Murphy USA Inc. (NYSE:MUSA) Q4 2022 Earnings Call Transcript

Murphy USA Inc. (NYSE:MUSA) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. It is now my pleasure to turn today’s call over to Mr. Christian Pikul. Sir, please go ahead.

Christian Pikul: Hey. Thank you, Brent. Good morning, everyone. With me today 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, including a discussion of our 2023 annual guidance, Mindy will provide an overview of the financial results. After a few closing comments from Andrew, we will then 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 1995. As such, no assurances can be given that these events will occur or that the projections will be attained.

A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K and other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements. During 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 will turn the call over to Andrew.

Andrew Clyde: Thank you, Christian. Good morning and welcome to everyone joining us today. In reviewing the company’s outstanding 2022 results and preparing for this call, I was really struck by how last year’s performance reflected so many of the improvements we have made to the business since our spin in 2013. These results reflect a lot of hard work over the past decade, executing against the key elements of the strategies we established a spin to create a sustainable and advantaged business. We prioritized organic growth, adding over 500 stores to the network since 2012. We improved store productivity, optimizing cost while improving per store merchandise contribution. In addition to substantially reducing our fuel breakeven metric, we enhanced employee engagement and customer satisfaction.

A trifecta, any retailer would be especially proud of. These actions improved our already low-cost position on the industry supply curve, while our relative advantage increased further as costs for the broader industry rose. We also leveraged our fuel infrastructure assets and capabilities to lower our supply cost and maximize our fuel contribution dollars through our retail pricing excellence campaign. Other significant capability investments like Murphy Drive Rewards further heightened our advantage and differentiated positioning with customers and consumers on our core merchandise offer, while the QuickChek acquisition significantly enhanced our food and beverage capabilities, while introducing a new advantaged format for growth. Perhaps the most telling statistic reflects our commitment to disciplined capital allocation.

As a result of our balanced 50-50 capital allocation strategy showcasing steady unit growth, with a consistent and opportunistic share repurchase, we have grown our store count by nearly 50% and repurchased more than 50% of our original shares outstanding. We are proud of these milestone achievements that created significant shareholder value for our long-term investors. These investments, coupled with our relentless focus on operational excellence helped lay the groundwork for the company’s outstanding 2022 results. Importantly, 2022 performance wasn’t just about fuel margins. We leveraged our scale and overall cost advantage, including the benefits from PS&W in a tight supply market to grow per store volumes and gain market share. We also leveraged Murphy Drive Rewards to generate continued tobacco outperformance that also led to share gains, which, along with stronger fuel traffic, helped to grow non-tobacco categories.

We grew food and beverage contribution by $9 million growing legacy Murphy contribution by nearly 50% to $8 million. We extracted further synergies from QuickChek, making excellent progress on our integration as our internal focus transitions in 2023, the enterprise-wide initiatives that will benefit the combined network. We have been very pleased with QuickChek’s performance and are equally excited about the future opportunities we see across both brands. Looking at OpEx, we took substantial costs out of the business leading up to COVID and while we are certainly not immune to the wider inflationary pressures on the industry, our advantaged format and low cost position afforded us the opportunity in 2022 to allocate incentives and employee appreciation programs without permanently impacting our cost structure.

This program helped to financially reward our employees and drive store level engagement, which resulted in strong merchandise sales and higher customer satisfaction. In closing out the 2022 performance discussion, it’s clear to us that our financial and operational results were the product of intentional actions we have taken as a management team. Our relentless efforts to improve the business have positioned us at the right place, at the right time, with the right capabilities and with the right team in place to extract the most value from the opportunity the market provided in 2022. At a time when affordability matters more to more people, Murphy USA is also very well positioned for the future. Looking out over the next decade, we are poised to continue delivering results and making investments that we believe better prepare the company to compete and win in 2023 and beyond.

