Murphy USA Inc.

Ladies and gentlemen, thank you for standing by, and welcome to MurphyUSA Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question anytime during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Christian Paykel, Vice President of Investor Relations. Thank you. Please come ahead, sir.

Thank you, Ashley. Good morning, everyone. Thanks again for joining us today. With me, as usual, are Andrew Clyde, President and Chief Executive Officer, Mindy West, Executive Vice President and Chief Financial Officer, and Donnie Smith, Vice President and Controller. After some opening comments from Andrew, Mindy will give us an overview of the financial results, and then we'll open up the call to Q&A. Please keep in mind that some of the comments made during this call, including the Q&A portion, will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the latest MurphyUSA Forms 10-K, 10-Q, 8-K, and other recent SEC filings. MurphyUSA takes no duty to publicly update or revise any forward-looking statements. During today's call, we may also provide certain performance measures that do not conform to generally accepted accounting principles or GAPs. We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the investor section of our website. With that, I'll turn the call over to Andrew.

Thank you, Christian. Good morning, and welcome to everyone joining us today. We're looking forward to discussing with you not only our strong third quarter results, but also the next steps we announced in the ongoing evolution of our capital allocation strategies. The business is demonstrating excellent momentum as we head into 2021, and we are excited about the opportunity set in front of us. So, let's get started with the third quarter results, which are comping equally impressive results from the third quarter of last year. Beginning with the fuels business, total fuel contribution dollars were only $6 million lower than last year, yet these results were delivered in a much different commodity price environment. Although COVID has changed the way we talked about business performance the past few quarters, we feel like we are back to talking about the normal drivers of volatility, including both the magnitude of change and overall direction of fuel prices. In the third quarter last year, prices generally trended lower through July and August and were flat in September. which was a highly favorable setting and generated an exceptional all-in fuel contribution of 20.1 cents per gallon. This year, prices were choppy but generally flat in July, trended steadily higher in August, and briefly dipped in September prior to rallying higher the last half of the month. Generally, that is an unfavorable environment. But remarkably, the third quarter 2020 environment generated an even higher all-in fuel margin of 22.3 cents per gallon, about 2 cents per gallon or 10% above the prior year. Despite total volumes down around 12% year over year, total fuel contribution dollars of $220 million were only about 2.5% lower, down from $226 million a year ago. Importantly, these results continue to validate our belief that fuel retailers are establishing higher baseline margins to help offset lower customer traffic, which remains down versus year-ago levels and could stay down given shifts in consumer behaviors and the way we work. More importantly, we believe Murphy USA, with its high-volume, ultra-low-cost, fuel-focused formats, will continue to benefit from the industry's higher fuel margin break-even requirements setting the stage for further success for us in 2021. Beyond strength and fuel results, our merchandise business continues to generate consistently impressive results. We held share gains in critical categories such as cigarettes, where once again we grew units, sales, and margins. When coupled with strength in other destination purchases like Lotto Lottery, It's clear customers are continuing to seek value from core products in our stores. Complementing continued strength in general merchandise and beer categories, which we highlighted as high performers on prior calls, we are seeing material sequential improvement in fuel-attached categories like packaged beverage, candy, and salty snacks. From an OpEx perspective, we saw some modest increases resulting from clear and deliberate choices we made to benefit both our employees and our customers. We maintained our commission kicker program throughout the third quarter to keep our frontline sales force engaged and motivated. And we saw the impact of that engagement in our merchandise results. We maintained our expanded sick leave policy. and assigned additional store hours to cleaning to maintain as safe an environment as we can for our customers. We also experienced a little bit of pressure in store supplies, shipping more cleaning and sanitation products to our stores, along with PPE gear and COVID-related safety signage. We also saw a negative variance on G&A expenses, but we couldn't be more pleased to be able to fund a $10 million donation from our outsized year-to-date earnings to the MurphyUSA Charitable Foundation which helps support critical programs in our community in broader southern Arkansas area. Importantly, the foundation also matches our employee giving, where we tallied another record year of support for our local United Way in our annual campaign. Our employees gave $375,000, which was a wonderful outcome, especially considering the elevated needs in our community this year. I want to thank all our employees for their generosity and positive commitment to the communities where we live and work. From third quarter results and encouraging October data, it is clear the business is gaining momentum as we head into 2021. Fuel volumes improved noticeably this month, where we are seeing prior year same-store comps improved to 94%, coupled with healthy margins in the high teens to 20-cent range. we continue to see the knock-on benefits from higher customer traffic and higher margin category merchandise sales. When coupled with market share gains in key categories, we are exiting the year at a materially higher level of per-store contribution, which helps underwrite our 2021 EBITDA target of about $500 million. So let's now turn to the press release we issued after yesterday's market close, where we announced an update to our capital allocation strategy. First and foremost, this announcement is an outcome of a systematic and longstanding commitment to consistently review and refine our capital allocation strategy, which to date has largely consisted of balanced organic growth and share repurchases. Accordingly, this latest refinement is not a sudden shift in strategy. Rather, the business has benefited from