Murphy USA Inc.

prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad if you would like to withdraw your question again press star one thank you christian pico vice president of investor relations you may begin your conference

Great. Thank you, Cheryl, and good morning, everybody. Thanks for joining us. With me, as usual, are Andrew Clyde, President and Chief Executive Officer, Mindy West, Executive Vice President and Chief Financial Officer, and Donnie Smith, Vice President and Controller. After some opening comments from Andrew, Mindy will provide an overview of the financial results. We will review our 2022 guidance, and then we will 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. 2021 was a record year for Merck USA, and our advantaged, everyday low-price business model continues to position us to win in this environment. Our performance is a direct reflection of intentional decisions to lean into our low-priced positions to benefit customers and drive volume to our stores to capture higher structural margins, which led to a record fuel contribution of $1.1 billion and over $700 million of merchandise contributions. This was particularly evident in the month of December, where Murphy volumes, excluding QuickCheck, were slightly ahead of 2019 and nearly twice the retail margin. We believe December and fourth quarter results are noteworthy as we transition from COVID and COVID recovery to a period of inflationary higher prices, which increasingly supports our ability to take share through our low price model and competitive pricing tactics. Our bottom of the market price position in fuel, tobacco, and other categories remains central to our driving long-term value. First and foremost, the Murphy USA brand has been built on value. As stewards of our brand and reputation, we seek to responsibly over-deliver on our value proposition to customers and challenge our highly engaged store managers and associates to over-deliver versus customer expectations. Second, value conscious customers remain an underserved and growing demand segment in the marketplace. In our real estate positions, especially in front of Walmart, best position us to serve that customer. With rising inflation further pressuring disposable income across most demographics, a lower price fuel and merchandise offer will help attract that incremental customer who is seeking value. And last, in an environment where other retailers are facing increased cost pressure, our low-price model serves us as a highly efficient, low-cost method to acquire new customers and reward the loyalty of existing customers. Cost inflation was certainly evident across the supply chain and across the range of markets we operate in, where we are taking appropriate actions with our workforce to ensure we remain competitive in hiring new associates and keeping our stores well-staffed. We've expanded our sick pay and enhanced commission programs to keep store associates engaged in serving the customer and driving sales. While we are carrying some of these costs with us into 2022, we remain as vigilant as ever in our cost discipline mindset, which is critical in supporting our everyday low-price model. As we've said before, our low-cost model becomes further advantaged during periods of wage inflation as more labor-intensive formats are forced to pass through proportionally higher costs through the fuel margin, where we are well-positioned to disproportionately benefit from our lower costs and higher volumes. Versus many competitors, our company-owned real estate model is also a big advantage for us in a period of inflation. Because we do not pay cash rent in most of our locations, we are not subject to inflation adjustments on our occupancy cost. As a result of these trends, the company is generating strong operating cash flows, enabling our capital allocation strategy that prioritizes both new store growth and return of capital to shareholders. Additionally, our balance sheet is well positioned, given the earnings power of the business in the current environment, and creates incremental optionality around how to best deploy free cash flow. We remain committed to accelerating new store growth, and the team is working hard to push through the pipeline through permitting and supply chain challenges, and deliver up to 45 new stores and 35 raise and rebuilds in 2022. We have committed to increasing the dividend, not just in 22, but in the years to come, and to returning excess capital to shareholders through opportunistic share repurchases, which continue to be our highest return use of excess free cash flow. We will remain flexible in our capital allocation strategy, effectively utilizing the most accretive levers, which we are confident will continue generating shareholder value going forward. This call also marks the first anniversary of our QuickCheck acquisition, and I'm very proud to report our synergy capture is ahead of schedule and our view of the long-term potential continues to increase. As we have begun to incorporate Murphy's scale and thoughtful approach to business transformation, our excitement regarding the future potentials for both the Murphy and QuickCheck brands continues to grow. Moreover, our confidence that we made the right acquisition with QuickCheck has been validated through our due diligence of other M&A opportunities, none of which had the same quality of assets, the existing earnings power, or the future potential we see in QuickCheck. From a synergy perspective, we are tracking ahead of our internal schedule targeting $28 million of synergies over a three-year timeframe. Having achieved over 8 million of synergies in 2021, most of which is embedded in our record $1.1 billion of total fuel contribution dollars. The fuel synergies have come primarily from implementing the same principles we leveraged in our retail pricing excellence initiative within the Murphy Network, better understanding store-by-store demand elasticity and quick-check footprint and optimizing pricing tactics accordingly. Secondarily, we've been able to secure more favorable terms in renegotiating supply contracts while leveraging inventory management technology with our fuel carriers. Additionally, through leveraging scale with back office processing and the elimination of quick check executive and advisory board costs, we have achieved $2 million of G&A synergies. As we communicated early on in our integration messaging, our assessment of both direct and reverse merchandise and food and beverage synergy remained back-end weighted, but the opportunity set is growing. We have undertaken some important strategic work to better understand market dynamics, consumer preferences, and demand segments. This work helps to inform what we can and should do with the Murphy brand and, as importantly, what we shouldn't do. as well as identifying the greatest opportunities that exist within the QuickCheck brand. This body of work will help align our offer to customers within categories where we have the right to win while leveraging the distinctive strengths of each brand. These efforts will also inform our future NPI strategy and continue to generate in-store productivity improvements. I'll now hand it over to Mindy to review some financial items, after which I will review our 2022 guidance. Mindy?

