margins.

The strong margin performance over the last few years continued in the third quarter as we delivered margins of 13 cents per gallon.

No extraordinary story to share for this quarter the continued.

Combination of increased market volatility higher breakeven margins and our gross profit optimization strategies delivered strong margins, even with some rising prices of first half of the quarter.

Looking forward to the fourth quarter, we expect the same fundamental factors to remain in place. However, just like with volume or margins are often seasonally lower when compared to the third quarter.

Even with some variability quarter to quarter as we have said many times when you look at our business over a full year period, we continued to deliver strong and growing results.

I want to briefly touch on the devastating wildfires experienced on the island of Maui in August.

We have three sites that were impacted by the fires and clearly there has been some additional business impact as a result of reduced travel to the island. So overall it is not material to our results.

More importantly, we are very grateful that all our employees are safe now many of them experienced dramatic impacts to their homes and families.

We are extremely proud of our team in Hawaii, and how they've been able to pivot from worrying about the impacts on their own lives and livelihoods and find ways to help their neighbors and contribute to the community response.

Thank you to all of them.

Turning to expenses.

Consistent discipline in managing our expenses remains one of our core strengths and our third quarter results firmly demonstrate that as they were basically flat to the second quarter.

Even with the increase in our EBITDA guidance for the full year, we expect our expenses to be in the range that we shared in may.

Moving on to maintenance and growth capital. Both of these also remained in line with our revised 2023 guidance we provided in May.

If we look at our overall growth profile.

We have deployed approximately $1 $3 billion of growth acquisition and working capital since the beginning of 2021.

Our growth strategy has been focused on adding fuel distribution and midstream assets.

On the acquisition side, we've been able to identify businesses that fit into our strategy and execute on those results.

We find businesses, where we can add value to the fuel supply chain grow volume reduced supply costs or expand margin.

We optimize expenses and utilize our balance sheet and capital discipline.

To invest in the acquired businesses in ways that unlocks value.

We look at integrating our fuel distribution business with midstream assets.

Even where that might appear to be a step out like our trans mix or Puerto Rico acquisitions at the core of the strategy is the same.

I already talked about how we are growing our fuel volume.

We are also now one of the largest refined product terminal operators in the United States and the largest transmit operator <unk>.

These represent high quality infrastructure assets that will continue to have value for decades to come in in any energy transition scenario.

I'll also supporting our growing fuel distribution portfolio.

Simply put our acquisitions and subsequent operational results speak for themselves.

Before turning the time over to Joe I'll end on this Sunoco remains a growth company.

Talked a lot about the stability of our base business the strong market Foundation, our expense discipline and gross profit optimization.

Ultimately those are all tools that both deliver results and our current business and enable us to continue to grow.

We will do that through investing in high return organic projects.

Focusing on making accretive acquisitions at attractive transaction multiples, which will deliver immediate results for our stakeholders and ultimately drive continued depreciation in our unit price.

Joe.

Thanks, Carl and good morning, everyone. We delivered a very strong third quarter. Although in 2023 is not quite over I wanted to provide some perspective on this year as a whole.

On a macro level field distribution has remained highly attractive within the energy sector. The combination of higher breakeven margins and commodity volatility has supported strong earnings for select companies that can optimize gross profit and manage expenses. Obviously this is with Sunoco does well.

In addition, our growth in the terminal business has enhanced our overall portfolio, providing further stability and growth opportunities. As a result, we are on pace for another record year as Scott mentioned, we increased our EBITDA guidance for the full year 2023.

We expect more of the same in 2020 for this December will provide a new investor presentation, which include our formal 2020 for guidance and business outlook I'd like to preview a few key themes, we expect to grow and have another strong year in 2024, we expect industry fundamentals to remain.

<unk> and we expect a continuation of our proven track record of optimizing our business and various macro environments.

Regardless of one's outlook fueled demand inflation recession risk and geopolitical uncertainty, we expect our stable portfolio to deliver strong results in various environments.

With our increasing cash flow, we expect to grow both organically and through acquisition the opportunity set remains ample and attractive and finally, we're in a position to increase our distribution again next year.

