Q3 2021 Murphy Usa Inc Earnings Call
Conductance to embrace what we've said for some time or structural changes to industry breakeven fuel margins. The narrative has begun to change from when and if so how much.
So keeping with that one simple question in mind I want to give you a slightly different view of the financial results. We delivered this quarter and how we think it should impact your view of our business.
So looking at our results. If you think about the total merchandise contribution of $187 million or.
We're roughly 17 per gallon on roughly $1 1 billion gallon sold.
And then back out all the store Opex of about <unk> 14 per gallon oil field and marketing G&A overhead of <unk> <unk> per gallon.
You get about a penny per gallon profit of roughly $10 million.
So for the sake of argument the merchandise contribution alone.
Has covered all of the operating cost to run the stores, including all of the field related and supporting overhead.
Then if you look at the fuel margin of $26 six per gallon back.
<unk> payment fees of about <unk> <unk> per gallon and roughly <unk> <unk> per gallon of corporate G&A.
You get about <unk> 96 per gallon.
Is net of a penny per rent.
Which on $1 1 billion gallon sold essentially gets you to our EBITDA.
$212 million.
For the quarter.
When you think about the business that way the fuel component of our earnings stream.
Is essentially 100% of the profit.
<unk> all the cash flow to service our capital structure.
And fund our capital allocation decisions.
Most importantly, our growth and maintenance capital the interest on our debt taxes, the depreciation of our assets our dividend and.
And share repurchases.
So how do we think about our fuel business and the expected earnings stream. It provides.
Yes.
First our volumes are higher than the industry average and our public peers, which is a huge advantage.
We have demonstrated that with the benefits of our product supply business. Our total fuel margins are less volatile over time than our public peers.
And with our low cost structure, we have greater upside exposure to the structural change we are seeing in breakeven fuel margin trends.
Last.
With elevated prices and increasing price sensitivity across customer segments.
Our everyday low price position as advantage to grow share.
And thanks to quick check also of high volume brands and other initiatives to enhance the food offer across our network. We believe we are best positioned amongst our peers to continue to grow the high margin component of our merchandise contribution.
That is likely to not only absorb future costs and inflation headwinds.
But it will also lead to even higher non fuel profits.
Going forward, we are focused on three overarching goals to sustain and grow our advantaged value position.
First we will continue to expand our merchandise contribution efficiently.
We are not immune to the operating headwinds the industry is facing but in our situation. These pressures have been largely offset by growth in our merchandise contribution but simply.
We also had higher costs by just selling more stuff.
Second we are laser focused on sustaining and growing our fuel market share profitably.
We are doing this through our new stores, which are demonstrating higher volumes, our fuel pricing tactics in stripes.
And optimizing our fuel supply.
So we will continue to profitably invest in sustaining our everyday low price position to grow market share over time.
And third we will continue to grow EBITDA and free cash flow through high quality organic growth and building better stores.
The productivity initiatives around which we have a successful track record of delivering value.
And the successful integration and expansion of a quick check assets.
These strategic priorities are first calls on capital.
Beyond these growth initiatives, we will continue our share repurchase program, given our view of the future outlook for the business and expected future valuation.
And lastly, we are committed to growing the dividend distribution to maintain our modest yield as our shares continued to appreciate.
Ever since our spin when our business was assigned only a six multiple reflecting in part the market's perception of the more fuel oriented business.
We have demonstrated the enduring value of our resilient and agile business model.
What makes our value creation formula.
And powerful when our mines is that the fuel piece of our business is going to likely have the largest exposure to outsized growth in the near term given the higher trending breakeven fuel margins for the industry.
The headwinds were seeing are magnified for less efficient operators, who sell less fuel and have fewer levers they can pull to maintain profitability by complementing our fuel exposure with efficient expansion of the merchandise business. We will continue to overcome headwinds increased the earnings power of the business over time.
And grow our multiple has the advantage value player and our retail sector.
So rather than pondering are reversed.
Hearing a temporary period of lower trending margins.
Which will happen at some point, but at higher levels than we've seen historically, we believe investors should be assigning less risk the fuel and in fact should be thinking about how much premium to assign this powerful driver of our earnings power.
Im now going to turn the call over to Mindy before we open up the call to Q&A.
Thanks, Andrew and good.
Morning, everyone I am going to R&D and standard items quickly total revenue for the third quarter of 2021 with $4 6 billion versus $2 8 billion in the third quarter of last year, which was not included as a quick check average retail gasoline prices were $2 99 per gallon in the third quarter.
