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.

Number eight, leveraging our home office heroes.

In addition to the dedication of our store associates, our home office teams have worked diligently behind the scenes to help seamlessly incorporate the QuickCheck family and assets into MRF USA. I want to especially thank our accounting team for all the late nights and weekends to close the books on two accounting systems and reconcile different reporting periods. Our technology team for helping to quickly integrate collaboration tools and back office functionality. Our human resources team has had their hands full transitioning and onboarding an entire organization to become part of MRF USA and our contracts management team for accelerating the alignment of key contracts. As of July 12th, our entire home office teams are 100% back in the office while we continue to explore ways to increase flexibility to staff. I'm extremely proud of our entire company as we overcame a very difficult environment to deliver an outstanding quarter of financial results. Number nine, taking employee engagement to the next level. In the midst of and on top of everything going on, we launched our biannual employment engagement survey at Murph USA, following QuickCheck's annual survey a few months before. While the pandemic has resulted in fewer companies conducting surveys, and general declines in employee participation. We achieved higher participation levels than in 2019 and exceeded the benchmarks across our priority engagement focus areas, including four new items measuring inclusion and diversity. High marks on questions around fairness, trust and ability to effectively manage a diverse workforce all suggest we are demonstrating our commitment to employee growth and well-being. The basis for everything we accomplish as a company in any environment is a function of the engagement and spirit of the team. And my leadership team and I are extremely proud that we find our organization stronger and more engaged on the other side of these difficult times. As always, we will not be complacent in this regard, and we will actively listen to and incorporate feedback that can take our team's engagement to the next level. And last, number 10, believing in and investing in ourselves. During the first half of 2021, we actively engaged investors and took every opportunity to engage investor sentiment and perceptions, not only about Murph USA, but also the broader convenience sector. A few key themes emerged about relative investor preferences that were best summed up with one investor's comment to us. There's little appetite for high-quality defensive stocks with so many lower-quality cyclical companies leveraged to the recovery that are more attractive to short-term investors. While I believe we are much more than a defensive stock, as the quarter demonstrated, I certainly believe Murphy USA is a high-quality stock. Knowing one can't fight the tape, we repurchased $148 million worth of stock in the second quarter, which represents our conviction of the future potential of the business. This investment is not merely an outlet for free cash flow. As we balance our repurchase decisions against the capital needs of the company, invest where we think it will benefit our shareholders the most over the long term. This decision was made easier for us during the quarter as investor uncertainty, despite strong operating and financial performance, has led to what we believe is a continued disconnect in our stock price. This uncertainty persists against a favorable backdrop of structurally higher fuel margins, a continued robust outlook for new store growth, and the long-term synergy capture and value embedded in the QuickCheck acquisition. We cannot be more confident about our future and our ability to execute for all our stakeholders. From the resiliency of our business model and agility of our leaders to respond to disruption to the relentless pursuit to achieve the full potential of our growing business through the actions of an engaged and ever-complacent team, I could not be more proud of the overall results this quarter. I hope this narrative provides you with additional and helpful color on how we believe the quarter should be defined. I'm going to turn the call over to Mindy now and then provide some color on our revised guidance metrics before opening up the call to Q&A. Mindy?

Thanks, Andrew, and good morning, everyone. I'm just going to review some standard items quickly. Total revenue for the second quarter 2021 was $4.5 billion, which includes a whole quarter of QuickCheck contribution versus the first quarter of this year when our financial results only reflected business post-close, which meant January the 29th through March the 31st. Second quarter revenue was higher than $2.4 billion a year ago, which did not include quick check and also reflects lower gasoline prices. The average retail gasoline prices per gallon during the quarter were $2.73 versus $1.71 in 2020. Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $244.5 million in the first quarter versus $274.2 million in the same period in 2020. Net income in the second quarter was $128.8 million versus $168.9 million in 2020. Total debt on the balance sheet as of June 30, 2021 was approximately $1.8 billion, broken out as follows. We have long-term debt of around $1.794 billion, and additionally approximately $12 million is captured in current liabilities representing 1% per annum amortization of the term loan and the remainder of reduction in long-term lease obligations as they are paid through operating expense. Our $350 million revolving credit facility had a zero outstanding balance as of June 30th and is still currently undrawn. These figures result in a gross adjusted leverage ratio we report to our lenders of approximately 2.6 times and cash and cash equivalents total $165 million as of June 30th. Capital expenditures for the second quarter were approximately $89 million, $22 million of which was attributable to QuickCheck. The majority of second quarter CapEx was growth capital allocated to new store construction. Thank you, everyone. I will now turn the call back over to Andrew.

