Murphy USA Inc (MUSA) 2017 Q4 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Fourth Quarter 2017 Results Conference Call. (Operator Instructions) Mr. Christian Pikul, Director of Investor Relations, you may begin your conference.

Great. Thanks, Kelly. Good morning, everyone. Thanks for joining us today. With me, as usual, are Mr. 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 after some closing comments, we'll discuss our 2018 guidance and then 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 a further discussion of risk factors, please see the latest Murphy USA Form 10-K, 10-Q, 8-K and any other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements.

During today's call, we may also provide certain performance measures that do not conform to generally accepted accounting principles, or GAAP. We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the Investor section of our website.

With that, I will turn the call over to Andrew.

Thank you, Christian. Good morning, and welcome to Murphy USA's Fourth Quarter 2017 Conference Call. I assume you have all read through our press release regarding our fourth quarter and full year 2017 results, so I will keep my comments and remarks brief in addressing the quarter and full year performance. I want to make sure we have ample time to discuss 2018 guidance and take as much Q&A as time will allow.

There are 4 main takeaways I do want to start with. First, our business model remains very resilient. I'm very pleased with the resilience of the business and how it's demonstrated over the past year, overcoming a difficult first quarter that caused us to revise our guidance, and then persevering through severe events that impacted our stores, our employees and the communities we serve.

As shown in our year-end results, we delivered 2017 EBITDA of $406 million, delivering results within not only our revised guidance range of $340 million to $410 million but also within our original guided range of $400 million to $450 million. To get there, we got help from our fuel business through a bias towards margin capture around the disruptions as well as strong second half and Q4 results from our merchandise categories. Further, while under pressure in the first quarter of 2017 showing $0.00 per gallon margin contribution, the product supply and wholesale activities prove the ability to continue generating between $0.02 to $0.03 per gallon annually to our total fuel contribution margin, in line with our long-term guidance. This business will always be subject to headwinds and regulatory uncertainty, which is why we have built a strategy, operating model and balance sheet that can perform in a variety of market environments. In 2017, we once again proved that resilience

Second, we continue to find ways to add value to the business. Total merchandise contribution was up $17 million in 2017, as we began to recognize the benefits of our year-long initiatives around optimizing value from our promotional offers and supporting key categories to drive better results. Notably, this improvement in merchandise, which shows a 4.4% increase in average per store month margins in the fourth quarter, comes despite lower fuel traffic and transactions. We are showing balanced and sustainable growth in all categories across all formats, so we are excited about the momentum we are bringing into 2018.

I also want to speak about tobacco specifically, as Q4 results showed strong customer engagement from a promotion that generated very impressive response rates and helped drive same-store margins up 6%. This level of customer uptake, which registered over 1 million unique participants in an 8-week timeframe, is a positive indicator of the kind of impact we believe a wider Murphy USA loyalty offer can generate. We remain on track with our pilot for the end of Q1.

We further bucked the industry trends and expanded our net store contribution and fuel breakeven requirement metric, as we continued to cut per-store operating expenses. As shown in the table on Page 3, station operating expenses, excluding credit card fees, averaged $20,800 per month in 2017, down from $21,400 in 2016, or a 2.6% improvement, resulting in approximately $10 million of financial benefit.

From a fuel perspective, 2017 was a relatively healthy year for margins, as we priced to maximize fuel contribution, especially in periods of disruption versus pricing per volume in a competitive marketplace. As we compete for customers with a larger number of low-price operators, our volumes are going to continue to be under pressure. We'll fight for our customers and customer visits with our refreshed stores, outstanding customer service, our loyalty program and with an enhanced offer in our stores, which brings me to the third point.

We are moderating our rate of new store growth, while transforming our real estate strategy. We expect to build fewer new stores in 2018, and this is really a function of several factors: First, it is more difficult to generate acceptable returns with higher land cost and escalating building cost. Even with some of the improvements we've made, fewer locations of the same type will meet our return hurdles, as we continue to allocate capital in a highly disciplined manner. Second, a lower rate of growth was always an outcome of Plan B that we announced in early 2016. I've been on record saying this is a finite growth business since we spun in 2013, and while there are still very attractive markets to build new stores, we must remain deliberate in where we choose to build and the offer we are providing customers.

