Murphy USA Inc (MUSA) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Murphy USA first quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Tammy Taylor, senior manager of Investor Relations. Ma'am, you may begin.

Good morning, everyone and thank you for 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 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 to 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 further discussion of risk factors, please see Murphy USA's Form 10-K and other SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statement.

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.

Thanks, and good morning, everyone. We started 2015 with a solid first-quarter as momentum on several fronts carried over from 2014 into the new year, more than offsetting expected headwinds. Retail fuel margins benefited from record January performance, as the major wholesale price decline in December created a healthy environment early in the quarter before crude and product prices began their expected run up.

Product supply and wholesale contribution was challenged in an oversupplied, unconstrained rising price market. However, RIN sales at higher prices more than offset the impact as the as the EPA pushed the RFS announcement later into 2015.

Merchandise sales and margins continued their positive trends as nontobacco margin dollars offset tobacco declines. Ongoing costs continued to track nicely with expectations while we invested in a number of initiatives for the long run. The production and yield improvements at Hereford led to plant operating records, offsetting a weak market crush spread environment while we completed new investments to enhance the plant for the future.

While site growth was seasonally light as expected due to our construction schedule, we made excellent progress filling the pipeline for the second half of the year, so overall a really solid quarter on execution and bottom line results as we hit EPS consensus and beat last year's quarter. Mindy will go through the financial results now in more detail.

Thank you Andrew, and good morning. Murphy USA reported net income of $22.9 million or $0.50 per diluted share for the first quarter of 2015, compared to $9.6 million or $0.21 per diluted share for the first quarter of 2014. Income from continuing operations was $22.9 million or $0.50 per diluted share as compared to $8.8 million and $0.19 in the same quarter of 2014.

The higher results in continuing operations for the current quarter were primarily driven by higher retail fuel margins and volumes, higher RIN sales proceeds, and lower product supply and wholesale contribution.

The first quarter of 2014 contained an after-tax benefit of $10.9 million from the LIFO decrement in that period. There was no income from discontinued operations in the quarter, while the 2014 quarter contained the final adjustments to working capital for the sale of our Hankinson plant, which resulted in a gain of $0.8 million or $0.02 per diluted share net of tax.

Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA was $62.7 million compared to $43.2 million in the prior year quarter.

Our marketing segment, comprised of retail marketing and product supply and wholesale, contributed net income for the first quarter of $24.8 million, up from $13.8 million in the same quarter in 2014, primarily due to higher retail fuel margin.

Average retail fuel margins for the first quarter of this year, including taxes, were $0.0210 per gallon versus $0.0323 per gallon in the same period of 2014.

After-tax net income for corporate and other assets, including our ethanol production facility in Hereford, Texas, was a negative $1.8 million compared to a negative $4.9 million in the first quarter of 2014. The Hereford ethanol plant generated an operating loss for the first quarter of this year of $0.6 million compared to a net gain of $1.2 million in the first quarter of 2014. The lower results at Hereford in the current quarter were the result of lower crush spreads caused by lower ethanol prices, partially offset by a significantly higher yield.

Selling, general, and administrative expenses in the current quarter were $31.5 million compared to $28.1 million in the same period of 2014. The increase is primarily due to higher professional service fees related to ongoing projects.

We completed $39 million this quarter of the previously announced $250 million share repurchase program, which brings our total since program inception to about approximately $41 million.

At quarter-end we had $287.7 million of cash and cash equivalents, and our long-term debt totaled approximately $488.9 million resulting from the senior unsecured notes. Our net long-term debt position was $205.2 million. Our asset-based loan remains capped at its $450 million limit, subject to periodic borrowing base determinations, which currently limits us to $239.3 million. At the present time, that facility continues to be undrawn.

For the quarter we incurred $32.5 million in capital expenditures, of which $22.4 million was spent for retail growth, $8.4 million for retail maintenance items, and the remaining balance within our product supply and ethanol and corporate areas. Last year in the first quarter we spent $23.7 million.

That concludes an overview of financial results, so I will now turn it back to Andrew, who will discuss operational performance.

