Murphy USA Inc. (NYSE:MUSA) Q4 2023 Earnings Call Transcript February 8, 2024
Murphy USA Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I will now turn the floor over to Christian Pikul. You may begin your conference.
Christian Pikul: Thank you, Christine. Good morning, everyone. I appreciate you joining us today. With me 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 kick off our guidance conversation. After some follow-up comments from Andrew, we will open up the call to Q&A. Please keep in mind that some of the comments made during this call, including the Q&A portion, will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that the projections will be attained.
A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K and other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements. During today’s call, we may also provide certain performance measures that do not conform to generally accepted accounting principles or GAAP. We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the Investors Section of our website. With that, I will turn it over to Andrew.
Andrew Clyde: Thank you, Christian, and good morning, everyone. We are excited to discuss our fourth quarter 2023 performance, which reaffirms the strength of our strategy and business model as well as our enduring commitment to driving sustainable value for all our stakeholders. When looking at our fourth quarter and full year 2023 results, it’s clear to us that Murphy USA is delivering results, and it all revolves around the concept of more. And let me tell you what I mean by more. I often share that I believe the Murphy USA and QuickChek brands are serving the largest and fastest-growing customer segment in the U.S.: customers who are struggling to make ends meet, living paycheck to paycheck and who value affordability above all else.
When we look at our most loyal customers through the lens of our loyalty data, what do we see? First, we continue to get more from the same customers. When we look at a large panel of customers who’ve been shopping with us every month since 2019, we see that they are spending 50% more at Murphy USA in 2023 than they were in 2019, about $177 per month. Second, we are getting the same for more customers. New loyalty members that visited us for the first time in 2023, are making the same frequency of trips as the 2019’s most loyal cohort, about five transactions per month. But they are spending at higher levels and they are shopping more of the store with 28% of them having bought fuel, tobacco and nontobacco each month. In addition, we’re getting more from our existing stores.
As we continue to build on our history of lowering our fuel breakeven margin requirement and improving our coverage ratio, new initiatives are helping us maintain that trajectory. For example, one element of our digital transformation initiative focuses on upsell suggestions at the QuickChek touchscreens. Early pilots show uptake of suggested sell items have more than doubled. At Murphy, creating personalized offers through machine learning initiatives is resulting in more share of wallet captured from the same customers. Same initiatives and investments, they allow us to achieve more with less. Last year, we piloted a more sophisticated demand forecast and production planning tool at QuickChek stores. This initiative has resulted in driving a larger basket with better availability of items while also improving labor scheduling accuracy.
In other words, doing more with less staff hours. The pilot stores have demonstrated a 20% uplift in hob grab-and-go products, leading to an increase in contribution of 6% net of spoilage due to stronger in-stock positions during periods of peak demand, increasing our speed of service and giving customers more of what they want. The same demand forecast is now fine-tuning our labor scheduling. We’re also getting more from our new stores. We added 22 new stores to the Murphy-branded network in 2023. And while supply chain and permitting issues have deferred some of the financial impact of our new store program, most importantly, performance of these new stores has not been compromised. The 74 new Murphy banner stores added over the last three years averaged about 290,000 gallons per store month in 2023, nearly 20% higher than the network average in 2023, delivering more gallons to more customers.
From a merchandise perspective, we are seeing total merchandise sales per store month of about $205,000, about 15% higher than the Murphy network average, which is impressive given these stores are still ramping to their full potential. We’ve also put 13 new QuickChek stores into service over the same 3-year period, helping QuickChek generate record results in food and beverage sales and margins in the fourth quarter. Additionally, we are excited to share that QuickChek has received recognition for the number 1 spot in the CSP survey of the 20 best C-store coffee programs in 2023 and the number 2 best gas station for food in the USA Today. This recognition confirms what we already know: that QuickChek is a world-class food and beverage platform known for its high-quality fresh offer and innovative programs that keep customers coming back for more.
In addition to new stores, we are getting more from our legacy network of kiosks when our raise-and-rebuild program converts them into 1,400 square foot stores with an expanded center store offer and higher merchandise contribution. In short, these stores are selling more gallons and more merchandise. The raise-and-rebuild stores from calendar years 2020 through 2022 averaged 307,000 gallons per store month in 2023, about 27% higher than the network average. They averaged 230,000 per month in merchandise sales or about 27% higher than the Murphy network average also. Given our performance against this backdrop and the environment which we compete that is characterized by flat to negative macro demand, especially in fuel and cigarettes, this begs the question: if we are getting more in the marketplace, what does that mean for everyone else?