Thank you, Andrew, and good morning, everyone. I'm going to quickly review some standard items. Revenue for the fourth quarter and fourth year of 2021 was $4.8 billion and $17.4 billion, respectively, compared to $2.9 billion and $11.2 billion in the year-ago period. Average retail gasoline prices per gallon during the quarter were $3.05 versus $1.87 in the prior year period, and for the full year 2021. Retail gasoline prices averaged $2.77 per gallon versus $1.91 in 2020. Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, was 216.2 million in the fourth quarter versus 136.3 million in the fourth quarter of 2020. And for the full year, adjusted EBITDA was $828 million versus $723 million in the prior year. Cash and cash equivalents totaled $256.4 million as of December the 31st. Total debt on the balance sheet as of December the 31st, 2021 was approximately $1.8 billion, of which approximately $15 million is captured in current liability, representing the 1% per annum amortization of our term loans and the remainder a reduction in long-term lease obligations as they are paid through operating expense. Our $350 million revolving credit facility had a zero outstanding balance at quarter end and is currently undrawn. These figures result in adjusted gross leverage ratio that we report to our lenders of approximately 2.2 times. Turning to CapEx, capital expenditures for the fourth quarter were approximately $59 million, and totaled $278 million for the full year, with QuickCheck absorbing roughly $50 million of that annual spend. Of the $278 million combined total spend, approximately $225 million was growth capital, including 18 new Murphy Express stores, 5 new QuickCheck stores, and 27 Raisin Reveal projects. $20 million was spent on maintenance across both networks, and the remaining $33 million on corporate projects, including critical IT infrastructure investments and other revenue-driving capabilities, including NVR enhancements and other merchandising initiatives. Our total spend in 2021 was below our original and adjusted guidance range of $325 to $375, primarily stemming from delays in our new build program, much of which is filled over into 2022 as two new stores have been completed since year end and 13 new stores are currently under construction. Despite this level of activity early in the year, and as Andrew will address in guidance, the pipeline of opportunities that we can execute in 2022 does remain temporarily impacted by supply chain and other issues. So thank you, everyone. I will now turn the call back over to Andrew.

