Q2 2020 Murphy Usa Inc Earnings Call
Star on your Star one on your telephone keypad.
If you require any further assistance. Please press star zero I would now like to hands the conference over to your speaker today Christian Pikul. Thank you. Please go ahead.
Hey, Thank you good morning, everybody with me as usual, our Andrew Clark, 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 I'm, Andy will provide an overview of the financial results. We will briefly discuss our revised guidance and after closing comments from Andrew will open up the cold QNX.
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 at 1995.
No assurances can be given that these events will occur or did the projections will be attained a variety of factors exists that may cause actual results to differ for further discussion of risk factors. Please see the latest Murphy USA forms 10-K, 10-Q, 8-K, and other recent FCC filings Murphy USA takes no duty to publicly update or revise any forward.
Some statements during today's call. We may also provide certain performance measures that do not conform to generally accepted accounting principles for gap. We have provided scheduled to reconcile these non-GAAP measures with reported results on a GAAP basis as part of earnings press release, which can be found on the investor section of our website.
Now I'll turn the call Liberty Andrew Thank you Christian good morning, and welcome to everyone joining us today.
Today's call is the fourth investor update in as many months since we released Q1 results back in April we received positive feedback from investors for the level of transparency provided as we explained how cobot 19 impacted our business and financial results over time.
I certainly hope you have found this to be helpful. Well, the Q2 record results shouldn't come as a huge surprise given our prior disclosures importantly, we are maintaining that momentum into July and expect to sustain strong performance for the remainder of the year.
As such I'm going to spend my time today, focusing on three key trends that are now well established in their underlying drivers as fully appreciating. This is critical to the relative performance potential in overall valuation of our business.
These trends have been persistent not only throughout cobot 19, but are grounded in fundamentals, we were seeing well before 2020 cobot 19 simply amplified the financial impact of these existing underlying drivers.
I'll also provide an update to our guidance for the year as we said we would do so when we had the fact based to provide a point of view.
The persistence and sustainability of the trends, we will discuss not only give us the conviction for our guidance for the remainder of 2020, but also our outlook for 2021 relative to our raised the bar goalpost, we established as part of our shareholder value creation narrative.
Related to these goal post I will reiterate our commitment to our strategic capital allocation priorities as we look to take advantage of our strong cash and balance sheet position in light of an undervalued in attractively positioned business. When you look at our model in the context of these trends it's clear to us the market does not fully appreciate that.
Sustainable competitive advantage bar business and as long term value creation potential.
The first trend will discuss is the new equilibrium established in the relationship between industry fuel margins in demand we have spoken at length about how the fuel margin in any given area or geography is essentially set by the higher breakeven cost of the third quartile retailer.
We have observed this trend for several years and it helps to explain the gradual increase in both industry wide margins in our margins as the unit cost of the marginal retailers have continued to increase.
The new equilibrium was most easy to see in the early days a co benign team as unit cost doubled for the marginal retailers when industry volume fell by 50% higher.
The higher margin requirement to just maintained the same level of store profitability for the weaker competitors led to higher sustained margins for the industry, which were facilitated by crude prices that were already falling sharply.
With less volume loss and a lower base margin to start with Murphy USA benefited disproportionately from the same cents per gallon increase in overall margins, while maintaining its low price position.
The further illustrate that point consider may June and month to date July margins, which are well above historical norms. Despite sharply rising prices, which is certainly an atypical outcome.
As we've discussed in many calls these are the period, where we would expect fuel margins well below the annual average yeah. We actually earned over two times our annual average in May and June due to the dynamics of this equilibrium.
With volumes recovering to over 90% of prior year levels on a rolling seven day basis. In July we are forecasting year in same store volumes to recover to around 95% a 2019 levels as we enter 2021, yeah, we expect fuel margins to be at least one to three.
Since per gallon higher resulting in higher overall fuel contribution.
We believe this equilibrium persist due to the continued headwinds the marginal retailers will face in the cobot 19 recovery and beyond.
And our investments in our retail pricing excellence initiatives allow us to further maximize the value capture this potential.
