Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to The Murphy USA Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one. Thank you. Christian Pikul, Vice President of Investor Relations, you may begin your conference.
Great. Thank you, Emma. Good morning, everyone. With me, as usual, are Andrew Clyde, president and chief executive officer, Mindy West, executive vice president and chief financial officer, and Donnie Smith, vice president and controller. After some opening comments from Andrew, Mindy will provide an overview of the financial results, and then we'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 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'll turn the call over to Andrew.
Thank you, Christian. Good morning and welcome to everyone joining us today. Q3 results clearly demonstrate that the earnings power of our business has been, and we expect will continue to be, sustained throughout a variety of different macro and economic environments and business conditions. Looking back over the past three years, we performed well during the onset of the COVID-19 pandemic, successfully navigated supply chain challenges during the early period of the recovery, and widened our advantage in the most recent period of higher cost and inflationary wage pressures. We have prospered during periods of sharp rising product prices that threatened broader consumer spending, and in the most recent quarter, delivered strong financial results as prices fell and interest rates rose.
If our advantage business can thrive across these varied macroeconomic environments, each characterized by unique challenges and opportunities, we remain confident in our ability to perform if the economy worsens or if we embark upon a period of economic recovery. Our distinct model and enduring strategy have served our shareholders well, and we see no reason to believe the future will be any different in Murphy USA. Affordability matters, and we are clearly seeing the benefits of our everyday low price strategy in our Q3 results. On a same-store basis, Q3 gallons were up 9%, tobacco margins were up nearly 6%, and non-tobacco margins were up nearly 9%. Powerful proof points that our low price offer is resonating across categories, resulting in volume growth and market share gains.
The QuickChek offer also continues to resonate with customers as it delivers high-quality food and convenience items at value prices. We continue to invest in our customer value proposition at QuickChek and grow in the markets where it has already earned a loyal customer base and valuable brand recognition. This strong in-store performance amidst a challenging and uncertain economic backdrop further solidifies our view that for most consumers, a trip to Murphy USA represents a largely non-discretionary occasion, a trend that we are seeing continue into the Q4 . Our affordable offer continues to be underpinned by the low-cost DNA of our organization and our efficient operating model. While higher costs have impacted both our business and other industry operators, we continue to be advantaged from a labour perspective.
The operating expense comparisons are beginning to moderate as we start to lap some of the targeted wage adjustments and other inflationary impacts over the last 12 months. OpEx at the store level was up 6.4% for the quarter, including roughly $4 million of special incentives to our store associates. We cannot be more pleased with the impact of this appreciation program, which increased the engagement of our associates and allowed them to do what they do best, serve customers, drive merchandise sales, and recruit like-minded new associates. As we exited the summer, store-level engagement has maintained at a high level, and while staffing remains a challenge for the industry, we have seen a positive impact on recruiting and applicant flow in recent months.
Alongside these short-term investments in our affordable offer and operating model, we continue to prioritize disciplined capital allocation as we think about long-term investments. Our organic growth program continues to be the single most impactful driver of long-term sustainable growth in EBITDA and earnings per share. I'm pleased to report that we are on track to deliver between 40 and 45 new stores in 2022 and expect a similar level of activity in 2023. Importantly, all of our new stores are exceeding internal expectations and are incrementally positive to the network averages, as evidenced by the stronger APSM versus same-store sales figures in the fuel and non-tobacco categories.
In addition, we are on track to complete 30 raise and rebuilds which replace high-performing kiosk with a larger 1,400 sq ft store that features a broader assortment of higher margin merchandise, better grab-and-go food offering, and a more favourable customer experience. In addition to organic growth, share repurchase remains a key element of our broader capital allocation strategy and underpins our value creation pledge to investors. Given recent performance and our view of the sustainability of this performance, we believe our stock offers a compelling value based on both current and long-term earnings outlook. Continued share repurchase represents the most impactful use of free cash flow for long-term investors beyond capital allocated to organic growth.
As such, we continue to be active in share repurchase, buying back nearly 800,000 shares during the Q3 for $212 million at an average price of $276 per share. This amount represents significant progress against the five-year, $1 billion program our board approved in December of 2021, and we are currently on track to complete that program well ahead of schedule. Finally, I would note that while debate and uncertainty continue to exist with respect to the new baseline for long-term fuel margins, the excess cash generated and used to buy back shares over the past three years represents real and enduring value to long-term investors, with more than 25% of outstanding shares being repurchased over that period.