Fuel performance outperformed Q1 of 2014 on several fronts despite a volatile market within the quarter. Retail volume was up 5.8% overall and 1% on an average per site month basis. Retail margins were up $0.032 per gallon to $0.10, as record January margin helped to cushion the blow from rising prices in February and March.

Product supply and wholesale contribution fell in part due to the rising price environment and weaker agricultural demand for diesel, but mostly due to not repeating the inventory liquidation that led to a $17.8 million LIFO benefit last year as we have sustained operations at lower target inventory levels. RIN proceeds for the made up of the product supply shortfall as we collected $20 million more in Q1 2015 as prices averaged $0.70 per RIN.

Fuel prices have continued to creep up in April and early May, in line with typical seasonal patterns. As you surely noted, crude broke through the $60 per barrel mark this morning. Refineries are still enjoying nice crack spreads, so running at high utilization rates. Inventories remain high and there have been few logistics constraints or issues to date, but there have been a number of pipeline maintenance projects recently announced.

So, some of the conditions are building for the scenario of a selloff before the end of Q2 that we've seen in many prior years, and that would create the kind of volatility our business model benefits from.

Meanwhile we do see some bottom-line benefits from lower fuel prices as consumers are trading up to higher-margin midgrade and premium fuels. We also enjoy the lower credit card fees and feel surcharges on both fuel and merchandise distribution from lower prices.

Merchandise also put up solid numbers for the quarter. Total merchandise sales were up 4.3% overall and down only 0.5% on an average per site month basis as tobacco products fell only 2.4% for the quarter versus the quarter on quarter range of 3.5% to 8% declines we saw last year, as we were announcing the full impact of price increases implemented last year.

Margin dollars increased 4.6% overall and were flat on an average per site month basis, reflecting in part the timing of certain promotions and rebates which we will make up to achieve our expected annual per site margin dollar gains.

Turning to cost, station operating expense was essentially flat overall as lower credit card fees offset costs associated with new stores. Excluding credit card fees, station OpEx on an average per site month basis was flat. As Mindy noted, SG&A was up slightly due to project costs. But these initiatives are shining the light on a number of improvement areas to make our business stronger.

A real bright spot this quarter was our Hereford ethanol plant. While it lost $0.5 million due to weak market crush spreads, it set records for production and yield as production increased 30% and yields improved to 2.82 gallons per bushel. We completed the corn oil and starch extraction investments on time and budget, and early tests are in line with or better than expectations.

We just completed the one-year anniversary of a staff retention and motivation program, and plant staff experienced zero voluntary attrition in the last 12 months. That team has shown us what the operating potential of the plant really is, and with crush spreads greatly improved since quarter end, and new revenue and yield improvement streams online, we can start to consider the timing for realizing the full value for this non-core but well-performing asset.

On store growth we added five new 1200-square-foot stores in the quarter and have opened another three since. We currently have 16 sites under construction. We expect to complete the majority of the store refresh activities in Q2 and will deliver most of our new site growth in Q3 and Q4, as is typical due to our bill calendar with Walmart where construction essentially halts prior to the Thanksgiving holiday.

As Mindy noted we balanced our store growth investments with another $39 million in share repurchases and expect to continue with that program throughout the remainder of the year.

In summary, we are very pleased with the first quarter results but even more pleased with our execution. We knew 2015 was going to be an interesting year after the roller coaster ride in Q4 last year, and there is still a lot of run time left in 2015 to see how the global crude and product markets play out. So we will stay focused on what we can control: growing sites, executing operations, investing strategically for the long-term, and rewarding our shareholders.

And with that let me thank our team for their ongoing commitment to serving their customer and their fellow staff. So at this point, operator, we would like to open up the call for questions.

(Operator Instructions) Ben Brownlow, Raymond James.

I think you commented a little bit earlier about the growth in the nontobacco margin dollars. But if you could just give a little bit more color on that, it was up a little over 3%, which is a healthy growth rate relative to the industry. But it was a little bit of a deceleration to what you saw in 2014. Is that more difficult comparisons or just give a little color on your outlook there?