The second trend we observed in that was magnifying during coated with how our merchandise categories performed.
Our multi pack and carton cigarette offers had become a destination trip for consumers.
And second quarter results compare strongly against the already impressive high single digit contribution gains we put up last year.
We're carton volumes averaged in the mid 40% range pre co. Good they have leveled off in the high 50% range with no difference in contribution margin per pack.
In a world of fewer trips and enhanced focus on inventory management and pricing precision coupled with loyalty benefits in our best in class Upselling have paid off handsomely customers received the greatest value on larger S.K. you sizes that we're always available and delivered with great service.
And we believe these gains are sustainable as our ongoing commitment to capability investments in this category clearly represent a unique and differentiated strategy, which explains why we have grown market share by 300 basis points since the second quarter of 2018.
Given the share gains and strength, we are seeing in cigarettes. It may be easy to overlook or other tobacco categories, where vapor and alternative nicotine products are delivering substantial margin uplift.
To provide proper context second quarter total merchandise contribution margin was up about $13 million versus the prior year.
This increase $11 million came from tobacco of which roughly $8.3 million of which was attributable to cigarettes with other tobacco products for OTI, Pete accounting for $2.3 million of the incremental margin increase like cigarettes results reflect excel.
Optional execution through managing our in stock position, providing effect effective visual merchandising and offering an appealing product assortment, including enhanced promotion on larger pack and ask you sizes.
Murphy drive rewards continues to play an important role in driving traffic in introducing customers to new products, such as nicotine pouches, which now represent over 5% of our OLTP category.
With over 700000, New Murphy driver word participants added since March 1st we currently have insights on eight out of every 10 tobacco purchases leading to more focused promotional offers and manufacturer investments with higher customer redemption levels. The.
Timing could not have been better for our enhanced capability set to come together as we have not only gain customers. The gain loyal customers, who are less likely to go back to their old purchasing habits now that they have experienced greater value in service at Murphy USA.
Without question Cobot showed that our non to but our tobacco business is entirely uncorrelated with fuel traffic.
On the other hand, many of our non tobacco offers are more fuel dependent as you might expect but a few key category showed outsides gains.
During the quarter, we saw both sales and margin growth and lottery beer in the general merchandise categories, where we stood up a supply chain for mask in hand Sanitizers.
While the good news is we sold much more of these products.
The less good news is they were predominantly lower margin categories, specifically lottery, where sales were up 31% became with a mid single digit unit margin in fact.
55 of the 60 basis point decline in our all in merchandise unit margin of 15.4% was attributable to lottery.
Nevertheless, we're thrilled with the performance and we'll gladly accept lower average unit margins when growing total contribution dollars due to more sales into more customers.
As I've commented to some of you before while unit margin might be a simple and useful metric to you for modeling purposes at the end of the day, we take the contribution margin dollars to the bank.
For the remaining categories more highly correlated to fuel traffic like candy and packaged beverages sales are improving along with fuel volume so far in July and as we look out into the second half of the year in into 2021, we expect better performance from these higher margin categories. We're obviously not seeing metric.
Coverage in our fresh food offer due to the co good related restrictions, but we're not sitting on our hands simply waiting to heat up roller Grilles again, we are taking this opportunity to evaluate an overhaul our food and dispensed beverage offer across the existing network and with a specific focus on optimizing.
Our new larger 2800 square foot formats.
With new talent and capabilities. These opportunities were represent significant potential for incremental growth and margin in 2021 and beyond.
The third key trends centers around our business model and cost structure.
In simple terms. The reason we win in this environment is we havent ultra low fixed cost model, which enables and supports our everyday low price position, which in turn allows us to be even more competitive advantaged in attractive to customers. During this period.
When they need additional value the most.
Further we are seeing lower variable cost, primarily maintenance loss prevention into a lesser extent utilities, reflecting the lower customer traffic in accordingly, less use in wear and tear.
Our people cost at the store level have increased slightly.
And we would expect that given the higher merchandise sales and higher commissions that come with those sales and we're always pleased to pay more commissions to our store managers and associates because it means they are selling more merchandise in controlling costs, which is exactly what they are motivated to do.