Investors who have held throughout this period have not only enjoyed significant price appreciation, but can expect to enjoy a greater percentage of future earnings and shareholder distributions without having allocated more capital to their Murphy USA investment. With that, I will turn the call over to Mindy.
Thank you, Andrew, and good morning, everyone. Revenue for the Q3 was $6.2 billion compared to $4.6 billion in the year ago period. Average retail gasoline prices were $3.67 per gallon versus $2.89 per gallon in the Q3 of 2021. Q3 EBITDA was $367 million versus $212.5 million in the year ago period. Net income for the quarter was $219.5 million versus $104 million in 2021, resulting in reported earnings per share of $9.28 versus $3.98 in the year ago period. The effective tax rate in the Q3 was 24.5%.
The business continues to generate significant free cash flow, and that is reflected in our cash position. Cash balances did decline slightly to $193 million from $240 million in the Q2 , or a total net decrease of approximately $47 million, despite capital expenditures of roughly $78 million and roughly $220 million of shareholder distributions, including the $212 million of share repurchases Andrew mentioned in the Q3.
Total debt on the balance sheet as of September 30, 2022, remained at approximately $1.8 billion, of which approximately $15 million is captured in current liabilities, representing the 1% per annum amortization of our term loan and the remainder of reduction in long-term lease obligations. Our $350 million revolving credit facility had a $0.00 Outstanding balance at quarter end and is still currently undrawn. These figures result in gross adjusted leverage that we report to our lenders of approximately 1.5x . With that, I will turn it back over to Andrew.
Thanks, Mindy. Before taking any questions, I would note that Q3 average per store month volumes not only exceeded 2019 levels, but are the strongest since the Q3 of 2016. October performance continues this trend of taking share and growing volumes, which were up high single digits year-over-year. Current margins approximate $0.30 per gallon, up from about $0.20 per gallon to start the month. It's important to note we see recent margins reactive to and reflective of typical volatility related to the up and down swings in product prices.
While some may be tempted to label Q3 retail margins as an outlier, this level may simply be reflective of what the industry can expect in future periods of falling prices and indicative of a higher equilibrium industry structure that reflects the higher cost of doing business for the marginal convenience store retailer. With that, operator, let's open up the call to questions.
Thank you. As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question today comes from the line of Ben Bienvenu with Stephens. Your line is now open.
Hey, thanks. Good morning, everybody.
Morning, Ben.
I want to ask about the volume growth in the fuel side of the business because it's substantially higher than what we're seeing in the industry. Maybe, you know, now that we've seen prices go up and then come back down, I'm curious, one, what's your sense of kind of, to the extent you have the visibility, repeat rate on new customers that you've attracted that have maybe stuck around in a slightly lower price environment versus the peak we saw this summer? Then also, who do you think you're taking that market share from?
I think, you know, Mindy did a great job last quarter kind of explaining what we're seeing in terms of the price environment. We made significant investment over the last two to three years, really refining our pricing playbooks and our capabilities around this. You know, what was really helpful is during the rising price period, as we saw prices run up faster, we were able to maintain our differential, you know, hold on to and gain volume in that rising price period. When prices fell, we were able to, you know, widen our differentials appropriately. Certainly the volatility that we've continued to see since the Ukrainian invasion has really caused a great deal of uncertainty in the marketplace.
Prices are, you know, on average, going up $0.10, up or down $0.10, and that just creates uncertainty as to whether, tomorrow's prices are gonna run back up, or not. It's just been a very favourable environment for us. The stickiness comes from two things. One, you know, lower income consumers are facing challenges. For our Murphy USA customers, we know this is a non-discretionary purchase. In a high price environment, you know, they stay with us and we gain new customers as more and more consumers are impacted by the inflationary trends. I think as long as we're seeing higher prices, you know, they're gonna remain sticky.
I think the second thing is because of the discipline of our pricing, they trust the brand that it will be, you know, the lowest price in the marketplace. Then you compound that with the loyalty program that we've established and enhanced. There's a great deal of stickiness that comes with that. I think that, you know, that bodes well, you know, for the future outlook as well.
