Q2 2023 Murphy USA Inc Earnings Call
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I will now turn the call over to Christian Pikul, Vice President of Investor Relations. Please go ahead.
Yes. Thanks Brianna good morning, everyone. Thank you for joining us all today.
Today with me 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 will 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.
<unk> 10-K, 10-Q, 8-K, and other relevant 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 conform to generally accepted accounting principles or GAAP.
We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the 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, we're excited to discuss our exceptional second quarter performance, which reaffirms the strength of our strategy and business model and our enduring commitment to driving sustainable value for all our stakeholders.
Murphy USA reported another impressive quarter of financial results in Q2.
European by continued strength across all major categories.
Winning with fuel we achieved nearly flat a PSM volumes in Q2, including positive volumes in May and June as we held market share gains achieved last year and continued to outperform the opus volume survey in our geographies, we built on merchandise sales and margin momentum led by total volume and market share gains.
In tobacco and sales and contribution growth in non tobacco categories.
Tobacco share grew across all sub categories as we continue to promote and provide affordability to our customers while our non tobacco category saw broad based strength led by energy sales up 21% and units up over 13%.
Food and beverage across the enterprise also accelerated in Q2 with sales and margins up 6% and 3% respectively.
Despite some of the traffic challenges that continue to impact the northeast are quick check stores posted record food and beverage sales in Q2 with record margin months in May and June .
On the cost side, our already low cost model saw per store operating expense growth of less than 4% in Q2, as we continued to leverage our scale reduce overtime.
<unk> targeted wage increases from the prior year, notably as inflation eases associate engagement remains high as together, we focus on our mission to help customers affordably meet their non discretionary needs.
If I take a step back and consider the relatively benign external operating environment of the second quarter with nothing extraordinary taking place and then think about the high bar, we are lapping from the prior year period.
I view, our results as even more exceptional.
Turning specifically to fuel margins the past three years can be characterized by exogenous events, including pandemic driven demand destruction geopolitical instability severe volatility steeply rising prices and precipitous price fall offs, each and every quarter was distinct in its own way.
The one constant has been significantly higher fuel margins as the industry supply curve steepened due to cost and traffic headwinds for marginal retailers, some investors and even analysts have been reticent to believe that higher margins are sustainable and they wanted to see the results in a more normal period.
Following three years of macro uncertainty and onetime events. There was absolutely nothing remarkable about the environment in Q2 in fact, the only thing you may find remarkable about the quarter is that we are once again reporting all in fuel margins on the high end of our range at 29 and a half.
Per gallon.
In recent months more investors and analysts have asked me are we really still debating higher fuel margins. My answer of course is no. We are not there is no internal debate at Murphy USA the answer to us appears quite clear.
Looking ahead, while we do not know the market dynamics that will define the rest of Q3, we do not expect a quarter as remarkable as the third quarter of 2022 during.
During Q3 2022, we achieved significant share gains growing total gallons over 13% at all in margins of 38 cents per gallon, while peers reported flat or declining volumes. As we have stated previously these exceptional prior year gains at high margins are not repeatable in a normal quarter.
But were instead the result of a prolonged period of rapidly falling prices that we only witness every six to eight years.
I don't particularly like talking about two year stacks, but we know that Q3 will be a difficult comparison and want to set expectations. Accordingly, as a hypothetical flat same store gallons in Q3. This year would result in an industry, leading two year stack of 9% while declines as high as 4%.
Would still likely lead peers with a two year stack of 5%.
Internally, we are focused on sustaining last year's share gains, while continuing to drive traffic to our stores through our loyalty program in store promotions and overall pricing strategy and.
And while fully maintaining Q3 share gains would be an ambitious goal, where we would need some help from the macro environment I do believe that any two year stack for fuel volumes greater than 5% with demonstrates strong execution against our long term strategy.
Turning to merchandise as I mentioned at the beginning of this call. We are really pleased with our second quarter performance and seeing that momentum continue into the second half of the year.