All of this while maintaining strong coverage and leverage ratios operator that concludes our prepared remarks, you may open the line for questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

Press Star two if you'd like to remove your question from the queue. We ask that you. Please limit to one question and one follow up.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Hi, first question comes from Theresa Chen with Barclays. Please proceed with your question.

Good morning, Thank you for taking my questions.

I wanted to go back in the comments about Sunoco on being in remaining at both company Carl Tier comments about <unk>.

Gaming market share at Indy tumultuous volatile market can you talk about if this is primarily driven by the acquisitions or how have you been able to organically grow market share.

Yes Theresa.

Thanks for the question and if you think about.

The components in and kind of the contributions to our market share growth I think you hit on the two biggest so from an acquisition standpoint, clearly the biggest difference in volume there.

This quarter.

Third quarter this year versus third quarter last year is our acquisition of Peerless at the end of last year.

But in addition, there are investments that we've made both in growth capital and I'd say generically in working capital.

In growing our business.

And Thats <unk>.

Signing new customers to long term agreements and then I think finding opportunities to take advantage of market demand, whether that's through consolidating our supply in and selling that through through various wholesale channels.

And coupling that with additional branded growth, where we spend growth capital. So it's really a combination of both of those I would say.

Probably a little more towards the acquisitions, but I would not discount the growth that we've had coming from the investments in growth capital and working capital.

Got it and on the M&A landscape can you talk about what youre seeing as far as evolution as on valuation.

Assets coming to market that you're interested in how is that changing and particularly to midstream assets outside of wholesale distribution for on the infrastructure side are there opportunities where it may make sense to invest along with your parent.

Hey, Chris This is Joe.

Assessing the M&A landscape I would probably put it this way.

I know for probably for the last two years or three years, I've said pretty much the same thing.

That the opportunities out there looks it looks robust.

Looking forward, probably too this year into next year.

I would expect it to be exactly the same or maybe even better. So this situation.

We're in right now is I think people like Sunoco with a strong balance sheet, we bring synergies to the table I think we're very well situated whenever opportunities come up and trying to separate out between fuel distribution and midstream, we like both sectors and some of the acquisitions. We've done actually is not one or the other it's actually both.

So we're equally interested in both I think if there is an opportunity that pops up sonoco alone or with energy transfer. We're in a really good position to take advantage of that and when the right opportunity comes up we will take advantage of it.

Thank you.

Our next question comes from Spiro <unk> with Citi. Please proceed with your question.

Thanks, operator, good morning team.

Come back to you.

Around the distribution increase you sound pretty constructive once again as we head into next year and so just wondering if you can remind us some of the factors that you and the board will be looking at when you determine what the right size of that distribution increase could be.

Hey, Spiro this is Scott.

I'll take that one and maybe Joe can can follow up if necessary, but I think there's really three factors primarily that come into play when we evaluate the distribution and increases moving forward and those are really staying true to our capital allocation strategy right we want to.

Ensure surety of the distribution moving forward, we want to continue to protect the balance sheet and operate at or below our long term leverage target and we want to be in a continued position to grow the company.

So I think those are the three primary factors and then subsequent to that I think we want to we want to ensure.

On ongoing growth opportunities in the distribution rights of sizing it to where each year, we can continue to evaluate future growth opportunities and distribution increases.

As Joe said, we're in a position to that too with our announcement.

In 2024 to talk about another distribution increase and I think as we sit here today, you should expect something at or above the 2% that we announced earlier this year.

Helpful. Thanks for that Scott second question, maybe just kind of peerless.

Just curious if you guys can update us on any potential opportunities coming out of that asset I think you've owned it for almost a year now and it sounds like you're pretty excited about what you're able to sort of string out of their under new ownership.

Any update there and as we think about the size and magnitude whether it be capex or EBITDA contribution how should we be thinking about that.

Yes, Spiro this is Carl.

Yes.

That asset was.

Call it roughly.

Somewhere in the 10 to low teen EBITDA.

When we purchased it and we've already been able to increase that really through deploying working capital optimizing our supply.

Spending some capital we've introduced the Sunoco brand to the island. So we're very happy with the results we've achieved and what the team down there has done with with kind of our strategy and our balance sheet and our ability to deploy capital.

From the overall company standpoint, you know, even even doubling that business down there isn't super material, but we think it's more an example of how we're looking at continued growth as we go into new geographies that we're not just.