<unk> versus $1 90 in the prior year period.
Adjusted earnings before interest taxes, depreciation and amortization or EBIT.
It was $202 5 million in the third quarter versus $141 5 million in the same period in 2020 and net income in the third quarter was $104 million versus $66 9 million in 2020.
Total long term debt on the balance sheet as of September 30 was approximately $1 8 billion of which approximately $15 million is captured in current liabilities, representing 1% per annum amortization of our term loan and the remainder a reduction in long term lease obligations as they are paid through the.
<unk> expense.
Alright, 315, and revolving credit facility has a zero outstanding balance at quarter end and is currently Undrawn. These figures result, and adjusted leverage ratio, which we report to our lenders of approximately two four times.
Cash and cash equivalents totaled $301 3 million as of September 30th.
Capital expenditures for the third quarter were approximately $74 million $13 million of which was attributable to quick check and the majority of the overall capital or roughly $64 million was directed to new store construction, where we opened four new Murphy Express and three new quick check stores.
We opened one new Murphy Express and one new quick check store in October and we currently have 18, new sites under construction, including two new quick check sites. In addition to 10 raze and rebuild projects.
And with supply chain pressures impacting our Newbuild program, our capital spend is likely to be much closer to the lower end of our guided range of $325 million to $375 million as we will post on construction cost into the next year.
Thank you everyone I will now turn the call back over to Andrew.
Thanks Mindy.
Another great quarter, and as I alluded to earlier, one that on paper wasn't dramatically different in the second quarter.
So when we look at the financials.
For results, we wanted to be just a little more thoughtful on how simple the business can be when we aren't digging in deep explained variances or add color around certain performance metrics, which we detail in the release, we are clearly delivering top and bottom line performance that should resonate with investors and we expect.
To be able to continue growing these critical profit drivers in the business for the foreseeable future without.
With that operator, we will open the lines for Q&A.
Thank you at this time, if you would like to ask a question simply press Star then the number one on your telephone keypad now.
First question comes from the line of Bobby Griffin of Raymond James.
Good morning, Thank you for taking my questions.
Hey, Andrew.
First one can you just touch on.
Many comments to the just the pipeline for stores in 2020, I know you guys do a lot of work around pipeline and projects.
Outlook still the same or is that construction side of it got incrementally worse as we look at approaching you.
And stuff like that.
Maybe a handful of openings and.
And the updated number that shift to the first or second.
Of.
The overall plan of our pipeline looks really robust for next year I think right now we've got.
A 56 Murphy stores.
And then quick check stores kind of in the pipeline. We did we're looking still to do about it.
About 30, raze and rebuilds more than our target for 'twenty one.
We will be between 25 and 30 between Murphy and quick check for next year. So the pipeline looks good.
<unk> slipped from the prior numbers, we updated its only into the first or second week of January in 2022, and beyond looks very solid.
Okay. Great. That's helpful. And then also on station and other Opex were still getting quite chek integrated in so.
Trying to clean up our models a little bit.
The rate of $2 21, or so in the third quarter is that kind of the right base case to make.
For us to think about it and then take back into account the using the usual seasonality that happens in that line item.
I think thats, probably a good estimate I mean, we'll be clear about that the next call in terms of full year guidance for the.
The combined business, but.
There was certainly some.
Cost increases in Q.
Took place that kind of reflect a pretty good measure of what the ongoing.
Business runs out on a seasonal basis.
Okay, and then lastly for me Andrew.
Mark you mentioned the supply chain and I also appreciate the detailed kind of breaking the business down, but more simple way too with the per pennies and gallon side of things.
Apply chain side.
Limit some of the inside store sales and that's part of the decline in comps.
Sure.
It's a function of that look the comparisons are pretty tough to prior year and when you look at things on a two year stack. The business is still growing at a very healthy rate.
Yes, that's a great question Bobby look first thing I'd say is do look at the two year stack and so on a sales basis, you've got 10% on tobacco and 11% on non tobacco and what that essentially is saying is that we held share on the tobacco side I mean, we had really outsized gains.
Last year in this period.
And we held on to those.
Second thing on the non tobacco side is I mean, we had all this excess general merchandise sales of PPE.
So we successfully shifted the mix back I mean alternative snacks and snacks.
The increase is there more than made up for the shift in general merchandise Candy was increase.
Increase there was half the.
Size of the general merchandise declined so we successfully shifted the mix. The second thing I'd say is if you look at margin.