Okay, that makes sense. Yeah, that's a good point. I guess it's not just the price of fuel is high, it's the price of everything is high. That value bent from the consumer doesn't go away if fuel prices necessarily roll over a little bit. You kind of insinuated this in your comments, Andrew, about kind of the margins we've seen year to date. I mean, is that your paradigm for what you think your new fuel margin looks like on a go-forward basis? Do you think there's some elevated level of fuel margin earnings in your year to date performance that will, you know, go away as we go forward? Maybe if we could just revisit this topic, as I'm sure we'll continue to going forward.
Sure. You know, you could go back over any period of time and see a rising price environment like we saw for the first half of the year. Whether you look at our margins relative to those periods, you know, the OPIS data, average industry margins during those periods, and then, you know, compare that to the, you know, RINs and break-even margin requirements, you know, as you've done in some of your analysis, Ben, it correlates pretty well, right? You know, what we're seeing in the Q3 is just the typical effect of a falling price environment where the supply costs fall faster than the retail margin. I would suggest just doing the same analysis and look at similar periods of steeply falling prices.
You know, you could argue that, you know, this price, you know, fall off was somewhat unprecedented, but we can go back in time in 2014, 2008 and see similar periods there and just look at the differentials between the margins earned then and the margins earned now. It's really is that structural difference that's gonna be more enduring. I missed the second half of your question a while ago as to who we're taking share from. I think it is the marginal retailers broadly who continue to find themselves being forced to price up to maintain their breakeven.
If you look at the OPIS data, that survey of 25,000 to 30,000 retailers that, you know, suggests we're down 15% to 18% versus 2019, my guess is, and it's just a guess, is that largely represents kind of the, you know, the average to bottom half of the industry, not the top quartile, you know, high volume, low price retailers. It just creates that vicious cycle where as they lose a little bit more volume, incur a little bit higher costs, lose a little bit more traffic associated with that lost volume, the break even inches up.
It may only be a penny or two from these levels, but that certainly supports maintaining current levels and indeed growing that over time.
Yeah. Okay, great. Thanks so much.
Your next question comes from the line of Anthony Bonadio with Wells Fargo. Your line is now open.
Hey, good morning, guys. Thanks for taking my questions. I wanna ask about RINs quickly. Number of RINs you're selling now looks more or less in line with what you were doing before the pandemic, but prices have obviously risen considerably and remain elevated. Can you just talk about just a little more about the underlying drivers there and how sustainable you think that is? Then I know you've got it to that $0.025 to $0.03 per gallon contribution from PS&W RINs over the long run, but is there any reason to think that shouldn't be higher if current price levels stay?
Yeah, I'll take that question, Anthony. Yeah, RIN values continue to remain elevated, but we continue to sell rateably, month to month. That continues to be a fluctuating piece of our business. Also the way we explain it, we account for that in the other income category, and there's an offsetting impact in the spot to rack price that runs through the rest of our PS&W. Which is why we say over time, regardless of what RIN values do, we expect to make $0.02 to $0.03 a gallon. The fact that it can fluctuate quarter to quarter is based primarily on the direction of price movements.
In a quarter like we saw this one, where prices are falling, that's more of a disadvantaged environment for our product supply and wholesale just because of the way we account for the timing impact of the barrels. In those periods, you will see a decline in PS&W. In instances in which prices are running up, you're gonna see something over $0.02 to $0.03. On balance, we still expect that PS&W should be able to earn $0.02 to $0.03, maybe a little bit more as we continue to optimize and leverage our scale. On balance, we think that that's where it should land over the sweep of time.
You know, one thing I'd add, Anthony, to that is, you know, when we see, you know, environments in the past, it was often reflected, and so you saw more discounting at the racks, and that put pressure on that net number. You know, the tighter the refinery complex supply-demand balance is, the less discounting you're gonna see at the rack. That is something that can benefit us in the short term. But over long term, you know, as Mindy says, you know, the market gets back into equilibrium. You know, that's one of the other things to just look at is how tight is the supply-demand balance? You know, it's probably a little bit tighter than it was a couple of years ago, given the challenges with our energy policy.
Got it, got it. That's all really helpful. Then secondly, I just wanted to ask about the merchandise gross margins. Can you just talk a little bit more about what drove the 40 basis point expansion in the quarter? Taking a step back, that 20% number looks like a record for you guys. Is that a better way to think about the earnings power of this part of the business going forward, now that you've got the acquisition lapped, and we're starting to see more stable consumer behaviour?
