Murphy USA Inc. (MUSA) Earnings Call Transcript & Summary

Good morning. Thanks for joining us. For those of you who don't know me, I'm John Royall. I work on Phil Gresh's integrated oils and refining team here at JPMorgan. And I have lead coverage on the fuel retail and convenience store group. Very happy to be joined today by Andrew Clyde, President and CEO of Murphy USA. Andrew has been CEO of the company for the length of its existence as a public company since 2013, following a long career on the consulting side. So Andrew, I appreciate you joining us today, and I know you have a prepared presentation and some very impressive numbers that you put out this morning. So I'll hand it over to you and let you begin.

Great. Thanks, John, and thanks, JPMorgan, for hosting this. We're certainly getting used to this format. I'm still getting used to look -- figuring out exactly where to look at the camera at these virtual conferences, and we have a virtual town hall this weekend, so I'm getting a lot of advice from my kids these days on how to do some of these things. But glad to have you all joined today. I'll go through the slide deck that was sent out in our 8-K release, and I'll just make reference to the page numbers for folks to follow along. Obviously, Slide 2, we've got the usual cautionary statement, which I encourage you to read. And Slide 3 has some background on those in attendance with me today. Let me start with Slide 4. This is a chart that we've been really proud of when we -- and we first put it together a few years ago, it was pretty impactful when you think about a several year run as a public company spin-off to have your average share price higher year-over-year, your low share price higher year-over-year and your high improve year-over-year. And even in this COVID world, we didn't hit a low that was as low as 2019, and I'll still take the over on beating 2019's high for this year. I know this is a energy conference. One comment I'd make when you look at this chart. Early on, there was a lot of volatility in our share price as people looked at how fuel margins might behave relative to the underlying commodity. And certainly in 2014, we had outsized margins when crude prices fell off and then retrenched in 2015. We've seen that pattern before. Those of you who followed the renewable fuel standards and RINs, there is that period of political uncertainty. And as a large blender of ethanol and the gasoline, we went through that period where we had to defend our position that this is built into our integrated margin, just like it is with refiners. And there's not a windfall for us or a material cost for the refiners, it's in the supply price at the refinery gate, et cetera. And so one of the things that we've seen absent COVID is kind of a little bit of narrowing in some of the volatility of our shares as we're seen more now as a convenience retailer, probably just within outsized exposure to gasoline, and we'll talk about how that's really paid off for us in the current environment. One of the things that charts set up as the boxes on the right-hand side. And when we say set the bar, what we did is we look back and said from spin to 2018, we generated total shareholder returns of 14% on a compounded annual growth rate. And we did that essentially through 3 things. We took our EBITDA the first year of $340 million, it was around $285 million the year before the spin, up to over $400 million. We reduced the shares outstanding by over 30%, and we raised our multiple from 50% as we went from an unknown spin-off to a company that was known for strategy and execution. And we ask ourselves, what will we have to do to maintain this trajectory over the next 5-year period? And the math was pretty simple. We need to put a 5 in front of the EBITDA number or so grow EBITDA to over $500 million. Because of the significant amount of share repurchases we've done in the past, we only needed to reduce our share count by 1 million shares a year, and we made a significant dent in that already this year and then continue to grow our multiple. And all we really needed to do is add another turn from a 9 to a 10 to achieve that. And those are the goals that we set for ourselves. And then the remainder of this deck really speaks to how we aim to achieve those goals, especially in a normal environment. If you turn the page -- Slide 5, the chart on the left is what we call our simple formula for growing earnings per share. And this, at the heart, is a really, really simple business. And we spent a lot of time trying to make sure we don't add complexity to it where it's not needed. And the math is pretty simple. You start with the organic growth. Our strategy is to build and rebuild our assets where we have the right to win. For us, this means building a fleet of 30 this year, 50 next year and the following years of these larger 2,800 square foot stores that have higher returns, higher performance, higher EBITDA per store than the average in our fleet, convert the kiosks that we were known for when this company started in 1997 in front of Walmarts to larger 1,400 square foot stores and really manage the portfolio for the long term. Our oldest stores are just barely 20 years old. So we don't have the aging single-wall steel tanks at many of the 40-, 50-year-old stores that are trading out there at higher multiples go for. We've got a clean, environmentally sound network. The middle 3 bars are really how do we improve productivity to our large base of stores. And when we spun off, we had close to 1,200 stores. We have close to 1,500 stores now. And when you have that large base, $0.01 improvements can go a really long way when you're selling over 4 billion gallons of gasoline and diesel a year. And so we'll do that by improving our fuel contribution, our fuel breakeven requirement, which is our -- essentially our merchandise contribution minus the operating expenses and then being disciplined around our corporate cost. And really, improving that productivity does give us a competitive advantage. And we'll talk about the industry structure and the relative advantage we've gained since spin relative to the industry average and in sort of the third and fourth quartile players out there in the industry. But for matter of reference, at the spin, our fuel breakeven was about $0.034 per gallon. That's the amount of fuel margin we needed to cover all our cash costs before credit card fees. We've taken that number close to $0.005 a gallon. And meanwhile, the industry third quartile performers have gone from below $0.20 per gallon to over $0.25 to $0.28 per gallon. So that competitive gap continues to widen, which especially favors us in the current environment. And then the denominator, the shares outstanding, we've been committed to shareholder distribution since our spin-off, for every $1 billion of capital we spent on growth and improvement, we bought back $1 billion worth of our stock. And to date, we've repurchased over 35% of our shares. And so we're going to continue to allocate our capital in a very strategic and disciplined manner as we go forward. If you turn to Slide 6, one of the things that we've been doing over the past 2 or 3 of these virtual calls is seeking to increase the already high level of transparency we've had with investors since the spin during this crisis to give folks a sense of how is this business performing in this environment. And as we had our Q1 conference call, we talked about March and 3 periods and 10 days and the last -- first 10 days of April. We've showed some prior last 10-day metrics for prior months in our previous investor meeting. And today, with April and May results behind us, we're sharing our second quarter-to-date unaudited financial results here on this page and then June month-to-date numbers. And I think in a nutshell, what I would say is our business is built for an environment like this based on the customers we serve, the locations we serve them through, the offers we deliver, our customer service, our associates' interaction with those customers, the strength of our supply chain and our partners and the overall spirit of our employee base that's allowed us to contribute to these numbers. As you go down the page, let me just start with our fuel gallons. On an average per store month basis, we're down 28.6% gallons in April and May