Murphy USA Inc.

Good morning and welcome to the Murphy USA first quarter 2025 earnings conference call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at that time, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Christian Peichel, Vice President of Investor Relations. Thank you. Please go ahead.

Yeah, great. Thank you, Julianne. Good morning, everyone. And thanks again for joining us today. With me are Andrew Clyde, Chief Executive Officer, Mindy West, Chief Operating Officer, Gallagher Jeff, Chief Financial Officer, and Donnie Smith, Chief Accounting Officer. After some opening remarks from Andrew, Gallagher will provide some commentary on first quarter and financial results. And then following some closing comments from Andrew, 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 protections 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, and good morning, everyone. We've always said the MRF USA business model is somewhat inflation-proof, recession-resistant, and relatively immune to other periods of consumer weakness. We can now add tariff resistance to our lexicon. Our business model has proven durable and resilient against a wide-ranging variety of challenges over the last 12 years as a public company. It speaks to serving value-oriented customers, products that are largely non-discretionary, with an EDLP offer to a relatively simple, but always evolving business models. Our focus on making the business better has allowed us to deliver results and value to shareholders in almost any environment. If there's one thing that has stood out over the past decade, it's that every quarter is just a little bit different. It's like a saying we have here in South Arkansas. If you don't like the weather right now, just wait a few minutes. Murphy USA's first quarter results reflect the number of factors that, when distinctly broken out, provide a clear view of the core business and trends. especially when overlaid with a deep understanding of the underlying consumer behavior. When we look back at any quarter and consider what is important for the next 12 months and beyond, we typically organize these factors under three headings. Temporal factors that were one-off and are not expected to repeat in the next few years. Some of these are well known in advance and included in our annual plan. Others, while not anticipated, should not be a big surprise to investors as they have already been widely discussed by other firms. Cyclical factors that fluctuate up and down due to various conditions where value drivers shift both to the positive and the negative for a period of time outside of balanced and stable equilibrium. And finally, and most importantly, structural factors which tend to shift based on an industry's fundamental structure in each competitor's relative positioning, and how that relative positioning is evolving. On today's call, I'd like to review MurphyUSA's Q1 results under these headings and then overlay the results and trends with what we are seeing from our customers real time. I believe this will provide greater insights into what we believe remains a more enduring and resilient business and what was a relatively more challenging quarter. So let's start with the fuel category and the temporal factors. The first two are calendar effects, which are always fully embedded in our plan. This quarter, it was not repeating leap year and not repeating Easter and March, which together had a one and a half percent impact on same store gallons. Not planned, but clearly extreme and widely noted was the number, location, and magnitude of storms impacting same store gallons by another 50 basis points as the number of store days closed almost doubled versus a year ago. While impactful in the moment, these temporal factors are less relevant as they pertain to the long-term performance potential of the business. And taken together, these temporal factors account for almost half of the Q1 same-store gallon decline of 4.2%. More cyclical in nature is the lower absolute price level in the quarter. As we noted back in 2022, we see greater switching in share gains in high-price periods, and we get some of that back when price levels subside and move significantly lower as some subset of consumers trade off price for locational convenience. Retail prices over the past six months have averaged between $2.75 and $2.80 a gallon, down meaningfully from the past few years and at a level we haven't seen since the onset of COVID. Fortunately, with our loyalty programs, we see greater stickiness than in similar comparable periods without the same capability. In the current low-price environment, we are seeing loyal customers come a little less, buy a little more, even if overall volumes decline slightly due to some customer switching. Structurally, we believe return to office mandates and more sensible fuel economy regulations will enhance the longer-term outlook on fuel demand. That said, it is too early to pinpoint any benefit in the current quarter. Turning to fuel margins, retail margins were two cents per gallon higher in the first quarter versus the prior year. In part, these higher margins reflect a flatter price environment versus the prior year period, where gasoline prices increased about 50 cents fairly steadily from January through March of 2024. As a result, margins were not compressed during the normal cycle of rising Q1 prices to the same extent. Also, retail margins were up about 4.5 cents in the Northeast region, reflecting a more stable competitive dynamic. Structurally, we believe a more enduring source of higher retail margins in Q1 reflects higher break-even economics being passed through by retailers who are experiencing more significant volume declines, greater merchandise share losses, and higher operating costs, requiring higher fuel margins to maintain profitability. OPUS volume data points to the challenges these retailers continue to face. Additionally, we note that lower payment fees, which are typically passed through to customers in the retail price, did not appear to impact Q1 industry pricing and margins, further suggesting retailers continue to support structurally higher margins. Turning to the product supply margin net of RENs, we continue to operate in an oversupplied environment, masking the value and optionality of our supply chain assets and resulting in lower PS&W contribution year over year. As the cycle moves from short and tight in 2022 and 2023 to long and loose in 2024 and year to date, the long environment will likely keep PS&W performance compressed until the supply-demand balance returns to equilibrium. One of the benefits of the fuel product supply chain is that it does not stay out of equilibrium for long. Between recently announced refinery closures on the West Coast