In fact, I announced last week in a series of virtual town halls for our store managers and field leaders that we would be providing additional enhance commissions in the third quarter to reward and encourage our team as they stay focused on the customer in sales and I can't wait to see our teams incredible results.
As I wrap up the discussion on these three trends I would like to point out.
These are not independent trends, but rather the relationship is highly interrelated for us as the low cost player and for the marginal retailers.
For Murphy USA are low store level operating expenses, which showed a 1.4% decrease over the prior year quarter.
Coupled with stronger merchandise sales and contribution have further improved our fuel breakeven metric, which turned negative for the quarter, meaning we can sell fuel at a slightly negative margin in still breakeven, excluding credit card fees and certain corporate costs.
Remarkably we improved this metric more than a penny year over year moving from 81 basis points last year to negative 37 basis points. This year, a new record for Murphy USA in achieving or zero breakeven goal for the quarter.
Beyond earning this additional penny.
It also means we are keeping even more of the excess margin created by the higher prices established by the marginal retailers, who are experiencing an increase in their fuel breakeven economics.
Even more encouraging or the opportunities to continue to improve our per port performance through various initiatives, which in turn enhance the returns on our new store investments as we ramp up to 50, plus new stores in 2021.
I'll now turn over the call to Mindy to cover some regular financial update and I will return with our updated guidance in capital allocation priorities before taking your questions Mindy. Thanks, Andrew and good morning, everyone. Thank you for listening today.
I'll start off with some standard item.
Average retail gasoline prices per gallon during the quarter or $1.71 sharply lower than year ago prices of $2.48.
Capital expenditures approximate 66 million in the second quarter 53 of which was allocated to retail growth Sixmillion, some maintenance capital and the remaining 77 million allocated the various corporate and strategic initiatives.
As we have previously stated we're proceeded with our planned capital program in 2020 with no expected Kevin related delays and as a result, we have tightened our guidance range a bit to 250 million to 275 million versus the original 225 million to 275 million.
Based on our debt outstanding and thanks to very strong first half results. The leverage ratio. We report to our lenders dropped to approximately 1.4 times as of June Thirtyth and Thats down from 1.9 times in the first quarter and 2.1 times, which we reported in the second quarter at 29.
Team.
At this time 134 million remains under up to 400 million dollar repurchase authorization, which should be complete by July 2021.
We ended the quarter with 29.2 million common shares outstanding or about 29.5 million shares on a diluted basis.
As mentioned in the release, our cash and liquidity position you remain strong what's just over 400 million in cash on the balance sheet as of June Thirtyth, and a 168 million borrowing base available under our 325 million ABL facility.
That does remain undrawn.
In early April we made our term loan repayment of 12, and a half million, reducing our total debt to about 1.0 to 5 billion and in early July we made the next amortization payment, which reduced total debt to 1.1 to 5 billion.
So if we continue on that pace, we will end the year at about a billion dollars and debt.
And looking at the financial results I do want to make a few comments.
On the first quarter call I discussed the benefits of our low cost structure and even went so far to say the drawback of running a lean organization is there isn't just a lot of room to eliminate costs.
Also cautioned that we might even see a slight uptick in operating expenses as we responded to the store level challenges presented by Kevin 19.
But in fact through the dedicated efforts of our field team our per store operating cost at 21000 dollar $21050.
A 1.8% improvement versus the prior year.
Although we did incur some incremental expenses at the store level in our thoughts decoded the variable cost more closely correlated with customer traffic such as maintenance straight and utilities on meaningful reduction.
Inclusive of people cost and other fixed cost categories as shown in our guidance, we do expect cost to trend higher as customer traffic recovers and the second half and to remain within our guided range of 1% to 3%.
We're currently forecasting closer to the midpoint of that range.
Well significant uncertainty remains with respect to an economic recovery and how quickly customer traffic will return to normal levels. Our business remains free cash flow positive and we have a very strong balance cash balance and balance sheet liquidity, which is sufficient to carry us through even the most challenging environments that we can.
