Murphy USA Inc (MUSA) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Murphy Oil USA third-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Tammy Taylor, Senior Manager of Investor Relations and Corporate Communications. Ma'am, you may begin.

Thank you, Sam. Good morning, everyone, and thank you for joining us again on our call 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 a few opening remarks from Andrew, Mindy will provide an overview of the financial results. Andrew will then give an operational update and we will open up the call for questions.

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 a further discussion of risk factors, see Murphy USA's Form 10 and other 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, Tammy, and good morning, everyone, and we sincerely apologize for the technical difficulties experienced at the beginning of the call.

Murphy USA completed its inaugural quarter as a standalone company and we couldn't be more pleased with our results and our progress.

In terms of key financial results, we generated nearly $42 million in net income for the quarter or $0.89 per share compared to $11 million last year.

Gross margin from retail fuel totaled $144 million which was up $45 million with total volume up 1.1% and higher unit margins of $0.148 per gallon.

Merchandise gross margin was $73 million, down $6 million, reflecting lower cigarette sales. However, the decline was made up in part by an 8.5% increase in total non-tobacco sales per site as we realized our 54th successive increase in same quarter on same quarter per site growth in non-tobacco sales. We held total site operating costs essentially flat at $135 million despite adding 34 sites since this time last year.

Our financial position remains solid. We ended the quarter with over $262 million in cash and investments, six new sites were opened in the quarter bringing the year-to-date total to 21. Another eight have been opened since quarter end and another 22 are in construction.

We also completed the first of a handful of non-core asset sales generating over $6 million from the sale of our North Dakota crude gathering system. In addition, we signed a purchase and sale agreement for the sale of our Tampa terminal during the quarter.

The separation from our former parent, Murphy Oil Corporation, has been seamless. We executed the IT systems and accounting separation without any major hiccups. The transition services agreements between the two companies are working as planned and we are completing our 2014 budget and developing a baseline of our new corporate cost structure as well as identifying areas for future improvement.

Since the quarter ended, we have made significant further progress on our commitment to exit certain non-core assets. We entered into a purchase and sales agreement covering our Hankinson ethanol plant which we expect to close before year-end. We also elected to pay down 10% of our $150 million term loan.

As a standalone company, we remain very bullish about our outlook and future potential. Planning and permitting has ramped up on the Walmart carveout locations and we expect the number of sites and the cycle time to improve in 2014. The early results of our newly redesigned 1200-square foot format have been very impressive creating a high return model less dependent on tobacco. We have the financial strength and flexibility to even further accelerate this growth.

In summary, we feel great about the quarter and even more excited about our future.

I will now turn things over to Mindy to review our financial results and then I will provide a deeper dive into our operational performance. Mindy?

Thank you and good morning. Murphy USA reported net income of $41.7 million or $0.89 per diluted share for the third quarter of 2013 compared to $11 million or $0.24 per diluted share for the third quarter of 2012. The improvement in the current quarter was primarily driven by higher retail fuel margin, increased values received from the sale of Renewable Identification Numbers, commonly known as RINs, and improved results from our two ethanol manufacturing facilities.

Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $85.5 million, which was an increase of 118% over the prior-year quarter.

Net income in the marketing segment for the third quarter of 2013 increased $20.4 million over the same period in 2012 to $40.9 million compared to $20.5 million. Retail fuel margin increased 44% in the 2013 period to $0.148 per gallon compared to $0.103 per gallon in the comparable prior-year period. The higher fuel margins in the current period were attributable to periods of decreasing wholesale gasoline prices which caused margins to expand from prior-year levels.

Retail fuel volumes on a per store basis were 2.1% lower in the third quarter of 2013 compared to the third quarter of 2012 while they were up 1.1% on a total volume basis.

Merchandise margins in 2013 were slightly lower than the 2012 period with a decrease in merchandise sales revenues per store month of 1.5% which was mostly offset by an increased number of stores in the current period. The decrease in margins is due primarily to lower margins on tobacco products which is partially offset by growth in our non-tobacco product group in the current period.