versus prior years. The industry as a whole was down about 50%. It's coming back at a slow clip. We've seen June month-to-date down 25%. So we're about 75% of our volume. We've had some days where it's been at 80%. And it certainly varies a lot state by state, market by market, but we are seeing a steady recovery in volumes from a demand standpoint. But let's be clear, demand for light-duty passenger vehicles and trucks has still not recovered, but we believe it's recovered for us at a higher level than that of the industry. How does this translate into total fuel contribution? Well, if we're down 72% -- I mean, sorry, if we're at 72% of our gallons for April and May, and our total fuel contribution is up 120%, it means the margins are at a significantly higher level than they were in the prior years. And even in June month-to-date, our contribution is still up 15%. And effectively, what we see happening here is we saw this unprecedented fall off in crude prices before the COVID demand destruction took place. And there are periods there where we were earning $0.50, $0.60, $0.70 margins as prices started falling off. And for a low -- high volume, low-margin retailer like ourselves, if you're at $0.50 margins and you're normally at $0.125 margins, you're at 400% margin improvement. And so if your volumes were at 70%, you're still at almost 300% contribution improvement relative to your prior year performance. And so we had levels that were 300% to 400% and for the overall period ended up at 120%. For the industry, you had independents that may have been at a $0.30 margin to start with now that are at a 60% margin. They're up 200%, but their volume's cut in half. So their contribution levels only at 100% of what it was. And so as margins started coming down due to competitive pressures and then as crude prices are restored and product prices and margins compressed, the weaker industry players actually saw fuel contribution for a lot of this period below 100% of prior year. And what we've been able to do because of our historically low margin, high-volume position is maintain fuel contribution well over 100%. And even when it got just under 100% for a couple of days last week, we saw with crude prices fall off and some other changes in the market, we're well back to over 100%. So that's really how that dynamic played out. And I think being everyday low price, high volume, low margin, our business model on the left-hand side of the supply curve just took significantly more advantage from this position than those weaker participants on the right-hand side of the supply curve that effectively set the margin for the industry. If you look at the merchandise acceleration, we were on tobacco sales already growing 9% year-over-year in February, where the industry was down single digits. And as we saw in March with the pantry stocking and some of the prebuying, the sales continued to accelerate for a number of reasons. One, we believe our proximity to Walmart continues to be an advantage, where many firms only sell single packs of tobacco, we've always been noted for selling a higher percentage of cartons. Our carton sales have increased significantly as the number of trips and transactions decreased. We are seeing transaction counts in June now approximating very closely to prior year as those are catching back up. We made a significant investment, $30 million to $40 million of investment in our merchandise inventory to maintain in-stocks. We had an in-stock rate of 99.2% before. That actually increased to 99.3%, and we work closely with our supply chain partner, Core-Mark, to help them as we went from twice-a-week deliveries to once-a-week deliveries and built up inventory. So we invested in this period to maintain the inventory for our customers. And as you can see, June month-to-date, that sales acceleration continues as we're close to 20% year-over-year. Non-tobacco sales in Q1 took a little bit of a dip, but now those have continued to increase now at the same level as our tobacco sales. And this is where I think the company showed agility in developing supply chains for hand sanitizers, mask, other personal protective equipment, et cetera. And we've seen just a resurgence in some other categories as traffic and trips has started to increase. And so this was an area in Q1 that was mostly tobacco, less about non-tobacco. Now both of those major groupings are performing at a really high level. And as a result of that, our merchandise contribution quarter-to-date shows improvement of close to 12%. And June month-to-date is an improvement on top of that as well. Site operating expenses, we've always been a pretty lean operator. They were down 3.3% quarter to date. I think one of the things we found is we've made all the necessary investments for our people, including designing, implementing, installing a protective barrier system ourselves in under a week; getting the personal protective equipment to our staff; increasing the number of labor -- as [ Freddie ] and others from heading customer service improvements at a greater level than many of our competitors during this period. But some of the velocity-based costs like supplies and certain maintenance actually decreased with fuel volume, and so we ended up with a net savings there. So some of these savings are temporal in nature associated with the reduced gallons. Probably the most impressive number is the adjusted EBITDA for 2Q to date of $197 million. And so we fully expect to end second quarter with record earnings for the period, which sets us up very well from a cash position as we enter into the second half of the year. Do we know what's going to happen in the second half of the year? At this point, it's not exactly clear to any of us. Are we going to see a resurgence in virus cases? Is the economy going to fully reopen? Are we going to see all the transactions come back to the same level? Those are things that we're keeping a very sharp eye on. But from a liquidity standpoint, debt standpoint, et cetera, we are extremely well positioned to do this. The remainder of this deck largely is material that is unchanged since the prior investor conferences. So I'm not going to go through that in any great detail. One of the things I would highlight, though, is Slide #10, because I think this is an area where there probably hasn't been as much focus in the past from investors, and it's a major part of our story of how do you get to $500 million in EBITDA on a continued basis. And that is our new store pipeline. Since I joined, we focused largely building in front of the supercenters, the larger 1,200 and 1,400 square foot stores. When we realize that inventory of quality stores was getting smaller and smaller, we stepped back and said which of our formats that fit within our capability set, that's positioned us for the future. We identified this 2,800 store that could still be built on a very efficient modular basis. And that has been our focus. And we had 15 in our plan last year, 30 in our plan this year. We've built a pipeline where we're going to be able to build 50 of these stores on a sustainable basis going forward in our most attractive markets. Our capital plan has not slowed down at all this year because of our cash position, and we continue to take advantage of real estate opportunities. And frankly, we look to see more opportunities come about as a result of the current environment. So we're excited about the EBITDA per store contribution of these larger stores and maintaining that balance of 50 stores with the 25 raise and rebuilds is a significant part of our continued comp improvement on our key metrics and getting to our $500 million of EBITDA. Last, I would just note on Slide 12. From a leverage standpoint, we maintain a very conservative balance sheet. We're probably at 1.6x now based on current metrics, but we're going to maintain a conservative position. And I think that just anchors the comment I made earlier. Murphy USA was built for the current environment. And I think these results and the momentum that we are carrying into the end of Q2 and into Q3 further prove that out. So John, why don't I wrap up there with my prepared comments. I think we've got about 10 minutes of Q&A, which is what we had talked about, and we'll do our best to answer your questions, any that you've received during that period.

