Q3 2020 Murphy Usa Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Murphy USA third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question anytime during the.
Session, you would need to press star one on your telephone if you require any further assistance. Please press star zero about now by to hand, the conference over to your Speaker today Christian Tyco, Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you Ashley and good morning, everyone. Thanks again for joining US today with me as usual are 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 Mindy will give us an overview of the financial results and then we'll open up the call.
Q1 night, 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 as such no assurances can be given that these events will occur or that the projections will be attained a variety of factors exist that may cause actual results to differ.
For further discussion of risk factors. Please see the latest Murphy USA forms 10-K, 10-Q, 8-K, and other recent SEC filings Murphy USA takes no duty to publicly update or revise any forward looking statements. During todays call. We may also provide certain performance measures that do not conform to generally accepted accounting principles or GAAP.
We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the investor section of our website.
That I will turn the call over to Andrew Thank.
Thank you Christian good morning, and welcome to everyone joining us today.
We're looking forward to discussing with you not only our strong third quarter results, but also the next step we announced in the ongoing evolution of our capital allocation strategy the.
The business is demonstrating excellent momentum as we head into 2021, and we are excited about the opportunity set in front of us.
So let's get started with the third quarter results, which were comping equally impressive results from the third quarter of last year.
Beginning with the fuels business total fuel contribution dollars were only $6 million lower than last year. Yet. These results were delivered in a much different commodity price environment.
Cove It has changed the way we talked about business performance the past few quarters we.
We feel like we are back to talking about the normal driver is the volatility, including both the magnitude of change in overall direction of fuel prices.
In the third quarter last year prices generally trended lower through July and August and were flat in September which was a highly favorable siding and generated an exceptional all in fuel contribution of 20.1 cents per gallon.
This year prices were choppy, but generally flat in July trended steadily higher in August it briefly dipped in September prior to rallying high or the last half of the month.
Generally that is an unfavorable environment, but remarkably the third quarter 2020 environment generated an even higher all in fuel margin of 22.3 cents per gallon about two cents per gallon or 10% above the prior year.
Despite total volumes down around 12% year over year.
Total fuel contribution dollars of $220 million, we're only about 2.5% lower.
Down from $226 million a year ago.
Importantly, these results continue to validate our belief that fuel retailers are establishing higher baseline margins to help offset lower customer traffic, which remains down versus year ago levels in could stay down given shifts in consumer behavior and the way we work.
More importantly.
We believe Murphy USA with its high volume ultra low cost fuel focus format will continue to benefit from the industry's higher fuel margin breakeven requirements setting the stage for further success for us in 2021.
Beyond strengthened fuel results, our merchandise business continues to generate consistently impressive results.
We held share gains and critical categories, such as cigarettes were once again, we grew units sales and margins.
When coupled with strength in other destination purchases like lot of lottery, it's clear customers are continuing to seek value from core products in our stores.
Complementing continued strength in general merchandise in beer categories, which we highlighted as high performers on prior calls.
We are seeing material sequential improvement in fuel attached categories like packaged beverage candy and salty snacks.
From an Opex perspective, we saw some modest increases resulting from clearing deliberate choices, we made to benefit both our employees and our customers.
We maintained our commission kicker program throughout the third quarter to keep our frontline sales force engaged and motivated and.
And we saw the impact of that engagement in our merchandise results.
We maintained or expanded simply policy and assigned additional store hours to cleaning to maintain a safe environment, we can for our customers.
We also experienced a little bit of pressure in store supplies shipping more cleaning and sanitation products tourist stores, along with pp here in coated related safety signage.
We also saw a negative variance on DNA expenses, but we couldn't be more pleased to be able to fund a 10 million dollar donation from our outside year to date earnings to the Murphy USA charitable Foundation, which helped support critical programs in our community in broader southern Arkansas area.
Importantly, the foundation also matches, our employee, giving where we tallied another record year of support for our local United way in our annual campaign arm.
Our employees Gale $375000, which was a wonderful outcome, especially considering the elevated needs in our community this year I.
I want to thank all our employees for their generosity in positive commitment to the communities, where we live and work.
From third quarter results encouraging October data. It is clear the business is gaining momentum as we head into 2021.
Fuel volumes improved noticeably this month, we are seeing prior year same store comps improved to 94% coupled with healthy margins in the high teens to 20% range further.