Good day.
So with that ill turn the call back to Andrei.
Thanks, Mindy I want to close with an update of our 2020 guidance metrics.
As discussed in our Q1 call we withdrew fuel volume guidance and stated we would come back with an update when we had a more informed view, which we do.
As we provided in our press release, we have reinstated our full year fuel volume guidance to a range of 217.5 to 222.5 thousand gallons on a per store month basis to provide a little more insight into second half expectations I'll give you some of the math the 220.
2008, PS in mid point of that range suggests second half total volume of 2.044 billion gallons, which is about 7% lower than second half 2019, total volume and reflects expected contributions from new stores.
On an EPS in basis, the midpoint suggests 230000 per store month for the second half of the year, which would represent about an 8% decrease versus 2019.
That should get you pretty close to 220000 apss them for the full year average or about 3.94 or 5 billion gallons.
Well, we've gotten out of the business of providing margin guidance in the past I think it's important for investors to understand our thinking as it relates to the new fuel volume and margin equilibrium, we discussed which we believe represents another structural increase for the industry.
Due to the lower volumes the industry is facing we will enjoy the benefit of higher margins to the tune of one to three cents per gallon higher in the second half, which we believe will lead to full year margins between 24 and 25 cents per gallon.
Given the dynamics in play right now in July as I mentioned, we are forecasting second half all in margins of 19.75 cents per gallon, which is about a penny higher than last year in about two pennies higher than the five year average. We believe this is appropriate given the competitive behavior, we're seeing today.
That has resulted in margins coming down from nearly 80 cents per gallon early in the second quarter stabilizing at levels higher than historical norms would suggest especially in the recent rising price environment.
If you take that math a step further you will calculate total fuel contribution dollars of roughly $960 million, which has more than $250 million above prior year.
To reiterate our revised volume and margin guidance are of course predicated on continued reopening of the economy, but we also recognize volumes stabilization or even declines from current levels will result in flat to incrementally higher industry fuel margins, all else being equal which helped insulate.
Our financial risk.
We're also increasing our merchandise contribution guidance from $430 million to $435 million to a range of 455 million to $460 million due largely to the strong performance in the tobacco categories that we expect to continue through year end and into 2020.
The one.
Regarding organic growth for new stores, we provided guidance of up to 30, new stores and that number is likely going to be 26, new stores. However, we accelerated our raze and rebuild activity to maintain a level load for our construction and supply chain partners and that number is likely going to be 29 first.
As the up to 25 guidance. We initially provided so total store construction projects remain at 55 inline with our expected activity level and for Capex as many mentioned, we're going to tighten the range a bit and given that our construction activity has not been impacted by co that we're now forecasting a range.
The 250 million to $275 million.
The remaining guidance metrics are unchanged as shown in the release.
Using the midpoint of these new guidance ranges simply per modeling calibration purposes gets you in the ballpark of $720 million of EBITDA for the full year 2020.
As we look forward to 2021 industry analysts have projected fuel demand to recover to 90% to 95% a 2019 levels.
As we estimate our volumes can improved to 98% of 2019 levels, given our more rural geographical mix and our core consumer demographic.
Data from third party sources as well as analysis, we are conducting show conclusively that our mix of markets in customer segments are performing better than the broader U.S. average.
Further we believe this volume advantage will also come within associated margin benefit of at least 1.1 cents per gallon. This dynamic coupled with sustained tobacco gains and other improvements to our business, including initiatives around our merchandise supply chain contract renegotiations, improving our food and beverage off.
In larger formats, and adding more higher performing new to industry stores, whose return profile will benefit from all the changes we've talked about today reinforce our view that we are poised to exceed $500 million of EBITDA in 2021, which sets our new baseline for future growth.
That brings me to my final point.
In our investor deck, where we set our raised the bar objectives to sustain the same share price appreciation between 2019 in 2023 as we did since our spin we now expect to achieve on a sustainable basis, EBITDA above 500 million dollar sooner than anticipated.
The front loading of our share repurchases, we executed in early 2020 against our board authorized program of up to $400 million over two years, we're equally well positioned with our cash and balance sheet to complete this program ahead of schedule.