Thanks, Mindy. Before I open up the call to Q&A, we want to provide an update to our annual guidance for 2021 reflecting first half results and expected performance in the second half of 2021, given increased line of sight to some key metrics. Starting with organic growth, our plan was to construct up to 15 industry stores in 2021, including about five QuickCheck stores. However, supply chain limitations, primarily around the protective coating resin for underground fuel storage tanks, has created delays in our build schedule where we are pushing more 2021 stores into 2022, with that cascade continuing into 2023. So for 2021, we are now anticipating about 30 new Murphy Express stores and six new QuickCheck stores, along with 31 Raisin Rebuild projects. In 2022, early indications for a build class of 50 to 55 new Murphy Express stores and six to eight new QuickCheck stores in addition to 25 raise and rebuild projects. Beyond 2022, we are staffed for and maintain a real estate pipeline capable of adding approximately 55 to 60 new stores per year, including QuickCheck. From a capital spending perspective, we are maintaining activity levels throughout the forecast period and thus total capital spend will not be reduced commensurately with the NTI activity as we backfill 2021 NTIs with more raise and rebuilds and initiate 2022 build class activity sooner than normal. The result will be more rateable store openings across the four calendar quarters next year as we work to catch up on new store activity into 2023. As such, our combined capital budget, which prioritizes organic growth and new stores, was originally forecasted in a range of $325 million to $375 million which includes a range of $275 to $325 million for Murphy and up to $50 million for QuickCheck. While we expect to remain in this range, we are more likely to fall at or below the midpoint versus the upper end. Moving on to fuel contribution, we originally provided per store volume guidance of 245 to 255,000 gallons on an APSM basis. Thank you very much. Our merchandise business continues to perform, and we are tightening our range towards the high end of original guidance to between $690 million to $700 million. And this increase comes despite some of the headwinds we mentioned earlier in the call. On the OpEx side, as our average format size continues to grow, we expected our per store cost metrics to increase, both from new 2,800 square foot stores and raise and rebuilds, which turn a higher performing kiosk into a 1,400 square foot store. When combined with the larger format QuickCheck stores, our original guidance was arranged at $27,000 to $28,000 per store month in 2021. While cost control remains the central focus of our strategy, the labor market, supply, government-sponsored COVID relief programs, and inflationary pressures from a recovering economy have created widespread employment issues, not just for Merck USA and our C-Store competitors, but impacts have been felt more broadly across retail sectors. As mentioned, our priority has been to reward our employees who are committed to us through overtime, contest incentives, and commission-based adjustments, in addition to select market wage adjustments to invest in our people and maintain our sales growth trajectory. As a result of these actions, we are experiencing higher-than-normal pressure on our store-level operating expenses, which in turn impact benefit and other employee expense items. Some of these impacts have not yet made their way into our financial results. In the first half of the year, we expect the second half to reflect more labor pressures, resulting in an updated guidance of $28,000 to $29,000 per store month. When we compare these pressures to the typical competitor in our sector, who has larger average rosters and lower sales and volume throughput, we believe that not only will our relative cost impact be less than theirs, but we actually stand to gain to the extent their higher relative cost continue to be passed through in the form of higher fuel prices and margins. Our SG&A expense remains in the range of $190 to $200 million as we continue to invest in critical IT projects and personnel to help support corporate priorities, including the QuickCheck integration and drive long-term efficiencies and new capabilities. Effective tax rates are unchanged and expected to remain in the 24% to 26% range. Annually we have provided an approximate EBITDA outcome as a function of a representative all-in fuel margin to serve as a marker for modeling purposes and to help illustrate the earnings potential of the business. While we are not updating the prior modeling estimate for 2021, Thank you very much. In July, volumes are running at 93% of 2019 levels at retail margins north of 21 cents per gallon. Thus, combined with the first half results already booked, we certainly expect full-year results to eclipse our prior modeling estimate. With that, we will now open up the lines for our Q&A. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the queue in your roster. We have a first question. It comes from the line of Boney Herzog from Goldman Sachs. Your line is now open. You may ask your question.