Going to live with an acquisition that we make that we're going to use that as a base and a foundation for further growth. So I don't know that that we have a growth plan I can share with you that's going to materially change our profile in the Caribbean, but clearly we're going to continue to grow and look for opportunities whether that be acquisitions or deploying.

Continuing to deploy growth capital.

Got it helpful color guys. Thanks.

Okay.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.

Our next question comes from John Royall with Jpmorgan. Please proceed with your question.

Hi, good morning, Thanks for taking my question.

So my first question is you started the year with a 12% view on fuel margin.

And youre tracking much closer to 13, now and maybe a little bit ticking down in <unk>.

Your commentary at the time.

When you put out the guidance was understandably about the relationship between margin and volume. If you were higher on margin do you probably be lower in volume and clearly you are a good amount higher on both so my question is just high level.

What do you think has led to the better than expected environment and margin and how.

How much of it do you think a sustainable such that maybe we should expect sort of a closer to a third teams that level going forward for example.

Yes, John Thanks for the question it's definitely.

Something that we think about and I think it's worth highlighting on our results. So.

Going back to last year, when we put our guidance together.

We did do as you said link the volume and margin together and said Hey, let's really look at gross profit and then we said for each individual component of that we said Hey, we think this is the fat part of the curve and.

And as we fast forward to where we are today.

I think that relationship continues but if you go down a level I think it's insightful too it kind of adds to a comment that Joe made.

His prepared remarks about select companies being able to take advantage of certain market conditions. So the relationship between volume and margin really is a market related phenomenon right, where we're if volumes are flat to declining that's going to provide support for higher breakeven margins and then things like inflation or supply.

Chain problems or some of the things we've seen over the last few years contribute to that that higher breakeven margin. That's remained true. This year right. If you look at most market data, whether its EIA or other sources of demand overall demand. This year is is flat to maybe even more recently, it's slightly below.

Last year. So that provides continued support on the margin side.

With our scale, we're able to take advantage of that that that higher breakeven margin.

And then the thing that we've delivered on it.

Probably in excess of what our original guide was last year is our growth and so I talked about in my prepared remarks, I think <unk> question was really about how do we.

Where does that growth in market share come from and so that's where our added volume isn't coming from some tailwind in the market, it's really due to us deploying capital and growing and then we're able to take advantage of that higher breakeven margin to really out deliver in both areas.

Great. Thank you and Carl you answered my second question without even getting asked so I will turn it over thank you.

Yes.

Our next question comes from Selman <unk> with Stifel. Please proceed with your question.

Thank you.

I guess I just wanted to follow up on Spiro's question in terms of sort of return of capital.

Couple of questions. There number one is when you Scott Yeah outlined the things you consider I was just curious do you guys or the board.

Have a goal or what you think the appropriate coverage ratio has to run.

This business with.

Yes.

We've talked as part of our capital allocation strategy to be at or above one four times on the coverage ratio. So that that's the general area that we're kind of targeting for the long term and where we'd like to see the coverage and how we think about any distribution increases.

Got it and then also within there.

You guys talk with the board is there consideration of any.

Repurchases.

Yeah.

Buybacks have.

We've obviously been part of our return of capital discussion I think we see a lot of options to create unit holder value, but view distribution increases as providing flexibility to our unit holders and ensuring confidence in the future.

It doesn't mean, we haven't contemplated buybacks in the past as you know we did do.

As part of the 711 transaction proceeds back in 2018. So they have entered the discussion, but we see distribution increases as providing the the biggest return and I think the most confidence in our growth ability.

Thanks, Joe.

One other thing to Wisconsin is also we'd like our growth potential.

Obviously.

This is a balanced approach between.

Secure and growing distributions and maintain a really strong balance sheet, but just as importantly, as other tools that we look at the landscape and we see growth opportunities both from acquisition and from an organic capital standpoint, and we think that we can do that at a reasonable value with significant synergies. So we think we can create value for our stakeholders.

Operator: Greetings and welcome to Sunoco LP's third quarter, 2023 Earnings Conference call. At this time, all participants are on the listen only mode. A question and answer session will follow the formal presentation.

Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

More on that particular area.

Got it and then.

