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

Thank you for standing by. My name is Freda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA First Quarter 2026 Earnings Q&A Call. [Operator Instructions] I would now like to turn the call over to Christian Pikul. Please go ahead.

Thank you, Freda. Welcome, everybody. Thanks for joining us this morning for this Q&A session. With me are Mindy West, President and Chief Executive Officer; and Donnie Smith, Chief Financial Officer. As Freda said, we're happy to welcome more analysts to the research community covering Murphy USA. We're going to ask that you limit your initial questions to one and then get back in the queue afterwards. Please keep in mind that some of the comments discussed in today's Q&A session may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please refer to the forward-looking statements section of either the earnings release or the management commentary document for further details. And with that, I'm happy to open up the call.

[Operator Instructions] Our first question from Irene Nattel, RBC Capital Markets.

I was just wanting some more color on the updated 2026 outlook, notably around 2 elements. The first being the fuel margin guidance and the second being sort of relatively speaking, the slightly sort of the low end guidance on merch. And so I was wondering, looking for more color on contents and drivers of both of those, please?

Thank you for your question. When thinking about retail margins for the rest of the year, it's very difficult to predict where we're going to land because we're in the middle of a lot of heightened volatility with a crisis that continues to ebb and flow and don't know where that will end. While we can't predict the macro environment, we are seeing a higher floor for retail margins. So competitors are remaining rational. Pricing is reflective of those needs of the marginal retailer to maintain their required returns. So still reflecting that virtuous cycle that we've seen. What we haven't seen so far is a pronounced decline in price, which would gather incremental volumes for us as well as expand the retail margin. So at this point, we are not baking that into the forecast at all. So you could call our margin forecast somewhat conservative. I would agree with that. But I would also say that that's intentional on our part because we don't know what it's going to be. And we manage our business to try to outperform our commitments. So what we are saying is reflective of what we have high confidence that we can deliver at this point. With regard to the merch, obviously, our consumer is experiencing some budget pressures, which are putting some pressures on the nondiscretionary pieces of our merch business, although we have been very pleased with how resilient the customer has been year-to-date. But I will tell you that target when we originally said it at the beginning of the year, a bit of a stretch target anyway. It's going to be very hard to get to the high-end range of that target. And in the face of all the weather impact that we had in the first quarter, while we had the winter storms and at one point, had half our network closed. That results in just lots of demand there for those time periods, along with what we think are still going to be some pressures on our customers' wallets as we go through the rest of the year. That gives us confidence that, yes, we will be in the range but towards the low end of the range.

That's really helpful. Can I ask a follow-up question?

We're just going to move on, Irene, please get back in the queue.

Your next question from the line of Pooran Sharma with Stephens, Inc.

Congrats on posting the strong results. I wanted to get your sense on supply normalization. If current peace talks ultimately result in a durable resolution, how quickly do you think physical supplies could take to normalize, given depleted inventories that need to rebuild strategic reserves, disrupted shipping flows, potentially shuttered upstream and downstream assets. How long should investors expect supply tightness and volatility to persist even after the geopolitical situation improves?

A very good question for I wish that I had the answer to that because all the things that you mentioned are great uncertainties in the market. And very unlike what we saw in 2022, where COVID produce a demand shock and then the Russia/Ukraine created a lot of volatility, but really had no impact on domestic supply at all. When you look at the current conflict, obviously as a supply shock, is having a material impact on domestic inventories and flows essentially globally. So our belief is the return to normal is not likely at all in the near term and then yet to be seen is how much damage to infrastructure is there overseas? How long does that take to recover. And then you mentioned if this conflict resolves, I don't know that we have any line of sight to think that it's going to resolve quickly, but -- and so that in and of itself may a prolonged period. So I think we're looking at well into next year before this thing even begins to unwind.

Your next question from the line of Bonnie Herzog with Goldman Sachs.

I had a question on NTI. You mentioned in the press release that you expect your NTI delivery coming closer to the 45 new stores as opposed to, I guess, the upper end of guidance. So I was hoping to hear what changed is construction taking longer this year and/or did your original guidance maybe imply some M&A that now isn't happening? And then you also mentioned that you're pulling forward construction of new stores scheduled to open in '27. So should we assume a faster ramp of NTIs next year? And Ultimately, I guess, Mindy, how does this change the pace of growth and profitability since I think you said in the past, it takes a few years to reach run rate profitability on new stores.

Thanks, Bonnie. And yes, this year, we are going to be at the lower end of our stated range, but that is without the tuck-in acquisitions that we said would take us to the high end of the range. Those may come up. We don't know, but we are only commenting now as to what we have in the pipeline and the organic pipeline currently as we continue to invest heavily in our team and in our new store pipeline. So we think we are well positioned to grow at this rate and above per year going forward. Pulling some stores forward earlier in the year, that will certainly be helpful to get them to ramp starting sooner, but it does take, as a reminder, about 3 years for a store to get to full ramp. So it's not an indication that our activity is taking longer or we're doing less. It's just indicative of what we felt we could deliver from an organic standpoint and absent any tuck-in acquisitions. And the ramp, we think, is going to go as expected. And as for M&A, large-scale M&A, that's certainly not something that's on the radar for us and does not need to be given the health of our organic pipeline.