We believe it means others, especially those who don’t have their own unique value proposition are getting less. We’re taking share. Based on what we have all observed over the past few years when certain segments of the competition loses sale and sees their cost increase, they are relegated to make it up in the form of higher fuel margins. So what does this mean for Murphy USA? It means we also take home more cents per gallon at each store, which in turn funds more organic growth, more investments in distinctive capabilities that will generate even more in the future, allowing us to buy back more shares. This is the virtuous cycle and flywheel that defines Murphy USA. So I know the million-dollar question remains. If you’re getting more from other parts of the business in the future, do you still expect to capture more fuel margin?
And the short answer is yes, and I will cover that in a little bit more detail after Mindy reviews quarterly results and kickstarts to guidance conversations with some details around our 2024 capital plan. Mindy?
Mindy West: Thank you, Andrew. And continuing in the spirit of the more theme, I would like to say good morning to everyone. Sorry, I know that was bad. I’m going to hit a few operational highlights, and then I’m going to move on to financial results, and then I will discuss our 2024 capital plan. So starting with fuel. In 2023, total volumes were up 1.1% versus 2022 with per-store volumes of 242,000 gallons per month, finishing within our guided range of 240,000 to 245,000 gallons. Given the volatility experienced in 2022, I think it’s important to think about fuel volume performance on a 2-year stack, which shows Murphy USA per-store month volumes are up 5.6% versus about a 7% decline in the OPUS data in our markets. That translates to roughly 12% of share that we have taken from others.
Turning to merchandise. Total contribution dollars came in at $803 million or up 4.7% versus 2022 and in line with our guidance of $795 million to $815 million. Exceptional execution and promotional activity in the tobacco category led to strong share gains, driving a 4.6% increase in total tobacco contribution. Remarkably, we recorded over $2 billion in cigarette sales in 2023, growing our cigarette market share to 20% and growing smokeless to 15% share of market. Nontobacco growth accelerated in the fourth quarter with food and beverage sales and margin up 5.4% and 5.7%, respectively, on a per-store month basis. Looking at OpEx. Per store operating expenses, excluding payment fees and rent, averaged $33,200 per month in 2023, right at the midpoint of our guidance range of $32,500 and $34,000 per store month.
About 1/3 of this increase was attributable to employee-related expenses with 2/3 coming from other areas, particularly pressure in maintenance and loss prevention. However, keep in mind, some of this increase is attributable to our evolving format mix. If we exclude larger-format, new stores and raise-and-rebuild activity, we estimate that average per store month operating expense would have been up about 4% versus the 4.9% we reported. Now for some of the standard financial items. Revenue for the fourth quarter and full year 2023 was $5.1 billion and $21.5 billion, respectively, compared to $5.4 billion and $23.4 billion in the year ago period. EBITDA for the fourth quarter and full year 2023 was $275 million and $1.06 billion, respectively, compared to $230 million and $1.2 billion in the year ago period.
Net income for the quarter was $150 million versus $118 million in 2022, resulting in reported earnings per share of $7 versus $5.21 in the year ago period. Net income and earnings per share for the full year was $557 million and $25.49, respectively, versus $673 million and $28.10 per share in the year ago period. Average retail gasoline prices in the fourth quarter were $2.97 per gallon versus $3.19 per gallon in the fourth quarter of 2022. Retail gasoline prices for the full year averaged $3.19 in 2023, $3.63 in 2022. The effective tax rate in the fourth quarter was 23.6% and 24.2% for the full year. And for forecasting purposes, our 2024 guidance remains within a range of 24% to 26%. Total debt on the balance sheet as of December 31, 2023, remained at approximately $1.8 billion, of which approximately $15 million is captured in current liabilities, representing 1% per annum amortization of the term loan and the remainder of reduction in long-term lease obligations as they are paid through operating expense.
