Q1 2022 Murphy Usa Inc Earnings Call
Good morning, My name is Audrey and I will be your conference operator today.
At this time I would like to welcome everyone to the Murphy USA first quarter 2022 earnings Conference call. Today's conference is being recorded all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one once again thank you.
And now I would like to turn the conference over to Christian Pikul, Vice President of Investor Relations. Please go ahead.
Hey, Thanks, Audrey and good morning, everyone. Thanks for joining us today with me as usual are Andrew Clyde, 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 a brief overview of the financial results and then we'll open up the call to Q&A.
Please keep in mind that some of the comments made during this call, including the Q&A portion will be considered forward looking statements as defined in the private Securities Litigation Reform Act of 1095 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 today's call. When they 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 measure.
With the reported results on a GAAP basis as part of our earnings press release, which can be found in the investors section of our website with that I'll turn the call over to Andrew.
Thank you Christian good morning, and welcome to everyone. Joining us today. This is one of the busiest weeks of the year here at Murphy USA as we report earnings hold our annual general meeting of shareholders and meet with our board of directors.
And looking back over the most recent quarter and last year, we certainly have a lot to be proud of in terms of our results and share price performance, but just as importantly, how we went about achieving those results and we have just as much to be excited about in terms of our future potential given the enduring advantage of our low cost business model.
A loyal engagement of our growing customer base and the incredible spirit of our store associates in the field and home office staff, who support them.
If that was reflecting over the weekend on my letter to shareholders from this year's annual report it struck me that of all the commitments to our stakeholders our commitment to provide affordable transportation fuel and convenience products to our customers is becoming more and more relevant with each passing week and month we.
To learn more and more about our customers and their needs and by analyzing the behavior of around 100000 Murphy drive rewards customers, who have shopped with us each month since 2019, we're learning a lot about how they are navigating the current environment.
First their spend with us is rising significantly as fuel prices are up over a dollar a gallon, but their consumption remains relatively stable as fewer gallons per trip are made up by increased trip frequency as such we represent an increasing percentage of their household income, which tells us that there.
<unk> for Murphy USA are not discretionary.
They must get to work drive their kids to school and get to the store as most of them do not have the luxury to work remotely and shop online.
Second the extra trip is generating incremental merchandise sales, particularly in the tobacco category, where we are providing significant value relative to the competition.
Third as we reinvest margin into relatively lower prices at the pump and with our tailored promotions for our consumer packaged goods.
We're also gaining new customers, who are seeking greater value as they make the choice to switch brands before choosing to drive fewer miles or consume less of the products we sell.
As a result of increased fuel volume and traffic merchandise sales and margins from attach categories continue to grow.
The benefit of being more affordable and increasingly relevant to consumers is that we are gaining share profitably for both established and emerging categories. This holds true not just for our Mercury branded stores, but also for the quick check brand given their compelling price to value offers in food and beverage convenience items and low price mode.
Fuel in short our affordable customer value proposition is resonating in the current inflationary and high fuel price environment.
Supporting our value proposition is our low cost business model, what's not only continues to demonstrate its relative advantage in the face of macro challenges all retailers are facing but continues to further evolve through the leadership and initiative are of our staff.
While we continue to see a smaller than historical store applicant pool, we are keeping up with the turnover inherent to a business like ours, while taking additional steps to retain staff until vacancies through special incentives in recruiting marketing.
The team is doing a great job managing merchandise challenges by resetting planet grams, and introducing new products and substitutes to keep the shelf stock in.
In addition, core Mark did a great job navigating supply chain challenges and helping to keep our stores well stocked, especially around featured products for impactful promotions, we successfully executed during the quarter.
In addition, the acceleration of the CB for implementation at Murphy, a reverse synergy where quick check has a more advanced capability is on track to generate over $2 million in additional contribution.
This year by faster identification and resolution of out of stock or mispriced products.