Scott Grischow: I would now like to turn the conference over to your host, Scott Grischow, senior vice president of finance and investor relations. Thank you, you may begin. Thank you and good morning, everyone.

Let me just ask this.

If I look back over your balance sheet, and I mean, and I go back to slide 21.

<unk> had cash of less than 100 million consistently.

Scott Grischow: On the call with me this morning, our Jo 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 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.

Even if I go back over the model back to 15.

As I look back over the last several quarters youre running cash well above that and you ended this quarter with a quarter of a $1 billion in cash youll receivables receivables are up nicely as well is there something.

You guys want to hang onto more cash or is there something changing in the business is there any thoughts on just by all the cash on the balance sheet.

Yeah I'll take that this is Scott.

Scott Grischow: 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 their non-gap financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Snoco LP website for reconciliation of each financial measure. The third quarter brought a continuation of Snoco's strong financial performance throughout 2023. The partnership generated adjusted EBITDA of $257 million, compared to $276 million a year ago.

That cash balance that you saw at the end of the third quarter and I think at the end of the second quarter results of around $240 million. Those were book cash balances. They were not a bank cash. So there is obviously at a timing element there, we obviously manage cash to the lowest level possible redeploying that towards debt paydown.

On a revolving credit facility and obviously reinvesting in the business and acquisition so that cash is not being trapped or held.

For the long term it is being put back to the balance sheet or to growth.

Scott Grischow: Fuel volumes for the quarter were 2.1 billion gallons, up 7 percent from the third quarter of last year. Fuel margin on all gallons sold was 13 cents per gallon, compared to 13.9 cents per gallon a year ago. Total third quarter offered in expenses were $141 million, an increase of $10 million from the same period last year. This year-rear increase was attributable to the peerless and zenith acquisitions. During the third quarter, we spent $31 million of growth capital and $14 million in maintenance capital.

Okay. Thank you very much.

Our final question comes from Ned <unk> with Wells Fargo. Please proceed with your question.

Hey, guys. Good morning, Thanks for taking the question.

Given the resilience of your business and the well documented interplay between volumes and margins.

Is there a thought to provide a longer term.

Base forecast on EBITDA and or distribution growth as opposed to your typical one year forward update that you provided in December.

Scott Grischow: Third quarter, distributable cash flow as adjusted was $181 million, compared to $196 million in the third quarter of 2022, yielding a current quarter coverage ratio of two times and a trailing 12 months coverage ratio of 1.9 times. On October 20th, we declared an 84.2 cent per unit distribution consistent with last quarter. As you may recall, we increased our distribution by 2 percent in the first quarter of 2023, and we will determine our next distribution increase next year in the first quarter.

Yes, Joe good.

Good question.

We're going to put out a December investor presentation, and I tried to highlight a few of the themes that in the prepared remarks, but let me try to be even clear on this one.

If you look at our business when you look year over year for the last five years.

You've seen our balance sheet get better sooner coverage grow you've seen our EBITDA grow and every time we've done.

Formal guidance in December has been a growth while we haven't done and we plan to do in December is really talk about our confidence in 2024, but go even further and talk even longer term about industry fundamentals in house, how sunoco to position ourselves to thrive and those fundamentals on.

Scott Grischow: Turning to the balance sheet, at the end of the third quarter, we had $647 million outstanding on our revolving credit facility, leaving approximately $847 million of liquidity. Leverage at the end of the quarter was 3.9 times. In September, we completed an offering of $500 million of 7 percent senior notes due to 2028. We used the net proceeds from the offering to repay a portion of the outstanding borrowing on a revolving credit facility.

Scott Grischow: This note's offering not only improved our liquidity position, but it also allowed us to achieve a savings and interest expense given the difference between the current cost of borrowing on the revolving credit facility and the fixed rate on the new net. Finally, as a result of our strong performance year to date and our outlook for the remainder of the year, we are increasing our EBITDA guidance for the full year 2023 to be above $935 million.

Far far perspective, so if with a little bit of patients where in our December is right around the corner, we will give some some.

Good insightful thought about 2024 and beyond.

That's great. Thanks, Thanks for that I'm looking forward to the update in December.

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

Well, thanks, everyone for joining us on the call. This morning.

Please feel free to reach out with any follow up questions and we'll talk to everyone. Soon have a great day.