Your next question from the line of Ed Kelly with Wells Fargo.

This is John Parke on for Ed. I guess can you talk about some of the puts and takes for nicotine margin dynamics in Q2? And just kind of the outlook for Q3, just given the [indiscernible] here?

Yes. The [indiscernible] is going to be a big one. We do believe that nicotine is going to continue to be a tailwind for us in the second half. And excitingly, we're actually seeing strength in combustibles especially with the new value-priced Cowboy cut cigarette that did really well. It was well received by our customers. We actually had a hard time keeping that product on the shelf. And as we look forward, we think that, that's going to continue to be a source of strength. We also see some emerging other tobacco product opportunities in the second half, some new gen pouches are going to come online. We expect some flavored vape products back in the market. But again, as you reminded us, we do have a tough third quarter comp as we lap that [indiscernible] promotion. Our margins this quarter were reflective of growth in the pouch category of other tobacco products, but continued resurgence in that cigarette category, which, again, as a reminder, carries a lower margin than those other tobacco products. So Q3 is going to be a tough comp, but we think overall, the category is going to continue to be promotion heavy and will be a major participant in that.

Your next question from Thomas Palmer with JPMorgan.

Thanks for the question. I wanted to ask on what you're seeing with rewards. Last quarter, you discussed elevated sign-ups in the program when fuel prices moved higher. How is the conversion of those sign-ups been in terms of driving more consistent customer visits on those -- by those new members and then also converting those customers from the pump into the inside of the store.

Yes. That is a great question. As we said last quarter, our sign-ups were -- had elevated at $600,000 a month, up from around $400,000 a month. Happy to report that during the second quarter, sign-ups for even over that $600,000 mark every month during the quarter. Also, what we said was in the first quarter, what we were seeing was 40% of those new signees were either new or lapsed customers. That number has also ticked up in the second quarter to approaching 46% and is new or lapsed customers. So we love the MDR platform. It's making it easier for us to communicate with our customers to encourage full membership, which we know translates into durable and loyal behavior. So we're taking those new members on an automated journey with a series of offers to increase their engagement, building mechanisms that are very personal to the customers as they onboard, engage and we retain them. You mentioned driving business inside the store. Just to give you a specific example. One of the ways that we are encouraging pump to store conversion as we were offering spend $5 inside the store, save $0.05 on gas as part of that new customer journey, what we're seeing is that has been very successful. We're also encouraged that those new members are engaging more with the program, more often, and we know that they're going to be able to exhibit those loyal behaviors even sooner. So we're thrilled with what we're seeing with the higher sign-ups. That's obviously expanding the top of the loyalty funnel, and we are enhancing our ability to create positive customer relationships that we know is going to help drive future growth. And we are continuing to refine the platform, by the way, continuing to upgrade it, make it better for our customer. So thanks for the question.

Your next question from the line of Bobby Griffin with Raymond James.

Mindy, I appreciate all the detail on the volumes given in your script. And I think it's interesting you're getting more and more states flipping to positive volume with really 2 kind of as the drag, big ones, Colorado and Florida. So when you look at the numbers you gave us in that prepared remarks, like where do you think you are on that competitive curve? I know that's almost impossible probably to answer, but is that drag getting better or worse sequentially from those 2 states? And is there any gleanings from other states that kind of tell you you're getting towards the bottom of that competitive drag and we might be starting to lap it?

I would hate to call the bottom because I might be surprised with new competitive intensity in other areas. I like that you mentioned Colorado because that does represent at least some hope, while volumes are down. Our total volume is down much less than that as we are continuing to open new stores and grab share as well, and margins just like last quarter showed improvement actually up over 20%, just like they were in the first quarter. So competitive entry even there does remain high, but we're seeing improvement to margins as volumes are redistributing across the new stores. Seeing some of that in Florida, too, where volume continues to be down, but margins are actually healthier. So that may indicate kind of a turn in things. And in Texas, as we referenced, which is a large market for us. Our volumes are up as that represents a more mature steady market where we've had a lot of competitive entry, but that entry has normalized and everybody now has their share and knows their place and how to play the game. So not ready to call the thing and say it's over because I think we're still going to have competitive pressures, whether it be in Colorado, Florida or some new location. But the recipe continues to endure over time where it's painful in the beginning when those competitors come in, same as it is when we come in because everybody is competing for that share and we're going to fight to retain our share of that, too, which results in lower margins for us as volumes get redistributed. But over the course of time, as the competitive entry happens and volume gets reallocated, things get to a new normal with margins actually stabilizing at a higher level than they were before the competitive entry. But -- so hopefully, you're right, but I do appreciate your question. But we are seeing some green shoots at least to be able to talk about.

