Murphy USA Inc.

Good day, and thank you for standing by. Welcome to the MurphyUSA Third Quarter 2021 Earnings Conference Call. 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 during the session, you will need to press star 1 on your telephone. If you require any further assistance, 0. I would now like to hand the conference over to your speaker today, Christian Pacquiao. Please go ahead, sir.

Yes, good morning. Thank you, everyone, for joining us. As is the custom, with me today are Andrew Clyde, President and CEO, Mindy West, Executive Vice President and CFO, and Donnie Smith, Vice President and Controller. After some comments from Andrew, Mindy will give us an overview of the financial report, and 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 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 will turn the call over to Andrew.

Thank you, Christian. Good morning, and welcome to everyone joining us today. We were very pleased with Q3 performance, which we believe continues to showcase the reasons why MurphyUSA's Advantage business model is uniquely built to thrive in the current environment. and we expect our competitive advantage to continue to grow over time. Last quarter, we discussed the top 10 operating challenges the business was facing and how the team overcame those challenges to ensure delivery of strong financial results. The third quarter wasn't really all that different. We saw higher trending crude prices, continued labor challenges, and ongoing supply chain issues. Yet thanks to our dedicated store associates and support staff, We once again overcame those challenges and delivered another quarter of impressive financial results, further demonstrating the resilience of our business. It is becoming more evident to us and should be to investors that the headwinds our industry is facing are ultimately translating to tailwinds for Merck USA. In fact, in subsequent conversations with investors at virtual conferences in September, We acknowledge that these headwinds exist and are impactful. However, we also encourage investors to ask the second and third logical follow-up questions to better understand how these pressures are ultimately manifesting in higher break-even fuel margins for the average retailer. While there may have been some reluctance to embrace what we have said for some time or structural changes to industry break-even fuel margins, the narrative has begun to change from when and if to how much. So keeping with that one simple question in mind, I want to give you a slightly different view of the financial results we delivered this quarter and how we think it should impact your view of our business. So looking at our results, if you think about the total merchandise contribution of $187 million, or roughly 17 cents per gallon on roughly 1.1 billion gallons sold, And then back out all the store OpEx of about $0.14 per gallon, all field and marketing G&A overhead of $0.02 per gallon, you get about a penny per gallon profit, or roughly $10 million. So for the sake of argument, the merchandise contribution alone has covered all the operating costs to run the stores, including all the field-related and supporting overhead. Then if you look at the fuel margin of 26.6 cents per gallon, back out payment fees of about 4 cents per gallon and roughly 3 cents per gallon of corporate G&A, you get about 96 cents per gallon, which is net of a penny for rent, which on 1.1 billion gallons sold essentially gets you to our EBITDA of roughly $212 million for the quarter. When you think about the business that way, the fuel component of our earnings stream is essentially 100% of the profit, generating all the cash flow to service our capital structure and fund our capital allocation decisions. Most importantly, our growth and maintenance capital, the interest on our debt, taxes, the depreciation of our assets, our dividend, and share repurchases. So how do we think about our fuel business and the expected earnings stream it provides? First, our volumes are higher than the industry average in our public piers, which is a huge advantage. Second, we have demonstrated that with the benefits of our product supply business, our total fuel margins are less volatile over time than our public piers. And with our low-cost structure, we have greater upside exposure to the structural change we are seeing in break-even fuel margin trends. Last, with elevated prices and increasing price sensitivity across customer segments, our everyday low price position is advantaged to growth share. And thanks to QuickCheck, also a high-volume brand, and other initiatives to enhance the food offer across our network, We believe we are best positioned amongst our peers to continue to grow the high margin component of our merchandise contribution that is likely to not only absorb future costs and inflation headwinds, but will also lead to even higher non-field profits. Going forward, we are focused on three overarching goals to sustain and grow our advantage value position. First, we will continue to expand our merchandise contribution efficiently. We are not immune to the operating headwinds the industry is facing, but in our situation, these pressures have been largely offset by growth in our merchandise contribution. Put simply, we offset higher costs by just selling more stuff. Second, we are laser focused on sustaining and growing our fuel market share profitably. We are doing this through our new stores, which are demonstrating higher volumes, our fuel pricing tactics and strategies, and optimizing our fuel supply. So we will continue to profitably invest in sustaining our everyday low-price position to grow market share over time. And third, we will continue to grow EBITDA on free cash flow through high-quality organic growth and building better stores, the productivity initiatives around which we have a successful track record of delivering value, and the successful integration and expansion of the QuickCheck assets. These strategic priorities are our first calls on capital, Beyond these growth initiatives, we will continue our share repurchase program, given our view of the future outlook for the business and expected future valuation. And last, we are committed to growing the dividend distribution to maintain our modest yield as our shares continue to appreciate. Ever since our spend when our business was assigned only a six multiple, reflecting in part the market's perception of a more fuel-oriented business, we have demonstrated the enduring value of our resilient and agile business model. What makes our value creation formula so strong and powerful in our minds is that the fuel piece of our business is going to likely have the largest exposure to outsized growth in the near term, given the higher trending break-even fuel margins for the industry. The headwinds we're seeing are magnified for less efficient operators who sell less fuel and have fewer levers they can pull to maintain profitability. By complementing our fuel exposure with efficient expansion of the merchandise business, we will continue to overcome headwinds, increase the earnings power of the business over time, and grow our multiple as the advantage value player in our retail sector. So rather than pondering a reversal, or fearing a temporary period of lower trending margins, which will happen at some point but at higher levels than we've seen historically, we believe investors should be assigning less risk to fuel and, in fact, should be thinking about how much premium to assign this powerful driver of our earnings power. I'm now going to turn the call over to Mindy before we open up the call to Q&A.