On a two year stack, but even on a one year basis.
That's really impactful, so, especially as we think about tobacco.
We're starting to see.
Some declines on volume as an industry, we continue to outpace the industry on total nicotine and so sure there and being.
Now I guess the other thing I would just say from a trend standpoint, we ended the quarter really strong in September October we ran a candy promotion will be record.
Sales in the month of October and I think what that's telling me is we've got customers who are in the stores buying we got associates, who are engaged that will burn extra commission through a variety of promotions and we got manufacturers that want to deliver and sell their products, we just need a little more help and a little lesson interfere.
<unk>.
From some of the externalities, if you will to allow us just to see the economy recover and see things get back to normal, but we got engaged customers.
And manufacturers out there, helping us so hopefully that detail helps a little bit and I encourage you to look more at the.
Gen growth than just the sales growth.
Absolutely no I appreciate it very helpful. Best of luck here on an out year.
Great. Thanks.
It comes from the line of Bonnie Herzog of Goldman Sachs.
Thanks, so much guidance actually yes, and readout pinch hitting here for Bonnie So wanted to may be.
Pivoting, a little bit and talk about fuel margins here and maybe just.
How they trended during the quarter maybe.
Maybe specifically in September versus August.
And even in October now that the month is almost over just to get maybe how that's looking in Q4, and then separately I know, it's obviously still very early but how should we think about fuel margins for next year, especially.
Do you see this sort of rising fuel price environment are elevated fuel price environment continue just maybe wanted to get your sense of that as well. Thanks.
Sure well the first thing I'd say is across the months the margin was remarkably similar.
22, 27, 20, <unk>. So 24, all in retail not a whole lot of variability there and then you add the $2.06 of <unk> you get to the $26 six so.
Think maybe there's three things I would say kind of in response to your question.
<unk>.
Separate the notion of rising prices from elevated prices, we've seen rising prices. This year I may have been a significant.
As the falling prices, we saw last year and as you know margins contract when prices rise, but they really behave the same once you get to normalized but elevated levels and it's typically higher margins because of credit card fees are higher for us and everyone else and those get pass through.
<unk>.
As I just shared.
We saw.
Double digit retail margins typically we would see mid to high single digit margins in a similar rising price environment.
Permanent.
That magnitude.
The other thing I would say is while we have elevated prices theres a huge difference between $3 a gallon.
$4 a gallon.
First customers become more price sensitive as you get over $3. So the value brands like Murphy take share now we don't see gallons per fill go down, but we don't see total gallons go down and if you look back to 2008, we really didn't see a macro demand elasticity until.
You started approaching $4 a gallon as consumers really had to start making choices.
Around the utilities that they.
They think about.
And then what we saw was the prior behavior included buying smart cars, which disappeared just as quickly as they appear in the key point there is customers not just low low income customers all become price sensitive. So actually this is teeing up for a great environment, we couldnt have had.
Had a better margin environment.
For such a steeply rising price environment and the more elevated environment with the pass through effects, we're seeing we're going to see more normalized.
Run up and run downs, but at a higher level, but these customers are going to be more price sensitive and thats going to help us with our.
Everyday low price position.
And I guess, the other thing I would add to that you have a low cost operating model to start.
With <unk>, we've talked about some of the levers and scale we have the offsets.
The increases in the cost and frankly like we did this quarter and our expectation is we will continue to offset the costs with merchandise sales. So the higher fuel margins that we're seeing for us all flow through to the bottom line.
Often a $1 million you. Thank you so much.
Maybe just to sneak another one in here really quickly just on the beverage side I think you might have said something in the press release on beverages, but maybe just a little bit more detail on what youre seeing especially in immediate consumption and then maybe just looking at it from another perspective are you seeing any changes in consumer behavior around immediate consumption beverage it given some of those.
Trends, we are seeing in gas prices. Thanks, so much.
We really arent I mean, the beverage number picked up really nice year over year.
Theres, obviously the mix within that as you see challenges in <unk>.
<unk> being offset by energy drinks teas waters other products.
So the continued innovation.
Has been a big win.
They continue largely in the.
Murphy case to be a attached item.
The fuel or tobacco or other destinations of the store in a quick check side.
Part of the basket is part of the food destination, there and so.
<unk> have to wash down their food was something and so we're seeing continued growth in the beverages.
Beverages, and frankly, as we get into the synergy work with quick check see opportunities.
To make some improvements on that side.
Awesome. Thanks, so much and you really appreciate it.