Sure. I think our outlook is strong for the rest of the year. We had one category in particular that had rebates that fell in Q1 of last year that will come into a later quarter this year. Otherwise we felt the categories all performed very well and in line with expectations, so it's more of a timing issue. We fully expect to make up all of that in the quarters based on that.

Okay. And then on the credit card fees you had detailed and kind of laid out that the OpEx was flat on a per store basis excluding credit card fees. But do you have the total quarterly benefit on OpEx from credit card fees year-over-year?

No. We typically haven't provided the credit card fee breakdown as a separate line item.

Okay. And just one last one for me, on the new store construction, are all the 16 -- will they be opened up in the -- before the end of the second quarter?

Most of those will be in Q2. Some of those are expected to open in Q3 just based on their start time.

Great. Thank you, guys.

Damian Witkowski, Gabelli & Co.

Good morning. The product supply and wholesale segments -- Andrew, do you think you can still make that $40 million to $60 million guidance that you give us a while back as an average for -- on an annual basis? Or is 2015 an off year?

No, I mean I would expect us to continue to do that. If you go back through every quarter since we spun off and have been providing the results, you see a lot of movement quarter to quarter. So we've been experiencing a rising price market more recently, but the key point to make is not that it's a rising environment as much as it's a long environment without a lot of constraints.

So we do expect to see some maintenance projects come online that will tighten the market. We also expect to see, as you get through sort of the May period and there is plenty of fuel in the inventories for summer driving season, you know, to see a falloff in that. So I would never change outlook based on any one quarter in the year. Even if we blew out the first quarter as you've seen in the past, Damian, any one quarter could move that number up down pretty significantly.

Okay. And then if you look at 1% rise in fuel same-store sales -- not that it's a bad result, but if you look at fuel pricing on a per gallon basis being down almost 35% year-over-year, you probably could expect more. And you have been delivering, obviously, higher numbers before this. Is there anything in particular in the first quarter from a competitive perspective or macro perspective in your market that's sort of dumbing this number down?

No. So I'd say overall the major fuel demand forecasting entities project flat to declining fuel demand. I think EIE's latest numbers are kind of down 1%. So, being up 1%, you are -- you may have a quarter in which demand grew, but over the long run you are taking share at that level.

When we've had higher comps it's typically been in a falling market environment where we are able to put a little more price on the street and make that margin price trade-off. Certainly January was a good margin month. It was a good volume month. But we started seeing a run-up in February and March.

So we were actually pleased with the 1% growth overall. There's nothing from a macro standpoint -- nothing certainly from a competitive standpoint either that we see concerning.

Okay. And then on RINs, you did 54 million at a good price; 38 million a year ago. But you from running 54 million I think in the fourth quarter and now in the first quarter of this year. Is that number sustainable or are you just -- I'm not sure what your total annual output is overall. I thought it was about 150, so you are running ahead of it.

Yes, we are running a little bit ahead, partly because our proprietary blending operations were a little bit higher than before, so we generated some more RINs. I think ultimately sustainability is going to be a function of RIN prices, which are a function of supply and demand set by the RFS mandate, for which we have no answer in sight. So we'll get some early proposals I'd guess in June based on the most recent announcement, and hopefully we'll all have a little bit more insight after that.

Okay. Thank you.

Bryan Hunt, Wells Fargo.

Thank you. I was wondering if you could delve a little bit more into what you are seeing on the merchandise side and what your outlook may be for, one, inflation on packaged goods, and two, inflation on tobacco, whether you are anticipating any additional price increases from the tobacco companies this year?

Sure. I think you will probably want to talk to them about their schedule for price increases. But you know you've got categories like cigarettes and carbonated soft drinks in particular, and certain candy products that are flat to declining. And we've seen pretty much consistent price increases that are maintaining sales at a more constant level. And so I think they have a rhythm in which they do that and the retailers can anticipate that.

But we don't know them until they are firmly announced. So I think any of the categories in which we are seeing unit declines, I would hypothesize and expect to continue to see price increases. And we monitor both unit declines as well as the sales to get a good sense of what the traffic looks like.