Also impacting net income positively in the third quarter of 2013 was the sale of RINs of $31.8 million compared to only $5 million in the 2012 period. During the current period, $42 million RINs were sold at an average selling price of $0.75 per RIN.

Our ethanol segment performed well also this quarter contributing net income of $4.5 million compared to a $9.4 million loss the same quarter last year. The improvement in earnings was caused by a decrease in corn costs and higher ethanol prices which were partially offset by lower prices for co-products sold such as wet and dry distiller's grains with solubles.

Gross margin therefore improved significantly in the current quarter to $0.59 per gallon compared to $0.16 per gallon in the 2012 quarter.

After-tax net income for corporate declined in the recently completed quarter to a loss of $3.6 million compared to a loss of $0.1 million in the third quarter of 2012. This decrease was due to interest expense accrued since the August 14, 2013 issuance of $500 million of senior notes and the $150 million term loan taken out under our credit facility. The proceeds of both of these instruments were utilized to fund the dividend to our former parent at spin day on August 30.

At the end of the third-quarter 2013, our long-term debt totaled approximately $642 million comprised of the two borrowings just mentioned.

Cash, cash equivalents and short-term investments totaled over $262 million at September 30 providing us with a net debt position of $380 million at quarter end.

Now Andrew will talk more about this later but we did sell a non-core asset during the quarter and with those proceeds we elected to make an early payment of $15 million on our term loan bringing that balance down to $135 million.

Our asset based loan meanwhile remains capped at its $450 million limit subject to periodic borrowing base determinations which currently limit us to $338 million. At the present time, that facility continues to be undrawn.

For the quarter, we incurred $33.7 million in capital expenditures of which $26.3 million was spent for retail growth, $5.4 million for retail maintenance items, and the remaining amount for product supply, wholesale, ethanol and corporate. Last year in that same period, we spent $30.2 million in the third quarter including $19.2 million for retail growth, $8.2 million for retail sustaining capital and $2.8 million in our ethanol segment.

Now that concludes my overview of our financial results. So I will now turn it back to Andrew who will discuss our operational performance.

Thanks, Mindy. I would like to take a moment to go over a few areas of our operational performance for the quarter and year to date. Since this is our first quarter and as our business model is a bit different from some of the peers, we thought it would be helpful to provide some additional context in this first call.

So let's start with retail fuel performance. We sold 971 million gallons this quarter which is up 1.1% compared to 960 million gallons last year. On an average per site month basis, we sold 274,000 gallons in Q3 which is down 2% compared to 280,000 gallons last Q3. Year to date, we've averaged 268,000 gallons per site month which is down just 0.8% compared to 270,000 gallons in 2012.

Several factors influenced this absolute fuel volume performance. First, at the macro level, the best data we have seen suggests that vehicle miles traveled have been relatively flat year to date due to the ongoing uncertainty in the economy and some regional weather issues. So we believe that real efficiency gains in the auto fleet have caused macro motor fuel demand to decline somewhat in 2013 year to date compared to last year.

Second, as we look at market specific factors like price volatility, compared to the pricing environment we experienced in 2012, the same periods in 2013 have been less volatile and therefore not as beneficial for us. We also look at competitive entry around our sites and that impact on fuel volume which is offset by the higher average volume performance of the new sites we are opening.

Last, we evaluate Murphy specific factors like our special fuel promotions. We ran the $0.10, $0.15 seasonal discount program with Walmart for four months in 2012, from September to December, compared to a three-month program this year from April to early July. So about one less month in total. We also rolled out our $0.10 off fuel promotion with Coca-Cola in July and August this year which had a very strong impact on beverage sales as well as a positive uplift on fuel volumes when we look at average fill rates on redemptions.

Taken together, these factors explain the changes in the per site volume performance for the quarter and year to date. We expect full-year 2013 fuel volume to land around the low end of the 272,000 to 282,000 gallon per site month range we believe is the potential for our chain. For reference, we have averaged around 277,000 gallons per site month for the prior two years which is the midpoint in this range.

On a rolling 12-month basis, we have averaged 275,000 gallons per site month. We are optimistic about our fuel programs for next year and the potential for sustained lower crude oil and fuel prices to encourage more driving.

