Q1 2020 Earnings Call
[laughter] time, all participants are in listen only mode. After the speakers presentations will be a question and answer session.
Good question during the session you need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like they hand the conference over to your Speaker today Christian Tyco. Please go ahead.
Hi, good morning, everyone. Thanks for joining us a with me as usual our Mr., Andrew required President and Chief Executive Officer, Mindy West Executive Vice President and Chief Financial Officer, and Donnie Smith, Vice President controller. After some opening comments from Andrew Mindy will provide a didn't dept overview of our financial results and outlook.
Then we will open up the coal to some Tonight.
Please keep in mind that some of the comments made during this call, including the Q and a portion will be considered forward looking statements as defined in the private Securities Litigation Reform Act of 1995, I'm sorry, no assurances can be given that these events will occur or that the projections will be attained a variety of factors. It just it may cause actual results to differ for further discussion of risks factors. Please.
The latest Murphy USA forms 10-K, 10-Q, three and other recent SEC filings Murphy USA takes no duty to publicly update or revise any forward looking statements. During today's call. We may also provide certain performance measures that do not conform to generally accepted accounting principles or gap.
We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of 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 thank you to everyone for joining us today.
I hope everyone joining in line lessening in a reading later is doing well as we go through this unprecedented period in our country.
I hope that you and your loved ones are healthy and site.
Most of US had been through periods of disruption were similar on Suddenlink cloud surround us.
Personally think about the 2008, great recession, and the crude price fall off their precipitated that.
The dot com crashes, we saw new but less proven business model labs.
And the terrorist attacks on 911 and the change in the American psyche as we work together back towards normalcy, knowing full well some things would never be the same again.
And my personal view what makes this period in our history. So dramatic for so many people in for so many businesses.
Is that we have compound it on top of one another somewhat similar types of of that's been a significantly larger magnitude compress the combination of their impacts into shorter periods of time and how far less certainty on what the eventual recovery it looks like for the everyday life of individuals as well as more proven style.
What's businesses.
As I noted in my outreach calls door 1500 store managers in field personnel last week.
Many of them had been Bible harden from Hurricanes tornadoes and other events.
But nothing quite compares to what we're going through now.
At Murphy USA or business has been specifically impacted by the combination of three historic events rapid in steep fall in crude oil prices that resulted from the price war between Saudi Arabia in Russia, and the resulting oversupply and domestic and global markets.
The global Cobot 19, pandemic that introduced a dangerous fire throughout her country shutting border cities in many businesses.
Leading to significant demand destruction for most of the products that we sell more customers.
And the large scale government response in intervention to provide for safeguard our people and for our economy shoring up liquidity for businesses and for individuals who have found themselves of work.
What I would like to do on todays call to the extent I can is to use these events to frame how our business has responded to and is performing in the current environment and how our business is positioned to endure do this period of uncertainty knowing full well, we can't predict the future.
Well I hope you take away from today's call is that the principles upon which we have designed and built our business model has enabled Murphy USA to rise to the challenges these events.
And at the heart of this business model is an incredibly engaged and dedicated team of close to 10000 employees.
To rise to the occasion, each and every day to meet the needs of our customers.
As in a central service business, we are indeed, very fortunate to be able to serve the needs of our customers across the communities in which we operate during this period.
We're extremely grateful for employees in our key supply chain partners, who were at the front lines, making this happen.
And shareholder we can never lose sight of who really makes this business tick.
Because with our customers and the teams that serve them we have nothing.
I would like to start or performance discussion by talking about the impact the dramatic falloff in the price of oil had on our business.
Well the drop in crude prices from around $62 a barrel in January to just below $20 a barrel in late March was not of the same magnitude as we saw in 2008.
It occurred in a much much shorter timeframe.
The immediate resulted this rapid drop was the generation of total fuel margins of 22 and a half since per gallon.
Which in turn led to our record Q1 financial performance.
It is important to remember the fall off in crude prices was largely driven by geo political events.
Led to the high margin environment going into the Cobot 19 crisis and in that period, we were experiencing fuel volume increases of approximately 2.7% through February on a same store basis as our fuel pricing initiatives, we're delivering exceptional results.
March became a story a three periods.
In the first 10 days the March before the Cobot 19 crisis became widespread consumer demand was very strong and we were seeing per store volumes up 6.2%.
However, the pursuant demand shock as shelter in place orders across the country took hold had a significant impact on the second half of March performance.
During the Middle 10 days in the month of schools close to more people started working from home we saw some pre buying behavior and as a result per store volumes remained relatively strong at 2.7% over the prior year period.
Last 10 days the March how were exhibited the full affects the shelter in place orders with per store fuel volume showing year over year declines of 31.7%.