Further we continue to see the knock on benefit from higher customer traffic in higher margin category merchandise sales.
When coupled with market share gains in key categories. We are exiting the year at a materially higher level of per store contribution, which help underwrite our 2021 EBITDA target of about $500 million.
So, let's now turn to the press release, we issued after yesterday's market close where we announced an update to our capital allocation strategy.
First and foremost this announcement is an outcome of a systematic and longstanding commitment to consistently review and refine our capital allocation strategy, which to date has largely consisted a balanced organic growth and share repurchases.
Accordingly, this latest refinement is not a sudden shift in strategy.
Rather the business has benefited from ongoing strategic initiatives, we've executed over the past several years.
Enabling outsize operating leverage to the current market conditions, and resulting in strong free cash flow generation, along with significant cash balances.
As a result, we have a high class set of opportunities, which we have evaluated against the framework of our five year financial plan.
And the bottom line is we've simply got to the point, we are at now sooner than we originally anticipated.
To be clear organic growth remains our most significant earnings and value driver in our opinion and we remain committed to accelerating our NTS program in 2021 and beyond.
While the early results of our larger format 2800 square foot stores are highly encouraging it has taken us two to three years to develop a pipeline to support roughly 50, new stores per year.
So even a strategic decision made today to further accelerate in high growth would effectively be a longer term capital deployment decision.
Nevertheless, it 50, new larger format 2800 square foot stores per year, we are adding square footage on an annual basis that will exceed even some of our most ambitious small format in kiosk build classes of prior years.
Given the importance of new store growth and performance as it impacts our five year plan, we are focusing management's attention on building a distinctive food and beverage offer that is fit for our purpose our formats and our customers to support the highest possible returns on our growth investments which represent over two.
$250 million of capital expenditures a year going forward.
To ensure that outcome, we are allocating internal resources and making investments in people with the expertise and experience to help us maximize new store investments in the year to come.
As we point management's focus towards food and beverage we see this as a natural outcome of the maturity of our operating model.
Which is now prioritizing a new set of value drivers to help propel the business forward.
Management focus is a valuable and precious resource that we have harnessed successfully since our spin delivering results and executing business critical initiatives.
If you go back several years ago, we pointed our cross functional optimization focus in other areas for example, tobacco, where we identified opportunities to improve our supply chain terms and service levels, our in store ordering and inventory management practices in our home office pricing and promotional.
Activities.
Today, we have significantly enhance capabilities, including our partnership with Cormark, new operating and pricing capabilities and Murphy drive rewards, which of all generated both share gains and margin contribution growth since their implementation.
Therefore, as we now point, our optimization machine towards our lease develop categories.
Not only are we coming up the learning curve faster, but we have new capabilities in place, which elevate our expectations of future benefits. In particular, we are close to renewing another five year contract with core Mark that we expect to benefit the business in 2021 and beyond with specific emphasis on improving and optimizing our.
Food and beverage offer in cost of goods.
We recognize that building these capabilities internally is not easy and it takes time.
And given we are in the early stages of building. These new capabilities. We are also open to acquiring the capability set from the outside that could complement what we do well and that could also provide distinctive offered that scale suitable for our formats in customers.
More broadly we have not participated in the M&A market beyond one off location for several reasons, we have succinctly stated over the years.
In our view paying a premium for less than average assets. The simply build scale is not a financially sustainable model, we would rather acquire their value seeking customers through new store growth with our low price offers which we believe has generated higher returns than we could have attained through M&A.
As such we view the acquisition of a unique capability like food and beverage through a different lens.
Moreover, after having built or bought in enhanced food and beverage capability. We could then view the acquisition of better than average midsized firms in markets, we find attractive differently as we would have a stronger basis to compete for those assets and generate the necessary synergies to make an acquisition accretive.
At the end of the day, the M&A opportunities, we desire may not be available to us at the price we want to pay but it is an option we are going to explore going forward and if successful could open up other path in the future.
The framework through which we have historically view capital allocation options remain largely unchanged. However.
However, as discussed we have advanced significantly as the firm since our spin and believe now is the right time to not only sustain and grow our primary capital allocation options.
But to diversify our capital allocation options, including a mechanism to return capital to shareholders more consistently going forward, namely a dividend.
On share repurchases, we have nearly completed the most recent authorization of up to $400 million in the board has approved an even larger up to $500 million repurchase authorization to be completed by December 31, 2023, providing us a little over three years, which is consistent with the pace.
