Q3 2022 Murphy Usa Inc Earnings Call
Good morning, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Murphy USA third quarter earnings Conference call.
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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star one thank you.
Christian Pikul Vice President of Investor Relations you May begin your conference.
Great. Thank you Emma and good morning, everyone 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 provide an 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 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. We may also provide certain performance measures that do not.
For them 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 investors section of our website with that I will turn the call over to Andrew.
Thank you Christian good morning, and welcome to everyone joining us today.
Third quarter results clearly demonstrate the earnings power of our business has been and we expect we will continue to be sustained throughout a variety of different macro and economic environment and business conditions.
Looking back over the past three years, we performed well during the onset of the COVID-19 pandemic.
Successfully navigated supply chain challenges during the early period of the recovery.
And widened our advantage in the most recent period of higher cost and inflationary wage pressures we.
We've prospered during periods of sharp rising product prices that threaten broader consumer spending in the most recent quarter delivered strong financial results as prices fell and interest rates rose.
If our advantaged business can thrive across these various macroeconomic environments. Each characterized by unique challenges and opportunities we remain confident in our ability to perform if the economy worsens or if we embark upon a period of economic recovery, our distinct model and enduring strategy have served our shareholders well.
And we see no reason to believe the future will be any different in Murphy USA.
Affordability matters and we are clearly seeing the benefits of our everyday low price strategy and our third quarter results.
On a same store basis Q3 gallons were up 9% tobacco margins were up nearly 6% and non tobacco margins were up nearly 9% powerful proof points that our low price offer is resonating across categories, resulting in volume growth and market share gains.
A quick check off we're also continues to resonate with customers as it delivers high quality food convenience items at value prices.
We continue to invest in our customer value proposition, a quick check and grow in the markets, where it has already earned a loyal customer base and valuable brand recognition.
The strong in store performance admits a challenging and uncertain economic backdrop further solidifies our view that for most consumers.
<unk> Murphy USA represents a largely non discretionary occasion.
Trend that we're seeing continue into the fourth quarter.
Our affordable offer continues to be underpinned by the low cost DNA of our organization and our efficient operating model.
While higher cost have impacted both our business and other industry operators, we continue to be advantaged from a labor perspective, the operating expense comparisons are beginning to moderate as we start to lap some of the targeted wage adjustments and other inflationary impacts over the last 12 months.
Opex at the store level was up six 4% for the quarter, including roughly $4 million of special incentives to our store associates, we cannot be more pleased with the impact of this appreciation program, which increase the engagement of our associates and allow them to do what they do best serve customers drive merchant.
<unk> sales and recruit Likeminded new associates.
As we exited the summer store level engagement has maintained at a high level and while staffing remains a challenge for the industry. We have seen a positive impact on recruiting and applicant flow in recent months.
Alongside these short term investments in our affordable offer an operating model, we continue to prioritize disciplined capital allocation as we think about long term investments.
Our organic growth program continues to be the single most impactful driver of long term sustainable growth in EBITA and earnings per share.
I am pleased to report that we're on track to deliver between 40 and 45, new stores in 2022 and expect a similar level of activity in 2023.
Importantly, all of our new stores are exceeding internal expectations and are incrementally positive to the network averages as evidenced by the stronger APSA them versus same store sales figures in the fuel and non tobacco categories.
In addition, we are on track to complete 33, raze and rebuilds, which replace high performing kiosks with a larger fortune 500 square foot store that features a broader assortment of higher margin merchandise better grab and go food offer and a more favorable customer experience.
In addition to organic growth share repurchase remains a key element of our broader capital allocation strategy and underpins our value creation pledge to investors.
Given our recent performance and our view of the sustainability of this performance. We believe our stock offers a compelling value based on both current and long term earnings outlook. We continue to believe share repurchase represents the most impactful use of free cash flow for long term investors beyond capital allocated to organic growth.
Such we continue to be active in share repurchase buying back nearly 800000 shares during the third quarter for $212 million at an average price of $276 per share.
This amount represents significant progress against the five year $1 billion program. Our board approved in December of 2021, and we are currently on track to complete that program well ahead of schedule.
Finally, I would note that while debate and uncertainties continue to exist with respect to the new baseline for long term fuel margins.
The excess cash cash generated and used to buy back shares over the past three years represents real and enduring value to long term investors with more than 25% of outstanding shares being repurchased over that period.
