Murphy USA Inc.

Good day and thank you for standing by. Welcome to the MurphyUSA second quarter 2021 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. And please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Christian Pikul. Sir, please go ahead.

Yeah, thank you. Good morning, everybody. Again, thanks for joining us. With me, as usual, are Andrew Clyde, President and Chief Executive Officer, Malynda 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 after a brief discussion around our revised guidance. 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 Murphy USA Forms 10-K, 10-Q, 8-K, and other recent SEC filings. Murphy USA 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 GAAP. 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 very pleased with Q2 performance, which led to the second strongest quarter in our history from a financial perspective, comping against outsized OPEC and COVID-impacted results from last year. While the end results were impressive, this was by far the single most challenging quarter from an operations and execution perspective we have ever faced as a company. I am very proud of our entire team as we overcame many significant obstacles to deliver these strong financial results. Make no mistake, these results were the outcome of a deliberate set of choices and intentional actions taken during the quarter that built on decisions and capabilities we have developed since then which in turn helped us overcome these challenges and deliver bottom line results in the manner you have come to expect as Merck USA shareholders. So rather than walk through operational highlights as I would normally do, I want to take this opportunity to do something different as we reflect on the COVID environment, recognize and thank key contributors including our field and home office heroes, and communicate to you just how nimble and responsive our business can be when it comes to serving customers, Working with strategic partners, supporting our employees, and delivering for all our stakeholders. To frame this conversation, we created a top ten list of some of the achievements we think are most representative of the MurphyUSA spirit, commitment, and passion for our business. Number one, leading through merchandise supply chain disruptions. We were certainly not the only retailer to face potentially disruptive supply chain issues, but our team was proactive and went the extra mile to ensure we could continue serving our customers. Let me give you a few examples. One of the reasons we were drawn to QuickCheck was a shared culture and work ethic, and during the quarter, the team proved themselves as committed to their customers as we are to ours. When faced with supply shortages that potentially impacted their prepared food offer, the operations team filled the void to make sure product got from suppliers to the stores including renting trucks themselves to deliver fresh produce so they could keep serving customers. That is what I call amazing spirit and a commitment to customer service. On the merchandise front, some of our largest suppliers were disrupted due to raw material availability and workforce shortages, which resulted in reduced availability of certain items. Our team had to go the extra mile to ensure our stores remained stocked, keeping in constant contact with vendor partners, taking deliveries of product outside normal operating hours, adjusting the promotional calendar when appropriate, and communicating updated planogram tactics to the stores. Number two, adapting to the ransomware attack on the Colonial Pipeline. Low probability and almost unforeseeable outlier events continue to make headlines, with the most recent being the ransomware attack on the Colonial Pipeline, where we are one of the largest shippers. The event mirrored in many ways a major hurricane for which we are very well prepared, as we witnessed significant pre-buying activity before outages began. The event impacted nearly a third of our stores and resulted in widespread gasoline shortages across the southeastern United States. Our supply team with their capabilities, experiences, and assets was able to optimize routing of fuel supplies from other markets while leveraging our fuel carrier partnerships and storage positions to help minimize operational impact. As such, total volume impact was minimal across the time horizon of the event. Number three, navigating continued driver shortages for fuel and merchandise logistics. Driver availability, which has been a material and contributing factor to broader fuel and merchandise supply chain challenges, also impacted store operations. In this case, our scale and strategic relationships with fuel carriers helped to minimize outages and rate increases on the fuel transport side. From a broader merchandising perspective, store operations were challenged as fewer deliveries translated to extra labor and effort to stock and display some direct distributed products, further taxing store-level employees. Our renewed partnership with Coremark continued to pay dividends as they maintained excellent fill rates on core products, and their new TrackMyOrder real-time logistics technology allowed efficient use of store labor. Despite the three externalities highlighted above, we continue to press forward with major initiatives to drive improvements to position the business for the future. Number four, engaging customers and store associates through innovative tobacco