Our early wins from our food and beverage strategy of improving sales and contribution while streamlining labor and cost to serve for both brands.
Necessity is the mother of invention and one of the ways our asset development team is keeping our raze and rebuild guidance intact is by finding ways to repurpose more and more equipment and components from existing stores before they are torn down as we navigate supply chain issues.
The list goes on but I think you get the point, we remain intent not only in preserving our competitive advantage, but growing it as the senior leadership team. We are in the early stages of outlining the next wave of top and bottom line growth initiatives similar to the campaigns, we launched back in 2018 that transform some of our critical capabilities.
Like the retail fuels pricing excellence initiatives and enhanced the foundation of our business model like ours zero breakeven and employee value proposition initiatives.
As we like to say at Murphy USA, we will never be complacent, and we have a great opportunity to build on our current momentum.
As this virtuous cycle of winning with the customer with our <unk> offers delivered to our advantage business model by engaged employees and business partners continues we're also able to invest in our other stakeholders. We recently kicked off the third year of our Roundup campaign benefiting the boys and girls Club of America.
Which thanks to our engaged customers continues to make a positive impact in the communities we serve.
During the quarter, we also repurchased more than $150 million of our shares while continuing to grow our dividend continuing our industry, leading track record of total shareholder returns.
The notion that when we win with our customers all of our stakeholders win is not new by any means but the ongoing work over the past two to three years as part of our ESG reporting has placed an even greater focus on what really matters in the yen to have a sustainable business like being more affordable and relevant to your customers.
Taken together the teams hard work and efforts generated strong first quarter results for Murphy USA.
Importantly, a key element underpinning our earnings strength, namely a high structural fuel breakeven requirement for the industry remains in place as cost pressures continue and fuel price volatility is increasing.
This means smaller fuel retailers face an increasingly uncertain future and that risk is being partially offset through higher industry margins.
In this environment, we were able to extend our discount to peers generating greater loyalty amongst our existing customers and attracting more price sensitive customers. As a result, we not only delivered strong year over year gallon growth for the quarter, but our per store fuel volumes in April 2022 were higher than the same period in <unk>.
2019, providing further proof that we are not only taking share, but taking share profitably as we shift from COVID-19 recovery to yet another new and different macro setting.
While our volumes are higher we note that the recovery in macro demand remains fragile and will be subject to natural and artificial fluctuations as total fuel demand remains exposed to inflationary pressures, coupled with emerging geopolitical risk and concerns about future recessionary pressure. Despite these risk it is evident to us that our value.
We will continue to resonate with more and more value seeking customers further increasing our advantage in the marketplace and sustaining our ability to grow this advantage into the future regardless of the macro environment we face.
One particular element of the first quarter results that is more temporal and subject to movement of commodity prices is the outside outsized contributions from our product supply plus rins performance, which added $10 seven per gallon to our all in margins as we've said consistently and repeatedly in the past we expect PS.
<unk> plus rent margins to average two to three cents over time. We've also noted that during periods of extreme price volatility.
<unk> results will be skewed to the directional move in prices. Thus Q1 results are consistent with a price environment that saw our ball prices move up over 90 <unk> during the quarter.
In fact, if we back out the uncontrollable impact of this price change.
For example, all the timing and inventory adjustments, we see about two seven per gallon of net contribution resulting from RIN sales, partially offset by a loss we incur that is embedded in our internal spot to rack transfer price.
Provide a little further context for these results I would direct you to Q1 2020 results, where our ball prices fell a little over one dollar per gallon and resulted in total <unk> W contribution of negative $4.04 per gallon or about seven to eight cents below our stated long term average.
This should serve as yet another reminder, that the product supply and Rins part of the business remains relatively stable over time absent price movements as each of these volatile quarters delivered the underlying two to three per gallon, we've told investors to expect.