Investors, who have held throughout this period has not only enjoyed significant price appreciation, but can expect to enjoy a greater percentage of future earnings and shareholder distributions without having allocated more capital to the Murphy USA investment.
With that I will turn the call over to Mindy.
Thank you Andrew and good morning, everyone.
Revenue for the third quarter was $6 2 billion compared to $4 6 billion in the year ago period average retail gasoline prices were $3 67 per gallon versus $2 89 per gallon in the third quarter of 2021.
Third quarter, EBITDA was $367 million versus $212 5 million in the year ago period.
Net income for the quarter.
Was $219 $5 million versus $104 million in 2021, resulting in reported earnings per share of $9 28 versus $3 98 in the year ago period.
And the effective tax rate in the third quarter was 24, 5%.
The business continues to generate significant free cash flow and that is reflected in our cash position cash.
Cash balances declined slightly to $193 million from $240 million in the second quarter or a total net decrease of approximately $47 million. Despite capital expenditures of roughly $78 million and roughly $220 million of shareholder distributions, including the $212 million a share right.
Purchased as Andrew mentioned in the third quarter.
Total debt on our balance sheet as of September 30 of 2020 to remain at approximately $1 8 billion of which approximately $15 million is captured in current liabilities, representing the 1% per annum amortization of our term loan and the remainder of reduction in long term lease obligation.
Our $350 million revolving credit facility had a zero outstanding balance at quarter end and is still currently Undrawn. These figures result in gross adjusted leverage that we report to our lenders of approximately one five times and with that I will turn it back over to Andrew.
Mindy before taking any questions I would note that third quarter average per store month volumes not only exceeded 2019 levels, but are the strongest since the third quarter of 2016 October .
October performance continues this trend of taking share and growing volumes, which were up high single digits year over year.
Current margins approximate <unk> 30 per gallon up from about 20 cents per gallon to start the month.
It's important to note, we see recent margins reactive to and reflective of typical volatility related to the up and down swings in product prices. So while some may be tempted to label third quarter retail margins as an outlier. This level may simply be reflective of what the industry can expect in future periods of falling.
Prices and indicative of a higher equilibrium industry structure that reflects the higher cost of doing business for the marginal convenience store retailer.
With that operator, let's open up the call to questions.
Yeah.
Thank you as.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question today comes from the line of Ben The Avenue with Stephens. Your line is now open.
Hey, Thanks, good morning, everybody.
Good morning, guys wanted to ask I wanted to ask about the.
Volume growth in the fuel side of the business because its substantially higher than what we're seeing in the industry.
And maybe.
Now that we've seen prices go up and then come back down I'm curious one what's your sense of kind of to the extent you have visibility repeat rate on new customers that you have.
<unk> may be stuck around.
Slightly lower price environment versus the peak, which all of the summer and then also.
So do you think you are taking that market share from.
So I think you know Mindy did a great job last quarter kind of explaining what we're seeing in terms of the price environment. We made significant investment over the last two to three years really refining our pricing playbooks and our capabilities around this and what it was.
Really helpful is during the rising price period.
As we saw prices run up faster.
We were able to maintain our differential.
On to and gain volume in that rising price periods, so when prices fell.
We were able to.
Widened differentials appropriately and certainly the volatility that we've continued to see since the Ukrainian invasion.
<unk> has really caused a great deal of uncertainty in the marketplace prices are on average going up 10.
Up or down 10 cents.
And that just creates uncertainty as to whether.
Tomorrow's prices are going to run back up.
So it's just been a very favorable environment for us.
The stickiness comes from two things one lower income consumers.
We are facing challenges and for Murphy USA customers. We know this is a non discretionary.
Purchase so at a high price.
Environment.
They stay with us and we gained new customers as more and more consumers are impacted by the slight inflationary trends. So I think as long as we're seeing higher prices.
We're going to remain sticky.
I think the second thing is because of the discipline of our pricing.
They trust the brand that it will be.
The lowest price in the marketplace.
And then you compound that with the loyalty program that we've established an enhanced theres a great deal of stickiness that that comes with that so I think that that bodes well for the future.
Outlook as well.
Okay that makes sense, yeah, and that's a good point I guess, it's not just the price of fuel as high as the price of everything is high so that value band from the consumer doesn't go away if fuel prices necessarily roll over a little bit.
You kind of insinuated. This in your comments, Andrew about kind of the margins we've seen year to date.
