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.

Thanks, Andrew, and good morning, everyone. I'm going to review some standard items quickly. Total revenue for the third quarter of 2021 was $4.6 billion versus $2.8 billion in the third quarter of last year, which was not inclusive of QuickCheck. Average retail gasoline prices were $2.89 per gallon in the third quarter versus $1.90 in the prior year period. Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $202.5 million in the third quarter versus $141.5 million in the same period in 2020. And net income in the third quarter was $104 million versus $66.9 million in 2020. Total long-term debt on the balance sheet as of September the 30th was approximately $1.8 billion, of which approximately $15 million is captured in current liabilities, representing 1% per annum amortization of our 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 has a zero outstanding balance at quarter end and is currently undrawn. These figures result in adjusted leverage ratio, which we report to our lenders of approximately 2.4 times. Cash and cash equivalents total $301.3 million as of September 30th. Capital expenditures for the third quarter were approximately $74 million, $13 million of which was attributable to QuickCheck, and the majority of the overall capital, or roughly $64 million, was directed to new store construction, where we opened four new Murphy Express and three new QuickCheck stores. We opened one new Murphy Express and one new QuickCheck store in October, and we currently have 18 new sites under construction, including two new QuickCheck sites in addition to 10 raise and rebuild projects. And with supply chain pressures impacting our new build program, our capital spend is likely to be much closer to the lower end of our guided range of $325 to $375 million as we will push some construction costs into the next year. Thank you, everyone. I will now turn the call back over to Andrew.

Thanks, Mindy. It's been another great quarter, and as I alluded to earlier, one that on paper wasn't dramatically different than the second quarter. So when we look at the financial results, we wanted to be just a little more thoughtful on how simple the business can be when we aren't digging in deep to explain variances or add color around certain performance metrics, which we detail in the release. We're clearly delivering top and bottom line performance that should resonate with investors, and we expect to be able to continue growing these critical profit drivers in the business for the foreseeable future. With that, operator, we will open the lines for our Q&A.

Thank you. At this time, if you would like to ask a question, simply press star, then the number one on your telephone keypad now. Your first question comes from the line of Bobby Griffin of Raymond James.

Good morning, buddy. Thank you for taking my questions.

Hey, Bobby.

Andrew, first I want to just touch on, and there's a little Mindy's comments too, but just the pipeline for Shores in 2022. I know you guys do a lot of work around, you know, pipeline and projects. Is the outlook still the same, or is the construction side of it gotten incrementally worse?

As we look at approaching years and stuff like that, you know, there may

be a handful of openings in the updated number that shift to the first or second of, you know, the overall plan.

The pipeline looks really robust for next year. I think right now we've got, you know, 56 Murphy stores and QuickCheck stores kind of in the pipeline.

We're looking still to do about About 30 raise and rebuilds more than our target for 21.

And, you know, we'll be between 25 and 30 between Murphy and QuickCheck for next year. So the pipeline looks good. If something slips from the prior numbers we updated, it's only into the first or second week of January. And 2022 and beyond looks very solid.

Okay, great. That's helpful. And then also on station other objects, we're still getting quick check integrated in. So, you know, trying to clean up our models a little bit is the rate of 2 21 or so in the third quarter. Is that kind of the right base case? So maybe for us to think about and then take back into account the using the usual seasonality that happens in that line item.

I think that's probably a good estimate. I mean, we'll be clear about that, you know, the next call in terms of, you know, full year guidance for the, you know, the combined business. But, you know, there was certainly some cost increases in Q3 that took place that kind of reflect a pretty good measure of what the ongoing, you know, business runs at on a seasonal basis.

Okay, and then lastly for me, Andrew, in your preparing remarks, you mentioned supply chain, and I also appreciate the detail of kind of breaking the business down the more simple way, too, with the per pennies and gallon side of things. The supply chain side, did it limit some of the inside store sales, and that's part of the decline in comps, or is it just a function that, look, the comparisons were pretty tough the prior year, and when you look at things on a two-year stack, the business is still growing at a very healthy rate?