I think what's important for us is the continued innovation in packaged beverages and snacks and other tobacco products that allow us to offset the unit decline. And certainly the larger 1200 square-foot stores allow us to sell more units, independent of what the prices are doing.

The second question is, when you look at the fuel price decline, some of your peers are reporting a little bit better elasticity as the consumer takes those savings and buys merchandise. I was wondering if you could maybe talk about what your insights are, on what the consumer is doing with the excess dollars or at least in your stores.

So the first thing I would do is segment the consumers maybe into two groups. We talk about the lower to middle class consumer. It's our customer, it's Walmart's customer and to what extent have they benefited relative to the middle income and higher income bracket consumers.

Our view is that lower income consumer is pretty hard-pressed still these days as we haven't seen the commensurate rises in wages and income and the like. So I think that's kind of point one is who is your consumer.

I think part two is you've got to look at the store format. We run typically with smaller kiosks, etc. And so in terms of upgrading products, we are seeing that both on fuel and certain tobacco and other products to more premium products. But with the limited formats, you don't see as much switching dining occasions and buying prepared food at our stores, because we don't offer that versus some of the bigger box stores.

You know we've looked at this pretty thoroughly, and when you take out a number of the factors that are known, there's not a whole lot left that we can point to and say, hey, there is this gasoline windfall that we are seeing in our site. Conversely, when prices do increase -- which they will do -- we are not expecting to see a fall off as those dollars are taken away from the consumer. So I think over the long-term we feel pretty comfortable and we are hopeful that the overall consumer environment for the low income consumer will continue to get better.

And then my last question, I was wondering if you could segment for us the openings this year between Super Walmarts and Walmart Neighborhood Markets, and maybe give us a little bit of insight into the relative performance of locations -- the performance of those locations on a relative basis. Thanks.

Right. So we are not opening any Murphy USA stores in front of Neighborhood Markets. We have around 30 that we have opened in prior years, but all of our future growth with Walmart is in front of Supercenters. And that's our strategy with them. And our express stores that we build adjacent to Walmart where they don't have a carve-out or an out lot to give us, we are doing those in front of supercenters only.

You know, in terms of performance of our Neighborhood Markets relative to our Supercenters they don't generate the same level of traffic. They don't generate, as a result, the same level of fuel sales. And I think we shared some of that in our analyst day presentation.

Our view is that the Supercenter creates a level of traffic that is necessary for a standalone retailer like us to be profitable and generate good returns. But a Neighborhood Market would be much more challenging for a standalone operator.

Thank you for your time.

Matthew Boss, JPMorgan.

Good morning, guys. This is Esteban on for Matt. As you guys begin to ramp your store growth over the next few years, can we expect to see higher than your longer-term 50 basis point and annual merchandise margin expansion?

And then on tobacco declines -- they've been a little more muted lately. How much of this do you think is the consumer has more money in their pockets versus you taking share from others? Or is there anything else causing this?

Yes, so I think on the first question around -- on margins, where we still have a large, large base of kiosk sites -- and while we are making improvements on those with the super coolers and the refreshes, they are still going to be predominantly tobacco. And so it's a big, big base from which you are trying to move with the new stores. So I'd say for right now, kind of more in line with what we talked about before.

Remind me of your second question.

On the tobacco decline.

So we saw price increases there that have been passed through. We've seen some shift in the competitive environment around MLP -- that has been helpful. And so I think certainly first quarter last year we had something like an 8% quarter on quarter decline. By the fourth quarter last year we were at 3.5%. So we are starting to see that negative trend decelerate a little bit.

I think there's just a number of factors in there, but some of it is price and margin versus units. So we are continuing to see units decline, but they have slowed also.

Got it. And do you still expect to complete your $250 million share authorization by this year end?

Well, that's the time we've given ourselves, and as we said, that's our current plan to do that. We are still having to do it under the 10b5-1 plans until our spend restrictions are lifted in September.