Scott Grischow: This represents a $20 million increase to the top end of the revised guidance range we issued in May for their demonstrating our ability to continue to grow cashflow year after year in any environment. The reliability and free cashflow generation of our operations allows us to remain consistent in our capital allocation strategy and focus on our three pillars. First, to maintain a secure distribution with annual growth, second, to protect our balance sheet, and third, to pursue discipline, investment, and growth opportunities. We are confident that this framework will continue to deliver strong returns to our unit holders.

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

Karl Fails: With that, I will now turn the call over to Carl to lock through some additional thoughts on our third quarter performance. Thanks, Scott.

Karl Fails: Good morning, everyone. We delivered another strong quarter supported by continued strength and margins, volume growth, expense discipline, efficient operations, and accretive acquisitions. When you step back and look at our business, it continues to perform quarter after quarter. The fundamentals are sound. We have put ourselves in a solid financial position and we have the strategies to take advantage of market opportunities. Our volumes this quarter were up about 7% versus a third quarter of last year.

Karl Fails: The continued growth and volume relative to prior years comes from the contribution from our capital deployed, both organic and through acquisitions, as well as demand growth and some geographies. This quarter marks the highest volume quarter in our history in the second consecutive quarter where our volumes were above the 2 billion gallon mark. When you compare this to various reports on US demand, it is clear that we are outpacing the sector and picking up market share.

Karl Fails: Another sign that our growth is delivering tangible results. This is all occurring as we grow in our existing geographies and enter new markets. As we look to the end of the year, we expect that volume in the fourth quarter would see a normal seasonal decline sequentially, but our relative position in the market will remain strong. With respect to margins, the strong margin performance of the last few years continued in the third quarter as we delivered margins of 13 cents per gallon.

Karl Fails: There is no extraordinary story to share for this quarter. The continued combination of increased market volatility, higher break even margins, and our gross profit optimization strategies delivered strong margins even with some rising prices the first half of the quarter. Looking forward to the fourth quarter, we expect the same fundamental factors to remain in place. However, just like with volume, our margins are often seasonally lower when compared to the third quarter. Even with some variability quarter to quarter, as we have said many times, when you look at our business over a full year period, we continue to deliver strong and growing results.

Today's conference has ended please disconnect your lines at this time.

Karl Fails: I want to briefly touch on the devastating wildfires experienced on the island of Maui in August. We have three sites that were impacted by the fires and clearly there has been some additional business impact as a result of reduced travel to the island. Overall, it is not material to our results.

Karl Fails: More importantly, we are very grateful that all our employees are safe, though many of them experienced dramatic impacts to their homes and families. We are extremely proud of our team in Hawaii and how they have been able to pivot from worrying about the impacts on their own lives and livelihoods and find ways to help their neighbors and contribute to the community response. Thank you to all of them. It remains one of our course frames, and our third quarter results firmly demonstrate that as they were basically flat to the second quarter.

Karl Fails: Even with the increase in our EBITDA guidance for the full year, we expect our expenses to be in the range that we shared in May. Moving on to maintenance and growth capital, both of these also remain in line with our revised 2023 guidance we provided in May. If we look at our overall growth profile, we have deployed approximately $1.3 billion of growth, acquisition, and working capital since the beginning of 2021. Our growth strategy has been focused on adding fuel distribution in mid-stream assets.

Karl Fails: On the acquisition side, we have been able to identify businesses that fit into our strategy and execute on those results. We find businesses where we can add value to the fuel supply chain, grow volume, reduce supply costs, or expand margin. We optimize expenses and utilize our balance sheet and capital discipline to invest in the acquired businesses and ways that unlock value. We look at integrating our fuel distribution business with mid-stream assets, even where that might appear to be a step out like our Transmix or Puerto Rico acquisitions at the core of the strategy is the same.

Karl Fails: I already talked about how we are growing our fuel volume. We are also now one of the largest refined product terminal operators in the United States and the largest Transmix operator. These represent high-quality infrastructure assets that will continue to have value for decades to come in any energy transition scenario, while also supporting our growing fuel distribution portfolio. Simply put, our acquisitions and subsequent operational results speak for themselves.