Great. Thank you, Andrew. And really appreciate the update, and I could probably speak for the entire analyst community, this level of transparency is very appreciated. So you mentioned the strength in the fuel margin that has persisted, maybe for you guys a little bit longer than some of your smaller competitors. At what point -- and recognizing that it's a very uncertain environment, but at what point do you think we'll see a normalization in the margin? And is there a possibility that, that lags recovery in volume?

Yes. So I think this is where we have a point of view, and you referenced my prior consulting experience, where we'd looked at this in detail. I mean, I think the simple economics of the industry structure answer your question. And so if you look back historically, the breakeven margin requirement of about the third quartile industry participant market by market set the floor for what the market margin should be. And if the third quartile, before, was at about a $0.20 to $0.25 per gallon cash breakeven, and their volume was cut in half, that's what created the slowly declining margin structure that was north of $0.40 to $0.50 a gallon for a really long time. They needed that level of margin to cover their cash costs, right, when they were down 50% in volume. And that's going to create their motivation to price rationally at a level that generates that breakeven margin for them. And then the first quartile retailers and -- like ourselves, that are at less than $0.05 to $0.10, in our case, $0.005 a gallon, we're pricing at the bottom of the market. And so with that higher umbrella, you're making a choice to add price for volume, to add price for margin. And in a lot of cases, as we saw in the periods leading up to COVID, we were getting both volume and margin through our price optimization efforts. So what's the new normal? I have no idea, right? But what I can tell you is that volume for the industry participants that are setting kind of the margin structure for the industry market by market, their volume only recovers 80%. That's going to lead to a breakeven requirement for them that's higher than it was pre-COVID, right? And being down 10% volume impacts our fuel breakeven significantly less. And so we'll be able to have maybe a little bit lower volume; but on a percentage basis, much higher relative year-over-year margins than we would have had in the past. And that's just the advantage of being on the left side of any supply curve, and you probably have some listeners today that are industrials and chemicals and others. And it's all about industry structure. Are you on the left-hand side or the right-hand side? So COVID and the demand destruction and whether it's 3 months, 6 months, a year from now, if it doesn't fully recover, the right-hand side of the supply curve goes up. Our position on the left-hand slide doesn't change that much. And for us, that means there's a potential for margin expansion that we can choose to take in margin and volume or a little bit of both.