I believe the strong results speak for themselves. So I want to spend a little bit more time today talking about the exciting aspects of the quick check integration and how synergies and other benefits are manifesting across the enterprise.
We are in the early stages of recognizing significant benefits from product and menu innovation as well as enhanced promotional and marketing activities to help improve store performance, particularly in the food and beverage categories. The combined learnings of both companies are coalescing into sustainable and material performance drivers of the business and so I want to share some <unk>.
<unk> on this call.
Starting with branded products and promotions, we are creating new opportunities to engage with our customers outside of fuel and tobacco. We think this is a significant building block upon which we can implement further improvements in store traffic and profitability.
As an example, we saw strong sales from our limited time made the order watermelon Smoothie, a quick check which was subsequently re imagined and introduced as a limited time offer sour patch kids branded frozen slushy product at Murphy USA stores.
Similarly, edible cookie dough and brownie by Cups first introduced in the quick check open coolers were quickly followed up at Murphy stores.
Having successfully increased the level of promotional awareness of <unk> two for $5 breakfast sandwiches, where we grew both sales and margins by 11% in the quarter. We have introduced similar to for promotions for Murphy grab and go items across multiple categories and day parts.
We expect to accelerate the use of promotions and limited time offers across the enterprise in the second half of 2023, giving customers even more reason to come inside our stores.
Turning to innovation the quick check format is the perfect test and learn environment to identify high potential products that have strong overlap with Murphy USA customers and a quick check team has been leading these innovation efforts for instance, we develop products with well known national brands, including a new and exclusive.
<unk> sugar free frozen energy drink with prime and partnered with Red Bull on both iced and exclusive to QC frozen flavored infusions, creating a new traffic driving and basket building category in store at QC and.
In addition to the introduction of Nitro coffee a QC. These innovations are expected to lead to new dispense beverage options at Murphy branded stores.
We also continue to innovate in our growing core categories, where the made to order menu at QC is being realigned with consumer insights and fresh product preferences. This will lead to some exciting new sandwiches signature sandwiches to be introduced in the second half of 2023.
Maintaining a differentiated offer is vital not only to customer engagement, but to encourage customer retention, we need to give customers more reason to come into our stores and even more reasons to want to come back as we incubate and unleash this innovative mindset across the enterprise we are increasingly excited about the future opportunities.
Impact store performance.
Turning to marketing and other customer facing improvements with the right products and the right amount of innovation clearly communicating and presenting our improved and then distinctive offer to customers is becoming increasingly important for both quick check and Murphy USA.
From a visual marketing perspective through the insights learned from our in store experience campaign. We recently kicked off a series of retrofits on existing 2800 square foot stores, featuring a new layout based on learnings from quick check.
Selling spaces optimize allowing for easier traffic flow queuing lanes have been added that promote impulse sales and reduce congestion around the register while at the same time, we improved lighting and signage.
Lay out a specifically designed around driving food and beverage sales at Murphy stores, enabling access to more desirable assortment of high quality grab and go grab and reheat Ingo and self serve dispense beverages that are more accessible visually appealing and relevant to our customers.
With the right assets in the right places selling the right products managed by the right people. We are in a unique position as a company to fully realized benefits and more intentionally dry food and beverage sales through targeted marketing strategies that go beyond our most effective marketing tool of everyday low prices.
We are in the early stages of further leveraging our digital assets to unlock significant value inside the store through machine learning test and we are more and more excited about the potential of the combined business.
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 up the call to Q&A.
Thanks, Andrew and good morning, everyone revenue for the second quarter of 2023 with $5 6 billion versus $6 8 billion in the year ago period, adjusted EBITDA was $257 million versus $317 million in the second quarter of 2022 and net income for the second quarter was 132.
$8 million or $6 <unk> per share versus $183 3 million or $7 53 per share in the prior period.
Average retail gasoline prices were $3 21 per gallon versus $4 21 per gallon in the year ago period.