April month to date fuel volumes have leveled out.
At an average decline a 31.6% with the variance of daily levels, reflecting a variety of factors, including Hey, Dave and government stimulus payments as well as prior year effects.
Higher total margins endured throughout the quarter as crude prices continue to fall.
What should no longer be a surprise to anyone is that our net supply margins offset some portion of the retail margins in this price environment.
On margins have endured in the first half of April but continue to trend down.
How quickly margins return to normal levels will be a function of how and when crude prices were store demand recovers and local marketing competitive dynamics respond.
That said, we believe we should expect to earn higher total fuel contribution than many of our peers. During this important period. During this period for two important reasons.
First assuming our stores continue to perform at around 70% of normal volumes, we will fare better than the average industry store, which based on third party sources suggest the national average decline of around 50% of normal volumes.
Second given our normal fuel margin is much lower due to our everyday low price position relative percent increase in our fuel margin is significantly higher than the relative percent increase of the average from.
When you multiply our relative volume change times are relative margin improvement, we expect to be at or above 100% of normal total fuel contribution levels for a longer period of time versus our peers.
Last given our very low fuel breakeven cash margin requirement of less than a penny the impact of lower loss gallons has significantly less impact to us than the average industry side, let alone the marginal industry site, which has a breakeven requirement of over 25 cents.
Which after losing half this gallons rises to 50 cents per gallon.
I'll wrap up the discussion on fuel performance I want to especially thank our fuel carriers and suppliers, who have worked with us through so many challenges, including the destruction of one carrier headquarters and Jonesboro, Arkansas from a recent tornado.
Next I would like to discuss how cobot 19 has impacted our business be on fuel demand, particularly our merchandise sales.
As most of us or personally aware the implementation of social distancing and shelter in place orders has created a stock piling mentality.
If we look at March through the same three periods, we were having an excellent quarter to date in the merchandise business with per store sales up 7.1% in the first 10 days of March versus prior year.
Building on the strength, we saw in January and February performance, which was comping very well in both tobacco and non tobacco race in Q4 2019 headwinds.
In the middle of the month merchandise sales per store increased to 29% above prior year sales as consumer stocked up on a centralized UBS, particularly cigarettes.
And the last 10 days of March per store sales were flat versus the year ago period with continued strength and tobacco sales showing a 6% year over year improvement offset by a reduction of non tobacco sales, which were down 13.3% as both fuel and tobacco traffic was lower.
Again based on Nielsen Another third party sources, we believe our performance in our core categories is outperforming what the industry you're seeing on average we believe three factors really drive this.
First there's absolutely no down in our minds that our proximity to Walmart supercenters in the uplift in traffic. They are experiencing is having a positive and differentiated impact on our business. The strategic relationship has always been important to our model, but it is even more so in the current environment.
Second our value conscious customers have become more loyal to us and we have added customers and share of wallet as evidenced by new Murphy drive rewards members. We are seeing trips spike on key dates like the most recent government stimulus check payments and other pay day events were more customers are stocking up with us.
Before or after stocking up at Walmart.
Third exceptional operational execution from our store associates, along with support from our incredible supply chain partner Cormark in our manufacturing partners have allowed us to maintain high in stock levels as we quickly stocked up and built inventory early on our highest selling items as it.
Result performance in categories like cigarettes have remained positive threw out and we have seen material shifts in current buyers going from 48% to 58% of purchases as some competitor to competitors do not even offer cartons. This has led to notable share gains.
Through the first two weeks of April total merchandise sales are up 8.3% with tobacco up 13.3% and non tobacco down 4.3%.
We are in alcohol sales were up 9.1% in general merchandise is up 6.5% in part due to standing up a new hand sanitizer supply chain in short order.
While we have temporarily eliminated prepared food like Robert relied them in our mug refill program per customer safety considerations. These categories represent a small part of our overall product mix today.
The third and last discussion topic relates to the unprecedented steps our government has taken to limit and manage the spread of the virus.
And provide liquidity to the overall economy.
Let me start by stating clearly that at this time Murphy USA does not anticipate the need for government financial assistance.
As Mindy will elaborate on further our cash position is strong we continue to generate significant operating cash flow our credit facilities have capacity and our debt maturities are well down the road. Thanks to our well time refinancing last year at very attractive rates.
Our conservative balance sheet is yet another strategic asset that was an intentional design element of our business model.
As a result, we continue to invest in our new stores, and raze and rebuild opportunities and while we had the flexibility if necessary to adjust our capital plans for the second half of the year, we have no plans to do so at this time.
Our current projects are all on track with only one delay due to weather.