Which we have executed prior programs.
Needless to say that commitment should clearly demonstrate our view of the potential of the business over the next few years.
Share repurchase can be an extremely effective value creation tool if implemented properly over the right time period and with a business like ours that is still growing and improving and while we feel like we have taken advantage of market volatility we understand some periods will be more desirable than others and there will simply be times when we are.
Out of the market.
To supplement those periods and provide consistent returns of capital. The long term shareholders. We are excited to make another commitment to long term value creation in establishing a modest yet meaningful quarterly dividend of 25 cents per share.
This initial dividend offered the yield in line with our broader retail peer group represents a small percentage of our historical cash balances and provides an excellent mechanism to grow with the cash flow generation ability of our business over time as we continue to build out our network and optimize returns from our new store.
Yes.
We think this is a seminal moment for both our company and our investors and is another compelling reason to become a Murphy USA shareholder and with that I will turn it over to Mindy.
Thanks, Andrew Good morning, everyone and thank you for listening today I will start off with some standard items.
Average retail gasoline prices per gallon during the quarter were $1.90 sharply lower than year ago prices of $2.38.
Capital expenditures approximated $61 million in the third quarter 54 million of which was allocated to retail gross 5 million to maintenance capital and the remaining 2 million allocated to various corporate and strategic initiatives we.
We continue to expect full year capital capital spending in 2020 to fall between $250 million and $275 million.
We ended the third quarter with cash on the balance sheet of 318 million 197 million of availability under our 325 million ABL facility, which remains undrawn.
Total debt outstanding at quarter end was down to 1.0125 billion, reflecting ongoing quarterly term loan principal payments of 12 and a half million.
And is down to 1 billion currently post the quarter four principal payment we made in early October.
Based on quarter end debt outstanding the leverage ratio, we report to our lenders was approximately 1.4 times as of September the Thirtyth.
Versus 1.4 times in the second quarter, and 2.1 times reported in the third quarter of 2019.
Although we don't expect a repeat of 2020 financial performance in 2021, the balance sheet does remain under Levered, if current market conditions persist and could be utilized to support some of the capital allocation strategies Andrew mentioned.
Due to the execution of approximately $90 million of share repurchase during the third quarter as of September Thirtyth 28.6 million common shares were outstanding or about 29 million shares on a fully diluted basis.
As stated in the press release 7 million remains in the up to $400 million program authorized by the board in July of 2019, which means since quarter end, we have repurchased another 300000 shares or about $37 million worth.
Any amounts left over from that program will be executed as market conditions allow prior to kicking off any activity in the up to $500 million program recently authorized by the board.
And looking at the financial results I want to make just a couple of comments.
There are no changes to the revised 2020 guidance published in our second quarter earnings release with the exception of some onetime DNA expense, we incurred during the third quarter, which will push total expense for the year above that guided range total DNA expense for the third quarter was $53.7 million an increase of nearly 80.
10 million above the prior year quarter as Andrew said, we were very pleased to announce a $10 million donation to the Murphy USA charitable foundation, which is important to all of US here in El Dorado and South Arkansas.
In addition to this donation we also trued up some accruals for about 2 million and the remaining variance was due to investments in new capabilities and the timing of certain project expenses.
That wraps up my comments, so I will turn it back over to Andrew.
Thanks Mindy.
I want to close with the final message to our existing shareholders and potential investors listening in our commitment to value creation through organic growth remains our highest priority now sure you capital will continue to flow to our highest returning opportunities.
When we had the right opportunities in the right markets to further accelerate our high return organic growth program, we will allocate incremental capital commensurate with that opportunity.
Secondarily, we will continue to use cash balances free cash flow in an appropriately leveraged balance sheet to support other value creation initiatives, including share repurchase and dividends with dividend preservation and growth receiving priority consideration now that we've initiated one.
Lastly, we will continue to explore and seek out M&A opportunities with distinctive capability building synergy in reverse synergy potential to optimize the returns from both our new stores in any acquired assets with that operator, we can open up the lines for acuity.
At this time I would like to ask a question. Please press Star then the number one on your telephone keypad.
And your first question comes from Ben Bendini with Stephens, Inc.
Hey, good morning Ray more.
Morning, Ben Lu.
I think the most notable.
And a focus here on the quarters and you provided a lot of good contacts and commentaries on the updated.