Thanks, Mindy. Let's close with a review of 21 performance against our guidance metrics, and then I'll provide some insight and context around our 22 forecast. Starting with organic growth, as Mindy noted, we added 23 new stores in 2021, and that included five QuickCheck stores in the 27 raise and rebuilds. This level was below both our originally guided range and our adjusted guided range of between 34 and 38 new stores that we reported in July and 31 raise and rebuilds. It's noted the shortfall was largely attributable to delays in permitting and construction, but that has resulted in a higher than normal level of new store activity in January. Since the beginning of the year, two stores have already been placed in service and 13 new Murphy Express and one new QuickCheck store are underway, along with three raise and rebuild projects. Given the strong start to our 2022 build program, we are targeting up to 45 new stores, including seven QuickCheck locations and up to 35 raise and rebuilds, which have already been prioritized to backfill ongoing permitting and supply chain hurdles in our NTI program. Our real estate team and organization has the capacity to support and build a class of between 50 to 60 new stores, along with up to 25 raise and rebuild projects annually, and we expect to return to this activity level over the next few years. Moving on to fuel contribution, 2021 fuel volumes of 229,000 gallons average per store month fell short of our adjusted guidance range of 232,000 to 238,000 gallons as Delta and Omicron variants continued to hold back the full recovery, although robust margins contributed to stronger year-over-year fuel contribution dollars. Looking ahead in 2022, we currently expect fuel volumes to increase roughly 2% to 7%. or between $235,000 and $245,000 on a per store month basis. Looking at our store profitability, for merchandise contribution, we delivered $702 million of merchandise margin in 2021, just above our guided range. We plan to continue growing that contribution in 2022 to a range of between $740 and $760 million or an increase of between 5% and 8%. This growth is attributable primarily to increases in non-tobacco and food and beverage categories supplemented by continued growth in tobacco contribution. Operating expenses, excluding payment fees and rent, came in at $28,800 average per store month in 2021 within our adjusted guided range of $28,000 to $29,000 APSM. which, due to one-time items and wage and inflationary pressures experienced in the second half of the year, was above our original guided range of $27,000 to $28,000 APSM. Given these trends, we feel like we are relatively well positioned heading into 2022, yet are prudently forecasting a wider range of between $29.5 and $31,000 on a per-store month basis or up to a 7.7% increase given ongoing labor market challenges and supply chain disruptions, as well as the potential for future regulations that together could effectively impose materially higher costs on businesses like MurphyUSA. As a reminder, 2021 results included only 11 months of quick check, whereas our 2022 guidance metrics reflected expected full-year impacts Just something to keep in mind when looking at year-over-year comparisons. For our corporate costs, 2021 general administrative expense was $194 million within our guided range of $190 to $200 million. In 2022, we expect the range to move a bit higher to between $200 and $210 million as we continue to make investments in people and processes that enable new capabilities and support critical strategic initiatives. In 2022, we expect our effective tax rate to remain within a range of 24 to 26%. Last, on capital allocation for 2021, our total spend of $278 million ended up below our guided range of $325 to $375 million, primarily due to delays already discussed. Given current new store and raise and rebuild activity, we expect total spending to be in a range of $350 to $400 million. The majority of this capital is earmarked for growth, approximately $300 to $325 million, as we accelerate our activity with up to 45 new stores, including five to seven quick check locations. We expect a range of $30 to $40 million for maintenance capital, and between $20 to $35 million for ongoing technology investments and other corporate strategic initiatives. As we wrap up our prepared comments, I just want to remind investors of our intentional decision to discontinue fuel margin guidance since 2019. This choice was the outcome of our intent to focus investor conversations more on the long-term potential of the business and rather than having less productive discussions and conversations around quarterly moves and fuel margins, which can be volatile in the short-term trends but generally fell within a three-cent range in the year since our 2013 spinoff. We believe shifting this conversation has helped our investors become better informed about the business and may have helped lay the groundwork for higher valuation. Those benefits aside, we have typically supplemented our guidance with an EBITDA marker for investors primarily to assist with buy-side and sell-side modeling, which suggests a single EBITDA outcome at a specific fuel margin assumption. To continue that practice, using the midpoint of the ranges I just provided in a structurally higher, yet prudently conservative margin of 21 cents per gallon, we would expect the business to generate EBITDA in the area of $630 million. From an internal planning perspective, this level of earnings fulfills our capital allocation objectives in terms of store growth, a higher dividend, and continued share repurchase. In the past, our internal planning estimates stress tested a plus or minus one penny a gallon assumption. At this structurally higher but conservative level of 21 cents per gallon, we could certainly expect to see greater upside variability given 2020 and 2021 performance that continues in the current environment. If we do continue to see elevated margin trends, a recently announced $1 billion share repurchase program provides investors clear line of sight as we look to see how we would allocate incremental capital from upside earnings. And with that operator, we're ready to open up the call to Q&A.

Thank you. To ask a question, please press star 1 on your telephone keypad. The first question is from Ben Bevinu of Stevens. Please go ahead. Your line is open.

Hey, thanks. Good morning. Good morning. So my first question is related to your consumer. I think there's a lot of focus on the lower-end consumer this year as we cycle past some of the stimulus that we saw last year. And we've seen really across all elements of life here today, broad-based inflation. You talked about your relative positioning in the market as a share gainer in this environment. When you think about the potential trade down by existing consumers in your stores or reduced consumption by existing consumers in your stores versus the incremental market share you might take in an environment like this? What do you think the net of that environment is? And then just as a finer point, what response are you seeing today from your consumers relative to these higher prices that we see in the market?

