Good day, and thank you for standing by. Welcome to the Murphy USA Third Quarter 2021 earnings conference call. I'm Spencer, operator, in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, zero. I would now like to hand the conference over to your speaker today, Christian Pikul. Please go ahead, sir.
Yes, good morning. Thank you everyone for joining us. As is the custom, with me today are Andrew Clyde, President and CEO, Mindy West, Executive Vice President and CFO, and Donnie Smith, Vice President and Controller. After some comments from Andrew, Mindy will give us an overview and we'll open up the call to Q&A. Please keep in mind that some of the comments made during this call, including the Q&A portion, will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 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 investor section of our website. With that, I will turn the call over to Andrew.
Thank you, Christian. Good morning and welcome to everyone joining us today. We were very pleased with Q3 performance, which we believe continues to showcase the reasons why Murphy USA's advantage business model is uniquely built to thrive in the current environment, and we expect our competitive advantage to continue to grow over time. Last quarter, we discussed the top ten operating challenges the business was facing and how the team overcame those challenges to ensure delivery of structural results. Third quarter wasn't really all that different. We saw higher trending crude prices, continued labor challenges, and ongoing supply chain issues. Yet thanks to our dedicated store associates and support staff, we once again overcame those challenges and delivered another quarter of impressive financial results, further demonstrating the resilience of our business.
It is becoming more evident to us, and should be to investors, that the headwinds our industry is facing are ultimately translating to tailwinds for Murphy USA. In fact, in subsequent conversations with investors at virtual conferences in September, we acknowledged that these headwinds exist and are impactful. However, we also encourage investors to ask the second and third logical follow-up questions to better understand how these pressures are ultimately manifesting in higher breakeven fuel margins for the average retailer. Where there may have been some reluctance to embrace what we have said for some time are structural changes to industry breakeven fuel margins, the narrative has begun to change from when and if to how much.
Keeping with that one simple question in mind, I wanna give you a slightly different view of the financial results we delivered this quarter and how we think it should impact your view of our business. Looking at our results, if you think about the total merchandise contribution of $187 million, or roughly $0.17 per gallon on roughly 1.1 billion gallons sold, and then back out all the store OpEx of about $0.14 per gallon, all field and marketing G&A overhead of $0.02 per gallon, you get about a penny per gallon profit, or roughly $10 million. For the sake of argument, the merchandise contribution alone has covered all the operating costs to run the stores, including all the field-related and supporting overhead.
If you look at the fuel margin of $0.266 per gallon, back out payment fees of about $0.04 per gallon and roughly $0.03 per gallon of corporate G&A, you get about $0.196 per gallon, which is net of a penny per rent, which on 1.1 billion gallons sold essentially gets you to our EBITDA of roughly $212 million for the quarter. When you think about the business that way, the fuel component of our earnings stream is essentially 100% of the profit, generating all the cash flow to service our capital structure and fund our capital allocation decisions. Most importantly, our growth and maintenance capital, the interest on our debt, taxes, the depreciation of our assets, our dividend, and share repurchases.
How do we think about our fuel business and the expected earnings stream it provides? First, our volumes are higher than the industry average in our public peers, which is a huge advantage. Second, we have demonstrated that with the benefits of our product supply business, our total fuel margins are less volatile over time than our public peers. With our low-cost structure, we have greater upside exposure to the structural change we are seeing in break-even fuel margin trends.
Last, with elevated prices and increasing price sensitivity across customer segments, our everyday low price position is an advantage to grow share. Thanks to QuickChek, also a high volume brand, and other initiatives to enhance the food offer across our network, we believe we are best positioned amongst our peers to continue to grow the high margin component of our merchandise contribution that is likely to not only absorb future costs and inflation headwinds, but will also lead to even higher non-fuel profits. Going forward, we are focused on three overarching goals to sustain and grow our advantaged value position. First, we will continue to expand our merchandise contribution efficiently. We are not immune to the operating headwinds the industry is facing, but in our situation, these pressures have been largely offset by growth in our merchandise contribution. Put simply, we offset higher costs by just selling more stuff.