Turning to retail fuel margins, we earned $0.148 per gallon in the third quarter bringing our average year-to-date unit margin to $0.139 ahead of last year at $0.125. On a rolling 12-month basis, the unit margin of $0.14 is above the upper end of the $0.12 to $0.13 historical average that we use for capital allocation and long-range planning purposes.

Over the course of 2013, we have seen less price volatility compared to 2012. However, we have seen a persistent decline in the underlying crude oil prices which supports an underlying decline in motor fuel spot prices.

While it is too early to comment on fourth-quarter margins, we did experience a much more significant falloff in wholesale prices last October than what we are seeing in 2013 largely because the average price at the beginning of the fourth quarter this year was already much lower compared to the price level in 2012.

When you take our fuel volume and unit margin performance together, our year-to-date retail fuel gross margin is nearly $50 million above last year. This level of retail fuel performance is distinctive to Murphy USA and is one of the strengths that separates us from our competitors. At our relatively high per site volumes and consistent average fuel margins, we remain very excited about the fuel category and its differential impact to our performance.

Switching gears, let's discuss the performance of our nonfuel merchandise categories. Total merchandise sales were $556 million for the quarter, up 1.7% from $548 million last year. Given the relatively high mix of tobacco sales in our mix, we will discuss the tobacco and non-tobacco category separately as our merchandising team continues to demonstrate strong non-tobacco performance to offset some of the headwinds experienced in the tobacco category.

Tobacco sales totaled $444 million in the third quarter of 2013 down 0.7% overall. On an average per site month basis, tobacco sales were $125,000, down 3.8%. Our tobacco category performance is explained by a number of factors.

First, we continue to see a persistent decline in the industry volume of cigarette sales at a rate of around 5% per year and we expect that to continue. In the past, this decline was offset in part by manufacturer price increases which were passed on to consumers. This year, many retailers who were typically higher-priced became more aggressive in order to qualify for certain incentives. The net effect of these actions reduced Murphy's relative price differential to consumers.

As a destination for low-priced tobacco for many of our consumers, it was important for us to maintain our low price position and so we put additional margin on the street to hold share. We've also seen other retailers getting more engaged in the tobacco category especially mass merchants like the Dollar Store chains. That said, we continue to lead the industry in per site volumes and remain a destination for the ever-increasing value seeking consumer.

Offsetting the decline in cigarettes was a strong increase in smokeless products. Smokeless product sales per site increased by 6.5% for the quarter and gross margin dollars increase by 4.8%. Electronic cigarette sales remain strong and we expect significant additional growth from the category. Q3 sales were up 6% and year-to-date sales were up 14% compared to 2012. We have expanded the category to include additional leading brands and we are working with key suppliers to market new products in test markets.

Our mix of tobacco sales to non-tobacco sales shifted from 81.6% to 79.7% for the third quarter. This is a result not only from the decline in tobacco sales but from the ongoing improvements made in non-tobacco merchandising. Non-tobacco sales totaled $113 million for the quarter, up 12% from last year. On an average per site month basis, non-tobacco sales were up 8.5% for the quarter and 6% year to date.

There are a number of categories to highlight that have sustained this momentum. Total beverage category sales per site month increased 7.6% quarter on quarter. In July and August, we introduced with Coca-Cola a buy three 20 ounce Coke products get $0.10 off per gallon fuel promotion. The results were phenomenal especially considering the industry's performance on carbonated soft drinks. Our CSD sales for the quarter were up 11.6% while the convenience channel was up 1% nationwide.

We have launched a similar program with Pepsi in October and November and expect to have consistent programs of this type in 2014.

We also saw significant increases in other beverage categories relative to the industry including energy drinks where we saw 15.9% growth for Murphy versus 6.8% for the industry, sports drinks at 14.5% versus 5.3%, and juices, 25.9% versus 3.6%.

Candy sales in gross margin dollars increased 18.4% and 24.8% respectively for the quarter as the category was prominent in our promotions calendar during (technical difficulty) and our site staff culture of up selling products is simply second to none in the industry.