Yeah, thanks so much. This is actually a Sam Reed pitch hitting in for Bonnie. I wanted to just quickly touch on the merchandise margins in Q2 and recognize they were very strong. But maybe could you give us a little bit of a sense and perhaps quantify how much of the lift specifically came from QuickCheck's higher margin business versus maybe just strength across your core Moosa business? Thanks.

The total contribution margin dollars was a strong mix of all of the above. If you think about our tobacco category, we continued to grow that. Non-tobacco on the Murphy side continued to grow as general merchandise from pandemic-related items, PPE, etc., was growing. offset by new innovation and items. The fresh food and beverages that was turned off for much of the prior period, the Murphy stores in the prior year came back. I mean, a lot of the absolute incremental growth year over year in the quarter was quick check because it wasn't reported in the prior period and we haven't broken out those numbers separately. But what I would say for their businesses, they have well-achieving record food sales, highest ever to rebound. What's been interesting is looking at the day parts where some of the early morning coffee The late evening day part for smoothies and other beverages through some of the delivery apps continues to grow. And so we're seeing offsets at different day parts, different products, and likely different customer segments. So I would say brands and all the categories.

Thanks so much, Andrew. That's really helpful. And let me just pivot just with one question. and the employee side, especially as it relates to your store hours. I know that was something you touched on in the prepared remarks. Is there a specific day part that's being impacted here the most? And is there a risk that some of these reductions in hours might need to be permanent if some of these labor pressures persist? Thanks.

Yeah, so, I mean, we're generally looking throughout the year multiple times at, you know, the first two. Thank you for joining us. and, you know, we will resume normal operating hours as soon as we're in a increase the opening hours seasonally like we would normally have done. And so I think that's one of the things customers have probably gotten used to is that some stores just aren't going to be open as late as they were. We fully expect to be able to optimize those hours when the shortages and labor challenges get some relief.

Awesome. Thanks so much, Andrew. I really appreciate it. I'll pass it on. Thank you.

Thank you. Next question comes from the line of Bobby Griffin. Your line is now open. You may ask your question.

Good morning, everybody. Thanks for taking my questions. Andrew, I guess I want to first talk on maybe a little bit high-level subject, but we've talked in the past about this new equilibrium in fuel, and you guys are really showing it in your results, you know, first six months as well as the July comments. You know, we're in a rising oil environment, and that hasn't changed it either, so you know this industry very well, but If you were to think out of your crystal ball, what do you think would have to happen for that new equilibrium to go away?

I think you have to have highly irrational competitors to be able to do that. I think in the current environment where volumes are still pressured, you just see a more rational behavior. The point I noted about labor is a really important one. We're experiencing the same challenges as everyone else, but we have a smaller average roster. At the same time, we have higher throughput in merchandise and volume throughput. On a cents per gallon basis, even if you saw these trends continue, our impact is about You know, a half a cent to a penny in some of the worst case scenarios we've modeled where the impact for the third or fourth quartile NACS retailer is four to five cents per gallon. So the economic pressure that the typical retailer is under is going to have to be made up somewhere. and there's only a few categories that have the pricing power and the ability to push through and fuel prices is one of those. What I would also say is that you know as other retailers continue to develop the food and beverage offer, especially some of the ones like QuickCheck, etc. Food and beverage is the path to purchase for the overall store, right? And so they're able to bring in and we're able to bring in the QuickCheck stores customers through those offers. And so you don't have to be as aggressive on the fuel side to drive traffic. And so I think there's just a combination of just Thank you very much. Thank you for joining us. to which were a benefit. And if you're talking one to five cents per gallon, it's immaterial from a consumer perspective when you've seen prices rise 70, 80, 90 cents because of higher oil prices and other factors. So, you know, that's not a crystal ball. That's just the analysis that we've done. But I think there's a lot of Thank you very much.

For the store operating hours, do you expect to get those back to maybe normal levels for the second half, or is that a headwind that you think will persist for the rest of 2021?

So I would hope by the fall and winter, we're back to the normal fall and winter hours. We would typically raise our hours during the summer. A lot of the stores are at those higher summer hours now. The stores we've had to do this at are the ones that had the most severe... Labor shortages. And so that's just going to be a function of those markets, the competitor dynamics there, the employee incentives or disincentives that may be in place there. So, you know, it's going to be market by market, but I would certainly hope by the fall on an average basis we're back to that point. But if not, we'll continue to maximize the merchandise sales with the hours and the staff that we have as we did this quarter. Okay. Sorry about interrupting there.