Second, we are laser focused on sustaining and growing our fuel market share profitably. We are doing this through our new stores, which are demonstrating higher volumes, our fuel pricing tactics and strategies, and optimizing our fuel supply. We will continue to profitably invest in sustaining our everyday low price position to grow market share over time. Third, we will continue to grow EBITDA and free cash flow through high quality organic growth and building better stores, the productivity initiatives around which we have a successful track record of delivering value, and the successful integration and expansion of the QuickChek assets. These strategic priorities are our first calls on capital. Beyond these growth initiatives, we will continue our share repurchase program given our view of the future outlook for the business and expected future valuation.
Last, we are committed to growing the dividend distribution to maintain our modest yield as our shares continue to appreciate. Ever since our spin when our business was assigned only a 6x multiple, reflecting in part the market's perception of the more fuel-oriented business, we have demonstrated the enduring value of our resilient and agile business model. What makes our value creation formula so unique and powerful in our minds is that the fuel piece of our business is going to likely have the largest exposure to outsized growth in the near term, given the higher trending break-even fuel margins for the industry. The headwinds we're seeing are magnified for less efficient operators who sell less fuel and have fewer levers they can pull to maintain profitability.
By complementing our fuel exposure with efficient expansion of the merchandise business, we will continue to overcome headwinds, increase the earnings power of the business over time, and grow our multiple as the advantaged value player in our retail sector. Rather than pondering a reverse or fearing a temporary period of lower trending margins, which will happen at some point, but at higher levels than we've seen historically, we believe investors should be assigning less risk to fuel, and in fact, should be thinking about how much premium to assign this powerful driver of our earnings power. I'm now gonna turn the call over to Mindy before we open up the call to Q&A.
Thanks, Andrew. Good morning, everyone. I'm going to review some standard items quickly. Total revenue for the third quarter of 2021 was $4.6 billion versus $2.8 billion in the third quarter of last year, which was not inclusive of QuickChek. Average retail gasoline prices were $2.89 per gallon in the third quarter versus $1.90 in the prior year period. Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $202.5 million in the third quarter versus $141.5 million in the same period in 2020. Net income in the third quarter was $104 million versus $66.9 million in 2020.
Total long-term debt on the balance sheet as of September 30th 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. Our $350 million revolving credit facility has a $0 outstanding balance at quarter end and is currently undrawn. These figures result in adjusted leverage ratio, which we report to our lenders of approximately 2.4x . Cash and cash equivalents totaled $301.3 million as of September 30th.
Capital expenditures for the third quarter were approximately $74 million, $13 million of which was attributable to QuickChek, and the majority of the overall capital, or roughly $64 million, was directed to new store construction, where we opened four new Murphy Express and three new QuickChek stores. We opened one new Murphy Express and one new QuickChek store in October, and we currently have 18 new sites under construction, including two new QuickChek sites in addition to 10 raze and rebuild projects. With supply chain pressures impacting our new build program, our capital spend is likely to be much closer to the lower end of our guided range of $325 million-$375 million as we will push some construction costs into the next year. Thank you, everyone. I will now turn the call back over to Andrew.
Thanks, Mindy. It's been another great quarter, and as I alluded to earlier, one that on paper wasn't dramatically different than the second quarter. When we look at the financial results, we wanted to be just a little more thoughtful on how simple the business can be when we aren't digging in deep to explain variances or add color around certain performance metrics, which we detail in the release. We're clearly delivering top and bottom line performance that should resonate with investors, and we expect to be able to continue growing these critical profit drivers in the business for the foreseeable future. With that operator, we will open the lines for our Q&A.
Thank you. At this time, if you would like to ask a question, simply press star then the number one on your telephone keypad now. Your first question comes from the line of Bobby Griffin of Raymond James.
Good morning, everybody. Thank you for taking my questions.
Hey, Bobby.
Andrew, I'd first like to just touch on and a little of Mindy's comments too, but just the pipeline for stores in 2022. I know you guys do a lot of work around, you know, pipeline and projects. Is the outlook still the same or has the construction side of it gotten incrementally worse here, where there could be some further delays in 2022?