As I said before we're very fortunate to be an essential service provider and we remain open for business as such we have taken significant measures to ensure the safety of our customers and our associates. We have added labor hours to our stores for more thorough and frequent cleaning procedures and we now so.
Stock some items that are simply dropped off by certain distributors.
We have provided various PPP PE items to our staff.
And when available to our customers, including designing sourcing installing protective sneeze guard barriers for our walk in stores in less than a week.
We are meeting and in some cases exceeding the standards and guidelines set by various national state local governments.
The results of our effort efforts is that we've kept our network up and running with no store closure currently.
We have temporarily closed 43 stores to date for deep cleaning, which typically last a few hours.
Opening hours had been reduced at 74 stores due to mandated curfew restrictions and we have reduced opening hours and another 79 stores on as discretionary basis for safety or security concerns.
We continue to hire new associates, and we have a record low eight store manager vacancies across the entire chain.
The benefit of maintaining opening hours and increasing operating hours labor hours is that we are at least able to provide our store associates with the ability to maintain their income.
We have provided assurance around Q2 commission levels, and we're ensuring schedules give our managers time to balance demands at work and at home.
We've also added a variety of benefits, including an expanded paid sickly policy for coated related banners.
Hi hosted calls last week with all our store in district managers will they continued to provide direct feedback to me my leadership team on how we can best work through this together.
In return our associates are doing what they are famous for delivering friendly service and upselling, even in the face a lower demand keeping their stores clean and in stock and engaging their customers, we couldn't be prouder of our team their relationship with their customers is truly what defines our brand.
Our customers have noticed the steps, we're taking in our stores for their safety and for the benefit our staff and it is reassuring to hear their direct feedback daily through a variety of channels.
Our commitment to helping the communities in which we do business hasn't stopped with our employees and our customers. We recently announced a partnership with the boys and Girls Club of America that had been in the works well before the current crisis began where we made an annual commitment of at least $500000 to help provide a central skills and tools.
The next generation.
We kicked off the partnership with a voluntary customer Roundup campaign, which our store associates got enthusiastically behind.
Since its launch on April 1st we have raised over $350000, which speaks volumes for how even in these challenging times our customers are always willing to look out for those in greater need.
As investors and shareholders, we had the benefit of owning a piece of the company that has shown resilience and agility in the current environment.
We started the quarter firing on all cylinders and in that context, we executed $141 million of share repurchases in alignment with prior statements around our intent to front load or up to 400 million dollar repurchase program in order to accelerate expected benefits for long term investors as we continue to grow in it.
Proves the business.
We believe this amount closely approximate full year 2020 expectations and a one point out we did make the decision to halt our repurchase activity as the social impacts the co. The 19 became to make themselves known.
Coupled with robust margins, we still ended the quarter with a very strong cash position and we wanted to proactively preserve liquidity to ensure we had the resources to enable our strategic objectives preserve future options and support our employees no matter what scenario, we might find ourselves spacing in the second half.
For the year.
Many now we're reflecting the other day about many of the key principles that we first shared with investors as we were going public in 2013 I.
I summarize those and my recent annual shareholder letter.
While we couldn't no way even imagine we're all going through today, we take great. We take pride knowing Murphy USA business model was built for times like this to not only endure but to emerge better and stronger.
Now I'll turn the call over to Mindy.
Thank you Andrew Hello, everyone.
Going to change my narrative a bit here to address the cobot 19 environment and its impact on our business and move away from summarizing some of the financial information that is already provided to you in the release.
During this time I know how important the balance sheet and liquidity is to investors. It's important to may two so let me provide some additional color around our financial position.
But first let me take care of some standard items Capex approximated 45 million for the first quarter, most of which was allocated to retail growth our EMS the upgrade initiative and to a lesser extent maintenance capital.
Average retail gasoline prices per gallon during the quarter were consistent with a year ago at $2 in 14 cents versus $2.15 in 2019.
Based on our debt outstanding the leverage ratio, we report to our lenders approximated 1.9 times for the first quarter of 2020.
Down slightly from the two times in the first quarter 2019, and down even more significantly from the 2.4 times and the fourth quarter of 2019.
This time, we have 134 million remaining under our up to 400 million dollar repurchase authorization by July 2021.
Given the incur environment. However, we do not expect to be in the market during the second quarter for any repurchase activity.
We did in the quarter with 29.2 million shares outstanding.
We are all impacted and we'll continue to be impacted by Kevin 19, but despite the challenges to our people and our customers I'm happy to say that financially we are in good position at Murphy USA.
Two under this extraordinary situation, thanks to our strong balance sheet.
Our low cost model and solid fundamentals underpinning our high volume fuel business.
As Andrew mentioned, we are entering the second quarter in a position of strength with 200 million in cash on our balance sheet.