Karl Fails: Before turning the time over to Joe, I will end on this. Sonoco remains a growth company. I talk a lot about the stability of our base business, the strong market foundation, our expense discipline, and gross profit optimization. Ultimately, those are all tools that both deliver results in our current business and enable us to continue to grow. We will do that through investing in high-return organic projects and focusing on making accretive acquisitions at attractive transaction multiples, which will deliver immediate results for our stakeholders and ultimately drive continued appreciation in our unit price.

Joe Kim: Joe? Thanks, Carl.

Joe Kim: Good morning, everyone. We delivered a very strong third quarter. Although 2023 is not quite over, I want to provide some perspective on this year as a whole. On a macro level, fuel distribution has remained highly attractive within the energy sector. The combination of higher-break even margins and commodity volatility has supported strong earnings for select companies that can optimize gross profit and manage expenses. Obviously, this is what Sonoco does well. In addition, our growth in the terminal business has enhanced our overall portfolio, providing further stability and growth opportunities. As a result, we're on pace for another recorder. As Scott mentioned, we increased our EBITDA guidance for the four year 2023. We expect more the same in 2024.

Joe Kim: This December will provide a new investor presentation which will include our formal 2024 guidance and business outlook. I'd like to preview a few key themes. We expect to grow and have another strong year in 2024. We expect industry fundamentals to remain supportive and we expect a continuation of our proven track record of optimizing our business in various macro environments. Regardless of one's outlook on field demand, inflation recession risk and geopolitical uncertainty, we expect our stable portfolio to deliver strong results in various environments. With our increasing cash flow, we expect to grow both organically and through acquisition. The opportunity set remains ample and attractive. And finally, we're in a position to increase our distribution again next year.

Operator: All of this, while maintaining strong coverage and leverage ratios, operator that concludes our prepared remarks, we may open the line for questions.

Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Theresa Chen: Hi, first question comes from Theresa Chen with Barclays. Please proceed with your question.

Karl Fails: Good morning. Thank you for taking my questions. I wanted to go back to the comments about SNCCO being and remaining of growth company. Carl, to your comments about gaining market share in these tumultuous volatile markets, can you talk about if this is primarily driven by the acquisitions or how have you been able to organically grow market share? Theresa, thanks for the question. If you think about the components and kind of the contributions to our market share growth, I think you hit on the two biggest.

Karl Fails: From an acquisitions standpoint, clearly the biggest difference in volume this quarter, this year versus third quarter last year is our acquisition of peerless at the end of last year. In addition, there are investments that we've made both in growth capital and I'd stay generically in working capital in growing our business. That's signing new customers to long-term agreements. Then I think finding opportunities to take advantage of market demand, whether that's through consolidating our supply and selling that through various wholesale channels, and coupling that with additional branded growths where we spend growth capitals.

Karl Fails: So it's really a combination of both of those. I'd say, probably a little more towards the acquisitions, but I would not discount the growth that we've had coming from the investments in growth capital working capital. Got it. And on the M&A landscape, you talk about what you're seeing as far as evolution of valuation assets coming to market and that you're interested in. How is that changing? And particularly to midstream assets, outside of wholesale distribution for on the infrastructure site, are there opportunities where it makes sense to invest along with your parent?

Joe Kim: Hey, Chris, this Joe, assessing the M&A landscape, I would probably put it this way. I know for probably for the last two or three years, I've said pretty much the same thing that that the opportunities out there looks, looks robust. Looking forward, probably to this year and to next year, I would expect it to be exactly the same or maybe even better.

Joe Kim: So the situation that we're in right now is I think people like Sunoco with a strong balance sheet. We bring synergies to the table. I think we're very well situated whenever opportunities come up and trying to separate out between field distribution and mainstream. We like both sectors and some of the acquisitions we've done actually is not one or the others actually both. So we're equally interested in both. I think if there's an opportunity that pops up, Sunoco alone or with energy transfer, we're in a really good position to take advantage of that. And when the right opportunity comes up, we'll take advantage of it.

Theresa Chen: Thank you.

Spiro Jonas: Our next question comes from Spiro Jonas with City. Please proceed with your question. Thanks, operator.

Scott Grischow: One thing. Joe, I want to come back to your comment around the distribution increase. You sound pretty constructing once again as we head into next year. And so just wondering if you could remind us some of the factors that you and the board will be looking at when you determine what the right size of that distribution increase could be.