Capital allocation process, and I think what I heard you say is.
There might be a perception that a dividends signals potentially slowdown in growth or change or shift in your capital allocation strategy. That's been so effective I think what I'd say is it's it's really supplemental and I think.
You kind of demonstrated here.
But to the buyback I guess.
And buying the 700000 shares late in Threeq, you and then more in Fourq you at a price higher than here. So I guess, maybe help put into context for us.
[music].
How you continue to think about how this evolves maybe not in the near term, but over the long term.
And you talked about accelerating growth for new stores in 2021.
How long is that runway first.
For store growth I think that would be helpful for us here too.
Yes, Thanks, Ben it's a really good question and I'm sure. There's a whole lot of conspiracy theories or views about like why the change.
As you and I've talked about we've talked about with other investors I mean, we simply does have a high class set of opportunities.
In front of Us and if you think about having achieved strategic goals earlier, achieving the financial goals associated with those strategies earlier generating superior free cash flow, including the outsized leverage in the current environment. I mean, there was hardly a quarter that goes by that we don't have $300 million of cash.
In the bank and yet we're continuing to buy back shares at an accelerated rate and growing at an accelerated rate. So I mean, the free cash flow machine. This business is capable of doing more.
As we thought first about accelerating organic growth you know.
The the reality is we've already accelerated organic growth and building up a pipeline to be able to 50 stores a year on a sustainable basis and for the target markets we've identified.
We have a super long future of continuing to do that so there is no.
Constraint in the growth even in those markets.
It's more about if we wanted to increase the pipeline from 50 stores year to 75 stores a year that would take another couple of years to build up.
Pipeline to do it so we.
We couldn't announce that we're going to do 75, new stores in 2021, because 50 was already a stretch and if you went back a couple of years ago, We're only targeting 40.
In 2021, so we've accelerated the organic growth.
Just to start with.
As we think about share repurchase and dividends you know from a repurchase only model to a dividend only model.
Right out in the future investors talk about a dividend plus model, where you're mostly paying a dividend complementing it with share repurchases.
I'd like to use the phrase share repurchase plus and to the extent that we continue to accelerate our share repurchases.
And obviously, finishing the 400 million earlier.
Authorizing the $500 million program over the next three years is all supported by our shareholder value model that we present front of our board on a regular basis, our management team on a regular basis that shows that the future earnings potential from the existing business. This.
Tejas tonnage is the in high growth is going to generate a higher share price in the future than it is today and so we remain very bullish on that.
But the reality is we are in and out of the market all the time and there's a lot of volatility we expect future volatility and given that we are always sitting on so much cash for which we don't earn a significant return it very easy for us to think about a.
$28 million to $30 million.
Dividend less than 10% of that outstanding balance as a way to give something back to the shareholders on a consistent basis, whether we're in or out of the market in that particular quarter in its really as simple as that right. We have a high class set of opportunities. We've we've accelerated the anti growth we can act.
Celebrate it further but it's not something that we'd be to deploying significant capital on.
In the next two to three years into you built up an even larger pipeline to be able to do so so let me pause there and see if that address the essence of your question Ben.
Got it that's perfect. Thanks.
Tacking on to that on the M&A, that's something we've heard about in the past but.
But I think you guys don't executed really well in your business I'm curious when you think about buying someone elses business.
And layering on your.
In Houston skills is.
Is it just that.
That you need to justify the purchase price in the business I think about how <unk> and R&D are your multiple is maybe lower than where it should be and you might be on kind of an inverted scenario, where you have to buy businesses that multiples in excess of yours and capture synergies or efficiency is to get that deal to be accretive.
Is that the right perception by Miss perceiving that.
Do you guys think about making the math work on M&A, if you truly want to buy a good business with good capabilities.
Yes, so it's a great question, let's be real clear, we're not doing M&A for M&A.
We are not going to target average or below average.
Assets that are towards the end of life, we already have a very effective mechanism for acquiring those customers much more efficiently. So as we think about our larger format stores. I mean, we are in the food and dispensed beverage business. It's not the made to order with the kitchen with the commissary type model.
Many people think about.
But we have dispense soda, we have dispensed frozen beverage we have dispense coffee, we have open air dairy coolers, we have heated.