I can tell you that after the first two weeks of April business. Our current cash balances remain consistent with that amount, although they do fluctuate daily depending on day of weak and timing of certain payments, but broadly speaking. This is a free cash flow positive business and with current margins and volumes, we would expect cash balances to grow.
Over time.
Our balance sheet as well structured and strong.
As you May recall in September of 2019, we redeemed our 6% notes due 2023.
And replace those with new 10 year notes due 2029, lowering our coupon rate to foreign three quarters.
We also talked up our term loan, adding 250 million of debt that hasn't amortization rate of 12, and a half million per quarter.
First payment of which occurred on April the first leaving a balance of 237 half million and the next amortization payment schedule for July one.
Aside from these fixed 12, and a half million quarterly term loan repayments, we have no near term debt maturities.
In addition, the cash on hand, we also have our ABL facility to draw on with current available borrowing base of 91 million and that reflects historically low receivables and inventory value due to the low commodity price environment.
This facility was put into place largely to supplement working capital needs in a high price and low margin environment and in the current low price environment. The natural offset that we would expect our higher retail margins as is the case today.
Should prices move higher we would expect increased availability under this facility.
If the need arises we have added flexibility with respect to our capital program and tend to for much of our raze and rebuild program and anti store growth into 2021, which would reduce our capital program by at least $100 million.
However, given our strong cash position at this time, we intend to move forward with our high quality organic growth program to continue upgrading our network with bigger and better stores in 2020.
While preserving our land pipeline for higher growth in 2021.
In fact, we may actually be able to capitalize on real estate opportunities for our future store pipeline as retail related deal flow for high quality locations has become even more attractive in this environment.
The bottom line as we have a strong cash position and remain cash positive and all but the most conservative scenarios that we have tested which would require a rapid deterioration in fuel margin and persistent demand destruction throughout the entire year 2020, and that's an outcome, we see as unlikely.
We remain confident that our ABL whats support any short term liquidity needs without having to interrupt our organic growth program and for the record again, we're not thinking any government assistance, nor do we intend to seek any such assistance in the future.
Next I want to briefly discuss our cost structure with respect to the fixed and variable cost component.
We have always endeavor to maintain a low cost model at Murphy USA, but we do have a meaningful component of what I would call fixed costs, while we have some flexibility around labor hours there isn't a one to one correlation with transactions that will drive operating expenses lower by 30% to 40% to mats our fuel volumes.
We still have to maintain and provide upkeep for our stores, we have to pay property taxes and utilities and we will continue to support our employees.
Nevertheless, we would expect some modest swing of between five and 15 million of Opex NGL reductions should the current abnormally low demand environment persists into the second half of the year.
However, with labor hours relatively flat, an incremental costs rising to provide a safe and clean environment for our employees and our customers we might actually see a slight uptick in store operating expenses in the second quarter.
The one drawback of running a lean organization, they're simply isn't a lot of Ram to eliminate costs. When you already have an efficient operation.
As a reminder, we own 86% of the land under our site and does have low fixed payments for rent. Additionally, we should experience a benefit from lower payment fees and the low price environment, and our stores, our core or less labor than some other larger format food based model. So we are less exposed to higher margin revenue.
Shortfalls as our merchandise performance clearly show.
Finally, if we step back and look at our performance. So far in April we continue to generate positive March sales comp and while fuel volumes are running between 60 and 70% of prior year figures given total demand destruction that we have seen globally and here in the U.S., we appear to be holding onto our customers and market share or better than the national.
Average would suggest and as long as the fuel environment generates margins sufficient to offset lower volumes our businesses not financially compromised.
So that.
As the end of my comments. Thank you the everyone stay safe and I'll return the call back to Andrew.
Thanks Mindy.
Let me close with a very brief discussion around 2020 guidance clearly our fuel volume for the next few months is going to be challenged by the current environment.
As discussed fuel margin offset is more than making up for that and should continue to do so for the near term with no clear view on when demand will return to normal we are withdrawing our fuel volume guidance and we will come back and update it when we can provide a solid future view.
As for other operating guidance metrics, we are maintaining them as we continue to see strength in our merchandising sales and contribution and have sufficient levers to manage any near term pressure on operating costs and SDMA.
With respect to our capital spending anti and raze and rebuild program, we designed our capital structure to be able to invest in both good times in bad times as such we plan to continue to invest in the future growth of our business knowing that we have the flexibility if conditions change significantly.
I know, we've covered a little more than usual in our prepared remarks, but wanted to make sure. We proactively address the key issues that are on everyone's mind and with that operator, we will open up line for acuity.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Please limit your questions to one with one follow up question.