First, we are preparing for more new store growth, building better stores and strong markets. Looking at the network plan in 10 years, we would anticipate at least another 500 high-performing stores, providing material contributions to the future earnings potential of the company. That is in addition to ongoing efforts to improve the current network through our raze-and-rebuild program and other investments. Second, we will remain focused on improving same-store productivity, increasing efficiency across all aspects of the business and maintaining an ultra-low cost structure, which supports our everyday low price strategy. Third, we are embarking on a comprehensive set of new investments that will help extend and ultimately widen our competitive advantage in the industry.

The first of these digital transformation will help evolve the reach and effectiveness of our Murphy Drive Rewards loyalty platform, leveraging customer shopping habits to customize more impactful offers at scale and trigger point-of-sale upselling opportunities. In addition to customer-facing opportunities, transaction data will help inform pricing and assortment optimization at the local and store level. These learnings and capabilities will inform a redesign of the QuickChek Loyalty Program to increase brand awareness and attract new customers. These are just a few early examples of what we look to deliver from our digital transformation campaign. Another new campaign in-store experience involves a comprehensive redesign of the inside of new and existing Murphy stores, leveraging critical insights from consumer research, QuickChek’s food and beverage expertise and analysis of subcategory performance.

This effort goes beyond routine category resets, the resets represents a fundamentally different experience for our customer that will better showcase the breadth and accessibility of our product offerings and drive higher in-store sales. In turn, we will take full advantage of these combined learnings and synergies in the imagination and design of our Store of the Future, which we expect will enhance new store performance and returns over the next decade. Importantly, these initiatives go beyond technology and capital investments, but involve investments in people with new skills and experience sets in the home office as we build new muscles and data science and data analysis. Like prior capability-building investments such as MDR, retail pricing and our zero breakeven campaigns, success wasn’t realized overnight.

But as we have seen from our 2022 results, the tangible benefits we realized were achieved from seeds planted in prior years. Similarly, we expect these new investments to deliver significant tangible benefits in the coming years. With that context in mind, let me take you through the elements of our 2023 guidance. Starting with organic growth, which remains the centerpiece of our growth strategy, we completed a total of 36 new stores in 2022, including two QuickChek stores and completed 32 raze-and-rebuilds, a notable improvement compared to the 23 new stores opened in 2021. While new store additions fell short of our internal target of 45 new stores, we were able to backfill with a few more raze-and-rebuilds and enter 2023 with nine stores scheduled to open in the first quarter.

Putting new stores into service remains challenging from sourcing electric panels and concrete to local delays in hooking up to permanent power. Nonetheless, we maintain a robust inventory of high-quality new store locations and expect 2023 activity to eclipse that of 2022. As such, our guidance remains up to 45 new store additions and up to 30 raze-and-rebuilds. Moving on the fuel contribution, we are pleased to report 2022 average per store month fuel volumes were in line with the high end of guidance, just under 245,000 APSM, representing 7% growth versus 2021 as our everyday low price value proposition attracted more customers to our stores. Looking ahead, we don’t expect the same level of market share gains in 2023, given we are not expecting a once in every six year to eight years mega-price drop in our forecast, but we do expect to hold on to many of the new customers that came to our stores looking for value.

As a result, we are forecasting a slightly tighter range of volume guidance between 240,000 gallons per store month and 245,000 gallons per store month in 2023. Looking at store profitability. We delivered $767 million of merchandise margin in 2022, above the guided range of $740 million to $760 million due to strong performance from categories attached to fuel that benefited from higher customer traffic and a highly impactful promotional events in the tobacco category. In 2023, we expect to continue to take share and deliver growth for merchandising initiatives, driving contribution dollars to a range between $795 million and $815 million or an increase of about 5% at the midpoint. This growth is primarily attributable to increases in the non-tobacco merchandise and continued growth in food and beverage categories.