Our $350 million revolving credit facility remained undrawn at year-end, and these figures result in gross adjusted leverage that we report to our lenders of approximately 1.7x. CapEx for the fourth quarter and full year was $108 million and $344 million, respectively, and within our adjusted guidance range of $325 million to $375 million. Looking ahead into 2024, we expect to accelerate new store growth and raise-and-rebuild activities compared to last year. Coupled with new EBITDA-generative capital projects that are not tied to new stores, including up to 50 of our 2,800 square foot store renovations, we are effectively utilizing operating cash flow to grow the network and grow EBITDA. Our commitment to higher returns in new stores and across the network means we will continue our digital transformation investments to drive in-store sales and margin.
As a result, we expect total spending to increase to a range of $400 million to $450 million. Keep in mind, this capital program comprises not just spend on new stores for 2024, but also preconstruction and other spending on future year build classes as we ramp up to higher level of sustainable store growth in 2025 and beyond as conditions allow. As is historically the case, the majority of this capital is earmarked for growth projects, which translates to well over $300 million in 2024, and includes between 30 and 35 new stores that have a high probability of opening this year, including up to four new QuickChek stores. It is important to remember that in order to add 30 to 35 new stores this calendar year, that means the capital plan must reflect a higher level of projects to achieve that guided range after risk adjusting our build program for potential delays.
This means we can potentially put more stores into service in 2024 or get a head start on 2025 new stores, underscoring our ongoing commitment to organic growth as our highest priority in growing the business over the next five years. Additionally, in light of the success of our raise-and-rebuild program results to date, we are looking to increase raise-and-rebuild activity when conditions allow. In 2024, this means we are initially targeting between 30 and 40 raise-and-rebuild opportunities with the potential to do more depending on scheduling and other factors. And then beyond growth, we are earmarking roughly $80 million for maintenance capital, which includes $15 million of IT maintenance capital, a category we have previously identified as corporate and project spend in prior years.
So that leaves approximately $50 million for corporate capital needs, ongoing technology projects and other strategic initiatives underway. Now before I turn it back over to Andrew and as mentioned in the earnings release, we repurchased 442,000 shares during the quarter and just over 1 million shares for the full year, resulting in cash and cash equivalents balance of $118 million at year-end, which is up $61 million from 2022 net of our balanced capital allocation of $344 million of investment and $333 million of share repurchase, once again clearly demonstrating the accretive benefits of our positive free cash flow business. And with that, I’d like to turn the call back over to Andrew.
Andrew Clyde: Thanks, Mindy. Let me now quickly take you through some additional elements of our 2024 guidance. I’ll start with a few more details around organic growth. We completed a total of 28 new stores in 2023, including six QuickChek stores, and we executed 31 raise-and-rebuilds. As discussed in our third quarter call, while we are disappointed in our ability to put new stores into service, an ongoing issue for many retailers across the country, as Mindy mentioned, in 2024, we were able to complement new store growth by redirecting capital into other revenue-generating areas of the business. In addition to adding between 30 to 35 new stores this year, we are accelerating our raise-and-rebuild activity, targeting between 35 and 40 locations.
Further, we are planning on remodeling approximately 50 2,800 square foot stores to install queuing lanes, improving and consolidating our food and beverage offer in the store for easier customer access, adding additional cooler facings and creating a better customer experience through better lining and cleaner layouts, all of which will help to drive in-store sales, particularly in the food and beverage categories. As a reminder to our investors, raise-and-rebuilds and remodel projects are not store count-additive, but they are EBITDA-additive at rates of return equal to or better than our new store program, which runs between 12% and 15% after tax. Moving on to fuel volume. For the past two years, per-store volumes have remained within the 242,000 to 245,000 gallons per month range.
And in a normal environment, we expect new stores and raise-and-rebuild activity to offset flat to slightly declining legacy stores, resulting in flat to slightly higher per-store volumes in 2024. This translates to guidance up or down about 1% versus 2023 or a range of 240,000 to 245,000 gallons per month. Looking inside the store. In 2024, we expect to increase our trajectory of merchandise contribution growth. From 2014 to 2019, total annualized contribution growth for merchandise averaged about 6% and improved to 7% since 2020. In 2024, through a variety of investments in store performance, format expansion, enhanced center store promotional activity, continued innovation and new menu offers at QuickChek, we expect total contribution dollars to range between $860 million and $880 million or about 8% growth at that midpoint.