Before re entering the queue. Thank you.
Your first question comes from the line of Ben Ben View from Stephens. Your line is open.
Yes. Thank you good morning, everybody.
On a bit.
I want to ask first on some of the commentary you gave on April.
Which frankly I. So I was having some difficulty hearing you back I think I heard you say tobacco was up 13.3%.
Through the first two weeks at April non tobacco is down 4.3%.
As per ask about the tobacco side frankly, that's kind of remarkable to me in light of sweats. It sounds like the rest of the industry is doing and so I'm just curious if.
If you could expand on why you think you're tobacco sales are still so strong into April and then also.
The one key results were for a really strong as well.
I would just be curious to hear a little bit more.
About what you're doing that is working and maybe you tell us it's more of what you've already been doing but just curious to hear any detail that you can offer.
Yeah, Ben I would say, it's really building on our strengths were known as everyday low price for fuel and tobacco. We are a destination for that we're destination for cartons, and so where we have seen.
Sales in units up we've actually seen trips down so people are definitely coming less often but buying more and adding to their baskets and so I noted cartons roughly just under 50% to just under 60% I think the industry averages somewhere around 20% on a lot of our markets you have a smaller.
C stores that don't even sell cartons.
We have an incredible supply chain.
Partner with Cormark, and we worked very closely with or manufacturers.
You noted that we had a working capital.
Increase as we built inventory in anticipation of this to have the key selling items in stock in our associates did a great job of keeping.
Products in stock and so I mean, those are just the basics right you've got a customer brand proposition you've got to supply chain that keep that in stock you keep your price where it needs to be.
And it's available for the customer and then you have the additional value of Murphy Drive Awards I think we added something like 400000, new.
Members participants to Murphy Drive awards on the month of March and we've been looking at people that are showing up for the very very very first time.
And it says a lot about share gains that were getting.
From our competitors I mean, I'll give you a couple of numbers that.
Also just highlight the fact that.
Hey, Dave and government stimulus numbers are pretty impactful we've had six days in April where we sold over 1 million packs and we'd have to go back to August 2015.
To see numbers like that.
On the government stimulus day cigarettes were up 30% versus.
10%.
The the day before and smokeless and other tobacco products were up 25 and 38.
Percent, so what you're seeing is paydays key dates et cetera.
The customer's going to their chosen outlets to stock up.
Either Walmart or at our stores. It set are and so I think were the right place.
At the right time with the right products with right price.
Okay. That's helpful. Thanks.
My second question is related to fuel, we've obviously seen the big drops and wholesale gasoline prices over the last month or so.
But given all the dislocations in the Geo markets across the country I'd be curious to hear.
What opportunities exist in the market for you specifically.
To leverage your proprietary sourcing to procure.
Attractively priced gasoline maybe in excess even of what the market would present on the surface.
Sure so as we were watching.
Prices go down we were short to our.
A LIFO targets, which is generally a good a good practice.
As they've come down lower Weve invested in inventory and are now more balanced to those targets I think there were some.
Racks in the Midwest and areas contracts, we were able to acquire product.
For 20 cents, a gallon and so we're seeing opportunities across the board to take advantage of that and Mindy and Greg on the team are doing an exceptional job.
Doing that I think one of the challenges is.
[music].
I'm not sure prices can't get lower if you start looking at.
Prompt prices for crude WT shut in economics.
You know in West Texas.
Et cetera, and so there's a lot of concerns about logistics systems filling up no place to put it and the kind of net backs you would need to move that product. So.
We want to be.
Thoughtful even in this low price.
Environment about.
Inventory exposure, but we certainly manage the downward falwell antipsychotic back to.
The balance.
Okay. Thanks, good luck.
Thank you.
Your next question comes from the line of Bobby Griffin from Raymond James Your line is open.
Good morning, everybody. Thanks for taking my questions I hope everybody is safe and their families are doing well.
Thanks, Bobby.
I guess I, especially want to ask Andrew.
In kind of your history of the initial stuff when you see a fall off like this in crude prices to this magnitude how long do the outsize margins usually lasts for before returning to some type of normal year over year cadence and then maybe at the second part of that given that this is so different with volume trends and everything you think.
Headedly a lot of the local competitors that you see will hold onto these outsize margins for a longer period of time right now.
Yes, I think it's a great question I haven't seen anything like this before but I think we can go back and look at prior periods. The to build some analogy I mean, I think about 2008.
I mean, they went from $140 a barrel to $40 a barrel, but it took a while to get there and so that was a you never had periods where national margins were 50, 60 70 cents, but they were.
2030, plus for an extended period of time and while we saw.
I can't remember, 10% demand destruction between Alito nine the economy fell off.