Yes.
Your next question comes from the line of Ben.
<unk>.
Okay.
Much.
Good morning.
Hey, Bill.
So I wanted to ask a similar question to a question that Bob asked but.
About the merchandise business.
We're still integrating quick check into our models.
You noted some some commentary around kind of what the new normal is for operating expenses.
One of the things that stood out to us and the result was just.
The strength of the merchandise margin, which looks to be heavily driven by mix.
It is heavily driven by quick check.
Is this.
<unk> six type of level of run rate, how much seasonality should we expect in that margin.
Any sort of cover color you can offer there would be helpful.
Well I would say both on the Murphy and the quick check side, we saw really nice improvement.
In the in the mix on the Murphy side beverages Candy salty alternative snacks, all performed really well year over year more than.
Offsetting the general merchandise tailwind we had.
During COVID-19.
A quick check we continue to see.
Record food sales at a number of the stores. We've opened four stores just in the last few weeks and they are all hits the ground.
Really well, we've been able to take price.
To a certain extent on food items, there and so there's just a number of things that I would describe as.
Sustainable.
I think the essence of your questions.
From.
Our unit margin.
Standpoints, so mix is getting better.
The pricing is attractive there is probably a little less promotion.
On the margin.
On.
The Murphy side.
And I think it all plays plays well.
For our model.
Okay, great perfect.
My second question is about capital allocation you guys bump.
A lot of stock in the second quarter bought back a little bit less this quarter I know you bet spend ebbs and flows within the bigger picture paradigm of.
I missed the buyback.
I wanted to ask I.
I think this question has been asked for a few quarters ago.
But you youre continuing to integrate quick check.
<unk> got all these levers to pull on capital allocation.
Is M&A is still something we should consider incremental M&A going forward.
A one and done.
Or is it just circumstantial.
Yes.
Look it's a good it's a good question and clearly.
<unk> been so much activity out there on the market.
We've looked at things before and certainly when you do one all of sudden you find yourself being.
A lot more opportunities crossing your desk.
I think we described before how we thought about M&A, it's either something that's massively transformational which.
We really don't see opportunities, we see things a strategic building.
Buying a capability that would be hard to build and I think in buying quick check into <unk>, we kind of leapfrogged.
Brands like ourselves other brands that do food in the C store sector or to an honest to goodness quick serve restaurant I think we also noted last October there might be quality midsized change for which you could.
Ply your synergy capabilities and get synergies, including your enhanced synergies and I would say is most of the <unk>.
Assets that for sale in the market are generally weaker assets older assets.
When I think about older 30% to 40 year asset single wall tanks environmental.
Challenges not well positioned.
For a <unk> offer like a.
Quick check and so in some ways they become somewhat.
Differentiated stores.
And there are plenty of retailers out there who are looking to acquire those either to get scale or as part of a larger role up play.
At the et cetera. So.
I would never say never in terms of one and done but if you think about the intent behind quick check it was to really make a strategic acquisition to buy a capability.
If you saw something really unique out there that you thought you can apply that capability to or if you think about the Murphy Express model, where we may be looking to.
In our new markets.
And you could get a toehold position than they were quality assets.
You might do something like that but what I can tell you is.
Everything that we've seen and taken a look at it doesn't.
It doesn't fit.
<unk> fit that profile. So we put that much lower on the probability list, but I wouldn't assign a zero probability to it.
Okay perfect. Thanks.
Your next question comes from the line John Royall of J P. Morgan.
Hey, good morning, guys. Thanks for taking my question.
So my first question is on same store fuel volumes.
On the last conference call you had talked about July being about 93%.
19 volume than.
If I'm doing the math right here I think you finished the quarter on a two year basis somewhere around 89%. So.
August and September and if there was some degradation in demand if I'm actually looking at that correctly.
I apologize if I missed this.
The opening remarks, but I don't think you've mentioned anything on <unk>.
October <unk> return.
Any update there on sort of volumes would be appreciated. Thanks.
Yes, John look every every quarter is a tale of.
Three months or 13 weeks, if youre on the quick check retail.
So in July started.
Strong it's hard for us to actually say.
Without more.
The time from a hindsight standpoint was it macro demand, but certainly in a rising price environment, we want to maintain our everyday low price position, but its all you always just a little bit.
The challenge on that side I mean from our best near term indicators macro demand in our markets are still down 10 to 12.
So our view is that we held share.
In that period.
Okay.
But I'll.
<unk>.