As we take a longer-term view of the marketplace, we see more value in pursuing infill strategies in stronger markets versus dogmatically building our stores within the halo of a Walmart Supercenter. Walmart remains a world-class retailer and traffic aggregator, and they continue to draw customers to their brick-and-mortar stores. But attractive locations are not exclusive to co-locating with the Walmart, and there are fewer good locations left. Thus, we have retooled our retail strategy to put the right assets in the right locations to generate the right returns and better compete for customer visits, while staying within our capability set.

The fourth and final take away is we are well positioned as we enter 2018, with a strong balance sheet and free cash flow profile, to continue the execution of our capital allocation strategy. A direct outcome of a reduced capital budget is, of course, more free cash flow. Coupled with a lower effective corporate tax rate, we are in a very strong position to continue allocating capital to the best returns, which include share repurchases as well as internal investments to support new initiatives focused on driving additional value from our existing network of assets. Our leverage remains comfortably under 2.5x, giving us financial flexibility and optionality as we head into 2018.

And with that, I will turn things over to Mindy and then conclude with the discussion of our 2018 guidance.

Thanks, Andrew. And hi, everyone. Revenue for the fourth quarter and full year totaled $3.4 billion and $12.8 billion respectively, versus $3.1 billion and $11.6 billion in the prior period. This was largely attributable to higher product prices, and to a lesser extent, higher merchandise sales. Average retail gasoline prices per gallon during the fourth quarter and full year were $2.27 and $2.19 respectively, versus $2.03 and $1.93 in 2016.

Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, as previously mentioned, was $99 million in the fourth quarter and $406 million for the full year. This compares to $103.2 million in the fourth quarter of 2016 and $400 million for the full year. Net income was up significantly for the quarter due to an $88.96 million deferred income tax benefit as a result of the required reevaluation of our existing net deferred tax liability in accordance with the new lower federal tax rate. As a result, the effective tax rate for the full year 2017 was a negative 2.2% versus 37.1% in 2016. Total debt on the balance sheet as of December 31 was $881 million, broken out as follows: long-term debt of $861 million consisting of $494 million carrying value of our 6% notes due 2023; $299 million value of our 5.625% notes due 2027; and $72 million remaining on our $200 million term loan; and in addition, we are carrying $20 million of expected amortization under that term loan in current liabilities on the balance sheet. Using these figures and 2017 EBITDA of $406 million, our leverage ratio approximates 2.14, which is roughly the same as it was last quarter. Our ABL facility remains in place with a $450 million cap, subject to periodic borrowing base determinations, currently limiting us to $258 million at year end. And at the present time, that facility is undrawn.

Cash and cash equivalents totaled $170 million on December 31, resulting in net debt of approximately $711 million.

During the quarter, we repurchased 712,000 common shares for approximately $54 million at an average price of around $76 per share, completing our previously announced $500 million share repurchase plan within the stated 2-year time frame. That means, upon completion of that program, we continued to repurchase shares in the open market, approximately $29 million worth in the fourth quarter to end the quarter with $54 million in repurchases. We have spent an additional $17 million on repurchases so far in 2018. As we said in our earnings release, we remained committed to share repurchases, and we expect to conduct future repurchases in the same disciplined way, framed by our shareholder value model and for quarterly amounts consistent with our past history, subject, of course, to available cash balances and other demands on capital. There were 34.1 million common shares outstanding as of December 31, 2017.

So that brings us to CapEx. CapEx for the quarter, $61 million, bringing year-to-date CapEx to $274 million. As we will further address in the guidance portion of this call, our expected capital spending in 2018 will fall within the range of $225 million to $275 million. That consists of approximately $175 million for retail growth, approximately $40 million for maintenance capital, with the remaining funds earmarked for other investments, including various corporate initiatives and completion of our home office remodel.

That concludes the financial update, so I will now turn it back over to Andrew.

Thanks, Mindy. So let's review our 2018 guidance, and we're going to use our value creation formula components as a guide to that. So starting with organic growth, we are targeting up to 30 new stores and up to 25 raze-and-rebuild locations in 2018. This was versus 45 new stores and 21 raze-and-rebuilds in 2017. And there are several points I want to make around our new store activity. Building fewer, better stores is a direct and intended outcome of Plan B, if you recall our dialogue around the decision to build only Express-branded sites back in early January of 2016. We also took a judicious look at our Midwest stores and markets within that geography and decided in many cases, the returns just aren't there for continued new build investment in those markets. Third, in an industry that has seen a lot of new build brick-and-mortar activity the past several years, we remained disciplined with our capital and will not grow just for growth's sake. We remained disciplined with our investment, and we believe 2% to 3% unit growth is in line with other successful retail strategies that focus on quality over quantity. As such, we'll continue to invest in markets where we can generate good returns and continue to upgrade our network through raze-and-rebuild activity.