It is. You know, the big upside during the quarter was the non-tobacco merchandise that's attached to the fuel transactions, right? That's you know, your higher margin packaged beverage, centre of the store, you know, your grab-and-go items, dispensed beverage and the like that is associated with some, but certainly not all of the fuel trips. With you know, fuel gallons being up, naturally, those attached to fuel categories perform really well. You know, I think as long as we continue to you know, sustain you know, higher fuel volumes, et cetera, those attached categories will remain. That you know, 20% kind of resets now with you know, the QuickChek you know, higher margin business being added to the mix.
Got it. Thanks so much, guys, and good luck.
Thank you.
Your next question comes from the line of Rob Dickerson with Jefferies. Your line is now open.
Great. Thanks so much. So just kind of basic question. You know, I know we all kind of look at the OPIS data. There's obviously some volatility. You know, in the quarter, it seemed like kind of, you know, margins had come down a little bit as we got into October. I realize you stated, you know, that's kind of a more general, kind of margin outlook, and maybe it's not for all the, you know, it doesn't speak specifically to your performance, obviously. When we kind of look at that correlation, that does seem to be pretty strong. You still did kind of, you know, decently better, than what that correlation would have, you know, suggested over time, even if you go back, I don't know, seven years.
You know, would you say that there was any kind of near term dislocation kind of that you saw as you got through the quarter relative to kind of, you know, historical average? Is that something that should continue just because of competitive advantage? Thanks.
Yeah, Rob, I wish I could help you there. I mean, we don't spend a lot of time doing correlations to OPIS data because we're looking at our results every day and know what they are and the cash that goes into the bank. So trying to, you know, model it related to some, you know, third party estimate just doesn't, you know, serve, you know, significant purpose for us. I would say the basic fundamentals of the business haven't changed, right? When you know, when prices run up, you know, the big difference that we've seen is given the pressure on cost and volumes and merchandise sales, you know, we're not seeing as much margin compression as we did.
As prices fall, given the volatility that we're seeing in the daily price movements, there's probably greater uncertainty as what's gonna happen, you know, 24, 48, 72 hours. You see a little bit of a different dynamic there. That's how we look and explain the market to ourselves. If that creates a weaker correlation or a better correlation or explanation of the difference to the OPIS, I just can't speak to that.
All right, fair enough. Let me ask, I guess, a different way. You know, right now, if gas, let's just say going forward, price of gas comes down, right? Sounds like profitability in theory, you know, assuming there's some decelerated rate on, you know, price relative to cost, that your margin could actually go up from here. If the price of gas stays high, you should also be able to retain kind of an advantaged margin going forward in the near term because you're taking share on volume. Kind of a lot in there, but that's all I have. Thanks.
Yeah, look, I mean, this is just a real simple business. If prices rise, margins aren't gonna be as high. As prices fall, margins are gonna be greater. When prices on an absolute basis are higher, consumers are more price sensitive. When you're in an inflationary environment like we're in, and they're having to cut purchases elsewhere, they're gonna look for more value from everyday low price retailers like Murphy USA and other similarly competitive low price brands. If prices get back below $2 a gallon, consumers are flush, they're not gonna be as price sensitive. At current levels, you know, I expect that we will continue to, you know, gain market share at these price levels.
We'll just get back to the normal, up and down movement of typical volatility in the associated margin environments that we've seen historically. I think what the big difference is, you know, some of the lags and compression, you know, may continue to look different than in the past and more similar if volatility continues to hold up.
Got it. Thank you so much.
Your next question comes from the line of John Royall with JP Morgan. Your line is now open.
Hey, guys. Good morning. Thanks for taking my question. Can you talk about the underlying trend of OpEx inflation, how that's running, when you strip out things like the one-time bonuses and credit card fees? If I did the math right, I think you were relatively flat to 2Q on station OpEx when you strip out the bonuses. Have you seen a slowing of inflation or even that you're actually starting to move sideways at this point?
Yeah. We're probably in that four to five range if you strip out the appreciation bonus. We're certainly lapping some of the salary and hourly increases that we made a year ago. You know, as we complete our plan for 2023, we do continue to see that moderating not only sideways, but a little bit further down, closer to that 4% range. You know, there are certain costs that maybe we have long-term contracts that we haven't seen as much cost pressure on that will be picked up, you know, next year. We're certainly not looking at 6, 7, 8, 9% costs going forward, but probably more, you know, in that 4+% type range.
I don't know if that's sideways or down, but that's kind of a near-term view of what we're seeing.