Sure. You know, Ben, there's a lot of things that if you're doing a variance analysis and try to pick apart new customers you gain versus existing customers, what you might expect, the buying patterns, et cetera, it's hard. But I think with our Murphy Drop Awards data and insights, we're able to get a deeper view than, say, when we experienced the same type of rising prices in 2007 and 2008. You know, in that prior period when we saw gas prices approach $3.50 to $4 a gallon, it was really only until you got to about $4 a gallon that we really saw kind of macro demand elasticity fall off. So the first point is I still think there's room to go before, you know, the macro demand is impacted. That said, when you start getting above, you know, $3 a gallon, $3.25 a gallon, you absolutely see a shift as customers become more and more price sensitive. Premium customers trade down to mid-grade and regular customers that wouldn't go out of their way for a few cents find that that few cents really makes a difference. And you start seeing those customers flock to low-priced brands like Murphy, but there's also other lower-priced brands out there. So we expect to continue to take share as part of that dynamic. When we look at our Murphy Drive reward data, we see some interesting things. Certainly fill rates go down. They're down about 9% to 10%, say 11 gallons to 10 gallons. And you think about our customer, they're trying to see how far they can go on $20 or $40. And what they're doing is they're buying fewer gallons. So they have the same amount of change left over, but they're making more trips. And I think that's one of the things that I hope people have noticed is that the non-tobacco recovery in the last quarter and the year was really nice, and a lot of that is attached to fuel transactions. And so I think when you take all of this together, we would expect to see a net benefit from it. Our customers still have to get to work. They're still buying the most essential products that they need to buy. They're going to go out of their way to find value, and we're going to be best positioned to give them that value.

Okay, very helpful. My second question is revisiting in I think March of 21, you guys gave some outlook into 2024 around EBITDA guidance and kind of what the business might look like. Can you remind us what fuel margin, all-in-fuel margin was assumed in that $700 million EBITDA guidance?

Certainly. So, you know, back in 21, we still, you know, we had one year of COVID, and the, you know, expectation certainly was that, you know, margins, you know, might return to some structurally normal level. You know, I will look to, you know, Christian to give us the exact margin figure that we used in that period. But the world has certainly changed. I mean, then you remember before 2020, we were all talking about, well, can you sustain 16 cents per gallon? And, you know, that seemed like a stretch given where we were since the spin. And so we've seen a higher structural margin at the lower volume levels. We're seeing the volume recover. But we're seeing a much higher residual level sustained by the past through pricing that we're seeing in the market and our ability to capture that. And so, you know, I think as we noted in our marker, in the past we might have been looking at $0.16 plus or minus a penny. For conservative planning purposes, we're at $0.21 plus or minus a penny. At $700 million in the past, we probably would have been, you know, gradually getting that level, but at higher volumes. You know, we're probably seeing more upside than downside, you know, in any stress testing that we're doing. But we can get back to the assumption on what that 2024 number was for that $700 million EBITDA market then.

Okay, great. Thanks so much.

Your next question is from Bonnie Herzog of Goldman Sachs. Please go ahead. Your line is open.

All right. Thank you. Hi, Andrew. How are you?

Good morning, Bonnie.

good morning i actually wanted to ask about you know the the 21 cent per gallon you know for fuel margins that you called out i know you know you're just sharing this for modeling purposes only but you know i guess i'd be curious to hear from your perspective you know how realistic or maybe conservative you think that might be i guess i'm thinking about the context of what we're seeing you know with the the rising fuel cost environment Should we assume your margins step down, I guess, from the recent highs that we've seen, but ultimately stay elevated versus your historical performance?

Sure. Look, if I was to do just a simple walk forward from our historic 16 cents, which we used to challenge ourselves on these calls a lot about how are we going to sustain that given where we came from and walk it up to the 21 cents. I mean, we've effectively seen, you know, some benefits from, you know, QuickCheck being a higher margin market, especially with full serve. You know, we look at the structural margin that if you just said, hey, the higher break-even costs using, say, the NAX third quartile and the volume assumptions, You know, you would think that that might give you a penny and a half, two cents a gallon in terms of what we should be able to retain. But we're actually capturing a significantly larger amount of that residual. And I think as we look forward, I think we've got to ask ourselves, what is going to happen structurally to the marginal population? player and their need to pass through higher prices. And then given the competitive dynamics, what are we able to do, especially in a high and rising price environment where credit card fees are one of the biggest headwinds to everybody? And so I think as we get to that 21 cent marker, if you look at the last two years, there's a lot of evidence that the market is passing through a much higher level because it needs to and has to, and we're able to retain another four to five cents. But that's probably not a very prudent number to plan around. We want to, as a company, as a board, make sure that we've got line aside to our capital allocation priorities, our growth, our dividends, our share repurchase plans. And so that's why, Phil, this is a very prudent conservative marker to use, but as I've noted in investor meetings over the last few months, that there's probably more upside to a number like that than downside, where in the past we kind of always looked at a plus or minus a penny.