And I guess lastly for me, just on the raise and rebuild, we've talked about this a little bit before in the past, but they continue to perform extremely well. Can you just remind us and investors, how many more years left do you see in your raise and rebuild opportunity at the current cadence that you're doing them?

25 stores a year, we're doing this for many, many, many years to the future. There are certainly opportunities to accelerate that if we wanted to. There's also a nice cadence that when you've got 25, you can accelerate to 31 like we did to maintain the capital spending. It's really helpful for our modular manufactured building You know, partner and contractors as well to have a steady cadence. And so if we were to step up to a higher level, we would need to adjust the entire supply chain to do that. So we feel good with that cadence, but it's certainly a near-term lever we can flex. Certainly there are some locations where we would need additional land available. from Walmart to be able to do that. And that could be an opportunity to accelerate those. And certainly we see a benefit when they make improvements to their big super centers. And I know they see a benefit when they get a shiny new Murphy USA in front of their super center as part of an overall attractive everyday low price offer to customers. So a number of factors there that could impact that over the long run.

Thank you. I appreciate the details and the best of luck here in the second half of this year. Great. Thanks, Bobby.

Thank you. We have the next question. It comes from the line of John Will of JPMorgan. Your line is now open. You may ask your question.

Hi, good morning, guys. Thanks for taking my question. You've had a second quarter in a row now of really strong Qs and Ws plus Marines margins. There's another quarter where we saw rising commodity prices. Is there anything to call out other than the price effects in that margin in QQ? And then, at the major view on commodity prices going forward, should we expect the margin to normalize in the back half of the year?

Yeah, so you're right. We saw, once again, a rising price environment, which impacts the uncontrollable, as we call it, part of that PS&W margin, which was very favorable. We also had deeply negative supply margins that were all set by the RINs. And if you're covering the refiners, which I know you do, they had – pretty strong refinery crack spreads at over $21. And so they're capturing the benefit at the refinery gate of that REN price. So I don't think the world is tilted off its axis in terms of how the normal market expects to work in this dynamic. Normally, you would expect this second half of the year to see falling prices. in which case the retail margin is higher, the uncontrollable or the accounting timing trading variance would go negative and so you would see the net PS&W plus RENs to be kind of below the two and a half to three cents that we would normally expect. And so I think, you know, when we get to the end of the year, you know, if we've had a big falling price environment, you know, you'd likely, you know, see us get back on a, you know, normal amount on an annualized basis. And certainly as we think about 2022 and beyond, we're not projecting six cents. We're product supply plus rents. We're projecting two and a half to three cents has been the historical norm. But we do think the retail part of that margin has and will remain elevated for all of the reasons we've discussed. And, of course, it will fluctuate in rising and falling environments offset by the PS&W component.

That's really helpful. Thank you. And then I know you're in very early innings on the QuickCheck reverse synergies, and we shouldn't really expect any tangible progress this early, but can you just go through any type of work that's being done at this stage in terms of the longer-term goal of implementing QuickCheck's food offerings into your legacy stores?

Sure. So, you know, I think the stage we're in right now is sort of the broader, you know, strategy diagnostic around, you know, what is... ...which you see through the roller... ...real promotions...

that we have in place, et cetera.

And so, you know, if you think about the platforms that QuickCheck has, I mean, they have a made-to-order model in a kitchen in the store. So the question is, for a coffee program, you know, how do we want to best deliver that at a best practice level to our customers? Today we do bean-to-cup. are all associated with that. But we have nowhere near the condiment assortment or presentation that QuickCheck has to make that offer attractive.

If you look at their open air Thank you very much.

We have roller grills today, but we're nowhere near best practice in how we do that. QuickCheck doesn't have roller grills, so there's a whole set of questions around what should the platforms be to deliver the offer the Murphy customers want within our stores. Given those platforms, what are the tradeoffs given the space considerations? How do you execute to be great versus just average at the platforms you desire to be at? and I think that's where there's a lot of learning just around food and beverage, handling, safety, training and that process side, the metric side, the daily reporting side around waste, spoilage, the production planning, those are things we've already learned and begun to implement within our store. So as we've talked about before, it's not a cut and paste of the quick check platforms offer, et cetera, into the Murphy stores. It's really how do you think about food and beverage in the context of our store. As I said before, QuickCheck is a QSR, right, with over 50% of their merchandise sales being food and beverage. They are a high-performing QSR brand that happens to have convenience items. Oh, and by the way, it has fuel at half of their stores. And so we're not going to turn a Murphy Express into a QSR, but we can learn a lot about food and beverage from that capability.