Great. Thank you, Andrew. Just a question on the buyback. I think it was a couple years ago that you guys had put out some long-term targets, and at the time, I think you were talking about doing 1 million shares annually. This year, you're pacing pretty steadily, 700 to 800 thousand per quarter. How do you think about the buyback today with obviously much better cash flows persisting? Is this kind of a 2.5 to 3 million annually? Should we think about that as kind of the go forward rate number?
Look, the long run view that we present kind of every year with that raise the bar chart is essentially just, you know, posing the question, what do you have to believe to continue to generate compounded annual growth of our share price of 15% to 20%? There are three drivers, right? EBITDA growth, shares outstanding, and the multiple, you know, given to the business. You know, we've often kind of said, look, if you just achieve the EBITDA associated with improving the business, adding new stores, et cetera, it gets you to a certain sustainable level, you know, given a stated fuel margin. Buy back 1 million shares, get a half a turn or not on the multiple, that allows us to achieve our shareholder return objectives.
We've been very clear, organic growth is our first priority, and free cash flow above and beyond that is gonna get assigned to share repurchase. I think we've just been doing pretty much what we've pledged to investors is that additional free cash flow will be returned to shareholders via share repurchases. If we continue to see elevated fuel margins that generate free cash flow above our first growth priority, we will continue to do that. You know, we can't predict the future in terms of what the margins will absolutely be, but we can provide a commitment of how we will return that excess free cash flow to shareholders.
Okay. Understood. It sounds like the $1 million per year is maybe more like a floor. Okay. Thanks very much. We appreciate it.
Thanks.
Your next question comes from the line of Carla Casella with JP Morgan. Your line is now open.
Hi. Thank you for getting the question. We've heard several of our consumer food companies talk about how there was some strength in Q3 from the greater consumer mobility. I'm wondering if you've parsed out or can parse out how much of your Q3 strength might have been from greater consumer mobility versus other consumers just trading down into more value alternatives.
When you say mobility, are you speaking to back to work?
Oh, no. I think more consumer traveling. They've actually commented that during the summer, people were out traveling, so anything that was typically done at home, they saw less of. Then they're starting as schools have reopened, they're seeing kind of a return to normalcy. I'm wondering if you guys saw that same gonna pick up in the mobility travel during the summer. You're seeing this similar slowdown in travel as the schools have reopened.
Carla, we can't isolate our traffic at our stores based on, you know, consumer travel versus their normal purchases. We know in front of our Walmart stores, you know, 50% of people are going to or from a, you know, a trip to Walmart. We know people are trading down into our stores because we are the, you know, the lowest price, best value out there. But we can't isolate, you know, exactly if it's, you know, higher summer travel or not. We're seeing the typical seasonality. But, you know, underpinning all of this is probably a trade down effect, which is greater, which is reflected in the volume growth relative to the industry decline.
I would say, you know, that's the biggest factor driving the performance is the, you know, greater price sensitivity that consumers have around these nondiscretionary purchases and whether there's some discretionary travel in there, and we're getting, you know, more than our fair share of that is probably just a reflection of being a value brand.
Okay, great. Just one follow-up on the cost of your raise and rebuilds, so new construction, any change in overall, like, cost to build, and how we should be thinking about that as we model it in?
Yeah. We have noticed that there's about a $400,000 to $500,000 increase in the total cost to build. I mean, concrete's a great example of where you know costs are up significantly. The good news is when we then look at returns on capital with very very conservative you know margin assumptions we're achieving you know the same returns or higher as before. As we're seeing new stores come online you know they're achieving or exceeding those volume expectations, the consumer traffic at even higher margins. We are seeing a cost increase. It is flowing through, but returns continue to look very attractive, even with just very conservative margin enhancements in our you know capital projections.
Okay, great. Thank you very much.
Your next question comes from the line of Bobby Griffin with Raymond James. Your line is now open.
Good morning, buddy. Thanks for taking my questions. I guess, Andrew, first, we've talked about in the past kind of the flywheel effect on the tobacco business. As you guys have gained share, others go away from low price, the manufacturers support you more, and it kind of drives that flywheel. It seems the non-cigarette business though is picking up that there could be potential the same thing to start taking place going forward there. Just curious, like in your conversations with suppliers and stuff, is there opportunities for more support from them going forward into 2023, given your strength in non-tobacco versus what is likely the rest of the industry not growing nearly as much?