Yeah, that's a great question, Bobby. Look, first thing I'd say is do look at the two-year stack and so on a sales basis. You've got, you know, 10% on tobacco and 11% on non-tobacco. And what that essentially is saying is that we held share on the tobacco side. I mean, we had really outsized gains last year in this period, and we held on to those. The second thing on the non-backup side is, I mean, we had all this excess general merchandise sales of PPE. So we successfully shifted the mix back. I mean, alternative snacks and snacks, the increases there are more than made up for the shift in general merchandise. Candy was increased there was half the size of the general merchandise decline. So we successfully shifted the mix. The second thing I'd say is, you know, if you look at margin on a two-year stack, but even on a one-year basis, that's really impactful. So especially if you think about tobacco, we're starting to see, you know, some declines on volume as an industry. We continue to outpace the industry on total nicotine, and so share there into being successful. I guess the other thing I'd just say from a trend standpoint, we ended the quarter really strong in September. October, we ran a candy promotion, which would be record sales in the month of October. And I think what that's telling me is we've got customers who are in the stores buying. We've got associates who are engaged that earn extra commissions through a variety of promotions. And we've got manufacturers that want to deliver and sell their products. We just need a little more help and a little less interference from some of the externalities, if you will, to allow us just to see the economy recover and see things get back to normal. But we've got engaged customers. and manufacturers out there helping us. So hopefully that detail helps a little bit, and I encourage you to look more at the margin growth than just the sales growth.

Absolutely. No, I appreciate it. Very helpful. Best of luck here rounding out the year. Great. Thanks.

Comes from the line of Bonnie Herzog, Goldman Sachs.

Thanks so much, guys. It's actually Sam Reid. I've been sitting here for Bonnie. So I wanted to maybe pivot a little bit and talk about fuel margins here and maybe just how they trended during the quarter, you know, maybe specifically in September versus August and even in October now that, you know, that the month is almost over here, just to get a sense as to maybe how that's looking in Q4. And then separately, I know it's obviously still very early, but maybe how should we think about fuel margins for next year, especially, you know, if we do see this sort of rising fuel price environment or elevated fuel price environment continue? Just maybe wanted to get your sense of that as well. Thanks.

Sure. Well, the first thing I'd say is across the months, the margin was remarkably similar, you know, 22 cents, 27 cents, 23 cents. So, 24 cents all in retail, not a whole lot of variability there. And then you add the 2.6 cents of PS&W, you get to the 26.6 cents. So, you know, I think maybe there's three things I would say kind of in response to your question. I would separate the notion of rising prices from elevated prices.

We've seen rising prices this year, and they have been as significant as as the falling crisis we saw last year.

And as you know, margins contract when prices rise, but they really behave the same once you get to normalized but elevated levels. And it's typically higher margins because the credit card fees are higher for us and everyone else knows get passed through. As I just shared, I mean, we saw double-digit retail margins last Typically, we would see mid to high single-digit margins in a similar rising price environment of that magnitude. You know, the other thing I would say is while we have elevated prices, there's a huge difference between $3 a gallon and $4 a gallon. You know, first, customers become more price sensitive as you get over $3. So the value brands like Murphy take share. Now, we do see gallons per fill go down, but we don't see total gallons go down. And if you look back to 2008, we really didn't see a macro demand elasticity until you started approaching $4 a gallon as consumers really had to start making choices around the utilities that they think about. And then what we saw was the prior behavior included buying smart cars, which disappeared just as quickly as they appeared. And the key point there is, Customers, not just low income customers, all become price sensitive. So actually this is teeing up for a great environment. We couldn't have had a better margin environment for such a steeply rising price environment. In the more elevated environment with the pass-through effects we're seeing, we're going to see more normalized, you know, run-ups and run-downs, but at a higher level. But these customers are going to be more price sensitive, and that's going to help us with our everyday low-price position. And I guess the other thing I'd add to that, you have a low-cost operating model to start with. We've talked about some of the levers and scale we have to offset the increases in the cost. Expectations will continue to offset the cost with merchandise sales. So the higher fuel margins that we're seeing, for us, all flow through to the bottom line.

Awesome. No, Andrew, thank you so much. That's super.

Maybe just to sneak another one in here really quickly, just on the beverage side, I think you might have said something in the press release on beverages, but maybe just a little bit more detail on what you're seeing, especially in immediate consumption. And then, you know, maybe just looking at it from another perspective, are you seeing any changes in consumer behavior around immediate consumption beverages, you know, given some of those trends we are seeing in gas prices? Thanks so much.