Great. And then maybe sticking with the industry structure. Can you talk about the structure as it stands? Is this an industry in the U.S. that's somewhat consolidated at the top but quite fragmented at the bottom? And do you think that some of the smaller operators can ultimately survive in the industry? And in an environment like we're seeing today, could that usher in a period of shakeout?

Yes. So if you think about 2008 and the run-up in oil prices, I mean, you put that bottom 20% of the industry at significant risk. And I was expecting to see a lot of bankruptcies happen then. But then you saw crude prices fall off after July 31, 2008, and there's this period of significant margin expansion that kind of bailed out those that were really teetering on the edge. What we're seeing here is a little bit of the opposite. To the extent there was some period of net benefit on a fuel contribution standpoint, it happened when crude prices fell off in February and March, but it was immediately followed by the demand destruction. And for those weaker players, many of them were barely staying at 100% of net fuel contribution during that period. And so they're probably experiencing something less than that now. Many have tried to invest in a need to food service that has been temporarily closed during this period. Many of them from a tobacco standpoint have a packs versus cartons approach, and we're probably taking some of that share. It's also coming at a time where significant investment is being required of those players. The EMV investments that we've spent close to $80 million on for chip and pin at the dispenser. Many of those smaller firms were waiting on that, the major oil brands that support them. We're going to allow some of that waiting, et cetera. And so they postponed investments. But when that liability shift happens, that's going to be difficult. Many of these dealers rent their locations. And so if they're unable to make their payments, might there be some foreclosures, et cetera. So I think, John, unlike the last period that really shook up the industry, I think there's a set of compounding factors that are a little bit different this time. They're probably more troubling for the bottom 10% to 20% of the industry. And like so many other brick-and-mortar retailers that didn't have advantaged business models, many may just choose to close. And then the question is, those real estate owners, in many cases, the jobbers that support those dealers, they have a choice to say, do I keep that store closed or do we reopen it under some different ownership or structure in the future.

And I know you've been pretty vocal in preferring a build versus buy type of strategy. But this type of environment where some of these guys are coming under stress, would that potentially make acquisitions more attractive than you might have thought about it in the past?

Yes. So when you say these guys, we're not talking about the bottom 10% to 20% because it's a disadvantaged model that it's not clear to me why anyone, but just sort of a bottom feeder aggregator, would acquire them. And that's really the role of many of the jobbers out there. The biggest challenge, frankly, John, we had was we had a, in our view, an undervalued multiple, which didn't create the currency to pay up for companies at scale that were on the market. But frankly, looking at many of the deals that were out there, their EBITDA per store and other metrics were worse than ours. And so you really had a hard time getting your head around why would I pay a premium multiple using a undervalued currency to buy a business that was performing worse than ours. And so that was kind of the paradox that you were in, that would say we're better off building organically and then balancing that with our capital allocation on share buybacks. And if our average share buyback price is [ $60 to $70 ] a share and we're at [ 115 ], that was a better investment in use of capital. The opportunity that we would look for would be one where you could leverage a re-rated multiple that we've seen and would expect to see coming out of this COVID period where people realize Murphy USA's business is actually built for this environment. Structurally, its exposure to fuel is a net benefit because of the industry structure and the changes that are going to take place and the organic growth pipeline that we have in front of us, we believe that should award us a higher multiple than what we have today. And then if opportunities come about where some better-than-average firms come on the market because of distress or liquidity or a liquidity event, maybe a family business, private business is looking for, we're sitting in an advantaged position to do that versus a disadvantaged position to do that. And so we're always on the lookout for opportunities like that, where we could apply all the learnings we've had since our spin on a business where there could be net benefits. We just haven't seen anything like that to date and the math didn't work to do that. In the next 6 to 12 months, the math may look completely different and that might present opportunities for us.

Great. Well, I think we're out of time. So we'll wrap it up here. So Andrew, thanks very much for your time and a very thorough update, and looking forward to hearing about the remainder of the quarter in July.

Great. John, thank you, and investors, thank you very much as well for your time.