That was gradual too and so it was this steady downward progression week over week over week that allow that period of extraordinary profits for the industry with a very gradual decline.
On on the demand.
It's happened here is fundamentally different right you had a less significant falloff in a greater period of time, but it was accompanied by an unprecedented demand shock and the comments I made about the simple math.
We're currently running through the last.
Four or five days, 70% of.
Of prior year plan volumes, but if normally we're making 10 to 15 cents this time of year.
And your earning margins of three or four times that.
Your contribution margin a significantly higher than that so your question is right how long does that last.
I think you have to go back to really what sets margins and markets, which is going to be.
Kind of the average independent out there the marginal player and if they've got a 20 to 25 cents fuel breakeven.
Cash margin requirement and they've lost half their gallons.
Their cash breakeven requirement has doubled to 40 to 50 cents per gallon.
And that's ultimately what is going to.
Set the.
Some of the competitive dynamics market competitive dynamics.
Around the margins I think the other thing I would say is because they are relative margin was already high.
The increase in margin to them as a percentage may only be two legs and it half the volume thoroughly earning 100% of their prior contribution so as margins fall off now, they're earning less than 100% of their prior contribution in many of them invested in food and other things that are being curtailed.
And so you could you could imagine one or two scenarios one in which.
There are some discipline around that and that creates.
The foundation for the margin structure or it breaks through that and then that put significant pressure.
On the independents and I think what you'll see is the combination of both.
Depending on the local markets and we're actually seeing a combination of both I think this was just the marketing competitive dynamics will play out differently.
You know in different different markets.
But I think wording O unique position because we're starting with a high volume position, we havent lost as much volume, we're starting with a very low margin position relative to others and on a percent increase spaces that relative increases so much higher we're going to build a whether this with positive free cash flow Gen.
Duration for a much much longer time.
Bobby I can could add a little color on the competitive environment to what Andrew said, we're seeing competition really behave differently, depending on who they are a bottom of market players in general we seen them reduce their prices fairly steadily we've seen branded dealers. However, they tend to take me.
Or large moves down and we suspect this is primarily due to low pricing where they are building in fixed margins to the latest slide of gasoline that they've received.
And then when we look at the high person grocers. The results are more mix summer discounting why many appear more concerned with running the operations in their big box.
So for US we're relying on our fully staffed fuels pricing department and also our precision of our store level tactics to reassert, our bottom and market position and we're doing it really thoughtfully and deliberately unfortunately, our processes and controls have improved dramatically within the last year, which are unable to enabling us to do that quite well.
Environment.
I appreciate that I was very very helpful.
Thanks for all the detail I guess from my second question is maybe just on the wholesale supply side of the business.
Clearly understand how it reacts on oil falls off as quickly as it dies in an environment, where oil is down at this level levels. We haven't seen in a long time, but just is stable and flat how does that business recover does it start to get backwards normal EBITDA dollars, how should we think about how that would trend into Q4 out of flattish.
Cash.
Oil environment.
For insight.
So I think it's a question is how does how does the product supply wholesale net of Rins.
Behave in a flat market environment I think this is gets back to our proprietary supply advantage right and so you would look too.
Areas like the colonial pipeline system in the southeast and other areas, where we're able to deliver proprietary barrels.
Into those markets with refinery runs being.
Cut you may see.
Certain areas that are very loose and long with product in which that supply advantage may get.
Competed away at the racks as folks are trying to move product.
But you may all plus the other dislocations.
Where.
At advantages.
Is helpful. One of the challenges you can imagine is when you start dialing back refinery runs crud.
Closing shutting in crude units distillation units et cetera.
Turning those things on isn't a simple act I mean most of the.
That creates localize shocks that improve our business. That's all we're five state governors, we're asking for waivers on biofuel blending and so.
Yes.
Yeah, there's there's still some uncertainty about how some of that will play out.
It was as well, but certainly ethanol prices are very low and some of the ethanol producers of.
In refiners with ethanol plants have shut in.
Hi, number there their plants as well.
Hi, Thank you for answering my questions and our best of luck in to Q.
Thanks.
Your next question comes from the line of Chris Mandeville from Jefferies. Your line is open.
Chris Mandeville Your line is open.
Operator, we will just put him back into queue and go onto the next question.
Your next question comes from the line of Bryan Hunt from Wells Fargo Securities. Your line is open.
Thank you for your time.
I was wondering and you called this out.
Earlier.
Andrew I.
I was where if you could talk about the relative performance your stores that are within.
Couple of mile radius of a Walmart relative.
Two stores that are.
They they performed at a higher level.
Certainly at the beginning of the kind of the panic buying period, if you will.
In the Middle 10 days the March.