We really aren't. I mean, the beverage number picked up really nice year over year. You know, there's obviously the mix within that is you see challenges in CSD being offset by energy drinks, teas, waters. other products. So the continued innovation has been a big win. They continue largely in the Murphy case to be an attached item to the fuel or tobacco or other destination to the store. And in the QuickCheck side, part of the basket is part of the food destination there. And so you know consumers have to wash down their their food with something and so we're seeing continued growth in the uh beverages and you know frankly as we get into the synergy work with uh quick check see opportunities uh you know to make some improvements on that side awesome thanks so much andrew really appreciate it yep your next question comes from the line of ben bienvenue

So I want to ask a similar question to a question that Bobby asked, but about the merchandise business. You know, we're still integrating QuickCheck into our models. You noted some commentary around kind of what the new normal is for operating expenses. One of the things that stood out to us in the result was just the the strength of the merchandise margin, which looks to be heavily driven by mix, which I assume is heavily driven by quick check. Well, is this, you know, 19 six type of level of run rate? How much seasonality should we expect in that margin?

Any sort of cover color you can offer there would be helpful.

Well, I would say both on the Murphy and the QuickCheck side, we saw really nice improvement in the mix. I mean, on the Murphy side, beverages, candy, salty alternative snacks all performed really well year over year, more than offsetting the general merchandise tailwinds we had during COVID. At QuickCheck, we continue to see record food sales at a number of the stores. We've opened four stores just in the last few weeks, and they've all hit the ground really well. We've been able to take price to a certain extent on food items there. And so there's just a number of things that I would describe as sustainable, which I think is the essence of your question there. from a unit margin standpoint. So mix is getting better. Pricing's attractive. There's probably a little less promotion on the margin, on the Murphy side. And I think it all plays well for our model.

Okay, great, perfect. My second question is about capital allocation. You guys bought back a lot of stock in the second quarter, bought back a little bit less this quarter. I know you bet spend ebbs and flows within the bigger picture paradigm of a commitment to buyback. I want to ask, I think this question has been asked before a few quarters ago, but you're continuing to integrate QuickCheck. You've got all these levers to pull on capital allocation. Is M&A still something we should consider, incremental M&A, going forward? Was it a one-and-done, or is it just circumstantial? Thanks.

Yeah. Look, it's a good question, and clearly there's been so much activity out there on the market, and, you know, we've looked at things before, and certainly when you do one, all of a sudden you find yourself seeing a lot more opportunities crossing your desk. I think we've described before how we thought about M&A. It's either something that's massively transformational, which, you know, we really don't see opportunities. We see things as strategic, building, buying a capability that would be hard to build. And I think in buying QuickCheck, it's a QSR. We kind of leapfrogged that. brands like ourselves, other brands that do food in the C-store sector to an honest-to-goodness quick-serve restaurant. You know, I think we also noted last October there might be quality mid-size change for which you could apply your synergy, your capabilities and get synergies, including your enhanced synergies. And I would say is most of the assets that for sale in the market are generally weaker assets, older assets. And when I think about older, 30- to 40-year assets, single-wall tanks, environmental challenges, not well positioned for a QSR offer like a quick check. And so in some ways they become somewhat undifferentiated stores that and there are plenty of retailers out there who are looking to acquire those, either to get scale or as part of a larger roll-up play, et cetera. So, you know, I would never say never in terms of one and done, but if you think about the intent behind QuickCheck, it was to really make a strategic acquisition to buy a capability that You know, if you saw something really unique out there that you thought you could apply that capability to, or if you think about the Murphy Express model where we may be looking to, you know, enter new markets and you could get a toehold position and they were quality assets, you know, you might do something like that. But what I can tell you is everything that we've seen and taken a look at doesn't fit that profile. So I would put that much lower on the probability list, but I wouldn't assign a zero probability to it. Okay, perfect. Thanks.

Your next question comes from the line of John Royal of J.P. Morgan.

Hey, good morning, guys. Thanks for taking my question. So my first question is on same-store fuel volumes. I think on the last conference call you had talked about July being about a two-year basis, somewhere around 89%. So is there any color on August and September, and if there was some degradation in demand, if I'm actually looking at that correctly? And then I apologize if I missed it in the opening remarks, but I don't think you've mentioned anything on how October and 4Q are trending. So any updates there on the same sort of volume would be appreciated. Thanks.