Lotto and lottery sales and commissions increased 13.7% for the quarter and we benefited from the free press when our Lexington, South Carolina store sold the winning $400 million Powerball ticket.

Overall, we expect to see continued growth in non-tobacco categories to offset the headwinds in tobacco. We continue to innovate in our promotional activities; the implementation of our new merchandising and inventory management systems are progressing as planned; and as we continue to add more of the new 1200 square foot sites to our fleet, we will be able to further accelerate the shift in our mix of merchandise while preserving the ultra low-cost, low capital format that makes us unique.

On top of the strong topline performance, we held site operating costs flat year on year. Total site operating costs averaged $31,400 per site month in the third quarter 2013 compared to $32,500 in 3Q 2012. Across the major cost elements, average per site labor and benefit costs were held flat to prior years while a small increase in site maintenance costs were more than offset by lower credit card processing and payment fees. As the low price leader, we recognize the importance of maintaining low site operating costs and to counter the impact of inflation.

Separate from our retail fuel gross margin, we earned a modest contribution annually from our product supply and wholesale operations. As we have discussed in various analyst and investor presentations, our product supply and wholesale operation is tasked with the goal of providing secure ratable low-cost supply to our retail network through distinctive capabilities like our best buy system and asset positions like our historical pipeline shipper status. As such, the operation's performance goals are to earn around $20 million to $40 million per year in gross margin excluding RINs while facilitating the low transfer price for retail.

While this performance goal is relatively modest, this part of the value chain can be quite volatile from quarter to quarter. Product supply and wholesale gross margin for the third quarter of 2013 was negative $17 million compared to positive $7 million in the third quarter of 2013. Year to date, gross margin was $19 million through September 2013 compared to $21 million in 2012 as we benefited from a strong first quarter this year.

Several factors influenced the performance of this part of the value chain in Q3 which are very dynamic in nature. Refining margins were relatively high in Q3 so refiners had strong incentives to produce which was reflected in their high utilization rates. The forward market was in backwardation creating an incentive to discount and sell more product quickly at current prices versus at lower future prices.

The arbitrage between the Gulf Coast and other major markets like the New York Harbor and Chicago was mostly closed during the period so refiners were motivated to sell product locally versus shipping to distant markets.

Major pipeline systems like Colonial connecting the Gulf Coast to the regional markets experienced no major constraints impacting the flow of products. Inventory levels were relatively high as terminals were prepared for the higher summer driving season as well as for the hurricane season. And last, RIN prices were elevated especially in the early part of the quarter so refiners were motivated to sell blended product from terminals to collect the RIN credits to offset their obligations versus selling the product in the bulk spot markets.

When you take these factors together in Q3, there was a significant amount of product flowing through the terminal racks causing rack prices and margins to be depressed relative to more typical conditions. This impacts the product supply and wholesale part of our value chain because Murphy is buying proprietary bulk supply and transferring to retail at a rack benchmark price.

With the benchmark price depressed, the contribution from product supply is lower from intercompany transfers as is the margin from the sale of wholesale gallons.

As discussed, this part of the value chain is very dynamic. After around September 10, the factors above that made overall third-quarter results challenging largely reversed and we exited the third quarter with a very strong performance from the product supply and wholesale operations. Tight supply along major pipeline systems due to maintenance, open arbs from the US Gulf Coast to Chicago and New York Harbor, and lower refining margins and utilization have combined to deplete inventories and cause wholesale rack prices to increase significantly above spot prices.

As a result, Murphy's product supply and wholesale operations are enjoying higher contributions from intercompany transfers and wholesale sales in Q4.

However, what is more important is that during periods of such tight supply and allocated product, our core retail business enjoys secure ratable and low-cost product which is a distinct advantage over many competitors. So while the modest annual contribution from product supply and wholesale is nice to have, the advantage it creates for retail is what is truly distinctive. And some level of quarter-on-quarter volatility is part of the price we pay to achieve that.

Turning to asset sales, we are executing on our commitment to sell non-core assets. As we highlighted at the beginning of the call, we entered into a purchase and sales agreement for the sale of Hankinson which we expect to close before year end. We will provide additional details upon closing.