I mean is it is that your paradigm for what you think your new.
Fuel margin looks like on a go forward basis do you think there's some elevated level of fuel margin earnings and your year to year to date performance that will.
Go away as we go forward, maybe if we could just revisit this topic as Im sure we will continue to.
Going forward.
Our margins relative to those periods.
The opus data average industry margins during those periods.
And then compare that to the <unk>.
<unk> and breakeven margin requirements.
You've done in some of your analysis Ben.
It correlates pretty well right and so.
What we're seeing in the third quarter, it's just the.
Typical effect of a falling price environment, where the supply cost fall faster than the retail margin.
But I'd suggest just doing the same analysis and look at similar periods of steeply falling prices you could argue that this price.
Falloff was somewhat unprecedented but we can go back in time in 2014, 2000 and agency <unk>.
Similar periods, there and just look at the differentials.
Between.
The margins earned in and the margins are now.
So it's really is that structural difference that's going to be more enduring.
I missed the second half of your question, a while ago as to who we're taking share from.
I think it is the marginal retailers broadly.
Who continue to find themselves being forced to price up.
To maintain their breakeven if you look at the Opus data that survey of 25 to 30000 retailers that.
Suggests we're down 15% to 18% versus 2019.
My guess is it's just a guess is that largely represents kind of the the <unk>.
Average to bottom half of the industry not the top quartile high volume low price retailers and so I suspect Murphy USA, along with similarly competitive peers are the ones taking the share from the bottom half of the market and then it just creates that vicious cycle, where as they lose a little bit more volume.
Incur a little bit higher cost lose a little bit more traffic associated with that loss volume the breakeven inches up and it may only be a penny or two from these.
Levels, but that certainly supports maintaining current levels and indeed growing that over time.
Yeah, Okay, great. Thanks, so much.
Your next question comes from the line of Anthony <unk> with Wells Fargo. Your line is now open.
Hey, good morning, guys. Thanks for taking my questions.
So I wanted to ask about returns quickly number of Rins you are selling now it looks more or less in line with what you were doing before the pandemic, but prices have obviously risen considerably.
And remain elevated can you just talk about.
Just a little more about the underlying drivers there in.
And how sustainable you think that is and then I know you've got it to that two and a half to three cents per gallon contribution from P. S. W. Rents over the long run but is there any reason to think that shouldnt be higher if current price levels persist.
Yeah, I'll take that question Anthony yet brand values continue to remain elevated but we continue to sell ratably.
Month to month, and so that continues to be a fluctuating piece of our business and also the way we explain it we account for that in the other income category and there isn't an offsetting impact on the spot to rack price that runs through the rest of Rps and W. Which is why we say over time, regardless of what RIN values do we expect.
Sure.
To make two to three cents a gallon.
The fact that it can't fluctuate quarter to quarter is based primarily on the direction of pricing movements and so in a quarter like we saw this one where our prices are continuing are falling that's more of a disadvantaged environment for our product supply and wholesale just because of the way we account for the timing impact of the barrel.
So in those periods you will see a decline in <unk> in instances in which prices are running up youre going to see something over two to three cents, but on balance we still expect.
The <unk> should be able to earn two to three cents.
Maybe a little bit more as we continue to optimize and leverage our scale, but on balance we think that that's where it should land over the sweep of time.
One thing I would add Anthony to that is when we see you.
Environments in the past it was often reflective of a longer refinery supply demand balance and so you saw more discounting at the racks.
And that put pressure on that net number.
The tighter the refinery complex supply demand balances the less discounting youre going to see at the rack and so that is something that.
Can benefit us in the short term, but over a long term. It's meant he says the market gets back into <unk>.
<unk>. So that's one of the other things to just look at is how tight is the supply demand balance.
A little bit tighter than it was couple of years ago, given the challenges with our energy policy.
Got it got it that's all really helpful.
And then secondly, I just wanted to ask about the merchandize gross margins can you just talk a little bit more about what drove the 40 bps of expansion in the quarter and then taking a step back that 20% number it looks like a record for you guys.
A better way to think about the earnings power of this part of the business going forward now that you've got the acquisition lapped.
Starting to see more stable consumer behavior.
It is so.
The big.
Big upside during the quarter was the <unk>.
Non tobacco merchandise.
That's attached to the fuel transactions right and so that's your higher margin.