Scott Grischow: Hey, Spiro, this is Scott. I'll take that one and maybe Joe can can follow up if necessary. But I think there's really three factors primarily that come into play when we evaluate the distribution and increases moving forward. And those are really staying true to our capital allocation strategy, right. We want to ensure surety of the distribution moving forward. We want to continue to protect the balance sheet and operate at or below our long term leverage target.

Scott Grischow: And we want to be in a continued position to grow the company. So I think those are the three primary factors. And then subsequent that I think we want to we want to ensure ongoing growth opportunities in the distribution, right. So sizing it to where each year we can continue to evaluate future growth opportunities and distribution increases. You know, as Joe said, we're in a position to with our announcement in 2024 to talk about another distribution increase. And I think as we sit here today, you should expect something at or above the 2% that we announced earlier this year.

Spiro Jonas: Thank you very much for that, Scott.

Spiro Jonas: Second question, maybe it's going to peerless. Just curious if you guys can update us on the potential opportunities coming out of that aspect of the thing you've owned for almost a year now, and it's not like you were pretty excited about what you'd be able to sort of spring out of there under your new ownership. So, one, any update there, and as we think about the size and magnitude, whether it be Catholics or even a contribution, how should we think about that?

Karl Fails: Yes, Spiro, this Karl. You know, that asset was, call it roughly, you know, somewhere in the 10 to low teen EBITDA when we purchased it, and we've already been able to increase that, really through deploying, working capital, optimizing our supply, spending some capital, we've introduced the Sunoco brand to the island. So, we're very happy with the results we've achieved and what the team down there has done with our strategy and our balance sheet and our ability to deploy capital.

Karl Fails: From the overall company standpoint, you know, even doubling that business down there isn't super material, but we think it's more an example of how we're looking at continued growth as we go into new geographies that we're not just going to, you know, live with an acquisition that we make that we're going to use that as a base and a foundation for further growth. So, I don't know that we have a growth plan I can share with you that's going to materially change our profile and the Caribbean, but clearly we're going to continue to grow and look for opportunities, whether that be acquisitions or deploying, continuing to deploy growth capital. You got it, helpful color, guys.

Operator: Thanks for the time. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad, one moment while we poll for questions.

John Royal: Our next question comes from John Royal, which AP Morgan, please proceed with your question. Hi, good morning. Thanks for taking my question. So my first question is you started the year with a 12 cent view on fuel margin, and you're tracking much closer to 13 cents now, and maybe a little bit taking down in 4Q. But your commentary at the time when you put out the guidance was understandably about the relationship between margin and volume. If you were higher on margin, you'd probably be lower on volume, and clearly you're a good amount higher on both. So my question is just high level.

Karl Fails: What do you think is led to the better than expected environment in margin, and how much of it do you think is sustainable, such that maybe we should expect sort of a closer to a 13 cent level going forward, for example? Yeah, John. Thanks for the question. It's definitely something that we think about, and I think is worth highlighting on our results. So going back to last year when we put our guidance together, we did do as you said, link the volume and margin together and said, hey, let's really look at gross profit.

Karl Fails: And then we said for each individual component of that, we said, hey, we think this is a fat part of the curve. And as we fast forward to where we are today, I think that relationship continues. But if you go down a level, I think it's insightful to it kind of adds to a comment that Joe made in his prepared remarks about select companies being able to take advantage of certain market conditions.

Karl Fails: So the relationship between volume and margin really is a market related phenomenon, right? Where if volumes are flat to declining, that's going to provide support for higher break even margins, and then things like inflation or supply chain problems or some of the things we've seen over the last few years contribute to that higher break even margin. That's remained true this year, right? If you look at most market data, whether it's EIA or other sources of demand, overall demand this year is flat to maybe even more recently, it's slightly below last year.

Karl Fails: So that provides continued support on the margin side. With our scale, we're able to take advantage of that higher break even margin. And then the thing that we've delivered on probably an excess of what our original guide was last year is our growth. And so I talked about in my prepared remarks and I think Teresa's question was really about how do we, where does that growth and market share come from? And so that's where our added volume isn't coming from some tailwind in the market. It's really due to us deploying capital and growing. And then we're able to take advantage of that higher break even margin to really out-deliver in both areas.