Yeah. The numbers are very similar to what we talked about. As we look at approaching year-end, you know, with permitting and stuff like that, you know, there may be a handful of openings in the updated number that shift to the first or second week of January. That's not material from the standpoint of you know, the overall plan. The pipeline looks really robust for next year. I think right now we've got you know, 56 Murphy stores, seven QuickChek stores kind of in the pipeline. We're looking still to do about 30 raze and rebuilds, more than our target for 2021. You know, we'll be between 25 and 30 between Murphy and QuickChek for next year. The pipeline looks good.
If something slips from the prior numbers we updated, it's only into the first or second week of January, and 2022 and beyond looks very solid.
Okay. Great. That's helpful. Also on station other OpEx, we're still getting QuickChek integrated in, so, you know, trying to clean up our models a little bit. Is the rate of 221 or so in the third quarter the right base case to maybe for us to think about and then take back into account the usual seasonality that happens in that line item?
I think that's probably a good estimate. I mean, we'll be clear about that, you know, in the next call in terms of full-year guidance for the combined business. You know, there was certainly some cost increases in Q3 that took place that kind of reflect a pretty good measure of what the ongoing business runs at on a seasonal basis.
Okay. Lastly for me, Andrew, in your prepared remarks, you mentioned supply chain, and I also appreciate the detail of kind of breaking the business down the more simple way, too, with the pennies per gallon side of things. The supply chain side, did it limit some of the inside store sales and that's part of this modest decline in comps? Or it's just a function of, look, the comparisons were pretty tough the prior year, and when you look at things on a two-year stack, the business is still growing at a very healthy rate.
Yeah, that's a great question, Bobby. Look, first thing I'd say is do look at the two-year stack. On a sales basis, you've got, you know, 10% on tobacco and 11% on non-tobacco. And what that essentially is saying is that we held share on the tobacco side. I mean, we had really outsized gains last year in this period, and we held onto those. The second thing on the non-tobacco side is, I mean, we had all this excess general merchandise sales of PPE. So we successfully shifted the mix back. I mean, alternative snacks and snacks, the increases there more than made up for the shift in general merchandise. Candy was, increase there was half the size of the general merchandise decline. So we successfully shifted the mix.
The second thing I'd say is, you know, if you look at margin on a two-year stack, but even on a one-year basis, that's really impactful. Especially if we think about tobacco, we're starting to see, you know, some declines on volume as an industry. We continue to outpace the industry on total nicotine and so share there and being successful. I guess the other thing I'd just say from a trend standpoint, we ended the quarter really strong in September. October, we ran a candy promotion, which will be record candy sales in the month of October. I think what that's telling me is we've got customers who are in the stores buying. We've got associates who are engaged that will earn extra commissions through the variety of promotions.
We got manufacturers that wanna deliver and sell their products. We just need a little more help and a little less interference from some of the externalities, if you will, to allow us just to see the economy recover and see things get back to normal. We got engaged customers, associates, and manufacturers out there helping us. Hopefully, that detail helps a little bit. I'd encourage you to look more at the margin growth than just the sales growth.
Absolutely. No, I appreciate it. Very helpful. Best luck to you rounding out the year.
Great. Thanks.
Comes from the line of Bonnie Herzog, Goldman Sachs.
Thanks so much, guys. It's actually Sam Reid pinch hitting here for Bonnie. Wanted to maybe pivot a little bit and talk about fuel margins here and maybe just get into how they trended during the quarter, you know, maybe specifically in September versus August, even in October now that you know that the month is almost over here, just to get a sense as to maybe how that's looking in Q4. Separately, I know it's obviously still very early, but maybe how should we think about fuel margins for next year, especially you know if we do see this sort of rising fuel price environment or elevated fuel price environment continue? Just maybe wanted to get your sense of that as well. Thanks.
Sure. Well, the first thing I'd say is across the months, the margin was remarkably similar, you know, $0.22, $0.27, $0.23. $0.24 all in retail, not a whole lot of variability there. Then you add the $0.026 of PS&W, you get to the $0.266. You know, I think maybe there's three things I would say kind of in response to your question. I would separate the notion of rising prices from elevated prices. We've seen rising prices this year, and they have been as significant as the falling prices we saw last year. As you know, margins contract when prices rise, but they really behave the same once you get to normalized but elevated levels.