2018 will be a bit of a transitional year with respect to our real estate program. We want to put the right assets in the right location to generate the right returns, and that means we are focusing on the strongest markets to pursue infill activity in high-quality locations that may or may not be in close proximity to a Walmart. A logical outcome of this strategy is to build larger stores than our previous 1,200 square-foot locations, which in many cases were limited by the size of the lots we acquired near Walmart. We are optimizing our merchandise offer in a more efficient floor plan to provide 90% of the product that's in our larger format 3,400 square-foot stores into a roughly 2,800 square-foot box that can still be built modularly and efficiently. We will begin building some of these larger stores in 2018 and 2019, as our real estate team develops the pipeline for 2020 and beyond. As with all our investment decisions, we'll continue to be disciplined about our brick-and-mortar growth as one lever of our capital allocation strategy designed to maximize shareholder value.

Moving on to fuel contribution, we are adding a new guidance metric this year, total fuel contribution dollars, which is simply a product of our range of total fuel volumes at the range of expected margins. For the full year, we have provided a wide range of outcomes, from $575 million to $700 million, which won't necessarily help your modeling but is a function of the volatile margin environment in which our business operates.

We are providing annual retail fuel volume guidance of 4.1 billion to 4.3 billion gallons per year, which is a direct output of our average per store month volume guidance of 235,000 to 245,000 gallons per month. Given 2017 actual average per store month volumes of just over 245,000 gallons, we continue to expect downward pressure on volumes as long as the industry new build activity continues at the pace we have seen in the last several years. While some notable competitors like Walmart have dramatically reduced their brick-and-mortar investment of both neighborhood markets and supercenters, other public and private convenience store operators continue to open new stores in areas we operate. Although we expect some of the competitive pressures to diminish going forward, we expect lower volumes as a result of a highly saturated and competitive market, while still generating 3x the industry average with our low price position. We do have a number of volume enhancing initiatives underway, but we have not factored those yet into 2018 guidance.

From an all-in margin perspective, including our PS&W activities plus RINs, we expect a range of $0.14 per gallon to $0.165 per gallon versus the $0.1637 per gallon we delivered in 2017. With the run-up in oil prices, we believe the market presents more balanced opportunities for continued volatility, as prices seesaw between periods of OPEC cooperation and U.S. shale expansion as well as other factors.

Moving on to fuel breakeven and starting with merchandise. On the merchandise side of that equation, we will continue to see growth in contribution dollars. We are guiding to the same sales ranges as 2017 due to downward pressure on the tobacco category from a top line perspective. However, tobacco margins have remained stable due to manufacturing pricing, promotional programs and new products that we take advantage of. And when coupled with higher nontobacco sales and margins, we are guiding margin contribution to $390 million to $400 million from a sales range of $2.4 billion to $2.45 billion.

As a final caveat around merchandise performance in 2017, I will point out that we exited a couple of product categories that made the comps a little more difficult in 2017 that we haven't discussed before. To heighten customer security and reduce unnecessary complexity in our merchandise offer, we no longer sell fuel additives blended at the pump, nor do we sell certain brands of prepaid gift cards that were susceptible to fraud. As such, the nontobacco side of the business actually performed even better than the year-over-year comp suggests.

The second component of the fuel breakeven equation is the retail station OpEx expenses incurred at the store level in certain fuel functions supporting the store network. Our long-term stated goal is to beat inflation, which sets the brackets on our guided range of a 0 to 2% increase in operating costs. We still have meaningful value creation opportunities ahead of us, and we will still be able to move the needle by executing on a higher number of smaller improvements. But at the end of the day, we are faced with the same challenges other retail operators are facing in the form of higher wage pressure, increased benefit expense and escalating fuel support costs. Rest assured, cost discipline remains a cornerstone of our operating philosophy, and we will continue to make the business more competitive by focusing on remaining areas of inefficiency, leveraging technology investments and executing more consistently.

Moving on to corporate cost. Our guidance for SG&A expense will remain the same as 2017, in the $135 million to $140 million range. We will continue to invest in our home-office capabilities and IT infrastructure improvements at a consistent pace. 2017 SG&A expense included a $10 million investment in our community through accelerating charitable gifts into 2017, that we would have ultimately made in future time periods. The passage of the Tax Cuts and Jobs Act created the opportunity to do this and a couple of other tax-related strategies that improved our after-tax cash profile by over $2.7 million at the end of the year.