Yeah, John, look, you know, every quarter is a tale of, you know, three months or 13 weeks if you're on the quick check retail, you know, July started. um you know strong you know it's hard for us to actually say uh without more uh time from a hindsight standpoint was it macro demand but certainly in a rising price environment uh we want to maintain our everyday low price uh position but it's all you're always just a little bit uh you know challenged you know on that side i mean from our best Near term indicators, you know, macro demand in our markets are still down, you know, 10%, 12%, you know, percent. So, you know, our view is that we held share in that period. But I'll mention it since you asked. It's slightly above that, probably around, you know, 91%, you know, recovery month to date, which is stronger. And margins, you know, that's for 2018. margins are significantly, you know, higher than 2019. So total contribution remains elevated. And so I think the big question is, you know, when do you get out of that 89 to 90, 91, 92, you know, percent range and, you know, more into a persistent, you know, 95% range to kind of pre-COVID? And look, we see that some weeks. But often you can look back and say, well, there was a bigger storm event or something like that that you're comping against. So right now it just seems very persistent in that low 90s range. But with margin, that continues to more than make up for that. And I think for us, as we've noted and kind of framed today's call, that's all going straight to the line because we're able to offset, you know, all of the operating cost increases with the expansion on the merchandise side, which plays to the uniqueness of our model.

Great. Thank you. And then I just wanted to go back to your initial view of the $550 million Visa top of the year offer. that you had several quarters ago, and I think you had sort of an illustrative 18-cent fuel margin at that time. You know, obviously now we're through the first three quarters, you're over $600 million, and I think it's about $0.26 fuel margin year-to-date. So I know you tweaked some guidance figures a little bit, and, you know, it's very obvious that a lot of the drivers around the fuel margins And there's perhaps some pull the other way from OpEx. But just anything else you can highlight that's kind of different about this environment, more sort of along the margin other than the big headline pieces that we all know about, things that are a little bit different now than, you know, when you were looking at that $550 million view?

Yeah. Well, the first thing I would say is, you know, we have – I had a view coming into the year about how demand would recover, and we were wrong. Also, in some ways, kind of agnostic as to, you know, the volume because you would make up for it in margins. Beyond the COVID recovery time period being off, I don't think that – I mean, we certainly didn't anticipate – government reaction, market reaction around labor supply, the impact of labor shortages on logistics, supply chain, and all of those factors that have really made it extremely difficult for the typical retailer in this space And while we always, you know, subscribe to the notion of the higher fuel break-even as something being passed through, I think the degree to which you saw the labor cost inflation, the other cost inflation, the supply chain shortages that impacted this typical retailer, how quickly that would elevate inflation. you know, their price pass-through to just maintain their profitability. And in this rising period, you know, how that impacted a way. So, you know, as I think about next year, you know, again, I would say, look, is it going to be $90? or 95% or 100%, I'm not really sure. What I can tell you is that our advantage business model is uniquely built to thrive in this environment. It's about relative and advantage competitive positioning within the industry, and I think that's going to lead to higher fuel contribution over time. We noted in one of the investor conferences that you know, on a 21, 2021, 2022 store month basis, you know, historical numbers were typically around 750 to 800 million in fuel contribution. You know, in 2020 and 2021, that number is a lot closer to a billion in fuel contribution, right? In terms of where we expect next year to be, you know, you plan for somewhere in the middle, but you've probably got more chips on $100 million of upside to the business than you have $100 million of downside to the business as you think about how you think about planning for the business and allocating capital for the business. So hopefully that's, you know, helpful and we'll probably be as wrong in terms of guessing how 2022 evolves, but I think we're going to be right in terms of demonstrating the advantage aspects of our business model.

Yeah, that's really helpful. Thank you. And then if I could squeeze one more in, it's just going to be another impossible question on 2022. Yeah. On the OPEC side, it seems like you're tracking in line with your revised guidance. on station optics for the full year. Just any color. And I realize, you know, fully appreciate that you're putting out, you know, guidance in the next quarter, but any color on just the various kind of moving pieces back and forth looking into next year. I know you've got some inflation on the labor side that you're obviously, you know, handling a lot better than a lot of your competitors are. But just thinking about kind of where we are now at this sort of 30 level and how we should think about that going into next year.

Yeah, I'm just going to go back to the way I described the quarter, and maybe this will make it really simple for you. You did a great job kind of estimating the quarter this time. You nailed the number, so congratulations. So to get your long-term number, I think, more in line with where our view is, just think about the merchandise contribution. from the new stores, the improvement initiatives, et cetera, are going to more than offset the labor, supply, inflation, other operating cost increases that we will have. And so if you can get the gallons right and the fuel margin right, it's going to be really easy to estimate EBITDA. And then when that sustains at that higher level, I think it helps change the notion of this is you know, a higher risk business to actually a lower risk business given we're the advantage value player in our sector.

Okay. Thanks very much.

Great.

This concludes the Q&A session. Are there any closing remarks?

All right. Thank you. Today, I think my last comments probably summarized how we view the quarter, also how we view next year and the ongoing strength of our business. Thank you, and we'll look forward to talking to you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.