It's nice to see the market response. This morning as investors are beginning to share our view of the value creation, we as a management team have worked to deliver since spin.
Importantly, we have additional opportunities to continue to grow shareholder value not just in the current environment, but for the foreseeable future as we ramp up our organic growth program continued to deliver material improvements of the business and allocate capital in the shareholder friendly manner.
While investors may be quick to discount 2020 results. We believe the trends we discussed today have shown persistence throughout the cobot period, yet also reflect underlying fundamentals that have been in place well before cobot.
Given this view, we see no reason why an advantage resilient and growing business model like ours should trade at a discounted valuation versus our peer group. Unfortunately, we had the means to take advantage of this disconnect and share repurchase remains a powerful lever lever given our future earnings potential current cash position.
And balance sheet flexibility.
And with that operator, let's open up the lines for acuity.
At this time I would like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad, we'll pause for a moment to compiled the Q and a roster.
Your first question comes from Chris Mandeville with Jefferies.
Please go ahead.
Hi, good morning, guys.
Morning, Chris.
Hey, let's first start quickly on the brief comments around the exit from Minnesota I was just hoping maybe you could provide a little bit more color around.
Everything behind that what how you evaluated this and.
What type of models worthy of nine locations, where that in supercenter parking lots or have you found down the road and if there's any way of parsing out what type of performance they were illustrating relative to the footprint average.
Sure so in our investor deck about a year ago, where we talked about how our portfolio would evolve we noted that we might see some exits.
Minnesota It represents what we call. It just a subscale geography for US we had nine stores many of them are old kiosk.
The sad challenge of having a kiosk in Minnesota is you have to put a heater in the Super coolers. So the soda pop stone explode in the winter and we had some low performing stores. We'd also built a couple of new stores as part of the Walmart 200 program and when we looked at sort of the.
The various factors in that market decided that we would be better off packaging all nine stores together versus dealing with the three lower performance stores. The good news as we found a private buyer and as I understand that most of our employees have transitioned over and we appreciate there.
Support during this transition.
We havent carved out those numbers, that's something that we could.
Do and follow up with with Christian.
Needless to say.
The the metrics.
For the nine stores in that state, we're performing lower than the overall averages that we have across our business gross I can also that the volume associated with those sites was on average about 130000 gallons are slightly so dramatically underperforming the rest of the network and the combined.
I was less than a million dollars.
Okay. That's very helpful, maybe actually in which case and maybe that.
Following question on the implied guidance for total gallons in the back half of the year the at that they're going to be Wallace down high single digits.
[music].
I guess I'm still trying to kind of square why one would expect that level of decline anyway is that if you're currently running in that ballpark.
Is there anything to be thinking about in the back half of this year that would detract from a continued recovery versus the.
North of now 90%.
Prior year levels, or how should I be thinking about that especially in light of what many just referenced and now thats.
The Minnesota sale lumpy it only nine stores, what actually help the per store per month number.
Yes, nine stores at a 1500 won't move the needle look we've just we've largely straight line that we built a capability using mobility data that gives us a good sense of how our markets.
In stores are actually.
Recovering and.
Looked at the industry data from experts that are looking at a number of other factors and so we could certainly.
Exceed that number but there's other factors that could could cause some variability in there. So let's just our best estimate at the time and one thing I know is.
We will be wrong with that estimate but the.
The way, we're thinking about this new fuel volume margin equal or.
Equilibrium.
If we're wrong that means either high or low the industry is seeing the same and given those dynamics the higher contribution from margins will more than makeup any forecast there from a volume standpoint.
Got it Okay, and then number quota for the Minnesota size and volume that was for full year last year, they weren't performing nearly that strongly in the kind of environment.
Of course, Okay, and then my final question before I hop back in 16 years just.
Sure I guess I ask you just last month, our ourselves now.
I'm curious so you guys now have the capital a significant amount of that.
To deploy to accelerate.
Some of your priorities.
Gross share buyback.