the impact of tariffs on imported crude oil and products, we can expect the oversupplied environment to cycle back to a more balanced state in due course. Our plan calls for supply margins to normalize in the second half of 2025. Ultimately, the retail margin is the largest component of our fuel margin, and our structural advantage continues to benefit our results. As we've noted before, our total fuel margin is primarily driven by structural factors which accrue to Murphy's relative advantage. In the short term, temporal and cyclical factors can impact it both to the positive, as we saw in 2022, and to the negative, as in this Q1. Turning to inside the store, the same temporal factors had an impact on traffic, coupled with the 30 basis point headwind in merchandise sales attributable to not repeating a billion dollar jackpot that occurred in the first quarter of 2024. However, we did outperform in several store categories, including candy, where sales were up 15% against the year-on-year comp. That included the Easter holiday in Q1 of 2024. Starting with our nicotine categories, we continued to gain share in cigarettes, smokeless, and other nicotine products when compared to the market. When looking at first quarter results, it's extremely important to remember how much share we've taken since 2021 and how much we've outperformed the industry. Over the last four years, from 2021 through 2024, cigarette volume in the Murphy network has been about flat, while the market has lost roughly 20%. This translates to sales growth from manufacturer price increases of 11% over that same time period for Murphy versus industry sales declines of 9%. Q1 year-over-year cigarette sales comps are slightly negative, reflecting the same temporal challenges we saw in fuels, as well as some of the timing changes in the promotional cycle. That said, same-store sales is not the best metric to compare cigarette performance, given that the category is so heavily promoted and supported by the manufacturers. Our goal is to continue growing share profitably, noting total nicotine contribution margin was up a very healthy 2.8%, on a same store basis in the first quarter. On the non-combustible side of nicotine, we continue to see strong sales and margin contributions out of reduced risk products. Same store sales were up over 7% for the quarter and same store margin grew double digits up 15%. We remain highly confident and incredibly excited about our ability to deliver differentiated results in the nicotine space going forward. to our talented team of dedicated category specialists, ongoing investments in digital capabilities, and the second half-weighted promotional calendar. We're also cautiously optimistic that ongoing industry advocacy will have an effect on providing regulatory clarity and enforcement around illicit paper products. We're also taking a share profitably in many of the center store categories, including packaged beverage, candy, and general merchandise, where total sales are up high single digits against flat to declining Nielsen sales data in our footprint. These gains reflect in part the structural advantage we have created through some of our new digital capabilities, as well as strategic shifts in pricing and promotional effectiveness, leveraging many of the learnings and tactics from our differentiated nicotine capabilities and performance. Another bright spot in the quarter is the traction we are experiencing in food and beverage at QuickCheck, where menu innovation, The relaunch quick check rewards and targeted promotions is driving sandwich unit growth up 8% and increasing breakfast traffic. As a result, total food and beverage sales were up nearly 1% in the quarter. We still have work to do, and while tariff and margins remain challenged as the QSR value war cycle persists, we're really excited about our upcoming summer sales plan featuring innovative new products and more attractive bundled offers. We remain highly intentional with our investment in G&A, showing a $2 million benefit year over year. From an OpEx perspective, the addition of larger and more productive stores to our network, especially with a higher number of Q4 2024 and early Q1 openings, is skewing per store expenses higher, as communicated in our guidance. That said, we are performing better than our internal plan year to date. With record applicants easing inflation pressures, we are tightly controlling our labor hours and moderating planned wage adjustments accordingly. As a result, stores are operating closer to fully staffed levels, providing better service to customers, favorably impacting shrink costs, and reducing overtime hours. Despite all the noise in the press and changes in consumer sentiment in the soft data, one thing remains clear to us. The hard data, telling us that our customer is resilient and continues to seek value from MurphyUSA. This hard data derived from nearly 50 million loyalty customer transactions just in the first quarter of this year speaks to a pressured yet durable MurphyUSA customer. We can continue to see more and more people seeking value and trading down into MurphyUSA for their non-discretionary needs as evidenced by growing membership in our MurphyDrop Rewards and QuickCheck rewards loyalty programs, up 11% and 30% respectively in the first quarter. Interestingly, we are seeing growth in the middle to high-income customers, defined as over $55,000 and $100,000 in reported income respectively as a percent of total customers. This has gone from just under 40% at program launch to almost half the current membership base, meaning more and more customer segments are becoming value-seeking. As noted earlier, loyal customers come a little bit less often as their fill rate increases due to lower prices, but buy a little bit more each trip in terms of gallons and in the store with their savings, even as overall volumes decline slightly due to the modest level of switching for convenience. Last, on the consumer, we are seeing purchase behavior remain fairly static across income cohorts, meaning we are not seeing any incremental weakness from our lower-income consumer. This is especially important as we compare the headlines with the hard data. Lower-income earners are still spending, but they remain nimble with their decisions and choices, focusing on their fundamental daily needs where they balance inflation and other areas of their household budget with the largely non-discretionary products they rely on Murphy to deliver at the lowest prices. We continue to focus on these customers with targeted offers and promotions, which did drive higher pump-to-store conversion despite the fewer trips. I'll now turn it over to Gallagher to provide some details on our capital spending and recent balance sheet activity.