That's really helpful. Thank you very much.

Thank you. Next question comes from the line up, Ben. The line is now open. You may ask your question.

Hey, thank you. Good morning.

Morning, Ben.

I want to piggyback on John's question there. You talked about year-to-date all-in fuel margins. You also talked about how this rising price environment has benefited the PSW post-REN contribution have been a cyclical factor to the detriment of the retail margins. How indicative, though, do you think the all-in fuel margin is year-to-date of the go-forward? And I know there are variables that feed into that that can change things. It's not a single variable equation. But when you think relative to the start of the year about where the equilibrium would be on fuel margins versus now, I'm curious to hear kind of how you're thinking about things.

Ben, I think it's something that's just going to continue to evolve. And so if you think about just the retail component of it, and I break that apart because if we measure that from, say, the Opus Low to street, and you think about the typical average retailer, third quarter retail, getting their branded price to the street, If that's setting kind of the ceiling in the marketplace, what's driving that? A year ago, it was fuel volumes cut in half, and then they went from 50% to 60% to 70% to 80% to 90%. I don't know exactly what the national number is, but most reports would say it's still below 10%. And so if you think about their fuel break-even cash margin requirement to maintain their profitability... That component is still depressed, even though it's not as depressed as it was a year ago. But a lot has happened in the last year. Now we're not only experiencing labor challenges, but the inflationary pricing associated with that labor, higher prices on credit card fees, higher fuel transport costs, etc., has raised, you know, the typical retailer's break-even another three, four, five cents. And so with the Delta variant and potential restrictions coming back and employees taking different routes on that coming out of the summer driving season, don't know what's going to happen around back to school. I mean, there's a whole lot of variables out there, but I would encourage everyone to think about it in terms of the break-even formula. How are the relative sales going to do? What is their relative cost structure? How is it going to be impacted? What does the relative volume performance look like? And so I think that sort of market margin setting retailer is going to continue to feel ongoing pressure on all three of those fronts. And if there's anything this environment... Thank you for joining us. and we have additional levers like commissions and contests and the like to keep employees engaged and our fuel volumes recovering faster. And you and I have talked about sort of the supply curve and I know the industrial investors get it, but if we're on the far left-hand side and the price-setting mechanism is the far right-hand side and it gets steeper and steeper and steeper, we're going to benefit. I don't have a crystal ball to tell you what's going to happen to macro demand or labor or whatever, but I do believe and understand that the components that make up the margin setting, price setting mechanism in this market are going to continue to favor us with outsized leverage. If we can achieve that in a rising price environment, imagine what we can do in a falling price environment. The PS&W piece is just going to offset some of that. The retail margin will be higher in that falling price environment. We'll give up two or three or four cents on the PS&W side at the end of the year. We'll be back talking about three cents. Maybe we sold off some more RIMs in Q1 and Q2 at a higher price, and that balance fluctuates a little, but that's really not going to be a material number at the end of the day. and so I think it's going to be that fundamental and as long as investors continue to say, hey, structurally we're not sure about this, then I would argue structurally they either don't understand it or two, they believe a competitive dynamic is going to change and if it does and the margins crash and burn, you're going to see a large proportion of retailers in this business go out of business in which case there's an opportunity for those remaining.

Okay, fair enough. I want to ask about your operating expenses. You quantified it on a kind of cents per gallon relative impact versus the industry. Given the noise from the contribution of QuickCheck to the model, positive on the merchandise side, negative on the operating expense side, how should we think about kind of a steady same store sales operating expense growth in your business in this environment?

So I think we're going to address that, you know, as we think about our coverage ratio, you know, going forward, you know, fuel break even was, you know, kind of the key metric that we had. And as we get to zero, one, we've achieved the goal. Two, the metric gets weird. As volumes grow, the metric gets worse. And so The way we're thinking about it across all our categories is, what is the relative and so forth. to be able to monitor that. And so we haven't put forward a same-store target around that or an operating cost target, but what I would expect to see is that coverage ratio of merchandise margin to operating costs to continue to expand over time. And one of the things that we'll be sharing is how does that metric compare to our fuel break-even metric and, you know, it was stubbornly well below 90% for years up to the spin and it's consistently grown well over 110, 120% over the last few years. So, you know, I think that's often been the challenge for those implementing food and beverage programs in the C-Store sector is they raise cost at a rate greater than they're adding contribution margin. Our objective will be to continue to expand contribution margin by category and the coverage ratio by category. Okay, very good. Thanks very much.