Operating expenses, excluding payment fees and rent came in at 31,700 APSM in 2022 within our adjusted guided range of 31.5% to 32.5% APSM, which included the impact of our WayPay supplemental incentive program we provided our employees over the summer of 2022. While many of the factors impacting OpEx growth in 2022 will persist into 2023, including labor and service cost inflation, which are stickier in nature, not all of last year’s cost increases are built into our structural base. As a result, we expect a range of 2.6% to 7.4% increase in operating expenses, excluding credit card fees and rent or 32,500 to 34,000 on a per store month basis. This forecast does not assume a repeat of the special incentive program we implemented in 2022. For corporate cost, general and administrative expense adjusted for the $25 million contribution to the Murphy USA Charitable Foundation was $208 million, within the guided range of $200 million to $210 million.

2023 guidance of $235 million to $245 million reflects the aforementioned investments in people and technology around digital transformation and in-store experience, in addition to higher planned costs to extend a richer package of retirement benefits deeper into the organization as we sunset QuickChek retirement programs and fold them into Murphy USA. Similar to the early stages of developing and launching Murphy Drive Rewards, which laid the groundwork for significantly improved long-term performance from our merchandising business, these new investments come with significant upfront costs, but they are critical to maintaining our competitive advantage in the marketplace and further monetizing the benefits of our advantaged model over the next decade.

At this time, I will hand it over to Mindy to cover the capital allocation portion of the guidance, along with our normal review of the financial component of our results. Mindy?

Mindy West: Thank you, Andrew, and good morning, everyone. I will begin with CapEx, which for the fourth quarter and full year was $82 million and $306 million, respectively, at the low end of the adjusted guided range of $300 million to $350 million, primarily due to the new store delays and also timing around certain IT projects and ongoing improvement initiatives. Looking into 2023, given a higher level of expected new store and raze-and-rebuild activities, coupled with investments in some of our transformational campaigns, we expect total spending to be in a range of $375 million to $425 million. Turning to financial results. Revenue for the fourth quarter and full year 2022 was $5.4 billion and $23.4 billion, respectively, compared to $4.8 billion and $17.4 billion in the year ago period.

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EBITDA for the fourth quarter of full year 2022 was $230 million and $1.2 billion, respectively, compared to $216 million and $828 million in the year ago period. Net income for the quarter, $117.7 million versus $108.8 million in 2021, resulting in reported earnings per share of $5.21 versus $4.23 in the year ago period. Net income and earnings per share for the full year was $673 million and $28.10, respectively, versus $397 million and $14.92 per share in the year ago period. Average retail gasoline prices in the fourth quarter were $3.19 per gallon versus $305 per gallon in the fourth quarter of 2021 and for the full year averaged $3.63 in 2022 and $2.77 in 2021. The effective tax rate for the fourth quarter was 22.3% and 23.9% for the full year, and for forecasting purposes, our 2023 guidance remains within a range of $0.24 to $0.26.

As mentioned in the earnings release, we repurchased $240 million worth of shares in the fourth quarter, which left us with $61 million of cash and cash equivalents at year-end. You may have noticed that the balance sheet reflects two new categories, marketable securities of $17.9 million under current assets and non-current marketable securities of $4.4 million in long-term assets, which collectively are comprised of T-bills and high-quality corporate bonds, which can be converted to cash in one day to two days, if needed. These investments, of course, help us to earn a higher rate of return with any excess cash balances given the upward move in interest rates over the past year. Total debt on the balance sheet as of December 31, 2022, remained at approximately $1.8 billion, of which approximately $15 million is captured in current liabilities, representing our 1% per annum amortization of the term loan and the remainder is a reduction in long-term lease obligations as they are paid through operating expense.

Our $350 million revolving credit facility had a zero balance at year end and remain undrawn — and remains undrawn currently. These figures result in gross adjusted leverage ratio that we report to our lenders of approximately 1.5 times. And with that, I will turn it back over to Andrew.

Andrew Clyde: Thanks, Mindy. In closing, I do want to remind investors of the rationale behind our decision to discontinue fuel margin and consequently EBITDA guidance since 2019. This choice was the outcome of our intent to refocus investor conversations away from short-term fuel margins and to emphasize the long-term potential of the business. We believe shifting this conversation has helped investors become better informed about the true performance drivers that impact our valuation over time. Nevertheless, we have typically supplemented our guidance with an EBITDA marker for investors, primarily to assist with buy-side and sell-side modeling, which suggests a single EBITDA outcome at a specific fuel margin assumption. This year, we have opted to provide a range of margins with the book ends of that range representing $0.26 per gallon and $0.30 per gallon or about a $0.02 swing around the midpoint, which is representative of the historical annual margin volatility of the business prior to 2020.