Packaged beverage center of the store.
<unk> items dispense beverage and the like that is associated with.
Some but certainly not all of the field trips so with fuel gallons being up naturally those.
Attached to fuel categories performed really well.
And.
I think as long as we continue to sustain.
Yes.
Higher fuel volumes et cetera, those attached categories will remain and so that 20% kind of resets now with.
The quick check higher margin business.
Being added to the mix.
Got it thanks, so much guys and good luck.
Thank you.
Your next question comes from the line of Rob Dickerson with Jefferies. Your line is now open.
Great. Thanks, so much.
So just kind of a basic question.
I know, we all kind of look at the Opus data there was obviously some volatility.
In the quarter and it seemed like kind of margins had come down a little bit as we got into October I realize you stated you know that's kind of a more general.
Margin outlook, maybe it's out for all the it doesn't speak specifically to your performance obviously, but.
But when we kind of look at that correlation that does seem to be pretty strong I mean, you still did kind of decently better.
And what that correlation.
Suggested over time, even if you go back I don't know if seven years. So would you say that there was any kind of near term dislocation that you saw as you got through the quarter relative to kind of historical average.
And is that something that should continue just because of competitive advantage.
Okay.
Yeah, Rob I wish I could help you there I mean, we don't spend a lot of time doing correlations to opus data because we're looking at our results every day and know what.
They are in the cash that goes into the bank so trying to.
Model is related to some third party.
<unk> estimate.
Just doesn't serve significant purpose.
For us I would say the basic fundamentals of the business haven't changed right.
And prices run up.
The big difference that we've seen is given the pressure on cost and volumes and merchandise sales.
We're not seen as much margin compression as we did and as prices fall given the volatility that we're seeing in the daily price movements Theres, probably greater uncertainty is what's going to happen.
You know.
24, 48 72 hours.
So you see a little bit of a different dynamic there and so.
That's how we look and explain the market to ourselves and if that creates a.
A weaker correlation or a better correlation or explanation of the difference to the opus.
I just can't speak to that.
Fair enough.
Let me ask I guess a different way so.
Right now.
Gas or as I said going forward price of gas comes down right sounds like profitability in theory.
Assuming there is some decelerated right on.
Price relative to cost.
<unk> margin.
Margin could actually go up from here.
Or if the price of gas stays high you should also be able to retain kind of an advantaged margin going forward in the near term because you are taking share on volume so kind of a lot in there, but that's all I have thanks.
Yeah look I mean, this is just a real simple business if prices rise margins arent going to be as high as prices fall margins are going to be greater.
When prices on an absolute basis are higher consumers are more price sensitive and when you're in an inflationary environment like we're in.
And they're having to cut purchase elsewhere theyre going to look for more value from everyday low price retailers like Murphy USA.
And other similarly competitive low price brands, if prices get back below $2 a gallon.
Consumers are flush.
They're not going to be as price sensitive so.
At current levels.
I expect that we will.
<unk> continued to gain whole share at these price levels and then we'll just get back to the normal.
Up and down movement.
Typical volatility.
Volatility and the associated margin environments that we've seen historically I think what's the big difference is some of the lags in compression.
You know may continue to look.
Different than in the past and more similar if volatility continues to hold up.
Got it thank you so much.
Yeah.
Your next question comes from the line of John Royall with Jpmorgan. Your line is now open.
Hey, guys. Good morning, Thanks for taking my question.
Can you talk about the underlying trend of Opex inflation, how that's running when you strip out things like the onetime bonuses and credit card fees.
If I did the math right I think.
You were relatively flat to <unk> on station Opex, when you strip out the bonuses.
So have you seen a slowing of inflation or even that you are actually starting to move sideways at this point.
Yes, so we're probably in that 4% to five range. If you strip out the appreciation bonus we're certainly lapping some of the salary and hourly increases that we made a year ago as we complete our plan for 2023, we do continue to see that.
Moderating not only sideways, but a little bit further down closer to that 4%.
A range.
There are certain costs that maybe we had long term contracts that we haven't seen.
As much cost pressure on that will be picked up.
Next year, so we're certainly not looking at 678, 9%.
Costs going forward, but probably more than that.
Four plus percent type range, so I don't if that sideways or or or.
Are down, but that's kind of.
Our near term view of what we're seeing.
Great. Thank you Andrew and then so just a question on the buyback.