As the most attractive ethanol plant on the market with annual production exceeding 130 million gallons at very high yields and reliability, we expect to get a fair value price for Hankinson in line with the recent ICM plant transaction comps of between $1.12 and $1.39 per million gallons per year of production. We are content to continue operating Hereford for several months while crushed spreads are attractive with the goal of improving its yields and reliability so that we can generate higher sales proceeds than what was reflected in the indicative bids we received for the plant.

Initial results from the October shutdown were positive and we are planning another shutdown in March when further improvements will be made.

As a well-capitalized standalone company, we are a patient seller and we seek to maximize the value we receive from these non-core assets for our shareholders. We look forward to completing the transactions and we'll share more details at that time.

I would like to finish today's prepared comments on where we stand on our growth plans. While we started the year at 1164 sites, we expect to end 2013 with approximately 1208 sites open and another 11 sites under construction. While 2013 builds were below schedule due to the groundwork needed to kick start the new Walmart contract, our current pipeline of projects suggests we will complete between 60 and 80 sites in 2014 as we finish the early outlot locations with Walmart and ramp up the more time-consuming carveout locations.

We are very encouraged by the results of our newly redesigned 1200 square foot format sites after three to four months of operations. We will provide more details on the early returns in the new year as we will have a longer run rate and sample size to share. We are seeing higher fuel volumes, store sales, and store unit margins than the earlier 1200 square foot stores and these volumes and sales levels ramp up very quickly due to our price position and unique locations in front of Walmart.

As we look to the future, we are very optimistic about this new format not only in the context of the new sites but also for its potential as an upgrade to the smaller kiosks which will be considered as our relatively young network begins to age.

In summary, since the spin, we have strengthened an already strong financial position. We are executing on our commitment to divest non-core assets that will enable us to improve our net debt position. With continued strong earnings and cash flow, we can invest for growth and we will have the ample source ample sources of cash and credit to further accelerate growth. Our new format will allow us to sustain our quarter-on-quarter non-tobacco sales growth. Add all of this to our industry-leading fuel contribution, and we believe Murphy USA has a winning model.

In closing, I would like to thank our entire team of over 8000 employees who helped make the quarter a success and made the transition to being a standalone company so seamless.

At this point, we'd like to open up the discussion for questions.

(Operator Instructions). John Lawrence, Stephens.

Thank you. Good morning, everybody. Andrew, congratulations on the quarter. The first one out of the box and can you talk about a couple -- I have got a few questions. Number one is on the retail -- can you give us one more -- at the end there, I appreciate that clarity on the new box, can you explain a little bit between when you talk about the carveout locations versus the other ones and that time constraint of getting that done a little bit?

Yes, John. The outlots were parcels that Walmart had and sold to us that were outside of their main pad and so they were easier to plat, permit, and convey to us. The carveout locations are sections of their parking lot that are part of their original plat and so you have to go through an additional platting, permitting, surveying process that simply takes more time on average and some municipalities requires even more time.

So we frontloaded the process with the outlots while getting the carveout process started. We are accelerating the process and we will be able to improve that cycle time significantly in 2014.

Right, thanks. Secondly, your comments about more promotions, I mean has this been something that you focused on a lot more since the spin, the Coca-Cola and with Pepsi, and we'll see a lot more of those?

Yes, John. We have always had attractive promotions to target the value-seeking customer. Those have been in the works. We had trialed them before the spin. We actually got the Coke promotion in July and August before the spin. But we believe in today's environment to be competitive you've got to continue to offer value on beverages and fuel and we think this is a unique way to do that.

Just a couple of housekeeping. Mindy, on the expense side, the $14.5 million that you referred to is nonrecurring sort of spend-related expenses. We were actually looking for another I guess line item of G&A corporate. So the way you've reported that is a clean number as far as what we will see going forward?

Right, we have incurred here in the third quarter $14 million of what we characterize as one-time and spin-related charges. So if you adjust our number for that, that would be $34 million versus $28 million reported for the prior quarter and that gives us a year-to-date number of 94 on an adjusted basis which keeps us on track for our forecasted number in the 130-ish range for the year.