Heated items and he double items et cetera, and to be honest with you. It's our least developed category enduring co, but it was effectively shut down and we have made a number of strategic hires over the past few months. We've also been working very thoughtfully with our partner Cormark about what a very distinctive fit for Murphy USA emerge.
USA format in customer offer would look like.
In Rome, the customer renewing our contract with them, which is going to provide additional benefits to us in this category. So we're all about enhancing a capability, that's probably our least developed capability.
To get the most return out of our larger format stores right. So that's our priority.
But my prior background made it very well.
Obvious to me that look capability building is hard and even though I think we have done an exceptional job at Murphy USA building and enhancing our capabilities.
It would be foolish for us to think that we shouldn't look to the outside to say is there an appropriate capability we could acquire.
It's not going to be a massive firm, but on the other hand, it's got to be big enough to have capabilities that scale. Its people its technology as process experience. It could be brand. It could be platforms that are portable and you know what there may or may not be one out there, but if there was we would see synergies for.
And what we bring to them, but more importantly, we would see reverse synergies as we think about accelerating the kind of returns we could get in our stores and when we benchmark our stores to other firms we've seen into next benchmarks et cetera. We know there is a significant gap there and we've talked about several million.
In dollars of opportunity already in our plans to get there, but theres bigger opportunities in front of that.
Whether you build or buy that capability. You are then in a position to then say you know what the synergies we could already bring because of our low cost operating model, our advanced fuel supply chain.
Our exceptional merchandise supply chain and contracts.
Coupled with infield opportunities in markets that our target markets for us coupled with these new capabilities.
Could make M&A very accretive what we don't want to do is have you know.
Run of the mill average the below average slightly accretive M&A deals we could we could have been doing that all along it's unlikely would have generated kind of returns free cash flow and benefits to our shareholders that our organic path has led to.
But were simply further along than we thought we would be a couple of years ago.
And were accelerating organic growth and we need to improve one of our key capabilities to get the most return out of those new investments.
Okay. Thank you for that.
My last question you touched on the October trends as it relates to gallons you mentioned that the in store was was running.
Still at elevated levels just curious.
Can you provide more granularity on how the in store is performing through October.
And then.
On the gallons how much of that.
Improvement from what we saw in Threeq, you think even September.
Update you again is a function of the compare I think you had an easier compare in the fourth quarter and how much of it is.
Kind of what you're seeing that's.
Relative to either the external environment or.
Something that you guys are doing.
Sure. So I think from an external.
Environment October was good last year and frankly this year, we've seen again kind of a choppy.
The market so it kind of the teens to low 20 cents kind of reflects that we've seen some.
Relative to the end rising prices, we certainly saw that at the end of September so that wouldn't bode well for starting.
Off the month of.
October so from a market environment standpoint.
Actually comping a.
Better period last year than what we're seeing this year in terms of what we're doing we're clearly doing a better job on retail pricing excellence.
And we're further down.
The road in terms of optimizing.
Capability and so there will be a positive benefit.
From that would you know weve continued to see.
Every quarter.
On quarter on the merchandise numbers I don't have those right in front of me, but it's more of the same holding our gains.
On the.
Tobacco side, continuing to see destination purchases on some of the other key categories.
And with the recovering traffic seen the attach categories rebound.
Separately they are there as well so generally all very very strong and good.
Good news.
Okay, Great I'll leave it there thanks.
Thank you Ben.
Your next question comes from Bobby Griffin with Raymond James.
Good morning, Bye. Thank you for taking my questions.
We appreciate all the detail on the updated capital allocation strategy very helpful.
Engines.
On to talk about.
Back when you kind of in your prepared remarks, you guys have been executing at an extremely high level high class problem of having cash in different avenues to spend it can you maybe talk a little bit about some of the Bakken investments that are needed to support the bandwidth of being able to look into that look into the SMB as well as maintain organic growth.
As well as maintain some of the other initiatives that the company has been doing so successfully.
And when you say backend investments are you talking about.
Capex outlook are you talking about more.
Other things.
Well I mean people systems, just you know.
You guys. If you guys have been executing very well, we're moving into another area of potential upside through this.
This updated capital allocation.
Allocation strategies, how to maintain the bandwidth of the other organic growth stuff, that's been going so well to those people that need to be hired systems or anything of that then.
Going forward.
Sure. So what I would say is that if you just think about the organic growth I think we have an exceptional asset development team that has.
Focus on our core markets and.
Good partners that work with them.
Especially around the construction.