Okay. No, that's helpful, and it'll be interesting to certainly see how the year unfolds. you know, plays out. And then I guess my second question.

By the way, one of the things that we only saw in December, but we've seen rising prices throughout all of 2021. And so I think that's something else to keep in mind. The level of margin we achieved in a primarily rising price environment equaled that of 2020 where we saw that steep fall off. So I don't know where old prices are going to go Right. And if they keep going higher, that means at some point they'll just have further to fall. And so in this high price and future volatile environment, you know, there's areas for more margin upside structurally in some period in the future.

Yeah, that's a good point. And volatility is the key there. So That'll be interesting. And then I guess, Andrew, my second question is thinking about the CapEx guide, which is up, and then you're certainly focusing on growth. But at the same time, you've got this aggressive $1 billion buyback program. So how should we think about all of that in the context of your free cash flow and maybe appetite for future M&A or further M&A? Are you guys still open right now and exploring, especially given the success it seems that you've had with QuickCheck? Or do you think it's still more focusing on continuing to integrate QuickCheck?

Yeah. We'll go back to the messaging around QuickCheck. We made the acquisition. It was all about capability building. You know, how do we acquire a food and beverage capability, know-how insights that we can leverage for the future? And we felt that with such a unique asset, such a strong brand and positioning, it would be better to buy that capability than try to build it. And, you know, we've seen a lot of companies, you know, try and fail, and we've seen – Others try and succeed, but take a couple of decades to do that. And so that was the real purpose of that acquisition. You know, certainly we'd been in the deal flow, but after you do something like that and catch people by surprise, you're absolutely in the deal flow. And we saw a lot of transactions last year. And as we noted in the prepared remarks, nothing came close, to the quality of assets, the earnings, the earnings potential of QuickCheck, nor did we see something that had a capability that we said, wow, we could really leverage that and learn from that. One of the other things we noted was that, well, maybe there are quality regional mid-size change for which we could – you know, leverage the QuickCheck, you know, brand, offering, capability, some or all of the above, to those brands and formats. And we frankly didn't see anything where that fit was. And so while we're never going to say never, you know, I would just reemphasize that, you know, QuickCheck was a strategic acquisition with a very focused purpose. And we've seen nothing else out there that looks anything close to that or comparable from a different capability standpoint or something we feel really good about trying to leverage that capability on from a quality of asset standpoint. So, you know, M&A is not a target area for future capital allocation. And so we're really focused on, you know, our organic growth. The permitting process has been frustrating. You've got a lot of local and even DOT offices that remain short-staffed, closed for periods that just delays that process. And so we look forward to getting up to that 50 to 60 NTI range that we had talked about. Fortunately, we've got a great portfolio of future NTI candidates, I mean, sorry, raise and rebuild candidates. And in the current environment, They look even more attractive than they did two or three years ago. So I think it's nice, and I hope folks notice the ability to just shift our CapEx focus to those raise and rebuilds and convert some good-performing kiosks to even higher-performing small-format stores. And we're going to be able to do that within that range of, you know, EBITDA marker that we gave. And certainly, if we see one to two pennies every year for the next few years from a structurally higher margin, or four or five cents for one year, you know, we've given investors a clear line of sight where that additional margin would go towards with our newly announced share repurchase program. And we do have a history of completing those sooner than the timeframe that we typically announce.

Okay. I appreciate that. Super helpful.

Thanks.

As a reminder, if you'd like to ask a question, please press star 1. Your next question is from John Royal of J.P. Morgan. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my question. Good morning, and congrats on an entire year of four big quarterly beats. So really impressive. Thanks. So I appreciate the update on the QuickCheck synergies and sounds, you know, really encouraging so far. I think you said you're at 8 million now. Is there a number kind of where you expect to be by the end of the year? And then what would you need to see to bump up that 28 million target a little? I know a big chunk of it is backing weight, so I can understand why it may be a little early at this point. But just any thoughts there would be great. Thanks.