As opposed to the big unknown question at the moment is when not if we see a significant fall off in commodity prices, where we typically see outsize retail margins and typically achieve our greatest gallon growth I'm now going to hand, the call over to Mindy to briefly review the financial results and then we will wrap up and open the call to Q&A. Thank you.
You, Andrew and good morning, everyone revenue for the first quarter of 2022 was $5 1 billion compared to $3 5 billion in the year ago period.
Average retail gasoline prices were $3 43, a gallon versus $2 37 per gallon in the first quarter of 2021.
Adjusted earnings before interest taxes, depreciation and amortization or EBITDA was $277 million in the first quarter versus $154 8 million in 2021.
Net income for the quarter was also higher than the previous year at $152 4 million versus $55 3 million in 2021, and the effective tax rate for the first quarter was 21, 24%.
Total debt on the balance sheet as of March. The March 31, 2022 was approximately $1 8 billion of which approximately $15 million is captured in current liabilities, representing the 1% per annum amortization of the term loan and the remainder a reduction in long term lease obligations as they are paid through opera.
<unk> expense.
Alright, $350 million revolving credit facility had a zero outstanding balance at quarter end and is currently Undrawn. These figures result, an adjusted leverage ratio that we report to our lenders of approximately one nine times and cash and cash equivalents totaled $356 4 million as of March 31.
<unk> of about 100 million since year end and with that I will turn the call back over to Andrew great.
Alright, Thanks Mindy.
I believe this quarter's results highlight that the advantages embedded in our model are increasing in many of the structural factors are unlikely to dissipate in the near future as smaller retailers in the sector face increased challenges. While we are certainly not immune to some of these factors, we believe our scale business model customer positioning and continuous improvement.
<unk> set better positions us to mitigate these pressures thus growing our relative cost advantage.
As a result, I remain highly confident in our ability to compete and win in this environment and continuing delivering best in class total shareholder returns in any environment, we may face in the future and with that operator, we can open up the lines for our questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause just a moment to compile the Q&A roster.
We'll take our first question from Ben <unk>.
<unk> with Stephens.
And I'm sorry, Dan. Your line is open you may have yourself muted.
And hearing no response, we'll move next to John Royall with Jpmorgan.
Hey, good morning, guys. Thanks for taking my questions can you hear me.
Yes.
Great.
So just wanted to ask on inflationary pressures your station Opex came in at the low end of the full year guidance range for the quarter, which I think is.
Somewhat of an upside surprise at least in my thinking.
So what are you seeing right now on the cost side I guess after you strip out the impact of credit card fees, which I think are relatively well understood.
What are you seeing in that station Opex side, and how do we think about that relative to the <unk>.
Sure well look I mean, we're not immune to the pressures that everyone's facing we did make some of the.
Step changes in labor last year, and I believe we got ourselves relatively well positioned there are some additional changes were made.
Making.
This year, but we started in a pretty good spot having digested.
A lot of those last years.
Supplies continues to be an area, where we have.
Increases in some price changes some.
Some of our maintenance providers are asking for diesel surcharges.
For example, and so there's just an ongoing set of things like that that we and many others.
Are facing so it's as we said, we're not immune to it but I think with our scale, having made some of the changes having a compelling compelling employee value proposition.
Creates stability.
As well.
Okay. Thanks, that's helpful and then in the past.
And your history of Republic, as a public company I don't know if we really had.
This happened, but I'm sure. It has in your tenure with the company in the past when you guys have picked up market share in periods like this where prices.
Cause people to trade the lower price retailers.
Have you been able to hold onto some of that share when <unk> goes back down I know you were sort of able to do that with.
The tobacco share that you gain during the Covid period, you kind of held onto it even.
Even when we came out of it have you seen similar impacts.
On the price straight there.
Yes. So look if you go back to 2007 and 2008, that's probably the Best example that was before my time, but I did study that period deeply.
For Murphy USA.
The company was gaining share significantly.
Crude prices were going up to 140.
And then you had the period in 2009.