We solve that distinction.
Very clearly it continues.
Today, and I think when you see key.
Hey days or government check issuance days, you see that as well.
But the reality is that represents the majority of our stores and so.
They are most benefit from that.
But that again, it's very much a positive.
Is there way and give us a magnitude a difference and the performance of the stores or you have those half of the roughly stores or near Walmart versus the other.
Yes, I have to come back after the exact number I think recalling at some point is anywhere from 5% to 8% depending on the.
The categories.
All right.
Thank you and then my last question is.
Oh.
Grocery and or big box retail.
I have dramatically change their their promotional and marketing tactics in this environment.
So can you talk about what you all maybe doing a difference.
From promotion and marketing standpoint.
Well I think when youre everyday low price of you know that's one of the objectives is to try not to win customers through.
Promotional pricing, but everyday low pricing and then surprise the customer with additional value on top of that and so.
I think one for some of our core categories like tobacco.
Being in stock was a huge advantage number one having to everyday low price.
The second advantage, having the Murphy drive rewards program on top of that and what we drew these new customers in from competitors.
We gained significant number of.
Members.
From that.
To the extent the manufacturers have programs.
When they call and say Hey, we've got a program how quickly can you.
Launch that if they're trying to move move product or address an issue. We can typically turn it on within 48 to 72 hours and so the customers will see additional.
Value there and we've got some new programs that have been launched in the last week or so.
That reflect that so.
Thats part of the beauty of being everyday low price you don't have to resort to new promotions. All the time to win I will say on candy and some of the other ones. There's a cadence of buy one get one or various things and those were doing extremely well.
In Q1 also you recall last.
Last year, we diverted a lot of that associate time to launching Murphy drop awards.
And you and I am sorry, just to touch on one of the topics you to you addressed in your answer.
Given your relative performance to the industry are you seeing in your opinion greater opportunities to should will and unique promotions with your vendors relative to what your peers are saying and that's a dramatic best of luck stay healthy.
Absolutely we absolutely are because they know that we can step up with the working capital.
To take on the inventory take on.
Keep the product.
Stock sell through the promotions with excellent et cetera, and so.
If you've got to manufacture regardless, who it is.
And they want to.
Attack the largest possible audience with the fewest amounts of dollars with exceptional execution, we're going to be.
The top of that list.
Thanks for your time.
Thank you.
Your next question comes from the line of Chris Mandeville from Jefferies. Your line is open.
Andrew can you haven't you hear me.
We can't.
It was out of work at home challenge.
Yeah, I have a wonderful world the working from Valeant as followed is for that.
I was hoping that could build off of what Dan had brought up a little bit earlier with respect to just the continued impressive tobacco results.
Yes at the margin the contribution as well as on a percentage basis being up year on year.
Or even more impressive and just the sales dynamics in my mind so.
Yes, just outside of the greater carton mix that you realized in the quarter.
You offer up any other puts and takes on how you manage to drive the margin in that category.
Yes, so as we talk about cigarettes, but it's also smokeless and the other tobacco products as well they are all up double digits and truly for the same the same reason tried its high in stock it's great.
Value and.
We are at the right place at the right time with that.
Products, So it's really.
All of the categories in subcategories.
Performing at a really really high level I mean, we've had.
Tobacco sales in the month of April.
That were up double.
Double digit most of the days and I think Easter Sunday was the only negative day when traffic was down.
Generally across the board.
For the for the network.
So okay. That's helpful.
And then I do appreciate the commentary surrounding.
Some level of sustainability in margin profile on fuel.
Foreseeable future.
And just what you've been seeing with respect to some of your.
Lower quality as competitors, if you will but if we think about matters longer term and how over the last 20 to 25 years, we've seen structural improvements in the industry fuel margin capture.
Coming out of Krona virus, I guess Im just kind of entry to get your perspective on how you think.
Cove, it influences matters permanently and how fuel retailers at large.
Looking at fuel margins.
Yeah, I think some of the fundamentals are going to change that much in the sense that.
If the if kind of the more the margin in a market assessed by that.
70, Fiveth percentile.
Retail store, we can expect their breakeven requirements to continue to go up and even if you see a fall out through an event like this where we go from losing 1% of our stores too.
I don't know.
Let's see lost 5% to 10% of the stores in the industry over a a multiyear period you would still look at.
Those.
Cash margin.
Requirements.
Two.
Set up the margin structure.
For the industry and so.
I think you're going to continue to see a lot of pressure on the smaller stores and those that decide to exit and hopefully then get a lot of value for the real estate and.
Be successful doing something else.
Theres going to be another set of retailers on the margin that are facing the same set of.