It's typically higher margins 'cause the credit card fees are higher for us and everyone else, and those get passed through. Also, in the recent rising price environment, as I just shared, I mean, we saw double-digit retail margins. Typically, we would see mid- to high-single-digit margins in a similar rising price environment of that magnitude. You know, the other thing I would say is, while we have elevated prices, there's a huge difference between $3 a gallon and $4 a gallon. You know, first, customers become more price sensitive as you get over $3, so the value brands like Murphy take share. Now, we do see gallons per fill go down, but we don't see total gallons go down.
If you look back to 2008, we really didn't see a macro demand elasticity until you started approaching $4 a gallon as consumers really had to start making choices around the utilities that they think about. You know, then what we saw was the prior behavior included buying smart cars, which disappeared just as quickly as they appeared. The key point there is customers, not just low income customers, all become price sensitive. Actually this is teeing up for a great environment. We couldn't have had a better margin environment for such a steeply rising price environment. In the more elevated environment with the pass-through effects we're seeing, we're gonna see more normalized, you know, run-ups and rundowns, but at a higher level.
These customers are gonna be more price sensitive, and that's gonna help us with our everyday low price position. I guess the other thing I'd add to that, you know, when you think about it, those rising costs that we're seeing, you know, the average retailer isn't gonna have, you know, the same levers we have to win in that environment. We have a low-cost operating model to start with. We've talked about some of the levers and scale we have to offset the increases in the cost. Frankly, like we did this quarter and our expectation is we'll continue to offset the cost with merchandise sales. These higher fuel margins that we're seeing, for us, all flow through to the bottom line.
Awesome. No, Andrew, thank you so much. That's super. Maybe just to sneak another one in here really quickly, just on the beverage side. I think you might have said something in the press release on beverages, but maybe just a little bit more detail on what you're seeing, especially in immediate consumption. You know, maybe just looking at it from another perspective, are you seeing any changes in consumer behavior around immediate consumption beverages, you know, given some of those trends we are seeing in gas prices? Thanks so much.
We really aren't. I mean, the beverage number picked up really nice year-over-year. You know, there's obviously the mix within that is you see challenges in CSD being offset by energy drinks, teas, waters, other products. The continued innovation has been a big win. You know, they continue largely in the Murphy case to be an attached item to the fuel or tobacco or other destinations of the store. In the QuickChek side, part of the basket is part of the food destination there. You know, consumers have to wash down their food with something, and we're seeing continued growth in the beverages.
You know, frankly, as we get into the synergy work with QuickChek, see opportunities, you know, to make some improvements on that side.
Awesome. Thanks so much, Andrew. I really appreciate it.
Yep.
Your next question comes from the line of Ben Bienvenu.
Good morning.
Hey, Ben.
I wanna ask a similar question to a question that Bobby asked, but about the merchandise business. You know, we're still integrating QuickChek into our models. You noted some commentary around kind of what the new normal is for operating expenses. One of the things that stood out to us and the result was just the strength of the merchandise margin, which looks to be heavily driven by mix, which I assume is heavily driven by QuickChek as well. Is this, you know, 19.6% type of level a run rate? How much seasonality should we expect in that margin? Any sort of color you can offer there would be helpful.
Well, I would say both on the Murphy and the QuickChek side, we saw really nice improvement, you know, in the mix. I mean, on the Murphy side, you know, beverages, candy, salty alternative snacks all performed really well year-over-year, more than you know, offsetting the general merchandise tailwinds we had during COVID. You know, at QuickChek, we continue to see, you know, record food sales at a number of the stores. We've opened four stores just in the last few weeks, and they've all hit the ground, you know, really well. We've been able to take price to a certain extent on food items there.