I think it was a couple of years ago, you guys had put out some some long term targets and at the time I think you were talking about doing a million shares.
Annually.
This year, you're pacing pretty steadily 700 800000 per quarter. So how do you think about the buyback today with obviously much better cash flows persisting.
Is this a kind of a two and a half to $3 million and you'll you should we think about that as kind of the go forward rate number.
Yeah, So look does.
Long run view that we present kind of every year with that raised the bar chart is essentially just.
Posing the question what do you have to believe to continue to generate.
Compounded annual growth of our share price of 15% to 20% and there are three drivers right EBITDA gross shares outstanding and the multiple.
Given to the business and so.
We've often kind of said look if you just.
Steve the EBITDA associated with improving the business, adding new stores et cetera. It gets you to a certain sustainable level given a.
Our stated fuel margin.
Buyback of 1 million shares get a half a turn or not on the multiple that allows us to achieve our shareholder return objectives and then we've been very clear organic growth is our first priority and free cash flows.
Above and beyond that is going to get assigned to share repurchase.
And so I think we've just been doing pretty much what we pledged to investors is that additional free cash flow will be returned to shareholders via share repurchases. So if we continue to see.
Elevated fuel margins that generate free cash flow above our first.
Growth priority, we will continue to do that and so.
We can't predict the future in terms of what the margins will absolutely be but we can provide a commitment of how we will.
Return that excess free cash flow to shareholders.
Okay understood. So it sounds like the $1 billion per year is maybe more like a poor okay. Thanks very much I appreciate it.
Thanks.
Your next question comes from the line of Carla Casella with Jpmorgan. Your line is now open.
Let me thank you for taking the question.
We've heard that several of our consumer food companies talk about how the strength.
In or an impact of <unk>, and then greater consumer mobility.
And I'm wondering if you parsed out or parse out how much of your Q3 strength might've been from greater consumer mobility versus.
The consumer is trading down into more value alternatives.
And when you say mobility are you speaking to back to work.
I think more consumer travelling they've actually commented that during the summer people are out traveling so anything that is typically done at home they sell lesser but then theyre starting as T bolt on.
Schools are reopened this thing kind of a return to normalcy I'm wondering if you guys saw that same kind of pick up in the mobility travel during the summer you are seeing this.
Ah.
Similar slowdown in travel.
All of us have reopened.
Carl we can't.
Isolate our traffic at our stores based on consumer travel versus our normal purchases, we know in front of our Walmart stores, 50% of people, we're going to or from a.
A trip to to Walmart, we know people are trading down into our stores because we are the.
The lowest price best value out there, but we can't isolate.
Exactly if it's higher summer travel or not we're seeing the typical seasonality.
But underpinning all of this is probably a trade down effect, which is greater which is reflected in the the volume growth relative to the.
Industry decline, so I would say that's.
That's the biggest factor driving the performance is the.
Greater price sensitivity.
That consumers have around these non discretionary purchases and whether theres some discretionary travel in there and we're getting.
More than our fair share of that is probably just a reflection of being a value brand.
Okay, Great and then just one follow up on the <unk>.
Cost of your raze and rebuilds and new construction.
Any change in overall cost to build and how we should be thinking about that as we model it in.
Yeah, we have noticed that there was about a four.
400000.
500000 dollar increase.
And the total cost.
To build I mean concretes are great example of were coster.
Up significantly.
The good news is when we then look at returns on capital.
With very very conservative.
Margin assumptions.
We're achieving.
The same returns are higher as before and then as we're seeing new stores come online.
They are achieving or exceeding those volume.
Expectations the consumer traffic.
At even higher margins. So we are seeing a cost increase it is flowing through but returns continues to look very attractive even with just very conservative.
Margin enhanced enhancements in our.
Capital projections.
Okay, great. Thank you very much.
Your next question comes from the line of Bobby Griffin with Raymond James Your line is now open.
Good morning, everybody. Thanks for taking my questions.
Yes, Andrew first we've talked about in the past kind of the flywheel effect on the tobacco business. As you guys have gained share others go away from low price. The manufacturer support you more on that kind of drives that flywheel. It seems the non cigarette business still here picking up that there could be potential the same thing to start taking place going forward there. So.
I'm just curious like in your conversations with suppliers and stuff is there opportunities for more support from them going forward into 2023, given your strength in non tobacco versus what is likely the rest of the industry not growing nearly as much.