Total debt on the balance sheet as of June 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 operating expense.
$350 million revolving credit facility had a zero outstanding balance at quarter end and is currently undrawn.
These figures result in gross adjusted leverage, which we report to our lenders of approximately one seven times.
And finally cash and cash equivalents totaled $93 million as of June 30th.
30 million since year end net of $142 million of capital spend and $108 million of share repurchase clearly demonstrating the accretive benefits of our positive free cash flow business.
And with that I will hand, it back over to Andrea Thanks Mindy.
In keeping with recent tradition I'd like to close with some insights around preliminary July performance.
As in any single month comparison remember performance is partially dictated by the price environment, we encounter.
In 2022, we witness steeply falling prices, which are very conducive to elevated margins supporting our ability to create price separation versus competitors and take share.
This July .
Those were actually up around 50 per gallon, which historically suggest a more challenging volume and margin setup. However, despite that move in prices I am pleased to say that retail only margins averaged around 25 per gallon in July moving north of 30.
Towards the end of the month and into the first few days of August and that is before the additional benefits. We would expect to report from PSN W. In a rising price environment.
Per store volumes are approximately 96% of prior year and 104% of 2021, dimmings demonstrating sustained market share gains over the two year period.
While it is somewhat shocking to see our internal daily reports highlighting that margins on many days during July were only 50% of the same day a year ago, we are very comfortable with the persistent structural equilibrium in the industry and the margins we are realizing.
As managers and owners of the business, who are truly invested for the long term while the exceptional 2022 results present, a challenging comp we are encouraged by the higher earnings power and cash flow generation of the business in a highly stable environment.
And the significant upside potential for outsides earnings and cash flow when volatility returns with that operator, we can open up the lines for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Our first question comes from Anthony <unk> with Wells Fargo. Your line is now open.
Yeah, Hey, good morning, guys. Thanks for taking our questions.
So I know, we're still a couple of quarters away from 2020 for guidance, but as I look at the 2027 targets you've given that thing.
To imply something like 7%, 8% compounded EBITDA growth from that.
$900 million midpoint, you talked about this year is that sort of the right way to think about the base case growth I will go into next year.
And then anything you can add as we think about possible benefit from strategic investments and.
In other puts and takes would be helpful as well.
Yes, that's great Anthony we really break down that bridge in three steps, we have new stores, and raze and rebuilds and a cadence for those.
And with our run rate expectation of 50, plus stores, 25% to 30, plus raze and rebuilds there is incremental EBITDA growth at higher per store comps, whether it's fuel volume merch sales et cetera.
And Thats the single largest component of that growth, we do expect this industry.
Supply curve breakeven equilibrium to continue.
Two <unk>.
Fuel margins.
Go up year over year, and we've built in and that algorithm small increases that we would expect to.
Capture.
Going forward.
Then the third component or the specific campaigns that we've launched for the business, whether it's around our in store experience, whether it's around the digital transformation the food and beverage innovation that we've talked about the machine learning tests, we're doing around promotion of the re imagined.
2800 square foot store and the retrofits were doing all of those things come together to complete the.
Walk towards that $1 2 billion goal.
Got it that's really helpful.
And then just quickly on volumes HSM gallons were down, but clearly a lot less than some of us for modeling.
And clearly improved from April so I guess, how should we think about the path of gallons from here now that we've lapped last year's price peak.
And then can you talk about what youre seeing in terms of share retention you seem to be hanging onto a lot of last year's share gains.
So any way you can frame that more detail would certainly be helpful.
Sure.
As we as we noted Q3 <unk>.
Certainly the latter part of Q2 with just an exceptional environment last year.
To gain market share right, you've got margins that were north of 50 cents per gallon as prices come down.
We're just in a unique position.
Two separate.
In a very very high price.
And the environment.
One of the things around share gains that we've mentioned and it's worth Iterating is.