Sure. We're not ready to announce the year two numbers. That'll be something that will be forthcoming in our investor conferences, which I think we have lined up beginning in March through June. So we'll have a more fulsome update at that time. You know, look, on the $28 million, you know, this is something, you know, we've talked about. At what point, you know, does it help to raise that number versus just recognize that what we're effectively doing is For the QuickCheck business, it's largely what we were doing for the MurphyUSA business, taking a really good business and making it better, going through the thoughtful business transformation approach, identifying continuous improvement opportunities, making that part and parcel to the earnings growth cadence every year. And I think that's probably how we're thinking about it right now. So rather than saying at the end of this year, hey, we're going to bump it from 28 to I'm just making up a number of 40, I think what you'll start hearing us talk more about is, hey, here's the nature and range of the additional continuous improvement, productivity improvement, pricing, promotion, loyalty, delivery, opportunities, that we get from combining two really strong but different businesses, you know, together. So I hope that's helpful. But at the same time, I hope, you know, that you can think that, hey, applying that same mindset that we did to our business at the spin, you know, to another business that, share some of the same characteristics our business did at the time of the spin. But there's just going to be a lot of additional opportunities that we didn't see. And whether we call it synergy or just build it into the future year guidance, I think at some point it becomes a little bit less relevant, what you call it, as long as it's flowing through into earnings growth.

Great. Thank you. That's really helpful. And then can you talk a little bit about the same-store margin number for 4Q for non-tobacco merchandise? It was a pretty big number, and just wondering what categories were driving that, and, you know, did you see some mix-up from a margin perspective there?

This is on the non-tobacco growth?

Yeah, I think you had, like, 11% same-store growth on the non-tobacco margins.

Yeah, so the packaged beverage, the massive candy promotion that we over-delivered on in October, and then just the comeback in the snack category were really the big drivers there, John. And really what we saw there is the attached to fuel component of it was really strong. And so, you know, that was the area that was weakest in 2020 and early 21 in COVID But as the fuel recovered in Q4 nicely, you saw those attached categories come back, along with an increase in the promotional activity, which really engaged our staff, but also engaged our customer. I think one thing of note is we're talking as a team, it's like, I can't remember when we've had a Q4 Murphy-only APSM number that was higher than the full year in a December number that was higher than a October, November on a constant basis. So, you know, we're seeing nice sequential acceleration through the quarter, you know, into the new year. You know, I think there was a little lag, you know, and burnout on the holidays and some weather stuff that we'll see in January versus we saw in February last year. But we feel really good about that. and we feel really good about the attached to fuel categories that really shined in Q4.

Thanks very much.

Your next question comes from Bobby Griffin of Raymond James. Please go ahead. Your line is open.

Thank you, and good morning, everybody. I guess, Andrew, I want to first start back on fuel a little bit and just a couple of different questions to kind of come out of maybe a little bit of a different angle. But when you look at your price gaps versus peers and smaller operators as they're having to raise their prices for this cost environment that's taking place, are you seeing your price gaps stay stable or are your price gaps actually widening, which would highlight the even bigger structure advantage that you have in this environment?

Yeah, look, there's not a one-size-fits-all because we do our pricing, whether it's fuel or tobacco, et cetera, store-by-store market, by market. But generally, we're going to become, you know, more differentiated in our pricing in this type of environment. So, you know, widening differentials on the average and, you know, it's a lot of that's going to be a function of which stores are more elastic, and that widening creates that additional value. But the key is absolutely staying everyday low price, right? Even the notion that in this environment you could close the gap a penny or two and reduce the differential and pick up that margin, that's the last signal we want to be sending inflation you know, pressed customers right now. So maintaining it or increasing it is going to be our focus to pass on some of that additional value to the customer. And it's really during these times, this is when our brand and reputation gets cemented in the eyes of our customers.

Absolutely. That's helpful. And then when you look kind of over the last three quarters, the fuel margins all in have been incredibly stable, 27 to 28 cents, basically, in round numbers. When you look at your monthly margins versus historical levels or versus kind of historical performance, is the monthly also a lot more stable today than it has been historical in terms of, like, does it bounce around a lot from month to month?