Thank you. Next question comes from the line of Matt Fishbein from Jeffries. Your line is now open. You may ask your question.

Hey, good morning. Thanks for the question. On the labor side of things, appreciated those examples on how the team executed through the quarter. It's very easy for us here on the call to see the release and say, oh, wow, this quarter looks great and excelled. But it's amazing to hear those specific stories about the work that went into Q2 results. The whole team from store to corporate should be very proud. And as we think about the Murphy USA and QuickCheck operating environment in different parts of the country against different competitor sets, and employing team members from different costs of living and perhaps even different personal priorities given that geographic difference. Are there any key teachings the Legacy Murphy team has learned from QuickCheck or vice versa on how to combat this industry but really sector-wide phenomenon?

Yeah, I would say we've learned a lot about each other and what we found is what we – Thank you for joining us. and a different way in terms of the fresh food offer as its distinctive portion of its brand relative to how the Murphy team goes about it. But the stories of district leaders renting trucks, going to produce suppliers and making sure stores had what they needed to make sandwiches It's frankly no different than our district managers at Murphy. Instead of doing their Walk for Excellence scorecard, it's helping the store associates unload deliveries, take out the trash, clean the pumps, do whatever it takes. And so I think this is where M&A can be difficult for firms or it can just be really fulfilling and rewarding if you find... a partner in that process that has the same culture and work ethics and fundamental beliefs about what it takes to be successful and excellent in this business then you can be open and collaborate and move the business forward so what I would say is what we learn most is that we're more similar than different in our commitment and that is just open the pathway to the hundred ideas that I referenced that the integration team has identified. And, you know, a quarter of those are already in the bag as, you know, quick wins or near-term things that we could just get on with. Some of them are going to be more difficult, like how we think about integrating accounting systems and the like. But it's a highly collaborative, appreciative environment.

Great. Appreciate that perspective. and just to follow up and double click on merchandise trends. First, can you provide any general directional quarter data update on what you're seeing? And second, on the $10 million increase in the bottom of The Total Merchandise Contribution Guide. By my math, which to be fair is an oversimplification, just taking where the two months of QuickCheck were tracking last quarter versus the prior full year QuickCheck contribution expectation. in a quick check food and beverage sales perhaps rebounded faster than anticipated. Should we be thinking about that potential rebound as a function of the reopening economy and quick checks higher exposure away from home food and beverage? Or was this mostly a market share gain given that extraordinary execution by team members?

Yeah, it's hard to say is it market share gain versus... Kind of the rebound, you know, recovery versus just, you know, ongoing initiative because unlike some of the fuel and tobacco, we don't have as, you know, readily available data, you know, on that side. So it's probably some mix of both. all of the above on that side. I don't have quarter to date numbers to share like we did on the fuel volume but I would say the trends are continuing. There's a strong environment around certain promotional categories on the other hand with some of the raw material shortages we're having to adjust the promotional calendar on some other items but If we think about the MRF USA stores, 93% fuel volume relative to 2019, that path to purchase coupled with the tobacco share gains is a good indicator of the foot traffic. Similarly, on the QuickCheck stores, Food and Beverage is the traffic driver at those stores. It coming back is also a good indication of foot traffic. So I just think with the economy reopening and those stores all running at a really high level despite a few operating hour adjustments, I think it just bodes well for the second half of the year. and I think it goes back to that employee engagement. I'm not sure every retailer out there is having that same benefit and so I think it's a real distinctive advantage on this marketplace and it's something customers can see and feel as well.

Perfect. Thank you very much. I'll pass it on.

Thank you. There are no more questions at this time. Please continue presenters.

Great. Well, thank you all for joining today. We don't normally do a top ten list, but I just felt that with such exceptional results in this quarter, it was just more helpful to just let you know just how challenging it was, but what these incredible team members did to overcome those challenges to deliver the results. So I hope you appreciated the narrative, and we'll look forward to the next call. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for participating. You may now disconnect.