promotions. Despite comping against last year's record pantry loading results, we were pleased but not surprised to see tobacco sales and margins continue to grow favorably against the prior year quarter which showed material outperformance that some investors may have thought was transitory. On a same-store basis, we grew tobacco sales slightly, but margin dollars grew at a 2.2% rate in the second quarter versus 2020. Meanwhile, the two-year stack shows growth north of 20%, meaning we have maintained and grown tobacco contribution from existing customers and new customers that we were able to better serve during the pandemic. Through targeted category investments in shelf space and fixtures coupled with our scale and upselling ability and, of course, the unique advantages of our Murphy Drive Rewards capabilities, we have become the retailer of choice for new product promotional activity in the broader tobacco category, a distinction that enhances our long-term participation in the evolving category as manufacturers continue to support and promote alternative nicotine products as they did in Q2. Our store employees know how to upsell product, and having effective promotions is one way in which we keep them motivated and engaged. They are incentivized through contests and bonus opportunities, which help drive results in both the tobacco and non-tobacco space. In a normal environment, the ability to properly staff our stores might not be a noteworthy event, but in our case, it was critical to executing effective promotions with our vendor partners, most notably in the tobacco space. Number five, resetting large format stores to achieve their return potential. Our success in the tobacco space does not mean that we have taken our eye off the ball in the center of the store categories either. To further our goal of optimizing return on capital employed, after analyzing opportunities in our large format 2,800 square foot store design, We implemented a reset across a group of pilot stores, resulting in increased merchandising space, better product assortment, more appealing lining packages and displays, along with many other changes to help improve the customer experience and grow sales. This follows the successful resets completed last year at our kiosk and small format stores as part of our overall zero break-even initiative. As a result, we have seen improvements across key categories, including salty snacks, candy, and alternative snack categories, as well as our fresh food products in the grab-and-go open-air coolers. Resets are being implemented across the large format stores, further boosting their return potential as part of our organic growth strategy. Number six, integrating the QuickCheck acquisition. We continue to execute and realize near-term synergies from the QuickCheck acquisition, and we are well on pace to meet our year one target of $5 million of run rate savings. Quick wins to date include leveraging our existing scale to reduce certain G&A, insurance costs, and vendor contracts, developing and implementing fuel pricing playbooks across the entire QuickCheck network to optimize fuel volume and margins, and increasing line of sight to larger target synergies such as renegotiating fuel and merchandise supply agreements. We could not be more pleased with QuickCheck's performance as many stores recorded all-time record food sales. The team is going above and beyond during these challenging times An alignment of the two cultures has created a highly collaborative environment to deliver additional opportunities. Our integration team has identified over 100 unique opportunities for consideration that could create incremental value over time. Despite the externalities faced during the quarter, we clearly didn't take our foot off the gas in terms of driving the business forward. and the only way we could achieve those results was through the dedication and engagement of our team members where we managed through additional challenges. Number seven, managing critical labor and staffing shortages. We were clearly not alone in facing labor and staffing challenges as businesses of all shapes and sizes are feeling the impact of the reopening economy combined with the myriad of competitive incentives and government disincentives. We were proactive in our approach to address the problem and deliberate in our actions to ensure our customer-facing services and sales-oriented activities were not compromised. We launched a hiring campaign which attracted more than 50,000 applicants in the second quarter and, where appropriate, adjusted hours of operations in some stores where staffing challenges were most severe. Further, we prioritized and communicated critical functions and workflows to the field to ensure customer-facing activities were not compromised. We happily and intentionally made tradeoffs to pay overtime to engage workers at one of the hours to help provide as seamless a customer experience as possible. In addition, we implemented a mix of seasonal rate increases and retention payments, which combined with higher commissions from promotional selling activities helped to stabilize turnover and boost new hires. While these actions did not completely offset the challenges we faced, They did help mitigate the pressure on our stores and allowed us to continue winning with our customers as evidenced by the impressive merchandise results achieved despite store operating hours that were 2% below normal due to staffing shortages.