As previously suggested, our effective tax rate is expected to be between 24% and 26%, including state taxes, down from the upper 30s range in prior years.

This brings us to capital allocation. And from a CapEx standpoint, as a function of moderate store growth, we expect our capital expenditures to fall in a range of $225 million to $275 million for 2018.

For net income, a combination of the above guided ranges, coupled with expected offsets within the ranges, results in EBITDA guidance of $390 million to $440 million. After adjusting for depreciation, interest and other items as provided in our supplemental disclosure, this translates to a net income range of $155 million to $195 million. We'll be thoughtful in our approach of how to redeploy incremental funds freed up from tax reform to make the appropriate investments in our business, our people, all for the long-term benefit of our shareholders. Our free cash flow will continue to gravitate towards the highest return opportunities in order to maximize shareholder returns. We remain committed to share repurchases, and as announced in our earnings release, we expect to opportunistically and consistently be in the market in a disciplined manner subject to available cash balances and other demands on capital.

With that, I will open up the call to Q&A.

(Operator Instructions) Our first question comes from the line of Carla Casella of JPMorgan.

This is [May Nin] on for Carla. Just looking at your capital structure, do you have any thoughts on perhaps calling on refinancing the 2023 bonds come August?

It's something that we will take a look at. And that's going to depend on, first of all, the premium that we would have to pay to call in those notes as well as what the rate environment is. So we will take a look at it, but we have not made a decision at this time.

Great. And second, thoughts on -- what are your thoughts on the wage increases, both on the consumer base point of view and your labor cost point of view going forward?

Yes. So on labor cost and wages, we want to be competitive in all of our markets. And so, we use geographic wage rates and benchmarks to make sure we're aligned there. So when we see pressures in those markets, we're able to adjust accordingly and be competitive. Certainly, one of the challenges in the convenience store industry is the high turnover, especially at the starting cashier rate. But that also allows you to then maintain lower wages, as a lot of the entry wages don't change year-over-year versus a business that might have significantly lower turnover in the business. And so, that's something we watch carefully, because we want to remain competitive in those markets, have the right employees and just manage that carefully.

Yes. And additionally, on -- how about from the consumer base point of view, are you seeing any changes in the way that people purchase and their behavior in that and such?

If the question is, if higher wages in -- across the U.S. has trickled down to consumers in our stores that we can attribute to more traffic or less traffic, I'd say it's too early to see anything at that point. And frankly, it would be hard to isolate that from a lot of the other factors that are going on.

Got it. And lastly, can you give us any color on how your Texas markets have been performing, just overall?

Our Texas markets?

Yes.

Okay, sorry. I couldn't understand you. Our Texas markets remain some of our strongest markets. We have 20% to 25% of our stores located there. And we've always had a very strong position there. They performed -- I guess they were challenged [end of] Q3 and in the beginning of Q4 with the storms, and so we've seen the recovery coming out of that. Good markets typically beget more competition, and so you've seen continued new build activity in those markets from a variety of competitors. That said, our value proposition remains very strong. That's where we've done a lot of our raze-and-rebuild activity. And the raze-and-rebuild performance post preopening has been very solid. So we continue to view Texas as a very strong market but also a very competitive market.

(Operator Instructions) Your next question comes from the line of Ben Bienvenu from Stephens.

I wanted to first start with CapEx. Mindy, could you provide a little bit more color in parsing out the buckets for CapEx? And then, as it relates to tax reform in relation to CapEx, is there anything that you've earmarked in terms of use of proceeds from tax reform within the CapEx guidance, or is the inference perhaps that you intend to use the majority of the proceeds for -- to share repurchase?

Well, to get to your second question first, if I may, the tax reform and the cash impact that, that provides gives us some optionality, and we will be thoughtful in how we use that. We obviously put together our [2018] formal plan before we knew that, that was going to pass. And so, the way to think about that is, it does provide additional freeboard and optionality for additional repurchases or other investments that we may choose to make. And some additional color under the 2018 CapEx, as I said, we're guiding to around $175 million of retail growth. And so, that's up to 30 new-to-industry sites that we will construct as well as up to 25 raze-and-rebuilds. We also have a bucket in here for a land bank, as we continue to be aggressive in purchasing land for sites that we will build in future years. For maintenance, it's comprised of the same things that usually is, although, I will say it's down a little bit from last year as a result of our refresh program is mostly done. We will be touching about 250 locations this year, but it's a much lighter touch than previously. So we have roughly $4 million to $5 million in the budget for that. Our super cooler investments will continue as we finish out that program. We're going to touch roughly 150 sites there. So that's roughly $8 million in capital that is classified under the maintenance portion. And then for the rest, we have the completion of our building remodel. And then investment in corporate and other initiatives comprises the remainder of that amount.