There's just a number of things that I would describe as, you know, sustainable, you know, which I think is the essence of your question, you know, from, you know, a unit margin, you know, standpoint. Mix is getting better. Pricing's attractive. You know, there's probably a little less promotion, on the margin, you know, on the Murphy side. I think it all plays well, you know, for our model.
Okay. Great. Perfect. My second question is about capital allocation. You guys bought back a lot of stock in the second quarter, bought back a little bit less this quarter. I know that spend ebbs and flows within the bigger picture paradigm of, you know, a commitment to buyback. I wanna ask, I think this question's been asked before a few quarters ago, but you're continuing to integrate QuickChek. You've got all these levers to pull on capital allocation. Is M&A still something we should consider, incremental M&A going forward? Was it a one and done, or is it just circumstantial? Thanks.
Yeah. Look, it's a good question, and clearly, there's been so much activity out there on the market and, you know, we'd looked at things before, and certainly when you do one, all of a sudden you find yourself seeing a lot more opportunities crossing your desk. I think we've described before how we thought about M&A. It's either something that's massively transformational, which, you know, we really don't see opportunities. We see things as strategic, building or buying a capability that would be hard to build. I think in buying QuickChek, it's a QSR. We kind of leapfrogged brands like ourselves, other brands that do food in the C-store sector to an honest-to-goodness quick serve restaurant.
You know, I think we also know that last October, there might be quality midsize chain for which you could apply your synergy, your capabilities and get synergies, including your enhanced synergies. I would say most of the assets that are for sale in the market are generally weaker assets, older assets, and when I think about older, 30-40-year assets, single-wall tanks, environmental challenges, not well positioned for a QSR offer like a QuickChek. In some ways, they become somewhat undifferentiated stores, and there are plenty of retailers out there who are looking to acquire those, either to get scale or as part of a larger roll-up play, et cetera.
you know, I would never say never in terms of one and done, but if you think about the intent behind QuickChek, it was to really make a strategic acquisition, to buy a capability. You know, if you saw something really unique out there that you thought you could apply that capability to, or if you think about the Murphy Express model, where we may be looking to, you know, enter new markets, and you could get a toehold position and they were quality assets, you know, you might do something like that. But what I can tell you is, everything that we've seen and taken a look at doesn't, you know, fit that profile. I would put that, you know, much lower on the probability list, but I wouldn't assign a zero probability to it.
Okay. Perfect. Thanks.
Your next question comes from the line of John Royall of JPMorgan.
Hey, good morning, guys. Thanks for taking my question. My first question's on same-store fuel volumes. I think on the last conference call, you had talked about July being about 93% of 2019 volumes. If I'm doing the math right here, I think you finished the quarter on a two-year basis somewhere around 89%. Is there any color on August and September and if there was some degradation in demand, if I'm actually looking at that correctly? I apologize if I missed it in the opening remarks, but I don't think you've mentioned anything on how October and fourth quarter are trending. Any update there on same-store volumes would be appreciated. Thanks.
Yeah. John, look, you know, every quarter is a tale of three months or 13 weeks if you're on the QuickChek retail segment. You know, July started strong. You know, it's hard for us to actually say without more time from a hindsight standpoint, was it macro demand? But certainly in a rising price environment, we wanna maintain our everyday low price position, but it's all, you're always just a little bit, you know, challenged, you know, on that side. I mean, from our best near-term indicators, you know, macro demand in our markets are still down, you know, 10%-12%. So, you know, our view is that we held share in that period.
Since you ask, it's slightly above that, probably around, you know, 91% of, you know, recovery, month to date, which is stronger. Margins, you know, and that's for 2018, margins are significantly, you know, higher than 2019, so total contribution remains elevated. I think the big question is, you know, when do you get out of that 89%- 90%, 91%, 92%, you know, percent range and, you know, more into a persistent, you know, 95% range to kind of pre-COVID. Look, we see that some weeks, but you know, often you can look back and say, well, there was a bigger storm, you know, event or something like that that you're comping against.
Right now it just seems very persistent in that low-90s range, but with margin that continues to more than make up for that. I think for us, as we've noted and kind of framed today's call, that's all going straight to the line because we're able to offset, you know, all of the operating cost increases with the expansion on the merchandise side, which plays to the uniqueness of our model.