It's slightly above that probably around 91%.
<unk> month to date, which is stronger.
And margins.
<unk>.
Margins are significantly higher.
Higher than 2019, so total contribution.
Remains elevated and so I think the big question is when do you wish.
When do you get out of that 89% to 90 90, 192% range.
And more into a persistent 95% range to kind of pre COVID-19.
And look we see that some weeks.
But.
Often you can look back and say well there was a bigger storm.
Event or something like that that you're comping against so right now it just seems very persistent.
And that low <unk> range, but with margin that continues to more than make up for that.
And I think for US as we've noted and kind of frame today's call. That's all going straight in line, because we're able to offset.
All of the operating cost increases with the expansion on the merchandise side, which plays to the uniqueness of our model.
Great. Thank you and then.
Just wanted to go back to your initial view.
$550 million EBITDA per year.
<unk> had several quarters ago.
You had sort of an illustrative.
On fuel margin at that time, obviously now we're through the first.
Three quarters year over $600 million.
And I think it's about <unk> <unk> fuel margin year to date.
I know you've tweaked some guidance figures a little bit.
It's very obvious that.
A lot of the drivers fuel margin.
There is.
Awesome.
All the other way from Opex.
Just anything else you can highlight the kind of different about this environment.
More sort of on the margin other than the big headline pieces that we all know about.
Things that are a little bit different now.
When you were looking at that $550 million a year.
Yes.
The first thing I would say is.
We had a view coming into the year about how demand would recover and we were wrong.
Also in some ways kind of agnostic as to.
The volume because you would make up for it and margins.
Beyond the Covid recovery time period being off I don't think that I mean, we certainly didn't anticipate.
The government reaction market reaction around.
Impact of labor shortages on logistics, the impact of that on supply chain.
And all of those factors that have really made it extremely difficult for the typical retailer.
In this space.
And while we always.
Subscribe to the notion of the higher fuel breakeven is something being passed through I think the degree to which you saw on the labor cost inflation.
Other cost inflation the supply chain shortages that impacted this typical retailer how quickly that would elevate.
<unk>.
Their price pass through to just maintain their profitability.
And in this rising period.
How that impacted.
Our business more in a positive way so.
<unk>.
So I think about next year again, I would say look.
Is it going to be 90% or 95% of our 100% I'm not really sure.
What I can tell you is that our advantaged business model is uniquely built to thrive in this environment, it's about relative and advantaged competitive positioning.
Within the industry and I think thats going to lead to.
Higher fuel contribution over time, we noted in one of the investor conferences that.
On a.
21, 2021 and 2022.
Store months basis.
The historical numbers were typically around $750 million to $800 million in fuel contribution.
In 2020 in 2021 that number is a lot closer to $1 billion in fuel contribution right in terms of where we expect next year to be.
You plan for somewhere in the middle right, but you've probably got more chips on $100 million of upside to the business. When you have $100 million of downside to the business as you think about.
How you think about planning for the business and allocating capital for the business.
So hopefully thats.
In terms of demonstrating the advantage aspects of our business model.
Yes, that's really helpful. Thank you and then if I could squeeze one more and its just going to be another impossible question on 2022.
On the Opex side.
It seems like Youre tracking in line with your revised guidance.
I am station Opex for the full year.
Any color on I realize fully appreciate that you are putting out.
<unk> in the next quarter, but.
Any color on that.
There is kind of moving pieces back and forth.
Looking into next year I know you've got some inflation on the labor side that Youre obviously.
Handling a lot better than a lot of your competitors are.
Just thinking about kind of where we are now.
30 level and how we should think about that going into next year.
Yes, I'm just going to go back the way I would describe the quarter and maybe this will make it really simple for and you did a great job kind of estimating the quarter. This timing he nailed a number so congratulations.
So to get your long term number I think more in line with where our view is.
Just think about the merchandise contribution.
From the new stores, the improvement initiatives et cetera are going to more than offset.
The labor supply inflation other operating cost increases.
We will have.
And so if you can get the gallons ride in the fuel margin rise is going to be really easy to estimate EBITDA and then when that sustains at that higher level I think it helps change the notion of this is <unk>.
Higher risk business to actually a lower risk business, given where the advantage value player in our sector.
Okay. Thanks very much.
Great.
This concludes the Q&A session are there any closing remarks.
Alright. Thanks.
Joining today I think my last comments, probably summarize how we view the quarter also how we view next year and the ongoing strength of our business. Thank you and we'll look forward to talking to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.