Ben, the one thing I would say is, while tax reforms certainly created some benefits and flexibility, there is nothing at all about our capital allocation discipline that's going to get looser. It's going to remain as tight as it's ever been.

Okay, great. And then this could be a question better suited for an offline discussion. But if I take the midpoint of your guidance assumptions that you provided, I have a hard time getting to even the low end of the EBITDA guidance range you provided. So I'm wondering if you could help me understand, sort of, what assumptions are baked in to the midpoint of the EBITDA guidance, recognizing that they might not all be linear?

No, that's a good point. And I suspect you're not the only one who will look value for some offline discussions with Christian and his team on that. The reality is, there's a lot of offsets in the business, and so if we're challenged with a difficult fuel volume environment, you may see margins improve from that. There may be independent relationships between that and merchandise, as we demonstrated in Q4, because of other promotional activity that we went on -- we took on. Certainly, there's a relationship between the operating cost and if we have lower transactions, whether it's in payment fees or it's in just staff labor hours allocated to the stores or other variable costs associated with the business. If we underperform from a earning standpoint, our compensation metrics underperform and SG&A is lower. And then there's other specific levers we can pull there. So there's a whole set of offsets there. And so, I think when we fell from an overall guidance range, even though we wanted to build a set parameters, that over any quarter in the year may underperform, I think we've demonstrated the resilience in our business model, our approach to dealing with adverse quarters, that we can still bring, kind of, total earnings within a much tighter range there. So I think 2017 was an excellent example of that. Q1 started off in a very challenged way, and we were still able to deliver the numbers. I think we felt like we left money on the table in 2017 in terms of total performance versus our potential. But it gives you an example of how we believe we can stay resilient. So I hope that helps. But there's no way you can, kind of, take the midpoint of all those things that come off the midpoint. There's just going to be some interrelationships that we feel confident in when we give you that overall guidance range for EBITDA.

Understood. That's helped. And then if I could just sneak in one last one. On the PS&W, to put it bluntly, we whiffed pretty hard on our estimate here in the fourth quarter. And I'm wondering, all the indicators that we monitor suggested to us that we should see some improvements in that profitability line sequentially and year-over-year. Can you discuss some of the factors? I know this is kind of resetting the clock on describing the PS&W business, but why was that business under pressure in 4Q in light of the backdrop?

Well, I think if you look at refining coming out of the storms, utilization continued to go back up. And the markets kind of showed its resilience to that. I think from a RIN standpoint, while RIN started off higher in the quarter, it came down as you had more regulatory uncertainty towards the back end. I think if you look at the 3 months at $0.027 all in including RINs, while it was lower than last year, that's clearly within our range. And so I guess we'd say, we didn't see that much awry from a market standpoint, it's just a lot of the same kind of general pressures out there we've seen. Certainly, with the rising price environment, there were some benefits around the uncontrollables side of it, the inventory valuation. But typically, that's not as material a number.

Your next question comes from the line of Ben Brownlow from Raymond James.

Andy, on the retooling, you've touched on the retooling of the real estate and kind of focused on the fill-in opportunity. Are all the new builds in 2018 going to be adjacent or still strategically targeting a radius around Walmart, and can you just touch on that kind of 2,400 square-foot model that you're looking at, some of the -- any metrics that you can give there?

Yes, so the up to 30 new-to-industry stores, probably 2/3 of those are going to be kind of the traditional 1,200 square-foot stores, in close proximity to Walmarts, a little more than 1/3. And then you have the remainder of the larger format stores. We already had plans for some of the larger 3,450 square-foot stick-built stores. And we believe a couple of those will be the modular 2,800 square-foot stores. That's actually 2,756 square foot. We've built some of those in the past. We like the fact that they're modular because you get them built for less, you get them up and running more quickly than the stick-built models. And the merchandise performance really isn't all that different from some of the larger square-footed stores. We've -- for the limited sample of those that we have in our network to date, 36, their fuel volume performance is well over 300,000 gallons, largely because of the markets they're in. The merchandise sales are well over $230,000 in sales per month at higher GP, because you've added a couple of new cooler doors, you have a beer cave, then you have some additional grab-and-go prepared food offers. But as I said before, we want to stay within our capability set. And so, we're not getting into food in a big way through this. So we believe it generates very attractive after-tax and levered returns. And so, if you compare that to the 3,450 stores, you're getting kind of the same or more bang for less bucks, so you get a higher return. And I think compared to the 1,200 square-foot stores, it's really just a function of how many great locations are left where you would put a 1,200 square-foot store. And with fewer and fewer in the halo of the Walmart Supercenters available, we believe the infill strategy in the strongest markets is going to be a better deployment of capital. And we'd already started some of that with the 3,450 square-foot stores in Arkansas and Colorado and Louisiana. We just believe this is a refinement to that where we can do it better, faster, stronger as we go forward.