Yeah look I think there are two things that consumer packaged goods manufacturers.
Look for.
I think they see both of them and Murphy USA.
One is growing the business.
And if you think about all these non tobacco categories attached to fuel.
They are growing disproportionately through Murphy USA.
And.
With the traffic down in other brands you can imagine that.
Others are not seeing the same type of growth and are seeing declines. So that's one thing.
Second is theirs.
Just been this bigger movement amongst some of the C store chains towards private label products.
And it makes sense for those that have their own commissary.
That have their own supply chain distribution are those that may have a.
Tighter concentration of stores from a.
Network standpoint.
But that model doesn't necessarily work well for Murphy, USA, especially giving one or smaller formats and to consumers come to us because they trust us that we're going to have the lowest and best prices and value on the best National and regional brands. They trust.
So if you are growing.
If youre growing the brand and you're committed to the brands I think there is the potential Bobby for that same flywheel effect, where on the margin.
Manufacturers are going to look at you and say you are committed.
And to the extent the contracts allow we can provide more support in.
And the various ways. They do it so I think it's I think that's a good question and that's how certainly we think about it in the great partnerships, we have with these brands.
Thank you I appreciate that and very helpful. And then I guess secondly, just on the fuel side of the business like when you look at kind of the daily wholesale prices you've talked about it a lot. There's just been a high level of volatility in the market. So I guess, maybe two parts one.
What do you what do you view this.
Obviously geopolitical events, but what else could be driving that and it looks like it could be sticky going forward and then two like structurally that puts you guys. It seems like a pretty advantaged spot.
That was to go back to normal would that be something we should account for that it would give peers back some of the they can compete better with you or do you think it's just something that it would not reverse hurt the business as much.
Sorry on the second part of the question its reverting back to a lower level of volatility.
Yeah, like if we collect a lower level.
Wholesale market and maybe even the PNW supply market is not as high.
Does that correspond with taking away like a pretty sizeable advantage that you guys have had here recently, because we've talked about how higher volatility really probably puds Musa even in a more advantaged place versus peers, given the optimization you've done on the fuel side and in the fact that the smaller players are worried about changing price, it's going to run up the next day just kind of curious.
What happens in the end market. If we go back to something normal even though we haven't seen normal quite yet.
Yes, so I think I understand so look I think I think it's been a day theres kind of three things that you look at our price is going up or down our prices higher LOE.
Our customers are more sensitive or not and then.
We are seeing higher or lower levels of volatility.
And so if we saw a much lower level of volatility and a much greater certainty.
Around.
Price movements.
I would expect some of that.
Kind of a risk premium.
People are waiting maybe two or three extra days to see what prices are going to do some of that advantage could actually go away.
Some of the things that drive it right geopolitical unrest.
Global supply demand balances right.
Just around.
OPEC and the changes that we've seen going all the way back to pre Covid the month before.
To what we've seen more recently with production cuts.
Cuts versus increases.
The refinery complex in the U S right with refineries being taken out of service refineries, then start running at higher levels of utilization. So they have unplanned outages and then when they take the refineries down for planned outages.
Just given all the challenges we continue to see unplanned outages.
Come on the other side of those turnarounds so.
I don't have a crystal ball with respect to how geopolitics and the global supply demand balance for crude is going to play out.
But certainly those challenges are not something that.
We're in a position as a as a country to see get resolved.
Any time quickly.
The logistics bottlenecks.
Now that we've seen in the past can continue to create that local volatility. So there are many sources of volatility.
And I suspect.
Most or all of them are going to be at play for the.
Near the medium.
Term.
Perfect that's exactly exactly what I was looking for actually I appreciate the details and best of luck to you in the fourth quarter.
Thank you.
Your next question comes from the line of Bonnie Herzog with Goldman Sachs.
Your line is now open.
Thank you Hi, Andrew.
One I wanted to circle back on something about the small and marching to operator, I just wanted to ask about them.
Then in the context of their breakeven margins.
You talked about this a bit but.
Clearly you and other large operators are benefiting from the structural change youre seeing in this industry as the small operators breakeven margins have gone up considerably given the disproportionate cost pressure <unk> been facing so how.
How are you thinking about thinking about this as inflation peaks and maybe some of these cost pressures start to ease for these operators.
Isn't there a scenario where small operators breakeven margins start to come down as cost pressures ease, which might result in some pressure Tim Martin as far yourself and your peers, just how do you think through the DAC.