To avoid zeroing in on a single reference point that elicits disproportional consideration and undue emphasis from investors for modeling purposes only using the midpoint of the official guidance metrics we discussed and attaching $0.26 and $0.30 all-in fuel margins to these forecasts, the outcome should approximate $800 million and $1 billion, respectively, of adjusted EBITDA. I appreciate you do not have a crystal ball, we don’t either. The biggest determinant of how much margin and volume we generate in any given calendar year is a function of a number of factors, the shape of the price curve, the magnitude and amplitude of the curve, which measure volatility, how different competitors behave in those environments, along with geopolitical events and other externalities that impact demand, restrict supply and shift the actual and forecasted supply-demand balances for the relevant commodities.

As we have noted, the magnitude and volatility of last year’s price curve created significant opportunities as input costs change dramatically on a daily basis, likely influencing how competitors responded. Where we do have a high level of confidence and do not need a crystal ball is how we are going to perform in the different environments that we are presented with, and looking at January 2023 results, they reflect what we would expect in a rising price environment. We have seen prices increase about $0.60 per gallon since mid-December, which typically results in depressed retail margins in a more difficult environment to grow volumes and capture share. While this kind of environment may be interpreted as disappointing to investors, I can tell you January volumes were up about 4% versus prior year January and retail only margins were in the neighborhood of $0.19 per gallon before adding the typical benefits we see in PS&W when prices rise.

As a result, total integrated contribution looks to be running ahead of January 2022, and we all know a kind of year 2022 turned out to be. In short, we are carrying over the momentum realized in 2022 across our business, generated from the essential advantages we built over the past decade. We feel great about how the year is starting off and there are still 11 months to go. With that, Operator, let’s open up the call to questions.

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Q&A Session

Operator: Your first question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is open.

Bonnie Herzog: Thank you. Hi, Andrew, and everyone. I had a — my first question, I guess, is on your station OpEx guidance. I mean, I think you highlighted a lower increase that you expect this year than maybe what you reported last year. So, first, I just want to make sure I heard that correctly. And then maybe you could walk through some of the key puts and takes regarding this? And then could you give us a sense of how this dynamic is possibly impacting breakeven margins, especially for the smaller or marginal operator right now? Is it — I guess, is it possible that as inflation peaks and pressures start to ease cost pressures that is? Is it such that these marginal players may not be forced to price so high at the pump, which could start to squeeze fuel margins a bit for the industry?

Andrew Clyde: Sure. So, yeah, let’s start with OpEx. One of the most transformational things that we are doing is building bigger stores, both at QuickChek and at Murphy USA, and then raising and rebuilding 25 to 35 plus stores a year. And so one of the big drivers of cost is the fact that we are building bigger stores that have a higher labor component that have higher fuel volumes, merchandise contribution, very attractive returns, even more attractive in the current environment. So that is one of the big drivers there. The labor component, as we noted, we didn’t build permanently into our cost structure with higher salary or hourly increases, but had the WayPay appreciation bonus over the summer, many other competitive competition, et cetera, that allowed our staff to earn more and sell more.

One of the changes with the QuickChek acquisition is, from a benefit standpoint that we are extending deeper into the organization as our IRS transition period has us consolidate those plans and some of that’s in G&A. With respect to other costs, we certainly had some favorable contracts. Some of those will be renewing in 2023 versus 2022 and so there may be some upward pressure there. If there’s one area of deflation, it might be in areas where hydrocarbons are consumed like garbage bags, et cetera, but those typically make up a smaller portion of the expenses. How does this really impact ultimately breakeven margins for the industry, for the marginal player and for us. What — I think your point is, inflation, the year-over-year rate of change is peaking, but I don’t think anyone is out there forecasting that we are going to see deflation.