That's helpful. And on the merchandise margin, that improvement was significantly better than what I had modeled. And it looks like a lot of it came from -- the bulk of it came from tobacco, and you referenced the loyalty program earlier in the call. Can you just give a little color around that? It seems like it's continuing to run through in the first quarter. And why the growth rate moderation on margins that you're guiding through 2018?

Yes. So this was our participation in a manufacturing program that other competitors had run prior to us. So we had periods in Q4 where we were running it with fewer other competitors running it. And I think over 40% of tobacco consumer awareness is through word of mouth. And so, consumers know where to find value with those products. And so, with the best deals out there, we attracted, kind of disproportionately, a higher level of traffic as a result of that, and as we said, independent of fuel traffic. And I think with our unique, distinctive up-selling ability, we were able to execute on that program at a very high level. So as we enter into 2018, we are going to be amongst many competitors that have this program, and while we think we can execute that program at a very high level, others will be doing it at the same time. And so, 2017 Q4 was a bit of an anomaly from our standpoint, and if you recall in the third quarter of 2017, we saw some pressure in part because that's when our competitors were running that program. So that's why you see the moderation as we guide throughout 2018. I think the key point about this is, as we introduced something through our sales associates at our store that's unique, new and different, we were extremely encouraged by that up-selling ability to something new that had loyalty program attributes to it. And that gives us a lot of confidence as we get ready to pilot that program at the end of Q1.

Your next question comes from the line of Bonnie Herzog from Wells Fargo.

So I wanted to talk to you about your retail fuel volumes. I guess, I'm just trying to better understand some of the pressure you're facing here. I know you've touched on it a bit, but any more color would be helpful. And then, what's a realistic long-term outlook for retail fuel volumes, and curious how you're seeing maybe the Amazon effect impacting your business, and have you guys considered partnering with them in any way?

Yes. So let me start with sort of the pressures. I mean, they are the same ones that we see, our competitors see and those in other -- in the retail industries that sell common goods like fuel and tobacco and the like see. I think, unique to Q4, we started October in the aftermath of 2 of the biggest events that hit our markets in Texas and Florida. And as the supply situation sorted itself out, we kind of shifted from pricing for margin to getting more aggressive to putting some of that margin on the street as we would do in a falling price environment towards volume. And for a period of time, we saw the kind of volume response we would expect to see. Unfortunately, we saw, pretty quickly, a major run-up in crude prices that persisted for the remainder of Q4 and into Q1. And so, that's a pressure that we see every year at some point, rising prices, falling prices. And during those rising price periods, we just aren't going to be as aggressive in pricing, given the margin compression, and we always expect to bleed off, during those periods, 2% to 3% in volume. Similarly, when prices fall sharply, we can price more aggressively if all the conditions are in place, and we can pick up 2% to 3% in volume when that happens. So one of the positives about a significant run-up in crude prices as we're now at a higher level, and at some point in time, you'll see shale expansion and over-drilling and prices will come back down, and we'll be able to benefit from that. The competitive pressures just remain ongoing, and where maybe in a prior year, when a falling price environment, we would have a monthly volume of 102% or 103% in those periods in 2017, we are close there to being just right at 100%. And so, we have seen a kind of a 2% to 3% decline in our average per store month volumes kind of structurally from competition. We've kind of anticipated in prior years that being closer to 1% to 2%, but we did see competition increase in a number of areas. One of the things that we had hoped to offset that with was the performance of our ongoing new build program, and certainly, the earlier build classes '15, '16 and some of '17 in the Midwest markets and the remainder of the Walmart 200 program just didn't perform and meet our expectations. I think with our larger format Express stores, they did. So some of that offset wasn't as meaningful as we had hoped. I'd say the raze-and-rebuilds continue to impress us in terms of when we're adding dispensers, adding the bigger store, we're getting the rebound there. But of course, you take those stores out of commission for 4, 5 months and then you bring them back on. You don't see the immediate impact there. But as we have more and more of those in the portfolio, we believe that, that will start to have a meaningful impact there. So I'd say the pressures are what they've been, right? You've got some one-off events that are different in their type of impact year-over-year. We certainly would not want to see 2017's events repeat itself. We got the falling and rising prices. And then, you've got the ongoing competition. I do think the number of Walmart neighborhood markets that were built in the prior 3 years was a meaningful number and it took shopping occasions away from the Supercenters and those shopping occasions impacted fuel visits at our store. But as you saw on their Analyst Day, they've now guided to 25 stores in total for the entire U.S. And so, I would say that competitive pressure has moderated significantly.