Yes, so if inflation peaks that means their annual rate of cost increases.
Is going to stop increasing but I don't think youre, suggesting we're going to see massive deflation where their cost actually.
Come down so theyre going to be.
Stuck with a higher cost structure than they had five years ago.
That's not going.
To change.
They've made fundamental decisions about.
How they think about traffic driving categories, whether it's fuel or tobacco and you don't even have to get into the marginal retailers you get into some of the more established.
Uh huh.
Second quartile change that.
Arnon everyday low price tobacco.
Contracts don't have the scale to invest in differentiated loyalty platforms have accepted.
They can continue to.
Raised prices and lose volume, but maintain a good level of.
Profitability.
You know you don't invest in your stores, so you're you're a sustaining maintenance.
Either goes up or if you don't invest in it it erodes the perception of quality at that store.
And it goes down so.
I don't think that.
Inflation moderating it.
4% and even going back to the long run goals of two 2.5% are going to change their cost structure. I think this is a structural step change.
That we've seen and there have been structural step changes.
In the past I think in the in the shorter.
Time periods, we come out of an inflationary.
And environment.
If we continue to see high prices and I suspect we're going to have.
Prices.
Closer to $3 are higher than prices.
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$2 consumers are going to remain.
Pressured and Theyre going to continue to seek seek out value.
So I think that's going to disproportionately benefit the low price retailers versus the higher price retailers.
I think the other thing is if you think about the structural change thats taken place.
The.
Annual increase to their breakeven is going to be much smaller than this kind of step level change that we've seen and so the ability for a retailer to pass through an extra one or two or three.
Per year, when you see prices running up or falling by a dollar a gallon is not something that.
Theyre going to hesitate to do because it's.
Barely noticed by.
Consumers in the spectrum.
Large price changes.
So anyway, so we feel pretty confident about the problem also is that anyone who has ever on everyday low price that got off of it just.
Just find it extremely expensive and painful to go try to capture that volume because they have to give up so much margin to get down to price points to get that volume back.
And those that have maintained that everyday low price position are going to fight to keep it.
I think we're just in a new equilibrium, we've seen a step change in the cost structure for the industry.
The increases are going to be much more modest going forward, but I don't think with lower inflation, we're going to see deflation or anything thats significantly brings our breakeven lower.
Not even on the margin I mean that was helpful to your point, yes, I'm not expecting it to go all the way back.
Pre COVID-19 because I agree it seems like there is certainly a permanent change which will help to support but even.
Slight easing of their breakeven margin should or could change the dynamic potentially just in terms of like as you highlighted the behaviors right.
Yeah, although the Formula is real simple their merchandise contribution is going to have to go up faster.
Future cost increases even at a lower rate of inflation.
Increase and then you got to divide that by the volume so.
Are they going to gain back their gallons.
Are they going to gain back their tobacco share.
Are they going to gain back their attached to fuel.
<unk> transactions those are the things you have to believe.
That was Super helpful. And then just my final question for you if I may it's on your guidance you didn't really touch on it our update this quarter, but there is no. There is only two months left in the year. So curious to hear how you feel about some of your ranges for instance, your merchandise contribution guidance for the year looks like it might be.
Service, unless you're expecting I guess, a meaningful slowdown in Q4, just any color on some of your ranges that would be helpful. Thanks.
Yes, what I would say is that around fuel we're closer to the higher end of the range that you can project out absolutely on merchandise.
We'll probably be.
Love the high end on cost were probably closer towards the low end of our.
Adjusted range, SG&A, probably close to being in the middle and Capex, probably just a little bit below the.
The low end of that range as some projects get pushed to the next year.
Alright, Thanks again.
Thank you.
This concludes today's Q&A I will now turn the call back to Andrew Clyde.
Alright, well, thanks to everyone for joining in I think as we said in the prepared remarks.
Third quarter represented a different.
Environment than the ones, we've seen in the past.
But I think the pattern that we certainly recognize is that our advantaged business model and the capabilities and the team surrounding it are well prepared.
To drive this business forward, regardless of the macro environment that we find themselves in.
We can't predict what that environment will be but we're confidence in the resilience of the business. The agility of our decision making on the bold steps we've taken in the past and will continue to take in the future to move this business forward for all our stakeholders.
You and look forward to any follow up questions.
This concludes today's conference call. Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
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