Yeah. Look, I think there are two things that consumer packaged goods manufacturers look for, and I think they see both of them in Murphy USA. One is growing the business, right? If you think about all these non-tobacco categories attached to fuel, you know, they are growing disproportionately through Murphy USA. You know, with the traffic down in other brands, you can imagine that others are not seeing the same type of growth, they're seeing declines. That's one thing. The second is, you know, there's just been this bigger movement amongst some of the C-store chains towards private label products.
It makes sense for those that have their own commissary, those that have their own supply chain distribution, those that may have a, you know, tighter concentration of stores from a network standpoint. That model doesn't necessarily work well for Murphy USA, especially given, one, our smaller formats, and two, consumers come to us because they trust us that we're gonna have the lowest and best prices and value on the best national and regional brands they trust.
If you're growing the brand and you're committed to the brands, I think there is the potential, Bobby, for that same flywheel effect where, on the margin, you know, manufacturers are gonna look at you and say you're committed, and, you know, to the extent the contracts allow, we can provide more support in the various ways they do it. I think it's a good question, and that's how certainly we think about it in the great partnerships we have with these brands.
Thank you. I appreciate that, and very helpful. Then I guess, secondly, you know, just on the fuel side of the business, like when we look at kind of the daily wholesale prices, you've talked about it a lot. There's just been a high level of volatility in the market. I guess maybe two parts. One, you know, what do you view the, you know, obviously geopolitical events, but what else could be driving that? It looks like it could be sticky going forward. Then two, like structurally, that puts you guys, it seems like in a pretty advantaged spot. If that was to go back to normal, would that be something we should account for that it would give peers back some of the, you know, they could compete better with you?
Do you think it's just something that it would not reverse hurt the business as much?
Sorry, on that second part of the question, it's reverting back to a lower level of volatility?
Yeah. Like, if we go back to lower level volatility in the wholesale market and maybe even the PS&W supply market's not as tight, does that correspond with taking away like a pretty sizable advantage that you guys have had here recently? 'Cause we've talked about how higher volatility really probably puts MUSA even in a more advantaged place versus peers, given the optimization you've done on the fuel side and the fact that, you know, the smaller players are worried about changing price if it's gonna run up the next day. Just kind of curious if what happens in the end market if we go back to something normal, even though we haven't seen normal quite yet.
Yeah. I think I understand. Look, I think at the end of the day, there's kind of three things that you look at. Are prices going up or down? Are prices, you know, high or low, where customers are more sensitive or not? And then, you know, are we seeing higher or lower levels of volatility? If we saw, you know, a much lower level of volatility and a much greater certainty around, you know, price movements, you know, I would expect, you know, some of that, kind of risk premium where, you know, people are waiting maybe two or three extra days to see what prices are gonna do. Some of that advantage could actually go away. What are some of the things that drive it, right?
Geopolitical unrest, global supply-demand balances, right? You think just around OPEC and the changes that we've seen going all the way back to pre-COVID, you know, the month before to what we've seen more recently with production cuts versus increases. The refinery complex in the U.S., right? With refineries being taken out of service. Refineries then start running at higher levels of utilization, so they have unplanned outages. When they take the refineries down for planned outages, just given all the challenges, you know, we continue to see unplanned outages come on the other side of those turnarounds. You know, I don't have a crystal ball with respect to how geopolitics and, you know, the global supply-demand balance for crude is gonna play out.
Certainly those challenges are not something that we're in a position, you know, as a country to see get resolved anytime quickly. You know, the logistics bottlenecks, you know, that we've seen in the past can continue to create that local volatility. There are many sources of volatility, and I suspect most or all of them are gonna be at play for the near to medium term.
Perfect. That's exactly what I was looking for, Andrew. I appreciate the details, and best of luck here in the Q4 .
Thank you.
Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.
Thank you. Hi, Andrew.
Bonnie.
I wanted to circle back on something about the small and marginal operators. You know, just wanted to ask about them in the context of their breakeven margins. You know, you talked about this a bit, but, you know, clearly you and other large operators are benefiting from, you know, the structural change we're seeing in this industry. As, you know, these small operators break even, you know, margins have gone up considerably given, you know, the disproportionate cost pressures they've been facing.
How are you thinking about this as inflation peaks and maybe, you know, some of these cost pressures start to ease for these operators? You know, isn't there a scenario where small operators' break even margins start to come down as cost pressures ease, which, you know, might result in some pressure to margins for, you know, yourself and your peers? Just how do you think through that?