Nine were prices fell off very significantly and look the reality is when you get below $2 customers aren't as price sensitive. So there is some portion of that volume that you don't hold on to in a recessionary period, where you see softer demand as we did then.
We probably.
Had outsized gains.
Up until July 31, 2008.
And so you definitely give some of that.
Away when you have broader recessionary periods.
The big difference that.
Is in place today versus then is the structural breakeven requirement for the industry is a step level or two or three higher.
Then it was then.
We've seen the labor pressures and we don't see those going away.
Additional regulations Luna.
Looming et cetera, some of the.
<unk>.
Market share around tobacco.
For example.
It has gone away I think the industry structure has also shifted Murphy's a standalone company, we had some other spinoffs.
As well so.
I think there is something about higher prices that are going to benefit us I think there is something about.
A.
$2, a gallon falloff, where people aren't going to be price sensitive, but I think the world is a different place than it was in 2008 I don't know if thats helpful, but I think structurally.
This environment sets up much better for us than for example, the 2009 2010 period on the other side of the big run up.
Yes. It is helpful. Thank you very much.
We'll go next to Bonnie Herzog of Goldman Sachs.
Alright, Thank you Hi, Andrew.
Morning.
Good morning, I'd like to ask a little bit more about some of the comments you were just making because I think you you touched on this in your prepared remarks, you mentioned you know the key question on everyone's minds is how sustainable are these incredible incredibly elevated fuel margins.
I agree in terms of what you just called out in terms of the structural change that were seeing which should help.
Right.
When do you expect these margins started to revert a little bit back towards historical levels and then in the context of that you know thinking about your guidance.
You've called out this 21 cents per gallon, just certainly from modeling purposes only but.
Q1 was clearly well above that so.
How comfortable are you with the ranges you laid out for the year given the strength you saw in Q1, so just to comment on your guidance as well would be helpful.
Sure as you said that not guidance is not guidance that was for modeling purposes, and I think the other thing we made very very clear to analysts and investors as it was for modeling for capital allocation purposes, right and at that 'twenty. One model number we can achieve our.
Objectives around growth and meet.
Minimum expectations for share repurchases and we just simply said look if there was more of that residual margin that we'd seen in the last couple of years.
If it was delivered we had a very clear line of sight to what we would do with that and we would buy back more shares which we did in the quarter and we would continue.
Two.
Allocate capital in a similar similar manner. So.
Think that's we're comfortable living in a 20 <unk> environment and we've got very clear line of sight, what we would do in a 25 cent.
And environment.
If you think about the residual margin that we've earned in the past and the fact that we earned it again this quarter and you ask yourself well what would you have to believe to continue earning it in the future I think there's a few things.
We think about you know I think in this quarter.
We saw record.
Absolute price increase 90 cents, a gallon and you book in that to the Q1 of 2020 at a dollar you saw an equal and opposite effect there and so you know.
Arguably you would say the retail margin for us was probably understated in the quarter because it was a rising.
Rice environment.
I think the second point I would make is there was actually a lot of volatility up and down movements within the quarter and especially in the last month or so.
And I think the teams.
Trying to describe how much of the residual would you keep theres almost what we would call sort of a risk premium.
That's worth a penny or two or three of that whereby when prices.
The run up and then they fall sharply and then they run up again in fall sharply in a 10 or 15 or 20 range.
<unk>.
I could imagine that a smaller retailer has to be thinking about okay, well if prices fall or are they just going to rise again within the week and with the current geopolitical.
Issues, we've had the various bands or proposed bands. So that's the kind of volatility we are seeing so I think if you put yourself in the shoes.
A weaker retailers they would ask themselves okay, what do I do in that environment.
What that means for us, though is that we can gain volume at a lower cost than perhaps in the past by putting some of that margin on the street. So we're going to continue to stay affordable relevant with our everyday low price offer and so I think you have both now the structural change.