Okay, thank you. Just wanted to go back to your initial view of the $550 million of EBITDA for the year that you had several quarters ago. I think you had sort of an illustrative $0.18 fuel margin at that time. You know, obviously now we're through the first three quarters, you're over $600 million. I think it's about $0.66 fuel margin year to date. I know you tweaked some guidance figures a little bit, and you know, it's very obvious that a lot of the drivers around the fuel margin and there's you know, perhaps some pull the other way from OpEx.
Just anything else you can highlight that's kind of different about this environment, more sort of along the margin other than the big headline pieces that we all know about? Things that are a little bit different now than, you know, when you were looking at that $550 million view.
Well, look, the first thing I would say is, you know, we had a view coming into the year about how demand would recover, and we were wrong, right? Also, in some ways, kind of agnostic as to, you know, the volume because you would make up for it in margins. Beyond the COVID recovery time period being off, I don't think. I mean, we certainly didn't anticipate government reaction, market reaction around labor supply, the impact on wages, the impact of labor shortages on logistics, the impact of that on supply chain, and all of those factors that have really made it extremely difficult for the typical retailer in this space.
While we always, you know, subscribe to the notion of the higher fuel break even as something being passed through, I think the degree to which you saw the labor cost inflation, the other cost inflation, the supply chain shortages that impacted this typical retailer, how quickly that would elevate, you know, their price pass-through to just maintain their profitability, and in this rising period, you know, how that impacted, you know, our business more in a positive way. You know, as I think about next year, you know, again, I would say, look, is it gonna be 90% or 95% or 100%? I'm not really sure. What I can tell you is that our advantage business model is uniquely built to thrive in this environment.
It's about relative competitive advantage positioning, you know, within the industry, and I think that's gonna lead to, you know, higher fuel contribution over time. You know, we noted in one of the investor conferences that, you know, on a 2021-2022 store month basis, you know, historical numbers were typically around $750 million-$800 million in fuel contribution. You know, in 2020 and 2021, that number's a lot closer to $1 billion in fuel contribution, right? In terms of where we expect next year to be, you know, you plan for somewhere in the middle, right?
You've probably got more chips on $100 million of upside to the business than you have $100 million of downside to the business as you think about how you think about planning for the business and allocating capital for the business. Hopefully that's, you know, helpful, and we'll probably be as wrong in terms of guessing how 2022 evolves, but I think we're gonna be right in terms of demonstrating the advantage aspects of our business model.
Yeah, that's really helpful. Thank you. If I could squeeze one more in, it's just gonna be another impossible question on 2022. So on the OpEx side, it seems like you're, you know, you're tracking in line with your revised guidance on station OpEx for the full year. Just any color, and I realize, you know, fully appreciate that you're putting out, you know, guidance in the next quarter, but any color on just the various kind of moving pieces back and forth looking into next year? I know you've got some inflation on the labor side that you're obviously, you know, handling a lot better than a lot of your competitors are.
Just thinking about kind of where we are now, at this sort of 30 level and how we should think about that going into next year.
Yeah, I'm just gonna go back to the way I described the quarter, and maybe this will make it really simple for you. You did a great job kind of estimating the quarter this time. You nailed the numbers, so congratulations.
Well, thank you.
To get your long-term number, I think more in line with where our view is, just think about the merchandise contribution, right? From the new stores, the improvement initiatives, et cetera, are gonna more than offset the labor supply inflation, other operating cost increases, that we will have. If you can get the gallons right and the fuel margin right, it's gonna be really easy to estimate EBITDA. When that sustains at that higher level, I think it helps change the notion of this is, you know, a higher risk business to actually a lower risk business given we're the advantaged value player in our sector.
Makes sense. Thanks very much.
Great.
This concludes the Q&A session. Are there any closing remarks?
All right. Thanks for joining today. I think my last comments probably summarize how we view the quarter, also how we view next year and the ongoing strength of our business. Thank you, and we'll look forward to talking to you next quarter.
This concludes today's conference call. Thank you for participating. You may now disconnect.