That's really helpful. And then, I mean, could you touch on Amazon and the effect we're seeing, whether it's related to traffic or consumer behavior changing. Just would love to hear from you, how you're thinking about that, and do you foresee any plans to work with them in any fashion? I'm just thinking, drop locations or anything there would be helpful.

Yes. I mean, I think this is where you had to really get into customer segmentation. I know how many packages show up at my office, my home, Mindy's office, next door every day from Amazon. And it certainly adds a lot of convenience from that standpoint. But I still drive to Walmart and Home Depot and all the other places. I'm just not picking up all of the same items but I'm still making trips there. I hate to ever think of myself as our average customer, but if you look at our demographics, my belief is, not as many packages from Amazon are showing up on their doors as some of us on this call. And I think that's really what you've got to look at. I think the pickup points at the Walmart Supercenters delivers a last-mile solution, especially for these heavy dry goods, dog food, bottled water, et cetera. But it isn't necessarily reducing the number of trips in and out of the parking lot. It may just be a different type of trip. So I think it's something we can't just overgeneralize or use our own perspectives or the perspectives of metro America to apply to our business. I think our unique customer segments, where we're co-located, and even the, kind of, the more rural markets that we're in, is going to suggest that it will impact us differently than maybe someone in a more metropolitan market with a different customer segment who has a whole different set of shopping experiences day-to-day. Look, there are a number of things that, between Amazon Cash, Google Pay, Walmart Pay, Apple, et cetera, that from a payment systems standpoint, creates opportunities for all retailers, and it's certainly something, as we roll out our EMV solution and continue to accept more and different types of payment mechanisms, including those with our loyalty program, that we will try to fully take advantage of. So it's too early to say what those partnerships look like. But there's more and more out there, and as consumers move towards those, we want to accept as many payment methods as we can, especially if those drive down the very, very high cost of payment cards in our business. It's almost a $0.03 per gallon cost for our business and it's one of the biggest costs out there. So hopefully, there could be some improvements on that front.

Your next question comes from the line of Chris Mandeville from Jefferies.

Vast majority of my questions have already been answered. But just to follow back up on one of Ben's questions earlier, with regards to the merchandise margin and how that tobacco promotion helped provide a 100 basis point uplift in the quarter, how that may not be necessarily unique going into 2018. That's somewhat of the reason as to why we should see a bit more moderation on margin expansion. Andrew, when it comes to the guidance itself and your loyalty program in totality as it's launched or piloted at the end of Q1, what is embedded in the guidance expectations for that?

We have none, as I mentioned in my notes, any of sort of the volume or traffic enhancing initiatives, including that loyalty program, none of those baked into our guidance. So we're going to have pilots in 2 major market areas starting at the end of Q1. And given that loyalty is really an outcome of changing consumer behavior, you've got highly loyal customers today, and you're seeking to move their behavior. You've got low share of wallet customers today and you're trying to change their behavior. And you've got 0 share of wallet customers and you're trying to change their behavior. And so, we need to look at this in a very thoughtful way, and it's going to take some time to make sure that the unique way in which we've designed this, the unique platform in which we've build it on and the way we are going to direct different segments of customers, given their starting point, to make sure that this is going to be an economically viable, attractive, meaningful program for us. As an everyday-low-price retailer, we don't have the ability to do high-low pricing and price discrimination that so many of the existing loyalty programs have, where they've raised prices for everybody and then lowered them for those who are part of the program. We could not do that because our core customer comes to us every day for that low price of fuel and tobacco and other convenience items. So we've designed something that's unique. We understand the economics that need to make it work and the customer behaviors that are needed to generate those economics, and so we're going to take our time and do it right. We've always said, we're not going to come out with a me-too-late solution. This is going to be a unique solution, but the economics have to work and we have to give it some time to make sure we're changing customer behaviors.