You've got the greater volatility you've got this sort of risk premium were.
Maybe.
You've got a different behavior there.
I think as long as we're going to be in a high price high cost volatile environment, It's not clear to me what would change.
When that environment changes that might be the environment.
Prices commodity prices fall and we know what happens in that type of environment.
And so coming out on the other side of that as I suggested.
Adjusted to John I think at least the structural challenges that we're seeing in the environment are likely to persist and that's the big difference from a consumer standpoint.
This is a non discretionary.
Purchase for them I think our view is.
$5 is the new $4 as vehicles are more efficient you've had inflation and wage growth etcetera, and so we certainly haven't seen in our markets the kind of demand destruction that we saw at $4 a gallon.
Back in 2008, so I think this is the perfect set up.
For our business and business model and customer value proposition.
No that's helpful and as you can appreciate it's very difficult to understand exactly what's going on because things seem to stay elevated and then maybe a little bit of a follow up question as it relates to our fuel volume.
Gal.
Gallons on a SaaS basis, just looking at what you reported in the quarter it seems to be built.
Below 2019 levels on that basis. So just curious to hear if you think gallons will have a return.
What I'm asking is pre COVID-19 levels and then if you.
Just based on that and then just thinking about it in the context of the share gains that youre talking about how that's translating in terms of maybe gallons and if in fact, youre, bringing a new customer.
Yes.
Right so for the quarter, you're absolutely right. We performed below 2019 in 2019 Q1 was.
It was a good quarter April look 2022.
The first.
Full month, where we have performed above 2019 levels and so.
You can look at the public Opus data, which I believe.
<unk>.
Represents demand from their survey, but it's still a good proxy in the other public peers et cetera, I think you'd get a you can reach the same conclusion that we are.
Taking share and doing that profitably so.
We feel confident around that I mean, I think this is where the Murphy drive rewards data is just so helpful. When you've got a when you have your 100000.
Remember panel data that you can look back and you can see they've made purchases with us every single month across fuel tobacco and merchandise and see their behaviors and how they are navigating the current <unk>.
Environment.
We know from a 100000 consumer sample that we're also gaining new customers and we're continuing to see that in new participants and members in our Murphy drive rewards program and so you know.
This is not different from what the company saw in the higher rising price environment of 2007 or eight it's no different than what other everyday low price retailer see in our sector.
Or another common goods sectors as well.
Okay. Maybe one final question from me if I may because you just touched on something about April so it sounds like gallons are better in April than they were back in April of 19, so they're accelerating so that's interesting in light of everything so maybe you could share with us some of the month to month.
<unk> that you saw during Q1, and then a little bit more color on what Youre seeing in April as it relates to especially quite frankly fuel margins.
With gallons are picking up.
What does that mean for fuel margins during the month of April .
Thanks, So much yes look yes, we saw we saw ongoing acceleration.
Throughout the quarter and look every every month in a quarter, especially the first quarter, where you've got winter storms in various things impact the business.
Especially then when you're comping over similar quarters from prior prior years et cetera, but generally the trend is an acceleration and we kind of crossed that four minute mile. Mark If you will and got about 2019.
In April .
And in the <unk>.
Seeing that we're not seeing a degradation.
The margin because of the pressures remain that drive the structural.
Breakeven requirement was thats, the kind of the market margin.
If you will and because of some of the volatility.
We're able to pretty efficiently.
Grow the volume and.
Get some share gains in the process.
Alright.
So trends are accelerating on a month to month basis. So far this year kind of what youre seeing and just so far this year correct perfect. Thanks, so much.
Yes.
Our next question comes from Bobby Griffin at Raymond James.
Okay.
Good morning, Bonnie Thanks for taking my questions and congrats on another great quarter.
Thanks, Bobby.
First question I want to talk on maybe to switch over to quick check more high level. I mean, you guys crossed the one year Mark since the acquisition.