And you clearly reference that you yourself as undervalued relative to what type of valuation in the markets describing to you. So I'm just trying to get a better understanding why there was no activity with respect to buyback in the current quarter.
If theres any general.
Way in which we can think about an annual practice.
If you will be looking to utilize a very front end loaded annual buyback program going forward.
Yes, I think in terms of where we sit now look our board weighed heavily.
The considerations for ending the share repurchase program.
But we conducted in the first part of the year.
In terms of your modeling of the other analysts et cetera, I think we largely hit the expectations.
For the year on a front end basis.
And our board will be meeting very shortly in the open window provided from this earning call.
Gives them the opportunities to consider the timing and level.
Of resuming those but if we stay as we've stated in the continued to state.
This is our preferred method of giving back value to our shareholders. So we have the means.
To do that to extend that as well as deliver on our capital priorities.
Our NGL pipeline is in excellent shape for 50 plus stores.
Next year and as we showed.
Our.
Ability to flex between a few lower in T.I.s due to some permitting delays.
And picking up raze and rebuilds, we can continue to deploy capital on a balanced spaces.
Okay I'll leave it there congrats guys take care.
Your next question comes from Bobby Griffin with Raymond James.
Please go ahead.
Good morning, everybody. Thanks for taking my questions I hope everybody stand say.
Yeah.
Andrew I guess I guess first I want to go back on your comments about the fuel equilibrium and kind of what's taking place in the industry is very helpful to kind of walk through that when you look at industry volumes do you think there's a certain volume that if the industry gets back to say they get back to 95% or 98% that the behavior will change.
Back to more of a normal behavior, where when you see rising oil you will see margins get pensioner, you'll see operators go after the incremental volume again.
So I think that has always been the normal behavior and I think we're seeing it.
Still right now margins are pinched as prices run up but theyre dispense from a higher level and when we see some opportunities when prices fall.
We see the widening behavior by ourselves and some of the other high volume low price retailers, it's just being done in a rational.
Disciplined manner and so.
I would I would encourage people to go back to prior periods 2014, 2018, when you saw sorry, 2008, nine, especially when you saw demand Shaw.
You can trace these periods of higher industry margins back to discount annuities like this but the underlying behavior didn't change it just happened at a higher margin level than before.
Of course, the greatest risk in an environment like this would be all the competitors would compete at all away.
But I think we've seen plenty of evidenced that says look we all have to earn a return on capital, whether we have private capital or public capital.
No one's motivated to do that just for the sake of gaining more volume.
Okay. That's helpful and when you look at the volume trends kind of in July versus the business update at the middle of June a pretty notable improvement in volumes.
Joe is kind of inline with the industry now july's, notably better than kind of third party industry data that's out there.
You have any besides just to kind of the standard strength in your business that we've talked about do you have any other kinda insights into why the big notable improvement is it just regionally or kind of maybe a walmart property saw big uptake or anything like that to help us maybe understand the nice inflection in your volume trends in July.
Yes.
It's a lot of isolated factors across markets with the economy opening.
Look did a lot of.
Third party data showing that.
Our customer segment typically lower income is spending more and recovering at a higher level than higher income ZIP codes. We've done some analysis using mobility data to actually show that volumes are recovering better.
In more rural markets, then more urban markets also with the customer demographic we're serving.
I would also say that we got sharper with our retail pricing.
Positioning during.
The latter half of June and into July as well as we keyed up for July 4th weekend 100 days this summer et cetera, and we saw benefits from that in those benefits have sustained as well.
Okay helpful. And then I guess lastly from me.
Just quick one than the share buyback potential and stuff understanding the board still has to meet and ultimately that as a board plus management decision, but when you look at kind of the uncertainty I guess in environment or the business ran is there a certain level of liquidity cash balance plus available liquidity on the ABS deal that you and the team we feel comfortable.
While managing the business with to help us think about what the potential could be if theres excess liquidity of that number.
Yes.
We haven't disclosed that that number not prepared to do that right now I think it's that coupled with what's your view of how earnings are going to flow through and look the reality is.
This cove and related demand destruction was with something certainly I've never seen my team and never seen the board and never seen of this this type and.