We are not going to see year-over-year changes go negative. I think we would be happy to see those changes get down to the 3% to 4%. We have a long way to go just to get it down to the Fed’s target rate of 2%. So while I see some of the cost pressure increases easing, we are starting from a base, I mean, if you want to do a one-year, two-year, three-year, four-year stack, you are just going to have smaller increases on significant increases from prior year. So I really don’t see anything from a cost pressure easing that is going to help this marginal operator. Let me tell you what we are seeing. In January, merchandise transactions are accelerating. Food and beverage transactions after a challenging fourth quarter accelerating. We just talked about the OpEx rate increases year-over-year is going to be lower and our fuel volume is sustaining it up 4%.

The result of that is our business is getting better. But when I look across the industry, some of the other reported numbers by firm or across the industry, we are not seeing those trends at the same level and so that would suggest to me that the industry breakeven is probably continuing to go up. I am not seeing anything that’s suggesting for the entire industry, merchandise and food and beverage is accelerating, data points to the opposite and the same with fuel volume. And so one of the proof points we would look at is, we — what are we seeing in January year-over-year margins and they are actually increasing versus a year ago. So I hope that answers your question. I understand cost pressures might ease, but there’s still going to be smaller increases on a significantly higher cost base that’s built up over the last two years to three years.

Bonnie Herzog: Right. No. That’s super helpful. Andrew, I know this is incredibly complex and there’s this dynamic of the structural change that you are kind of talking through within the industry? And I guess that’s maybe a little bit on my second question and final question that is, just in terms of the fuel margin range you provided for modeling purposes, I guess, first, I am a little curious why you chose to provide a range this year? And then, second, I guess, it does beg the question about what gives you maybe the confidence that your margins will be in that range? Just even given the dynamic we are seeing play out so far this year with, I think, industry margins down 57% in January versus December and you just kind of touched on where your margins are trending.

And again, I know it’s one month so far, but just trying to think through how the rest of the year may play out, and again, how much confidence do you have in that sort of that modeling purpose range? Thank you.

Andrew Clyde: Yeah. First of all, I would encourage you and everyone else not to make judgments based on sequential margin changes. I mean, if you have done that back in September to October and you see the huge margin when prices fall off significantly, you would come to just an erroneous perspective. So I would say, look at the broader trends. Look, prior to COVID in 2019, we were having a discussion at Murphy about sustaining $0.16 margins and there was probably as much disbelief around that is there is around current levels. But what have we seen over the last three years? Structurally, when we do our analysis, looking at sort of the NAC’s fourth quartile and adding cost inflation, volume reduction, merchandise changes, I mean, there’s at least a $0.10 per gallon increase that sustains itself and the NAC survey doesn’t represent the entire industry, especially the smaller players.

$0.26, actually $0.264 was our 2021 result. It’s a solid $0.10 above 2019 and the kind of that three-year average. I think the stake we are putting in the ground today is, we believe that represents kind of the new floor for us from a margin standpoint that has persisted and shows up in every way in which we can kind of triangulate the industry supply curve, the marginal players cost structure, et cetera. You book in that with the $0.34, again, actually $0.343 or $0.344 for 2022. But I think you have to walk that back $0.04 for the unique once in every six-year to eight-year price fall off that we had that we frankly hadn’t seen except in 2014 and 2008. And so that gets you under that $0.30 range, right? Now there are plenty of people that are saying crude prices stay between $70 and $85.

There are others we talk to that say they are going to be north of $100. I believe a $0.26 to $0.30 range provides a nice set of bookends based on what we have seen, what we can back into as a base case. And where, frankly, when we look at sort of the trends we are seeing and the trends it means for others, given we are gaining share. Once again, there may be more upside than downside within that range. But anyway, that’s how we got to the range. It’s kind of a 2021 base case, 2022 actual minus kind of a once in every six-year to eight-year effects and provides a nice range versus a single point. So thank you and we will move on to the next question

Bonnie Herzog: Thank you. Appreciate it.