Challenges they may not have invested in the in the now they've got the credit card liability they haven't been able to keep up with their investments in their stores and sale attract as much.
You know traffic and so forth and so I think thats really the fundamental that we've seen over time is that breakeven requirement gets higher and higher and higher the average pool margin goes up and then that's where you've got bottom of market retailers like us.
Who can operate on a lot much lower.
Margin and still have attractive returns reinvestment economics, and new to industry economics, and so I think it's just this gradual continual cycle format evolution that takes place and.
I really don't see that changing.
What would be dramatic is if our industry was like.
The video industry were all sudden you lost an entire format called the video store and that happened in a very short period of time and I don't think thats really going to be the case here.
Because of the role convenient stores gasoline stations play.
In the economy in the in the established base. So I think this is likely going to continue to play out as a process over overtime.
All right appreciate it thank you Andrew and I Hope you mentioned the rest the teams basis.
Thanks, Chris.
Your next question comes from the line of John Royale from JP Morgan Your line is open.
Hey, good morning, guys. Thanks for taking my question.
So you mentioned a couple times, maintaining your capital program throughout the environment.
Recognizing that you're ending one Q and a strong balance sheet position I guess.
What would you need to see to pull back on growth a little here and exercise that 100 million dollar flex that you mentioned.
We have to see are really sharp deterioration both in Q2 performance and performance outlook for the second half of the year, we've run a variety of.
Models and scenarios for the second quarter to get a sense of what that.
You know end of Q2 cash balance.
Would be and then on top of that run a set of scenarios for the second half of the year.
And you have to believe or worst of Q2 assumptions and our worst of the second half of the year assumptions to end the year with a zero cash balance.
Right and at that point time, we still haven't touched our aviall, which probably is going to be valued at much higher level, because what would contribute towards a lower second half performance would be rising prices and so the value of that would be higher. So we've got to believe the worst of the second quarter and the SEC.
Enhance scenarios to do that the challenge of course with Capex flexibility is every 30 to 60 days that goes by you've already now committed and started on product projects or it's too late to pull back on certain projects. So we're looking at Q2 very closely everything is going very positively from that.
Standpoint.
Versus our scenarios.
And then as we.
Come to towards the end of Q2.
Seeing more rent we can they make a decision on okay are we going to be.
In a situation, where we need to do that but I would handicap that is the Lois.
Possible scenario right now we just wanted to note that we do have the flexibility should the need arise, but that flexibility goes away the longer into the year, certainly you've got 2021 capex flexibility.
If this thing went on and on and on and what I would say is we're starting to see signs.
You know the economy reopening we don't know.
If.
Exactly when and how this is going to play out.
I will note that just one day, if you look at the government.
Stimulus.
Impact in tax payers receiving checks.
Yesterday, we only had four states, where our volume was below 70% on a plan basis.
And your own state of Arkansas was at 95.7%.
Plan.
With Doesnt states over 80% right and so it's just kind of a note that says okay that will stimulus to the economy and tax payers got to check and they went to spin it and they spent a lot of that with us but it does give you a sense that there's a lot of pent up demand out there and when it.
Comes back we expect to.
See it come Roaring back like this and we will get more than our fair share of that because of how we treated customers and worked with customers to keep them safe and given value during this period.
Okay. Thank you and then.
On the merchandise side.
Just wondering how the fuel side is affecting the comps inside the store in this environment. So.
Fuel volumes were down a certain percentage lower than you expected.
I guess what portion of that would you expect to flow through to inside the store I'm thinking about this right I would assume that correlation might be a little bit lower than normal, but not sure if I'm thinking about that right.
Yes, so a lot of the.
Stocking up on tobacco was completely independent of the trends we saw.
On the on the fuel side or is I noted the first 10 days of March.
Our fuel volumes were up something like 7% year over year.
And so yes, the stocking up period was only 2.7% where the merge numbers really spiked during that period. So there are becoming less correlated probably on a trip basis, we're probably having more standalone.
Merck's trips as people are going back to the Walmart coming back to our stores.
To stock up so not seeing some of that same correlation as we've seen before.
A good example would be where we were it.
Down, 30% Monday and Tuesday.
This week on fuel gallons, we were only down 20%.
When stay with the the.
The stimulus and so that you do see some continued correlation that's taken place.
Thank you.
Right.
Look we're at the top of the hour and.
Certainly we had little bit longer prepared comments, the normal, but we thought it would be important to try to give you as much clarity as possible on what we are seeing.
Three periods in March.
In the month to date period in April to give you.
Turning to slide to how our business is performing performing.
But we thank you for your time today your questions and certainly please follow up with Christian with any follow up.
Stay safe everyone. Thank you.
This concludes today's conference call you may now disconnect.
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