I think when we just step back and look at it in hindsight and you say well what drives industry margins, how did that play out during this period.
Yes, Theres just a number of proof points to just the fundamental economics and industry structure of a business like this and the benefit the ultra low cost retailer.
Gains in this period and so if you'd asked me that question in the midst of this.
I would have said a number higher.
I think given what we've seen in that this equilibrium continues to just prove out and now we see the structural increase.
We're going to we're going to remain conservative.
But what we say many 1.4 times.
Leverage Undrawn ABS deal.
Stronger demand season.
In front of a strong margins 400 million of cash.
We're in a very very good position.
To allocate capital against our strategic priorities and so on just leave it at that.
Okay. That's that's helpful. Congrats again on a excellent quarter and best of luck in the second half of 2020.
Thank you.
Your next question comes from Ben bands Aneel Steven.
Please go ahead.
Hi, everyone. This is up per on on for Ben.
Good morning to ask good morning.
Just wanted to ask.
A couple of questions.
First just wanted to see if you could elaborate on merchandise margins tobacco is quite strong, but we noticed non tobacco down quite a bit just wondering how co bid is impacting your mix within each of those buckets.
And then two has posted allowed you to increase the number of sites and your store pipeline.
And are you thinking about.
Are you have you improve the quality of those sites in light of the pandemic and then I just have a quick housekeeping question at the end.
Okay.
So the unit margin.
On a decline of <unk>, 0.6% 55 points as we said was due to lottery and so it's just because sales were way up and it's a low mid single digit.
Unit margin. So that's just drove the mix down, but theres a lot of contribution margin dollars associated with that.
The remaining five basis points were just due to promotional activity.
And there was no incremental murphy drop or words.
Impact since we had already rolled out the program nationally.
By this time last year so.
The high lottery, the higher beer and general merchandise.
Coupled with the lower.
Food dispensed beverage and packaged beverage and in candy items due to volume largely explained that in so we see.
Contribution dollars continuing to be be strong as gains are sustained and weaker areas improve with volumes those that are correlated with volume.
On the.
Real estate.
Side.
We're not yet at that point, where we're seeing a high level of distressed real estate out there.
But we certainly have.
A lot of dry powder, and we're well positioned with the developers and.
Real estate team and third parties that work with us in our target geography.
To take advantage of that and so.
To the extent we could accelerate.
The pipeline of new to industry locations in our target markets.
We would seek to do that and take advantage of this.
To this opportunity.
And then back to you for your housekeeping question.
Okay, Great I think this one's for Mindy when you were speaking $1 billion that that was total debt correct.
That's correct.
The Barnett.
Ending balance on the timeline as what that included we have nothing drawn under the ABL facility.
Awesome. Thank you for that and then I'll jump back into queue.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from Carla Casella with JP Morgan.
Please go ahead.
Hi, Thanks for taking the question.
And I noticed Walmart as expanding and talking more about it subscription service and it's probably to include some gas discounts and I'm wondering if you see any impact of that on your business or does do you partner with them on any of those.
Yeah, one would think that would just be a natural combination given the number of stores they have and the number of stores that we have for that.
For that opportunity so.
That is certainly something that we would.
Pain and.
Not much more I can say on that at this time.
Okay, and then is that typically when they do that does it cause the competitive threat for any of your story, where you're not partnering with them, but you are in the region.
So if you just think about the addition of neighborhood markets in stores in markets, where we're in.
It's adding capacity.
To those markets, what I would say is.
There's a lot more opportunities.
To collaborate on something like.
Like a program like that versus where we go head to head because it's not that many locations where within we're within a half a mile or eight mile of each other but you also have to step back and say if there was only 300 or.
Or so stores in their their network to get the full advantage of a program like that one would think.
That there would be a broader.
Application of it to get the kind of uplift one would get.
Okay, great. Thank you.
Your next question comes from Tom Elliott.
Please go ahead.
Good afternoon.
You can hear me okay.
Yes, we can area.
Fantastic two questions from me Firstly just.
If you could provide some color.