Side of that where I think our business got priority during co bid because we never put the brakes.
On the business. So there there's absolutely nothing that's.
Changing or slowing down on that front.
We've challenged.
Cross functional team to say, how do we get the most out of our 28, hundreds and we think about food and beverage further store labor optimization layouts et cetera, we have initiatives just to continuously improve and.
Think about the.
Further optimization there so.
As they.
Get into a normal cadence of maintaining a pipeline we had a building committee yesterday that that looked at some incredible new anti locations in Raizen build rebuild locations I would just say, we're just on a smooth running cadence for all of those activities into our store build plan continue.
Used to track.
Along the way so there's nothing really different that we're doing.
You know along along this front you know in terms of.
One of our capabilities Murphy drive rewards, we built it and we knew we had to build it.
To be successful around our two biggest categories fuel in tobacco and it has and so now we're effectively just going to deploying it to support other categories and it's an incredible capability because it's also a great communication tool to let customers know that we have new products come try this product and get.
They are.
Trial and conversion and acceptance so we can create panels.
From our customer base to give us input on their taste and so forth and so.
I mentioned in the prepared comments some of the capabilities. We built over the last few years were already so far down the learning curve and have the base in place we think the FNB capability could it get advance further we've made some strategic hires at the director and senior director level that have already come on board and are working closely.
We've built out economics on all the different platforms and.
Going down to the store level detail to set expectations, new performance targets et cetera store by store.
And I think we have a really good I'll call it the optimization machine per.
Approach to get the most out of every store we are simply pointing this machine at a new set of.
Opportunities than we've pointed out before and we recognized we needed to bring in some talent from the outside to be able to do that.
From an IP standpoint, we have a new vice president of IP that hit the ground running and help.
Hello.
Sustain the.
The remote work that we continue to do the cyber security.
Hi results that we continue to get and.
Keeping all our systems up and operating as well as exploring what else do we need to be able to do to.
To grow these other parts of our business so.
I also have a high class opportunity, having built I think one of the most exceptional retail management teams out there.
And together, we're all looking forward to that next challenge to move the business forward and I think part of what we described here is we got to the first set of finish line's early.
What's the next finish line that we want to run towards I think we have real clear line of sight, what that finish line looks like and we also have a lot of confidence of what the finish line looks like which is why we authorized $500 million a share repurchase now.
Because we have an anticipation of what the finish line will look like by the time that programs completed.
Very very very helpful. I appreciate that and I guess second for me I mean, when you think about the expanding.
Expanding FNB capabilities clearly on the larger next generation stores I mean that that can be very beneficial. When you look at kind of your powerful kiosks is that you do raze and rebuild and stuff do you see further opportunities to kind of integrate any potential acquisition or any potential additional capabilities into those smaller formats that could drive even better upside.
How did those high performing assets.
Absolutely I mean, our 1400 square foot stores have a have a coffee program.
We've got some stores, we pour out more coffee than we sell right. We've got to improve that and its a whole set of capabilities that will allow us to do that better same with dispensed beverage IC open air coolers readable items grab and go et cetera.
As I said, we're working on what we think are a couple of really unique clever ideas that will allow us to come up with something thats fit for our formats fit for our purpose and fit for our customers.
There's one thing you know about Murphy USA, we are not going to be a me too late.
Take that approach similar Murphy drop rewards, we recognize our model is different and so the ideas and the creativity and the innovation, we're going to apply to our unique opportunity set is going to probably look a little bit different than.
The average run of the mill offer out there as well.
Okay, I guess, Andrew Lastly, I mean, I understand a little bit tougher question far out, but look at the 500 million target next year I mean, if you had to pick one or two things that would cause you not to be able to get there from an industry standpoint, what would those be besides obviously economic recession or something but it is it just the volatility around fuel mark.
Indoors and lapping the big.
Merchandising growth.
Growth in gross profit anything just to help us think about that.
That number in context to some of the variables that you have to go up against.
Yes, I would say there is no lack of conviction of finishing a $500 million program in the next three years. It is more about the timing of it right and if you think about anything that would cause you to say Hey, you know what we're going to go slow to go fast versus Hey, we could.
Go faster on the front end like we did with a $400 million program. I mean, those are the things we're going to be looking for in that look theres a lot of uncertainty as we think about the current environment the capital markets the election taxes, other regulations et cetera, and so those things.