Curious on your view of how the integration went in the first year. Some good areas that you like some areas that you maybe want to work on and then kind of what some of the big initiatives are from integration in year two.
Sure. So look I think one of the things that we.
We loved about quick check with the people and the culture and everything that we thought we were joining up with has been the case I've been especially excited about.
The leadership, there not only our new leader Blake's Eagle, but the team on the ground there and how they've embraced change it hasn't been without challenges and questions and we spend a lot of time on that.
One of the beauties of being a public company is.
<unk>.
Have a of equity program at certain levels and I think people all of a sudden realize when you have a business and it performs and you're part of a bigger company that there is excitement and motivation.
Round that as well so.
We had a strong team and really think can appreciate.
Their engagement frankly, given all the changes that have taken place that are very proud.
History in past and a lot of success.
The food business.
It is really picking up nicely, we're seeing in the morning day parts pick up from both the beverage and a breakfast.
Sandwich standpoint.
We've done some pretty in depth consumer work to understand where the brand strength is what are some of the pillars that we're going to really amplify in our food and beverage strategy, but at the same time <unk> also not surprisingly identified some some low hanging fruit some quick wins and some more.
Medium term initiatives, where we can create value there so.
I think the thing we like as a leadership team has an opportunity set.
You can make a good business better and we think we have the opportunity to do that and again that relies on a strong team.
To be able to do that so great brand.
And the market there so.
I'll stop there, but I think those are two of the things. We're most excited about with the integration.
Yes.
The second kind of two parts of the second part of this question I mean, one is kind of what are what are some of the big moving blocks of working on this year in year, two and I guess to I mean, you gave some great data on the music customer and it's clearly a very defensive business you have there with murphys and performing extremely well.
A quick check out a little bit different mix.
Is that customer responded to inflation higher prices any any difference between the two I think you could maybe say some of their products are a little bit more discretionary than in what Murphy as kind of a mix of businesses. So any details there would be appreciated.
Yes look I don't I don't know about all of our quick check customers, but I know a good cup of coffee in the morning for me is not discretionary and we are there to for that the same for the best rated Italian sub.
In New Jersey from a value standpoint so.
One of the things is we really got to know the business is the customer is more like our customer than not they just happened to buy more food and beverages at their stores our customers eat too as we like to say they just don't buy as much of it from us. So I think there is opportunities around food and beverage optimization.
Always menu rationalization, there's price optimization.
They only launched their loyalty program.
Right before Covid right and got into delivery. So our team here built the first of its kind everyday low price loyalty program with Murphy drive rewards, so turning that talent towards the opportunity of quick check around digital loyalty.
And consumer insights creates a big opportunity.
There's opportunities to optimize we spent a lot of our efforts around cost management. It wasn't cost cutting it was round optimizing and so if you think about a <unk> like business theyre going to be opportunities to optimize.
Labor waste supply chain.
On top of pricing and promotions. So we think theres a great opportunity set.
To continue to make that business stronger.
Well listen the opportunity to take those advantages.
Into new stores as we continue to grow that brand.
Great and I guess lastly for me you know this.
This is the first quarter, we had all three months of the acquisition in there so getting the seasonality right in the model was a little bit off last year, because when you look at merchandize GP you guys left the year unchanged how did how did the quarter come in versus kind of internal expectations. In line was there any kind of moving parts and surprised you and then.
The seasonality I guess implies a step up but that's just anything there for us to keep in mind on the modeling standpoint.
Yes. So first of all we did not have January in the numbers last year. We closed on January 29. So this is two months. So I think one of the things you could look at it as a unit margin. This quarter is really due to two things the mix improved.
Improved we had.
A lot of higher quality sales, especially around packaged beverage and we'd like to look at those as kind of more attached to fuel. So as we grew gallons. We got more of the attach sales packaged beverage being a big part of that but there's also just ongoing innovation.
In packaged beverage and we're taking full advantage of that.