Your next question from the line of Jacob Aiken-Phillips with Melius Research.

Congrats on the strong results. Bonnie kind of touched on the NTI cadence, but I wanted to reconcile what the capital spending. So like NTI is down 45% and R&R is at approximately 10%, but you move CapEx up. So I mean can you quantify like what that additional CapEx is going to like land, construction pull forward, et cetera. And how much of it is timing versus others? And then just as a corollary, how should we think about share buybacks in that context?

Okay. So great dual questions. Yes, CapEx is trending to the high end of the range is we want to make sure that we deliver on our NTI program, and we will pull forward stores if we need to. So that's part of the estimate in case we're able to do that. We're also making some very proactive life cycle investments in our existing stores, so proactively replacing dispensers, HVAC units, SAFE, things like that. Rather than fixing a dispenser 4x, we're going ahead at a dispenser that we know is nearing the end of life and going ahead and replacing those. So we are deliberately refunneling some of our CapEx to those activities. And we're also intent on ensuring that we have future growth by investing in our land bank. So that is priority for us going forward, too, which again is taking us towards the high end of the range even absent the raise and rebuild activities. When we think about capital allocation and in particular, share repurchase, we are definitely going to lean into share repurchase as our capital allocation strategy has not changed. We're going to deliver capital for growth, and we have a slate of opportunities to do that, but share repurchase does remain one of our main levers, and we will continue to emphasize that as well. And the good news is the business throws off enough cash flow for us to be balanced at that over the sweep of time, and we can easily afford to continue to grow and accelerate growth with new-to-industry sites, while at the same time, maintaining disciplined share repurchases.

Your next question from the line of Brad Thomas with KeyBanc Capital Markets.

Congrats on the quarter here. I had a couple of things I wanted to ask about the same-store fuel volumes. Mindy, so I hate to make this a multiparter, but I'm wondering if you could give us a little color on, for one, sort of how that trended through the quarter and has been tracking as we've gotten into August? How you think about retaining these incremental customers that you're bringing in if you are seeing incremental customers as a part of that higher volume? And then maybe what efforts might be new to retain those customers that perhaps didn't exist in the past when you sometimes saw a benefit from these spikes in gas that led to incremental customers for you.

Okay. That's a very clever way of turning one question into three. So I remember all that you wanted me to cover here, but I think your first question was to talk about same-store volumes. Look, we view what we did in the second quarter. Volume performance of a positive 0.5% is very encouraging, especially given the pricing environment because while RBOB prices finished the quarter down 2%, the quarter itself was characterized by a lot of extreme offsetting movements. So we saw a run up in April, down in May versus a flat June. And we know that absolute price level matters. We saw stores above $4, though, only 18% of the time during the quarter, which we called out on our script. But also price direction matters just as much as the absolute price level, if not more, because, as you know, in a rising environment, competitors move higher response, that compresses spreads across the market, limits our ability to create that important separation. We saw that in April volume for same store, whereas we were essentially flattish to slightly down with that upward increase in prices. Then you know when prices fall, competitors are going to react at different speeds. That gives us the opportunity to create separation and drive incremental volume. That's exactly what we saw in May. RBOB above declined 16%. Our same-store volume increased 1.6%, which was even more pronounced during the last half of May. RBOB fell actually 18%. Same-store volume picked up over 2% versus prior year. When we look at July, again, July itself started a bit soft with fourth of July holiday, impacted by rain throughout a lot of our network. But the run-up in price that you saw during the month impacted our ability to differentiate based on price analogous to 2 out of the 3 months that we saw in the second quarter. But as we look into August, which granted, we only have 5 days of results, volume is actually up 1.5% as the market has dropped some. So key point here is, I think, volume is performing exactly as we would expect. And we opened today, by the way, also in the high 30s, so the margin isn't bad either. So I think May demonstrated and so far, August has as well, our ability to capture volume when falling wholesale allows us to differentiate on price and meaningfully drive it. And then when we think about our capabilities versus prior year, I go back again to the MDR that we just talked about, we just have an increased ability to be able to communicate with our customer, know our customer, understand the frequency of the trips where we may be leaking a trip or 2 with that customer and be able to drive more targeted promotions to that customer to drive that incremental behavior that we want to see. So I think we're in much better shape now that we've got these new customers here. And yes, we do have evidence that customers are trading down to a Murphy platform. We now have a greater ability to keep them and make them more sticky to us than what we have ever had in the past. So hopefully, that answered all that you wanted me to.

[Operator Instructions] Our next question is from Corey Tarlowe with Jefferies.