It's probably a little more stable, but it's probably, Bobby, because we're just seeing prices rise continuously. And so if you think about, you know, the history, you know, we kind of got used to a low and rising price environment in Q1 where, I mean, we're looking at less than 10 cent margins, certainly less than 10 cent retail margins. And then we'd always have, you know, okay, are prices going to fall in late April? Are they going to fall in May? Are they going to fall in June? Right. And then, you know, you would see the higher volume in the summer driving season. And then, you know, typically with some of the changeover prices fall off. But if you had an OPEC announcement like we did in one year, maybe I think 2016, maybe you see prices rise and then fall off pretty good in the fourth quarter. I mean, look at what happened in 2021. I mean, prices were rising most of the year. We got a little bit of a break in December. And so I think The main reason we're seeing more consistent margins quarter-to-quarter and month-to-month is we're in the same structural price environment quarter-to-quarter and month-to-month, where historically we would see kind of the quarterly patterns that I described, and it was anyone's guess when prices would peak or drop. you know, hit the bottom in the past. I don't know if that's helpful, but I think that's a better way of characterizing it. You know, back to my comment to Bonnie, it's like, at some point, you know, we're going to achieve a new equilibrium around the supply and demand globally with crude. It's going to be more stable, and yes, there'll be some geopolitical events that will cause it to go up a little bit more, and, you know, but I'm sure at some point there are going to be some price signals for oil and gas companies to deploy capital. And at some point, you know, we'll see supply demand get back in check. We'll see a period of falling price environments. We'll have even higher margins and the ability to pick up more volume. So I think it's even more impressive what we accomplished last year, given the nature of the price structure.

Yeah, that's what I was getting at. I mean, the rice and fruit environment that we kind of were in for the whole year and the margins have been incredibly impressive and the performance has been, you know, rock solid. So that's, yeah, that's what I was kind of digging into. And I guess, you know, just lastly for me on the tobacco category, obviously very big comparison. So, you know, think about on a two-year basis as well, but Are you just starting to see some of the more normal behavior come back where, like, during the pandemic and stuff, people were buying more kind of cartons and then, you know, we're going back to maybe single packs and stuff like that, and the category is starting to go back and behave as the category was behaving pre-COVID in terms of, you know, units down, pricing getting passed through, that type of stuff from an industry perspective?

Yeah, so here's what I would say. We didn't see the pants. So I think the two-year stack is the right thing to look at. And even with the more flattish numbers in Q4, what that's really saying is as certainly cigarette volume kind of starts going back to normal trends, we've been able to hold and gain share as a result. So I'd say that the two big differences are you're not seeing the pantry loading and you're not seeing the, you know, probably the same level of, you know, consumption that, you know, when you think about from a social standpoint, return to work standpoint that you saw during the, you know, early COVID and lockdown period. We are continuing to see elevated carton sales, and I think what we demonstrated to consumers during the pantry-loaded period was they get a better value at Murphy USA, multi-pack discounts on cartons, Murphy Drive reward benefits, et cetera, and we've kept those customers and gained some of their other business. You know, we also know in Q4, Smokeless was up nicely, and so, You know, some of that probably reflects some of the poly-use habits of consumers in a return-to-work environment where they may not smoke, but they may, you know, choose a non-combustible product to go to. So, you know, we're still bullish on the category from a contribution margin growth standpoint, even as the industry kind of returns to normal levels. Also bullish on the, you know, innovation category. you know, across the board as well, you know, as customers kind of migrate to lower risk products.

Thank you. Oh, congrats again.

Thank you.

There are no further questions at this time. I will turn the call over to Andrew Clyde for closing remarks.

Great. So just, Ben, just to get back to your question, you know, in that, you know, kind of raise the bar question, slide that we've used in our investor deck, we started at 18 cents and ramped up to 19 cents over the period. And so the 700 million in that example, you know, would be, you know, at a little over 19 cents per gallon average. So you see that walk take place over that period. So look, the next four to five year period, Outlook obviously can be quite a bit higher than that given the structural margin, given the contribution from organic growth, and the ability to capture the residual that we're currently doing. I hope that follow-up addresses that question. Again, everyone, thanks for your questions and comments today. You know, we're excited about the kind of business that we've built since our spin that has allowed us to achieve the results we've achieved in 2020 and 2021, and are very confident that we're going to be able to continue to leverage those capabilities to continue to generate shareholder value in the future, regardless of the environment that we find ourselves operating in. Thank you, and we'll look forward to any follow-up questions and calls later this week and next. Take care.

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