Turning to OpEx. While the inflationary factors that drove 2022 operating expense have moderated in 2023, labor and service cost inflation have proven sticky and remain in our structural base. Additionally, as we increase our average format size through 2,800 square foot stores coupled with raise-and-rebuild activity, we would expect not only higher fuel merchandise contribution but higher operating expenses as well. In fact, just from that growth activity alone, costs would increase about 1% a year. So as a result, we expect about 5% to 7% increases in per-store operating expenses, and this excludes credit card fees and rents and translates to $35,000 to $35,500 on a per-store month basis. For corporate costs, G&A expense was $241 million, within our guided range of $235 million to $245 million, reflecting our investments in people and technology.
These capability-building activities come with significant upfront investments, which will continue into 2024, but they are critical to making the company more competitive in the marketplace and leveraging our advantaged model over the next decade. These investments are as important to us as new store investments and come with much higher returns once these benefits scale across the network, which using Murphy Drive Rewards as an example, can take a few years to reach maximum impact but result in an extremely strong uplift across the network. With this in mind, we are funding this future growth with investment dollars today and expect G&A expense to increase about 8% at the midpoint to fall within a range of $255 million to $265 million, which is roughly half the growth rate in 2023, adjusted for a $25 million charitable donation made in 2022.
In closing, as is our custom, we will provide a range of fuel margins representative of our view of the industry around which investors can forecast the earnings power of the business subject to their own beliefs and expectations. For reference, the $0.26 to $0.30 range we guided to last year proved to be conservative given all-in actual margins of $0.314. Nevertheless, maintaining our view that a $0.02 swing around the midpoint is representative of the historical annual margin volatility of the business prior to 2020, we believe 2023 performance lays the groundwork for a sustainable range of $0.30 to $0.34 per gallon in 2024 and subject to upward bias beyond 2024. Given that the first half 2023 all-in margins approximated $0.29 per gallon with little-to-no volatility in prices or competitive behavior and second half all-in margins approximated $0.335 per gallon with relatively low volatility, we believe using these two periods to characterize the lower end of the range is an appropriate benchmark for future expectations.
If you recall, in 2022, we calculated the dramatic price decline in the third quarter, a once in every 5- to 6-year event. That’s about a $0.03 to $0.04 per gallon impact on fuel full year margins, which helps to find the high end of the range. Therefore, to achieve the high end of the range of $0.34 per gallon, one would have to assume a higher level of price volatility than last year and/or the potential for an extended fall in prices that would create opportunity for the industry and Murphy USA to experience elevated margins. Using the midpoint of the official guidance metrics discussed, bracketed by $0.30 to $0.34 all-in fuel margins, we would expect these outcomes to generate approximately $1 billion to $1.2 billion of adjusted EBITDA.
As we like to say, we don’t have a crystal ball, but we do believe we have accurately characterized for the past four years how the market would respond to the shocks we have seen over that period. But just as important is our perspective around how consumers behave during these shocks and how they respond to the Murphy USA value proposition. While past performance is not necessarily indicative of future results, last year’s performance in a relatively unremarkable setting gives us confidence that higher margins are not only structural and sustainable, but also that the same market and competitive forces resulting in persistently higher than expected margins will continue to influence the economics of the marginal player and result in upward pressure over time.
Let me close with a few comments on preliminary January performance. Per-store fuel volumes approximated 99% of prior year levels, impacted by severe winter weather across the southern states and in the Atlantic states, which impacted QuickChek traffic. However, retail-only margins are quite a bit higher than last January, averaging around $0.22 per gallon versus $0.19 per gallon in January of 2023 and we’re seeing them trend a bit higher in early February. We are seeing continued momentum in the tobacco category, growing market share across all segments and driving a 6% increase in tobacco contribution dollars in January. While nontobacco categories not attached to fuel were impacted by more customer traffic attributable to weather, food and beverage contribution dollars are showing signs of strength as price increases taken periodically throughout 2023 are showing up in the 2024 margins.
Of course, January is only one month, but we are certainly off to a great start with a lot of internal excitement around improvements we are making as we continue to drive the earnings potential of the business higher. Looking ahead into 2024 and beyond, investors should learn to expect more of the same for Murphy USA in the future. I’ll now turn the call back to the operator to open us up for some questions. Operator?
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