John Royal: Great, thank you, and Karl, you answered my second question without even getting asked, so I will turn it over. Thank you.

Selman Akyol: Our next question comes from Selman Akyol with Steve Vell, please proceed with your question. Thank you. I guess I just wanted to follow up on Spiro's questions in terms of sort of return to capital. A couple of questions there. Number one is, when you've got you outlined the things you consider, I was just curious, do you guys or the board have a goal or what you think the appropriate coverage ratio is to run this business with?

Selman Akyol: Yes, Selman, we've talked as part of our capital allocation strategy to be at or above 1.4 times on the coverage ratio, so that's the general area that we're kind of targeting for the long term, and where we'd like to see the coverage and how we think about any distribution increases.

Scott Grischow: Got it. And then also within there, when you guys talk with the board, is there consideration of any repurchases? You know, buybacks have obviously been a part of a return of capital discussion. I think, you know, we see a lot of options to create unit holder value, but view distribution increases is providing, you know, flexibility to our unit holders. And ensuring confidence in the future doesn't mean we haven't contemplated buybacks in the past, as you know, we did do one as part of the 7-11 transaction proceeds back in 2018. So they have entered the discussion, but we see distribution increases is providing the biggest return, and I think the most confidence in our growth ability.

Scott Grischow: It's filming show. One other thing to us got said is also we like our growth potential. And we know we obviously thought it's a balanced approach between secure and growing distributions and maintaining a really strong balance sheet, but just as importantly as other twos that we look at the landscape and we see growth opportunities, both from acquisition and from an organic capital standpoint, and we think that we can do that at a reasonable value with significant synergy. So we think we can create value for stakeholders on that particular area.

Scott Grischow: Got it. And then let me just ask this. And if I look back over your balance sheet, and I mean, and I go back to like 21, you know, you guys had cash less than 100 million consistently, even as I go back over the model back to 15. And as I look back over the last several quarters, you know, you're running cash well above that and you ended this quarter with a quarter of a billion in cash.

Scott Grischow: Your receivables receivables are up nicely as well. Is there something you guys want to hang on to more cash or is there something changing in the business? Is there any thoughts on just why all the cash on the balance sheet? Yeah, so I'll take that. This is Scott. That cash balance that you thought the end of the third quarter and I think at the end of the second quarter is also around 240 million dollars.

Scott Grischow: Those were book cash balances. They were not bank cash. So there is obviously a timing element there. We obviously managed cash to the lowest level possible, redeploying that towards dead paying down on a revolving credit facility and obviously reinvesting in the business and acquisition. So that cash is not being trapped or held for the long term. It's being put back to the balance sheet, to grow.

Selman Akyol: Okay, thank you very much.

Ned Baramov: Our final question comes from Ned Baramov with Wells Fargo. Please proceed with your question. Hey guys, good morning. Thanks for taking the question.

Joe Kim: Given the resilience of your business and the well-documented interplay between volumes and margins, is there a thought to provide a longer-term base forecast on EBITDA and or distribution growth as opposed to your typical one-year forward update that you're providing December? Yes, Joe. Good question. We have, we're going to put out a December investor presentation, and I try to highlight a few of the themes that are in the prepared remarks, but let me try to be even clearer on this one.

Joe Kim: If you look at our business, and you look year over year for last five years, you know, you've seen our balance, you get better, you've seen our coverage grow, you've seen our EBITDA grow, and every time we've done a formal guidance in December, it's been a growth. What we have been done, and what we plan to do in December, is really talk about our confidence in 2024, but go even further, and talk even longer term about industry fundamentals and how Sonoco can position ourselves to thrive in those fundamentals on a far perspective. So if you're with a little bit of patience, we're in December's right around the corner, we'll give some good insightful thought about 2024 and beyond.

Ned Baramov: That's great. Thanks for that. I'm looking forward to the updating December.

Scott Grischow: We've reached the end of the question and answer session.

Scott Grischow: I'd now like to turn on the call back over to Scott Grishel for closing comments. Well, thanks everyone for joining us on the call this morning. Please feel free to reach out with any follow-up questions, and we'll talk to everyone soon. Have a great day.

Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. Today's conference has ended, please.