Yeah. If inflation peaks, that means their annual rate of cost increases is going to stop increasing. I don't think you're suggesting we're gonna see massive deflation where their costs actually come down. They're gonna be, you know, stuck with a higher cost structure than they had five years ago. You know, that's not going to change. You know, they've made fundamental decisions about, you know, how they think about, you know, traffic driving categories, whether it's fuel or tobacco. You don't even have to get into the marginal retailers.
You get into some of the more established, you know, second quartile chains that aren't on everyday low price tobacco, you know, contracts, don't have the scale to invest in differentiated loyalty platforms, have accepted they can continue to raise prices and lose volume but maintain a level of, you know, profitability. You know, you don't invest in your stores, so your sustaining maintenance either goes up, or if you don't invest in it erodes the perception of quality at that store, and it goes down. You know, I don't think that, you know, inflation moderating at, you know, 4% and even going back to the long run goals of, you know, 2.5% are gonna change their cost structure.
I think this is a structural step change that we've seen, and there have been structural step changes you know in the past. You know I think in the shorter time periods we come out of an inflationary environment. You know if we continue to see high prices, and I suspect we're gonna have you know prices you know closer to $3 or higher than prices you know below $2, consumers are gonna remain pressured, and you know they're gonna continue to seek out value. I think that's gonna you know disproportionately benefit the low price retailers versus the higher price retailers.
I think the other thing is if you think about the structural change that's taken place, the annual increase to their breakeven is gonna be much smaller than this kind of step level change that we've seen. The ability for a retailer to pass through an extra $0.01 or $0.02 or $0.03 Per year when you see prices running up or falling by $1 a gallon is not something that, you know, they're gonna hesitate to do because it's gonna be barely noticed by consumers in the spectrum of large price changes. We feel pretty confident about that.
The problem also is that anyone who was ever on everyday low price that got off of it just finds it extremely expensive and painful to go try to capture that volume because they have to give up so much margin to get down to price points to get that volume back. Those that have maintained that everyday low price position are gonna fight to keep it. I think we're just in a new equilibrium. We've seen a step change in the cost structure for the industry. The increases are gonna be much more modest going forward, but I don't think, with lower inflation, we're gonna see deflation or anything that significantly brings their breakeven lower.
Not even on the margin? I mean, that was helpful. To your point, yeah, I'm not expecting it to go all the way back, you know, pre-COVID 'cause I agree. It seems like there's certainly a permanent change which will help to support. Even, you know, slight easing of their breakeven margin should or could change the dynamic, potentially, just in terms of, like, as you highlighted, the behaviours, right?
Yeah. The formula is real simple. Their merchandise contribution's gonna have to go up faster than future cost increases, even at a lower rate of inflation, you know, increase, and then you gotta divide that by the volume. Are they gonna gain back their gallons? Are they gonna gain back their tobacco share? You know, are they gonna gain back their attached to fuel, merchandise, transactions? Those are the things you have to believe.
Okay, that was super helpful. Just my final question for you, if I may. It's, you know, on your guidance, you didn't really touch on it or update it this quarter, but there's, you know, there's only two months left in the year. Curious to hear how you feel about some of your ranges. For instance, your merchandise contribution guidance for the year looks like it might be conservative unless, you know, you're expecting, I guess, a meaningful slowdown in Q4. Just any color on some of your ranges would be helpful. Thanks.
Yeah. What I would say is that, you know, around fuel, we're, you know, close to the higher end of the range that you can project out. Absolutely on merchandise, we'll probably be above the high end. On cost, we're probably closer towards the low end of our adjusted range. SG&A, probably close to being in the middle. CapEx, probably just a little bit below the low end of that range as some projects get pushed to the next year.
All right, thanks again.
Thank you.
This concludes today's Q&A. I will now turn the call back to Andrew Clyde.
Great. Well, thanks everyone for joining in. I think as we said in the prepared remarks, Q3 represented a different environment than the ones we've seen in the past. I think the pattern that we certainly recognize is that our advantage business model and the capabilities and the team surrounding it are well prepared to drive this business forward, regardless of the macro environment that we find themselves in. We can't predict what that environment will be, but we're confident in the resilience of the business, the agility of our decision-making, and the bold steps we've taken in the past and will continue to take in the future to move this business forward for all our stakeholders. Thank you, and look forward to any follow-up questions.
This concludes today's conference.