Our customers view fuel tobacco and many of the items. They buy from US is non discretionary purchases and I would say with the value brand quick check represents their outstanding food and beverage offer is also a non discretionary set of purchases and so when you see higher prices.
Other retailers, whether its high or low price environments and look we're still in a relatively high price environment.
At $80, a barrel crude prices were not back down to below $2, a gallon and so.
Consumers remain pressured and we continue to add consumers, whether it's in our fuel category, our tobacco category and so a few takeaways for the once in every six to eight year events like we saw in Q3 of 2022, we saw in 2014, we saw in 2008.
When crude oil prices fall sharply.
As long as prices remain elevated and consumers remain pressured our everyday low price offer is going to win not just across fuel gallons, but across other categories as well and of course those categories reinforce each other.
Thanks, so much guys.
Our next question comes from Ben <unk> with Stephens. Your line is now open.
Hey, Thanks, good morning, everybody.
Good morning, Bill I wanted to I wanted to drill in a bit if I could on the other operating expenses Andrew you noted in the quarter.
Growth ex credit card fees up 4%.
That's certainly a trend of moderation it sounds like.
You should expect continued moderation going forward, but maybe help us think about where the continued opportunities are there and what kind of the slope of that trend line might look like.
Yes, certainly we've talked over the last.
Two three years about some of the challenges that we faced also some of the onetime things we did to support our associates, who make all the difference in the world.
That was the main reason for updating guidance over the last three years in Q2 was the call out exceptional things that we were seeing or intentionally doing around operating expenses, we didn't call out anything or update anything this year in Q2 on opex, because we expect to stay within that.
Guidance.
For the full year, we're lapping some of the wage increases.
<unk> improving.
There are still challenges.
Out there to say the least but.
We feel comfortable that some of those pressures are indeed moderating as you could expect Q3 absolute opex is higher because of the driver seasons greater transactions.
Et cetera, but on a relative basis, we would expect to.
See these trends continue.
Okay great.
My second question is on merchandise and in particular around merchandise margins.
I know total merchandise margins were down year over year.
It really seems to be a function of mix with tobacco continuing to grow.
At a faster rate than certainly we were expecting.
Maybe if you could talk about.
Some of the opportunities and the glide path for margin expansion within each specific merchandise bucket versus the total because I know.
Top line growth has a bearing on the total margin.
Sure. So as you as you rightly point out.
Strong tobacco performance and significant share gains versus industry declines.
The drive that total unit margin.
Down within tobacco.
We continue to see improvement across all the categories as we think about the the more innovative.
Lower risk products those tend to come at much higher margins as well. So there was improvement when those categories and certainly with our leading.
<unk> market share position, we are best able to help with the transition towards those products at higher margins.
On the non tobacco side, if you start thinking about packaged beverage energy drink performance is.
Really really strong as we noted up 13% in units up 21%.
Sales for the quarter and so again at attractive margins relative to some of the historical.
Packaged beverage items with the reset of our stores as we think about the retrofits of the 2008 hundreds if we think about the queuing lanes in the impulse items.
At a high margin.
Items in that space that we would expect to see improve.
And <unk>.
Importantly, food and beverage not only a quick check in Murphy.
Posted really strong results and I think the offer that we are moving towards on the Murphy side, where we've got a better positioned.
Better set up for condiments et cetera for grab and go grab and reheating go our dispense beverage are being to cup coffee all of the self serve items there versus the made to order or made to stock items at QC.
Really seeing that performance turnaround and Thats, a source of higher margins as well. So I think been across the board, we're going to continue to see sales.
Gains market share gains.
And the intentionality behind the efforts.
Should start leading to.
Merchandise margin gains at the tobacco team gets in a competition with the non tobacco team and we see the same mixed issue as long as total margin dollars are going up I'm not going to get in the middle of that one.
Yes.
Yes, Okay understood very good thanks for taking my questions.
You bet.
Your next question comes from Bobby Griffin with Raymond James Your line is open.