ongoing strategic initiatives we have executed over the past several years, enabling outsized operating leverage to the current market conditions and resulting in strong free cash flow generation along with significant cash balances. As a result, we have a high class set of opportunities which we have evaluated against the framework of our five-year financial plan. And the bottom line is we simply got to the point we are at now sooner than we originally anticipated. To be clear, organic growth remains our most significant earnings and value driver, in our opinion, and we remain committed to accelerating our MTI program in 2021 and beyond. While the early results of our larger format 2,800 square foot stores are highly encouraging, it has taken us two to three years to develop the pipeline to support roughly 50 new stores per year. So even a strategic decision made today to further accelerate NTI growth would effectively be a longer term capital deployment decision. Nevertheless, at 50 new larger format 2,800 square foot stores per year, We are adding square footage on an annual basis that will exceed even some of our most ambitious small format and kiosk build classes of prior years. Given the importance of new store growth and performance as it impacts our five-year plan, we are focusing management's attention on building a distinctive food and beverage offer that is fit for our purpose, our format, and our customers' needs. to support the highest possible returns on our growth investments, which represent over $250 million of capital expenditures a year going forward. To ensure that outcome, we are allocating internal resources and making investments in people with the expertise and experience to help us maximize new store investments in the year to come. As we point management's focus towards food and beverage, we see this as a natural outcome of the maturity of our operating model, which is now prioritizing a new set of value drivers to help propel the business forward. Management focus is a valuable and precious resource that we have harnessed successfully since our spin, delivering results and executing business critical initiatives. If you go back several years ago, we pointed our cross-functional optimization focus in other areas. For example, tobacco, where we identified opportunities to improve our supply chain terms and service levels, our in-store ordering and inventory management practices, and our home office pricing and promotional activities. Today, we have significantly enhanced capabilities, including our partnership with Cormark, new operating and pricing capabilities, and Murphy Drive rewards, which have all generated both share gains and margin contribution growth since their implementation. Therefore, as we now point our optimization machine towards our least developed categories, not only are we coming up the learning curve faster, but we have new capabilities in place which elevate our expectations of future benefits. in particular we are close to renewing another five-year contract with coremark that we expect to benefit the business in 2021 and beyond with specific emphasis on improving and optimizing our food and beverage offer and cost of goods we recognize that building these capabilities internally is not easy and it takes time and given we are in the early stages of building these new capabilities We are also open to acquiring a capability set from the outside that could complement what we do well and that could also provide distinctive offers at scale suitable for our formats and customers. More broadly, we have not participated in the M&A market beyond one-off locations for several reasons we have succinctly stated over the years. In our view, paying a premium for less than average assets to simply build scale is is not a financially sustainable model. We would rather acquire their value-seeking customers through new store growth with our low-price offers, which we believe has generated higher returns than we could have attained through M&A. As such, we view the acquisition of a unique capability like food and beverage through a different lens. Moreover, after having built or bought an enhanced food and beverage capability, we could then view the acquisition of better than average midsize firms in markets we find attractive differently, as we would have a stronger basis to compete for those assets and generate the necessary synergies to make an acquisition accretive. At the end of the day, the M&A opportunities we desire may not be available to us at the price we want to pay, But it is an option we are going to explore going forward and, if successful, could open up other paths in the future. The framework through which we have historically viewed capital allocation options remains largely unchanged. However, as discussed, we have advanced significantly as a firm since our spin and believe now is the right time to not only sustain and grow our primary capital allocation options, but to diversify our capital allocation options, including a mechanism to return capital to shareholders more consistently going forward, namely a dividend. On share repurchases, we have nearly completed the most recent authorization of up to $400 million, and the Board has approved an even larger up to $500 million repurchase authorization to be completed by December 31st, 2023. providing us a little over three years, which is consistent with the pace at which we have executed prior programs. Needless to say, that commitment should clearly demonstrate our view of the potential of the business over the next few years. Share repurchase can be an extremely effective value creation tool if implemented properly over the right time period and with a business like ours that is still growing and improving. And while we feel like we have taken advantage of market volatility, we understand some periods will be more desirable than others, and there will simply be times when we are out of the market. To supplement those periods and provide consistent returns of capital to long-term shareholders, we are excited to make another commitment to long-term value creation in establishing a modest yet meaningful quarterly dividend of $0.25 per share. This initial dividend offers a yield in line with our broader retail peer group, represents a small percentage of our historical cash balances, and provides an excellent mechanism to grow with the cash flow generation ability of our business over time as we continue to build out our network and optimize returns from our new stores. We think this is a seminal moment for both our company and our investors and is another compelling reason to become a MurphyUSA shareholder. And with that, I will turn it over to Mindy.