Could have an impact on.
Near term EBITDA et cetera, and.
Those would be the things that we would be keeping a very close eye on and as you said there are external their industry they would affect all parties.
It said or a slow it's less about.
Where we expect to be at the end of that three year authorizations more the timing.
In which we execute that and that's why we thought a dividend was also very appropriately as well because if there is a timing period, where we're out of the market. We are continuing to provide a consistent return of capital to our shareholders.
Thanks, Andrew I don't think I, probably was not Super clear my question, but thats helpful and another asset goes I was more looking at the $500 million EBITDA target for only 21.
Okay would you answered, which answers very helpful indirectly to for modeling purpose and how we think about that but in regard to that EBITDA target. If there was a couple of things that would cause you not to hit it what would that be barring economic recession of course, you some of the variables.
That you guys have to comp against to help us keep that in context as we're building out our models.
Sure well look I think the first fundamental is this new fuel volume margin equilibrium that we've talked about and we continue to see evidence as weve shared in this quarter.
And what we're seeing currently that the market's behaving very rational theres.
Theres nothing that says the market could wake up one day and become highly irrational for whatever reason.
That's the single biggest driver of our.
Expected variability in.
Our numbers, but.
Just as it could put that number at risk you could see it having.
Outsized benefits in 2021 also so thats one is we call this year.
Swings both ways.
Certainly there could be regulations around.
Tobacco or second largest cash.
Category, I think Altria just announced a.
Price increase and we see.
Benefits that come from that but we can see tax increases.
Or other regulations that could impact that Fortunately our market mix is such that we are in a more favorable geographies and we are the most tightened regulations and taxes.
Tend to be.
I would say those are probably the two biggest items you know in terms of 2021.
EBITDA you any changes to regulations minimum wages et cetera, we certainly wouldn't expect that to.
Transpire in such a short term period, even with a new administration.
In the White house.
Thank you I appreciate the details congrats on a good quarter and good execution and best of luck in the fourth quarter.
Thanks, Bobby.
Hi, Kim for any questions. Please press Star then one and our telephone keypad and your next question comes from John Williams with JP Morgan.
Hi, good morning, Thanks for taking my question.
On the dividends are the plans to keep the yield in line with peers or do you have a particular per share growth target over time or.
Any other kind of ratio of income or cash flows you're targeting and I guess.
What I'm getting at is with the idea to eventually differentiate with the dividend or is it more just kind of keeping line with peers.
I think it's a good question.
John I think certainly.
At least three metrics most firms look at when they initially.
Initiate a dividend and we're clearly in terms of dividend paying firms.
On the lower end of that is not only in line with the.
Retail peers in our industry, but the broader retail peer group.
You know that we look at and so we will keep.
An eye on all the various metrics knowing that there are some things like your share price or market cap your shares outstanding other things that certainly impacts those metrics I.
I think to the second question about would it ever become a differentiator I think thats the difference between what I call the share repurchase plus model in a dividend plus model and I think we're still years away from a growth opportunity standpoint from moving to a dividend plus model where you differentiate.
On the dividend and new share repurchases to just supplement that I think our view is that there is still so much upside in our business value. That's not captured in the current share price earnings potential from the growth and the ramp of these new stores that hasn't built in.
We're going to be more bullish on share repurchases complementing it with.
With the dividend and I'm sure there are some point in every.
The Companys lifecycle, where it makes a transition to becoming more differentiated.
On a dividend, but we're nowhere near that stage given all the growth opportunities we have in front of us and the fact that growth isn't fully baked into our share price.
That's really helpful. Thank you and then on leverage levels.
You talked about the two and a half time Max.
Would you be willing to step outside of that for an attractive acquisition and can you remind us if you have any cover.
Covenants that restrict you'd be on certain levels I think in the past you've talked about maybe three or three and a half times with that might be a little stale.
Yes, I'll, let mindy tackle the covenants, but I think in terms of.
You know acquisitions.
I would take something pretty significant give.
Given our current cash balance our current leverage.
Race show.
To move.
Above two and a half times and we could certainly do that I think with our bonds trading at over 107%, we could effectively borrow money today at less than 4%. So we certainly wouldn't be.
Concerned about doing that but anything that we would do would get as quickly back below two and a half times very quickly and frankly, that's our stated goal. It's a great place for a business like ours to to operate it gives us a lot of free cash flow.