Around.
Since a gallon.
Throughout the quarter.
[music].
The basis.
Next quarter and then.
So after the call, but just wondering if you could perhaps laid out in either even from a ton stress just about.
How well you think you can you can hang on to margins through the rest of the year. That's my first question.
Sure So in April or since per gallon margin was.
51 cents and May it was 25 cents and in June it was.
22 cents on a.
Retail basis, and that we had the product supply in wholesale margin.
On top of that.
That led to.
North of 30 cents for.
May in June as we saw prices rising.
Significantly so we were seeing.
Nine and have to Tencent contribution from the PS and WP. So.
30 cents all in in a rising price environment that gets me back to my point normally at our that.
Our annual average of 16 cents.
We would expect to see margins in the.
Eight to 12 cents in a steeply rising environment and yet we were seeing more.
Margins twice that.
Why do we believe that.
It persist I mean, some of this just getting down to the the laws of supply and demand.
If the price setting.
Retailers.
We're experiencing.
Higher fixed higher variable costs, a a weaker volume recovery there unit economics require them to price higher to maintain profitability.
As simple as that in the.
That's the industry structure that this business operates within and if you're the lowest cost are amongst the lowest cost retailers in that industry.
The excess margin created from that enables you to.
Capture.
That even by offering the same everyday low price differential.
To your to your customers and.
I think the other thing I would say is that.
During this period, we also saw.
Prices being passed through to consumers right. So even as all of this high margin environment was taken place prices were falling and so they just fell at a lower rate than they would have if demand had held up and I think thats another dynamic that.
This industry has as we're we're passing on higher and lower prices to consumers everyday as commodity prices change and so I think those two fundamentals of our industry it structure.
Colin.
Steep supply curve, where you have weaker players on one side and ultra low players on the other side, coupled with the ability to pass through prices, which we do everyday I don't know another industry that has these massive signs that display.
The price and so with that level of transparency.
That's just the way the industry works.
Thank you that's very helpful.
Question on.
Working capital on those.
Driver for you guys, but I just wanted to get a better sense firstly on payables I think.
Please click.
And.
Thank you use your payables you split titles are the trade payables and accrued liabilities, but I didnt see that split.
Yesterday, so I just wanted to get a sense of.
Hi, how your working capital at ready made but this quarter.
Jamie.
Which is split that out for the end of the second quarter.
I know Christian can follow you follow up with more detail around the payables, but what I can tell you is working capital moved and acquire predominantly from the accumulation of very large cash balances.
And they.
Accounts receivable was lowered that was primarily due to lower product prices accounts payable was affected by the same thing and also lower sales volumes and then of course the balance sheet of course at a point in time measurement. So it depends on what day during the quarter to quarter end, because you could have a very different result at quarter end by Tuesday.
Versus a Friday.
But.
Our working capital bounces around quite a bit.
And that's just the way it is and most of that is due to prices volume on and timing of when at quarter end.
Okay appreciate and Chris Thanks to follow up with you on any other detailed questions regarding trade accounts versus others.
Okay.
Yes.
Just right.
Back in the queue and just one last question just on directionality I guess for working capital you able to provide sort of any comment on what youre expecting in the back half of the yet.
Well its prices would rise then that inventory that we replaced that our sites would incur an increase in working capital, but that's why we like our Abbeel facility because it also grows commensurate with prices growing as well as our liquidity grows in tandem with product prices increasing.
There are no further questions at this time.
Great.
One one point that I wanted to pass on that related to a per Ron's question, who was on for been.
Our Q2 non tobacco SM gross margin grew at 3.7% June grew at 12.7%. So I think that that helps I think address your question about the recovery of some of those categories. So just wanted to make sure that point was on.
In there.
So look thanks, everyone for joining the call today and given us the opportunity to share our results. Thanks to our team out there that continues to deliver great value for our customers in the face of all sorts of.
Adversity, and we'll look forward to keeping.
Providing the same level of transparency that we've been doing through out the cobot recovery. Thanks, everyone stay safe bye.
Thank you. This concludes today's conference call you may now disconnect.
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