Okay, great, thanks. While we are there, just the tax rate expectations for the year?

Tax rate expectations, you might have noticed that the tax rate for this quarter versus prior period quarter is a little off and that is due to the ethanol segment which incurs a lower state tax rate and therefore the loss that we had in the third quarter of last year of $5 million produced a reduced benefit to the overall MUSA rate.

So if you look at our ethanol as a segment, the typical tax rates there in the 34% to 35% versus retail in the 39% to 40% range. So our tax rate should trend towards the retail side especially as we exit the Hankinson business.

Great. Thanks a lot. Congratulations.

John, and thanks also being the first to initiate coverage and giving us a target to shoot for. We appreciate it.

Great, thanks.

(Operator Instructions). Damian Witkowski, Gabelli & Co.

Good morning. A question on where is -- the RINs, do they -- are they in your gross margin on a per gallon basis? Is that where I find them so I have to adjust that?

No, they are not. We report those separately as other revenue so if you turn to our marketing segment, you will see that separated as a separate line item under other revenue.

Okay. And once you sell your ethanol plants, do you still -- will you still benefit from RINs or -- I mean depending on their price in the market -- but will you still be selling RINs or no?

Yes, so the benefit we get from the RINs is from blending product not from manufacturing ethanol. So the RINs attached at the manufacturing facility, we do not buy any of our ethanol from the two plants. The RIN sales come from separating the RIN at the point in time we blend. So when we blend product, we capture the RIN at that point and we sell that. So we expect to continue to do that in the future.

And are all states blend right states for ethanol or is it just a few of them?

Given that we have a wholesale business, I think the blend right states, that provision applies more to standalone retailers who do not have the bulk blending capabilities so we are not impacted to that same extent I believe as a standalone retailer that doesn't have the product supply and wholesale capabilities we do.

And then how should we think about your annual capacity for generating RINs?

So what we've talked about before is on average over the course of the year, we will generate about 12 million RINs per month. It's higher in the summer when demand is higher and we are typically blending a little higher. It's lower in the first and fourth quarters and so that's the volume of RINs. The absolute price of RINs, we have seen it go from $0.03 at the end of last year to $1.40 back to the high $0.20s this week. So that's a lot harder to put a number on.

As we have talked about in investor and analyst presentations, our business model, our economics, our growth, our financial position is not dependent on the RINs so as we earn those, we are able to apply those proceeds to growth or returns to shareholders.

And then lastly, if I look at your gross margin for merchandise sales, the 80/20 split with cigarettes being 80% of your sales, but on a gross margin basis, how much do cigarettes account for? Have you actually said that publicly or you don't disclose that?

Yes, I don't think we have released that in the earnings, the separation between the margin between the two.

Okay, all right, thanks. I will get back in the queue. Thanks.

[Bidal Pentai], Front Four Capital Group.

Good morning, Andrew, Mindy and Tammy. Congrats again on the first quarter out of the gate. A question I have is pro forma for this ethanol plant sale, it looks like the company will be under levered compared to peers. Based on the cost of building a 1200 square foot store, it looks like comfortably you'll be able to fund that with cash flow from operations. So with additional asset sales, how do you out in the future, how do you think about returning capital to shareholders?

So I would say in the following way. First, we do have some debt covenants that we maintain so a certain amount of proceeds will definitely repay debt, reduce our net debt position and we set up our $150 million term loan anticipating having proceeds from asset sales of that magnitude and because of our tax free spin status, not wanting to do anything that might jeopardize that over the next two years.

When we think about our growth, we have opportunities for growth out of free cash flow. We have opportunities to accelerate growth beyond that and ramp up sites beyond the 60 to 80 sites that we have got pro forma for next year.

Beyond growth, we can then begin to think about tax efficient returns to shareholders either share repurchases or dividends. Our parent company had a strong history of doing both and we will take up those conversations in due course with our Bard but we've not made any determinations on those sorts of shareholder returns at this time.

Okay, thank you.

Carla Casella, JPMorgan.

Some of my questions have already been answered but on the midstream business, what percentage of your midstream volume now is going through your stores in the quarter and how does that vary from quarter to quarter?