Hey, good morning, Congrats on a good quarter and another strong market share performance.
Andrew I guess I, just wanted to kind of maybe circle back there on the merchandise side of things. It does seem like that is starting to kind of accelerate especially the cross the cross learnings between the two concepts is there any further capability that you guys need to build out.
The two concepts now a quick check or is it really kind of in our plug and play where you can move very fast and at a faster speed when you see something working in one area and move it to the other side of things.
Yes, it's a good question I mean, we're in the early stages of that.
Dallas Fort worth store that has the 2800 retrofit and we had Jack hammers going a week ago Sunday, and we had the new offer in place.
This past Sunday.
And the store looks great its visually more appealing.
The grab and go dispense beverage items are so much better highlighted better position on the back wall the queuing Lane looks.
Fantastic the merchandise looks great and.
And we've got stores in two other regions that we started that pilot on.
At the same time, we're looking at a new concept for 2800 store, we call it our store tomorrow.
And that'll be in 2024, but.
Done the work to identify what needs to change how it needs to be position the items that need to be in there a lot of the learning that I mentioned on the call are simple things, but.
Having a limited time offer frozen slush <unk>.
At Murphy and the whole <unk> concept, the marketing behind that digitally and otherwise are all capabilities that we're building off of.
The digital transformation work, we've talked about that's not only enhancing the Murphy drive rewards and.
That kind of redesigning the quick check loyalty program.
Also taking advantage of the fact that we've.
No.
In a digitized our business in terms of the insights from all of our transactions, but now how do we digitally optimized promotions identify unique customer DNA strands et cetera, and so the machine learning tests that we're doing.
Around a variety of promotions.
Other area that we're still in the early stages, but it built the data foundations the analytical tools the learning capabilities.
Inside the organization to do and they are just more and more categories subcategories products that we can point that to.
The other thing I would say is just just the new stores and how they're comping and the raze and rebuilds when they come back on have a tremendous impact.
On the performance of the merchandise categories as well and I think if you go back to Anthonys.
Question, the biggest part of our.
EBITDA growth from now the $27 28 to $1 2 billion.
It's from the innovation and growth.
But because we are.
Growing and improving with such a strong.
The cost base and business model to start with we do expect to keep more of the industry margin that gets passed through in that time period because of the marginal players in the industry are unable to make the same types of investments because they lack the scale and the team and the capabilities to be.
We're able to do that so I really do think of these things is all coming together in a very serendipitous way over the next few years to deliver that kind of EBITDA growth.
Thank you that's helpful and that was actually part of my second part of the question was going to be on new store productivity, but it seems like the.
The context from your response, the new bigger store productivity in the first 12 months to 24 months is ramping up well.
It absolutely is and so.
We look at the ramp after three months in the 12 months 24 36 months.
Periods, all look very good and when you look at the Bill classes.
That have completed that 24 to 36 month ramp.
They are all performing well above.
The same the same format, so that attribute to the better real estate.
Locations that we've identified for those stores.
Some of our new quick check stores are already in the top five of.
The best quick check stores and the.
And the network and so we see the similar type opportunities there.
Okay. Thank you I appreciate the details best of luck here, finishing up the rest of the year.
Thanks, Bobby.
Again, I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Your next question comes from Bonnie Herzog with Goldman Sachs. Your line is now open.
Alright, Thank you Hi, Andrew.
Good morning, I was hoping for a little bit more color on a comment you made regarding some of the promotions youre doing in tobacco.
I'm just trying to think through that and just kind of looking at margins, which might have been a little bit pressured and wondering if thats played a role there. So maybe you could talk through sort of your strategy with balancing profitability within your tobacco merchandise with the share gains that you've been realizing.
Sure.
Well look the first thing I would say is let's just look at the results relative to the industry.
Total volume was up almost 2% in.
Thank the industry declines have recently reported.
<unk> been down 8%.