And then on the other side of the mix, we had lower lottery that kind of comes and goes with jackpots.
And frankly, a lot of the stimulus money we saw.
Towards higher lottery sales as well so as that gets cut off you see a little bit of difference there and we had less general merchandise PPP. This year than last year. So mix was a big part of the.
Unit margin trends and so I'd like to think.
Some of that continues we also had an exceptional promotion that.
Grew the unit margin.
And in March and so some of that May not repeat exactly the same way, but I would say the trends continued to be strong and favorable.
For both brands as the businesses continue to recover from Covid and become more relevant in the current environment.
Thank you Andrew I appreciate all the details best of luck in <unk>.
Alright, thank you.
And we'll move next to Ben <unk> with Stephens.
Hey, Thanks, good morning, I apologize for missing the queue earlier.
I wanted to ask about just this idea of breakeven and kind of the dynamics in the first quarter and I think I think there's a recognition that margins have structurally gone up since pre COVID-19 and I think as we look at the last nine quarters, you've beaten on fuel.
And each of the last nine quarters since Covid started.
And.
For our observation one of the dynamics Thats interesting in this quarter is.
It's the strongest PSM W.
Plus Bryn Mawr.
Margin.
Think on record that we can see which would imply on the other side of that the retail margins are materially artificially suppressed as well.
I know there was some volatility in the quarter.
But when you think about the risk.
Billions of the business today, the positioning of the business today, the underlying earnings power of the <unk>.
Business today.
Youre, giving us periodic updates around guidance and at Investor conferences.
Obviously, the breakeven is changing with each passing month as costs go up.
Volume dynamics change.
So how should we be thinking about where the equilibrium is where that breakeven is.
And.
How much of.
What youre seeing now is.
One time versus not and I know you've covered this so just elaborating further it would be helpful. I think.
Yes, well look I think first.
First observations are spot on this was the single.
Largest price increase we've ever seen in a quarter.
And there's almost a.
Very high R. Squared regression that then shows that that's the highest <unk> margin because of the uncontrollable timing adjustments in book ending that an anchoring the regression on the other end as Q1, 2020, which has just the perfect equal and opposite effect.
And of course retail fuel margins were especially strong in Q1 of 2020. So you are right that the retail margins, probably a little bit understated, but if you put it altogether, it's still a good.
Representation of what we get so.
What sets the earnings power for us.
We're a price taker, but as an everyday low price retailer, we are going to be looking for opportunities to gain share and do that profitably and responsibly to have the lowest price out there.
For our customers and so look we don't update every month every quarter sort of the breakeven dynamics for the industry, but if you think about the big drivers per.
Say that third quartile retailer I mean, certainly it's going to start with their merchandise contribution.
And did they recover their tobacco gains and losses are not that they loss from COVID-19.
If there are fuel gallons are down still down they haven't recovered all of the attached.
Categories.
If the food and beverage offer isn't as relevant and you've got more drive throughs and other delivery services et cetera, maybe that part of the business. So I can imagine that the top line is still impacted for a number.
These players and they have had to pass through.
Higher prices and merchandising right, which creates this vicious cycle, if I lose some volume or lose some share I got a raise prices I'll take the penny profit and margin and it's a very vicious cycle, but it can go on for a while.
You get to the cost side of the equation and the same thing right I am having to pay a little bit more to get the labor I'm, having to work a little bit harder as a owner operator and.
Maintenance costs are a little bit higher.
We've got great partners in our business, whether its core mark whether it's our.
Fuel transport partners, and we're able to manage our costs there they are probably not able to.
Maintaining the same cost structure with third party providers, because they lack the scale.
And so I would imagine theyre going to continue to see cost pressures and you divide it by.
Lower gallons.
I would imagine that they continue to see increases in their breakeven requirement.
And that's before credit card fees I mean, our credit card fees were up a penny and a half a gallon this quarter versus.