Flexibility.
It.
Gives us the opportunity to be flexible with a lot of opportunity.
Mindy you want to add on to that talk about the covenants.
With regard to the covenants both of our bonds that we have outstanding carry a three times Max leverage which allows us to have unrestricted research.
Restricted payment, if we're below that which affects obviously share repurchases and dividends. So as long as we stay within the three times range and we have a lot of free board, but.
Between where we are now on there to even touched that we can do unrestricted share repurchases and dividends.
Great. Thank you very much.
Your next question comes from Carla Casella with JP Morgan.
Hi, one question on the M&A front and related on the on the correct here. So.
Wondering if you had had been seeing and turning down a lot of M&A opportunities in the past or if this will be a new.
Exploration for you and then also any criteria you can give us to put our arms around the M&A process. When you look at.
A max either dollar outlay or leverage or multiple any kind of criteria you put around that.
Yes so.
One thing we will have to get used to saying is we don't comment on any specific transactions or ones in the past, but I've said publicly we've looked at a lot of transactions I'd say, we're probably.
Not in the deal flow.
On on all of them because most of them would not have been attractive to us in the first place, but we have looked at a lot we have the capabilities.
No to analyze do the due diligence if you think about how we dissect and look at our built our business. We absolutely have the horsepower to get inside and look at other businesses and beyond just about where we see the opportunities.
We have a great set of advisors that supply.
Support us on a variety of initiatives to help on that front. So.
With respect to anything in the future I think we've been pretty clear right. I mean, our initial focus is can we complement the organic capability building efforts, we are undertaking to get the highest possible returns out of our larger formats.
By acquiring that capability on the outside right. So that means they have the capability its distinctive.
And you know the key thing you would see there is you know it should have the ability to port the capabilities and some of those platforms to our stores and so in that case it would be as much reverse synergies, but I couldn't help but think that there would be a.
Other synergies associated.
With that from the benefits were our business.
As advantage in so.
That's the primary focal point as we sit here today, we do have target markets that we are focused on that we are growing our end.
Anti effort.
Efforts in et cetera, and those strategic markets could present opportunities.
As well and as we look at just the normal type of synergies that we got we could get from those whether it's in the fuel supply chain and leveraging the proprietary capabilities. We have there whether it's our ability to optimize stores, which I think really is a distinctive capability.
In which is why a lot of the stores out there that we have seen have an EBITDA per store much lower than ours is that they're not fully.
Optimized.
And then I think we have a superior supply contract for more scale in so.
You know, it's not that we couldn't get synergies out of some of the.
Transactions that have taken place today, we'd want to make sure that we're getting a capability with them or it's a very strategic access to markets, where we're already planning on on growing anyway. So that gives you a sense of how we would look at it we're not going to do M&A for M&A say can go out and acquire.
Less than average assets at a premium.
Okay, Great and then just one clarification or follow up I guess on the food and beverage increased focus.
It doesn't sound like to me like you're considering switching to a bigger format, but just wanted to hear that from here that.
That is correct, we but we believe the 2800 square format that we have can deliver.
Very efficiently and effectively all of the things our customers are looking for I think theres a chasm you jump between that in a made to order model, which requires 567000 square feet $567 million to build two acres et cetera, one of the best looking stores in our building Committee yesterday was on six tenths of an.
Anchor.
Kwik trip sheet floral law firms, we always said Meyer.
Couldn't build or format on.
Less than two acres, we can still build our modular 2800 square foot store there. The key for US is to come up with a distinctive offer for our food dispensed beverage hot and cold et cetera.
That were already.
Putting the platforms in our stores and getting the most out of there. So yes definitively no. We're not looking to start building bigger stores is getting the most out of the high return stores, we've already got and our view is that with those even higher returns that gives us the confidence to even further accelerate or.
Organic growth in the future.
Okay, great. Thanks, a lot.
There are no further questions at this time I will now hand, the call back to Andrew Clyde for closing remarks.
Great well, thanks, everyone for joining today I know, we hit everyone with a lot, especially with our second announcement, but I think we got some great questions today, and I hope the clarity and conviction.
Behind our answers to the really good questions.
Give you a clear sense of where we're going with our business. We're really excited as were beginning to put 2020 in the rear view mirror, we have a lot of exciting things in front of us in 2021. Thank you all.
That concludes today's conference. Thank you for your participation you may now disconnect.