I think it's ranged in this quarter anywhere from 40% to 50%; I don't know the precise average, Carla. It varies on a number of factors. One is we look at just the pure economics of shipping product versus buying at the rack. We look at the nature of the contracts we have whether we can capture additional RINs by blending it ourselves versus getting the benefit of the RINs in the contract price.

We negotiate. We certainly want to preserve our shipper status by actually shipping the barrels through the pipeline. So those numbers will change month to month, week to week, quarter to quarter but that's a pretty consistent range that allows us to achieve that low-cost secure ratable supply that's key to our retail business.

Okay. And then how far out do you have a view or a look into the promotional environment in the CSDs? Do you think -- is this something where you've got your plan set through fourth quarter and early next year and is it going to remain promotional? It sounds like it really helped you in that area.

It really did. There's kind of two levels of promotions. We have a promotions calendar that we've already party established for all of next year. We call it our Circle of Stars promotion but it's what we do on site where we work with our vendors to identify what would be great selling items to promote in that quarter and it's actually a competition amongst our site staff to encourage up selling which our vendors tell us we do better than anyone in the industry.

So that promotion calendar has been laid out largely for all of 2014. Special promotions like the one we described with Coke and Pepsi, we are working to finalize best schedule but certainly we enjoyed the benefits of it, they enjoyed the benefits of the uplift so we expect to do more of those in 2014. We haven't finalized the calendars on those yet.

Okay, great, thank you.

Damian Witkowski, Gabelli.

Just wanted to follow up on tobacco sales. The statement you made that you have a 5% decrease industry wide on the volume side, if that continues as you expect it to and you go with the category, can we still have a turn in terms of what you earn on a gross margin basis on the merchandise side within the store? Or you don't think you can offset that with either smokeless, e-cigs or other non-tobacco merchandise?

Absolutely and that's exactly what we focus on. So you will see the decline in the volume depending on the price increases and the competitive dynamics will determine how much of that you can actually translate into gross margin dollar, sustainability or improvement on the cigarette side. We do see continued growth in smokeless sales and margins. We see continued significant growth on e-cig sales and margin.

And as we said, we went back 14, 15 years and we're able to see same quarter on same quarter per site growth in non-tobacco items and so we are looking at that point in time especially with our new 1200 square foot redesign format when we actually turn the corner from a net down in contribution due to the cigarettes to positive increases on an overall basis because of the improvement on cigarette areas.

And then any way to think about the proceeds from the ethanol, the Hankinson plant? What do you think your taxes will be? What is your tax cost basis that remains?

The tax book value on the Hankinson plant is just a little over $47 million.

Okay. And in terms of timing for the second plant and in terms of proceeds? Should we think about the same range or just because it's smaller you won't get as much as you hope to get here?

Yes, two things. So on the proceeds, Hankinson is an ICM plant and the costs for those typically have been between $1.00 and 1.40. There were some recent transaction comps on the Delta T plants that's more comparable to our assets. Those have been more in the $0.40 to $0.50 range. Some of those plants are actually located nearer to the corn. We are a destination market for corn at Hereford. Our advantage is the wet solubles, wet distiller's grain and the low carbon market in California is the upside on that plant.

So it will be significantly lower than what you would expect from an ICM plant.

In terms of timing, we did put it out for bid with Hankinson; the indicative bids were not that attractive for Hereford at its current yield. We'd had some production issues earlier in the year. With the outlook on the crush spread, we are very content to continue to operate it. We have got a yield improvement program in place and we basically look at that as an option to realize significantly higher proceeds than we would have realized by selling it right away. We've got a small team focused on that and it's not taking a lot of management's focus.

So we hope at least by this time next year if not sooner to have sold that at better realized value while making some money in this very attractive crush spread environment.

As we said before, we are a patient seller and we've got a financial position to be so.

Very helpful, thanks and congratulations.

Thank you.

Thank you.

Thank you.

We thank everybody for your time. Again, we apologize for the earlier technical difficulties. If folks did have to drop off because of that, please feel free to reach out to Tammy or any of us and we will be able to follow up with your questions.

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.