Prior years it is a significant increase.
That just kind of reflects the market power of visa Mastercard and the credit card.
Companies and so we're not immune to that but it really impacts the smaller players more significantly.
So I just think all these pressures continue.
To compound and so because of our scale the cost advantage.
At cetera, we're able to just reinvest part of our profit back into even lower relative prices across the categories.
To drive demand and it creates more of a virtuous cycle for us as I described in our prepared remarks.
Yes that makes sense okay great.
Second question is about share repurchase I know you don't.
Can you talk about your intention or desire when and where to buy back stock.
The observation I think is.
And each of the last several quarters. The stock has performed well and at any given point in time, it looks like you've been buying the stock at lower prices than where the stock is.
Finishing with the quarter.
And when thinking about.
Why or when you buy back stock relative to other opportunities you have.
I assume it's a moving target in terms of.
The earnings power of that business, and how it's evolving and I am curious.
Some monitoring of the breakeven how you decide what is the.
Fair price to buy back the stock.
Because in this quarter you might have seen that $180 a couple of quarters ago would've been a healthy price and it's 30% below where it is now.
So when thinking about kind of a refreshed underwriting of your business in the repurchase program.
How do you think about that can you help us think about how to think about it.
Sure. So we throw this chart in our Investor deck every year for the last few years and we talk about our total shareholder return and the movement of the share price.
One year three year five year since spin basis.
It leads our industry and it leads all the major <unk>.
<unk> and I think our leadership team and our board is really focused on long term shareholder value and when we show on the right hand side of that chart you know whats the raise the bar.
Uh huh.
Formula to maintain the same compounded annual growth of our share price.
We just lay out some simple parameters what do you have to believe about the EBITA. What do you have to believe about the multiple and what do you have to believe about the shares outstanding.
And we go to conferences and people tell us over long term shareholders will be in it two to three years, where there was a five year chart right. There and if you think about the amount of stock. We bought back every year, we would be the largest shareholder each and every year based on our buyback because we have a long term view of our business not a one.
Year to year, even three year view of the business. So it's really hard for us to sit here today and look out five years and not see a share price.
That is not significantly higher than it is today. If you just use a simple formula of how much earnings as the business is going to deliver.
Whats the shares outstanding.
And what's the multiple being assigned and look at we see a major market correction.
See it show up at lower multiples across all the companies.
That will revert at some time so our shares are just going to be cheaper in that environment, our price rises and falls right in with the outbreak of geopolitical risk we saw our price just.
Within the last 60 days back below $180, a share or we're able to take advantage of those opportunities. So I think Ben it starts with a much longer term view of.
The business the sustainability of the business. The fact that we talk about affordability, we talk about.
Engagement with our staff, we talk about being a low cost responsible retailer those are the things that make us sustainable and then that way we get we can be aligned with long term investors.
Through our share buybacks.
And so look we don't always get it right when we do at <unk>, five one and set parameters and maybe there's some things we see out there that cause us too.
Do more or do less in any given quarter, but I think the message that we're trying to deliver is.
Over a period of time. This is our primary way of giving value back to shareholders is going to be balanced with our organic growth.
The amount of rate organic growth is a function of the pipeline and the opportunity set in front of us and clearly this year.
As a little bit lower than what we ideally would have wanted it to be this year.
But when we balance those things out and you put that organic growth into that EBITA formula again, we can't see a scenario five years out where the business isn't worth more.
At a share price five years before that endpoint and we just keep rolling that mindset forward into the future.
Okay. Thanks, very much best of luck.
Thanks Ben.
And that does conclude our Q&A session. At this time I will turn the conference back over to Andrew for any concluding remarks.
Great well, thanks for all the questions today from the analysts and investors.
Listening in we're certainly excited about the quarter, but I think as we shared in the remarks, we remain just as excited.
About the future potential of our business. Thank you very much.
And that does conclude today's conference. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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