The only thing that we see that would get in the way of that would be accelerated growth opportunities for which we would need to use the cash. But right now we've got a balance sheet very well-positioned to be able to complete that. That was our stated intent.

Got it.

John Lawrence, Stephens.

Thank you, good morning. Andrew, would you -- over to your question, would you just take and go through the gross margins just a little bit more and talk about sort of the breakdown of when you were talking about the rebates? And I guess sequentially, cigarette gross margin is down a little bit, and sort of talk about those back and forth. And sort of what do you think is going on with the consumer with that, because it looks like cigarette gross margin held down the margin a little bit?

Yes, so I think unit margins overall were flat quarter on quarter at $0.14. So the tobacco gross margin dollar decline of just over 2% was actually a positive change. Beverages -- beer, wine, liquor, general merchandise -- all our main categories were positive. The candy category -- there were some timing issues. Salty snack, alternative snacks were all positive. So we felt very good about the overall performance of the merchandise categories.

And when you mentioned those rebates, if you true up the rebates how much of a difference? Is it material?

By the end of the year we expect to be right in line with our prior guidance, so just timing issues.

Okay. Great. Thank you.

And then, John, we also run different promotions at different times of the year and sequence those a little bit differently. So I think at the end of the day it's all about the overall calendar, and by year end we expect to be there on that front.

And remind us on the expenses that you are making some investments -- remind us what some of that investment spending is that may not be exactly going apples to apples against the comparisons.

John, I'll take that. This is Mindy. We have several million dollars in expenses that we expect over the course of the year, some of which have already hit in the first quarter. This pertains to our ASAP project that we've talked about before. That's the 16 projects that we are going to complete over a three-year time frame.

Since we already have seven projects in progress, we have already incurred a few million dollars worth of those fees. But we do still expect, at least at this time, to be within our guidance range for SG&A of [$120 million to $125 million]. We may be at the higher end of that since we are actually bringing some of those ASAP projects forward in the calendar from when we thought we were going to have those.

But the ASAP project is expected to be about $15 million of annual benefit, but it's not without cost. So the cost for the entire project over the three-year life would be between $25 million and $30 million.

$25 million and $30 million; and is there any way to breakout how much of that project was spent in the first quarter?

It's probably a couple million dollars in the first quarter.

Great. Thank you so much, appreciate it.

And, John, some of that also includes systems upgrades that we would be doing anyway, and foundational projects. Some of that is just capital spend or operating SG&A spend that we would need to be doing as part of our business regardless.

(Operator Instructions) Chip Saye, AWH Capital.

Hi, guys. It's Austin Hopper. Thanks for taking my question. You talked about this a little bit, but you mentioned that RINs were up due to a delayed EPA ruling. Just -- and if you could just kind of remind us of the dynamics of that? Thank you.

Of the RIN prices or the EPA ruling?

No, the delay of the EPA ruling and how it's kind of impacting RINs and how that can kind of play out. Thank you.

So I think ultimately this is just expectations on what the volume mandate is going to be. So you've got refiners that are obligated parties that have to meet those obligations. And we are sitting here in 2015, and we should be expecting our 2016 guidance, and we have yet to receive the 2014 or 2015 guidance.

So it's like many other things in our industry and others. We are operating in a world of regulatory uncertainty, which frankly isn't helpful. So if the supply of RINs generated by those that blend, and the demand for RINs by those who have the obligation is not clear, ultimately based on what the mandate level is going to be, there are going to be periods where the market thinks RIN supply is either long or short. And that effectively drives the prices. So we are a price taker in that environment, and we generate RINs from our blending. And that's kind of the basic fundamentals of it.

The timing of the proposal in June is kind of what we are expecting. It's not going to be the rules. There's going to be time for people to respond to those. And so it's still not clear to us exactly when we are going to have regulatory certainty in this area, so we expect to continue to see price volatility as people take different forward views on what the supply/demand outlook for RINs is going to be.

Great. Thanks.

Thank you. I am showing no further questions. I would like to turn the call back over to Andrew Clyde for closing remarks.

Right. Well, thank you everyone for attending and we look forward to joining again next quarter. Thank you very much.

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