And guess what that was the exact same thing we saw last year in Q2, so on a relative basis were up 4%, where the industry is down 20%.
And it's a lot like fuel.
You noted we were down 2%.
On a four year stacked, but if you look at that same opus data the.
The industry is down almost 19% over that period. So our goal is to continue to grow share grow volume.
And do it profitably.
And in the environment, where others are focusing less on these categories, whether it's fuel or tobacco categories. It presents an opportunity for us to take share and win the margin rate could be a function of a number of things like the mix between cigarettes smokeless other tobacco products.
Where we are.
Achieving record market share performance.
Continuing to grow that there could be specific promotions in the quarter.
If it's introducing a new nicotine pouch for example.
It may be designed in such a way where.
Margin.
Is accelerated and then when you have that next year comp against that.
It looks different and certainly just the mix between cigarette gains smokeless gains in other tobacco gains can impact the overall margin rate. So.
What I would say is our goal is to continue to invest and grow in the category participate in its transition do that in a profitable way taking share along the way and it's the everyday low price retailer, what we're not going to be doing is saying, let's go try to get another.
One or 2% margin rate and then lose that everyday low price positioning and it's really no different than fuel either a very similar highly elastic category, where if youre at the bottom of the market you've got to be the everyday low price, we can afford the price up one or two pennies.
The volume impact that would have.
That definitely makes sense, thanks for that color and then.
I guess my second question, hoping you could just talk a little bit about your capital allocation priorities here I think you've previously mentioned that 50 50 split between share repurchases and reinvestment back into your business. So.
You definitely bought back your stock and you've maybe stepped it up with that so just wanted to check in with you on.
How we should think about the.
Outlook, if you will between your.
Buybacks and Reinvestments and then definitely wanted to hear your thoughts on the current M&A environment and your interest your potential interest in future M&A. Thank you.
Yeah, our algorithm Hasnt changed in a lot of people will look at last year end.
And remind folks of our comment that if we generated excess free cash flow from a highly.
Hi, Lee elevated margins, we would direct that towards share repurchases as our primary vehicle for returning.
Capital to shareholders.
Say, we were maintaining that broadly 50 50.
Allocation and you would expect to see that over any kind of 12 to 24 month period, So really nothing thats changed there and look if crude oil prices go from 80 to 100 $120 a barrel and then fall sharply and we get a once in every six to eight year event.
Every two years.
We will have the same answer will direct the excess free cash flow.
To share repurchase.
In terms of M&A.
Certainly with the quick check acquisition, we see a lot more deal flow than we did before.
Sure.
I would say there is a lot of.
Chains out there that are selling it.
Peak margins, but theyre not everyday low price retailers their formats that are old we look at things like the age of tanks.
The need to replace them after 25 years.
A chain that is highly concentrated in our market you wouldn't be able to move.
Those stores to our everyday low price model and so we're highly conscious Bonnie of looking at things that would have a fit right from a consumer value proposition standpoint, as the entire enterprise is going to be focused on the mission of delivering value.
Having a high price in a low price retailer under the same roof with different mindsets around who the customer is and how you deliver value.
Would be challenging and so there is just not very many.
Retailers out there that are in a position to sell that kind of meet that criteria in fact.
Those that share of that mindset or some of the best run private retailer.
They're growing and they're great competitors, and certainly respect those organizations and I don't think they are selling anytime soon right.
Alright makes sense. Thanks, so much.
Youre welcome.
There are no further questions at this time with that I will turn the call back to Andrew Clyde for closing remarks.
Great well thanks, everyone for their questions today, I think as we noted last year and we've noted throughout this year.
Heading into a period of a difficult comparison.
I would just encourage folks to take the three to five year view of where this business is positioned to go the earnings and free cash flow generation that is going.
To create.
And recognize the initiatives that we continue to demonstrate proof points around that will take us there. So again, thanks for joining today and your continued interest in Murphy USA.
This will conclude the conference call. Thank you for joining US today you may now.