Okay. And then on capital allocation and the discussion around use of free cash, I just wanted to clarify, not having a formal buyback program out there, is that pivot a result of the fact that you just simply didn't know what tax reform was going to provide you when you established your 2018 plan? Or is there something else that we necessarily need to be cognizant about, whether it be thoughts of accelerating the establishment of the dividend or something along those lines?

Exactly. Here's the way I would describe the language in the release. That is our formal announcement. It is a good-till-canceled announcement, and we just decided not to bracket in a conventional way of a big number over a time period. But we remain confident in our ability to continue to do that, subject to other uses of cash and capital and market conditions. So consider that our formal announcement as good-till-canceled.

Got it. And then the last one for me. Marathon brought it up earlier this morning and you guys alluded to it a little bit in your press release as well. Andrew, I just was wondering if you could update us with regards to the statements of regulatory uncertainty? Not just what's out there to date, but also, if at all or at least remind us what type of financial implications it could have on the company?

Yes, and is there a specific area like RFS that you're thinking about, or other areas or regulatory uncertainty?

Well, so that's what Marathon had specified this morning, and I was just under the presumption that, that's in fact, what you were referencing in your release as well?

Yes. Look, I think there's regulatory uncertainty across the board, right? We started last year with uncertainty around [FSLA] and certainly, some competitors did things that had a bottom line impact. It didn't impact us because of how we responded. I think the thing about Q1 with the certain market behaviors of certain participants and how news and rumors and perceptions kind of echoed through the RIN market and what that did on prices, the RIN price became disconnected from the all-in supply margin, one would expect. When you have someone propose a cap on RIN prices, when we know that relationship exists and EPA has gone out of their way to show and improve it and deny petitions because the inner relationship exists between the RIN price and the supply margin or the crack spread the refiners earn, they say we're going to cap RIN prices without putting a cap on crack spreads for refineries, just creates that same type of uncertainty. When you have firms filing bankruptcy, specifically blaming it on that cost as opposed to assets that are stranded from advantaged crude and imports and the like, there's just a lot of noise that gets built up on that. But I think over time, groups like the EPA are able to come back, get all the information and say, "no, this is what matters, and this doesn't matter." I think we'll get to the same outcome, but there will be market noise and perceptions that impact the RIN market, which is its own independent paper market. And if it gets disconnected from the supply markets for which, over the longer term, there is a relationship with, those are the things that could impact our business. I wouldn't expect to see structurally a change as a result of it because of that inner relationship, but I would say, you could have periods like Q1, where it could get disconnected and it's no different than what we saw in Q3 of 2013 as we were spinning off, where probably got -- RIN prices got overinflated relative to what they should have been. So I think that's the dynamic that we have here. It's not going to impact our long-term business one bit, but there can be short-term noise that we could be a beneficiary of or we could get impacted. And kind of around the RINs topic, it's typically been a lot of effort that brings down those prices relative to the relationship we'd expect.

Right, so maybe just to summarize there, there's perception and then there's reality. And at the end of the day, regardless of what happens with the RFS mandate and the waiver program, Murphy, as a whole, you'll expect that $0.02 to $0.03 of net contribution between PS&W and RINs on an annualized basis.

That's correct. Because if you didn't have that, if you think about the working capital that we employ or anyone who supplies their own proprietary barrels, the value of the line space, the other capital or working capital involved in that, if you're not getting a benefit of that then you're not getting a return on that capital and the market should act very efficiently around that. So we believe that, over the long term, that's how we'll be remunerated and others who have similar positions will as well.

And your next question comes from the line of Ryan Domyancic from William Blair.

So for 2018 guidance, the high end of the retail fuel margin guidance is a bit above the typical long-term guidance. Not too much, but is there anything to read into that? Are you adjusting the way you price in 2018, getting sharper or doing anything differently?

No. I would just say, look, over the last 2, 3 years, we've made improvements to our business on a number of fronts and those things kind of cumulatively add up. And so I think we're just revising that to say, that's what the potential of what this business can generate. And so, it's really nothing more than that, Ryan.

Very good. And the second question. As you mentioned in the press release on your SG&A guidance, that includes investments for IT and corporate projects. Any way you can talk about what the dollar amount of those investments are? And then how many years are those investments expected to persist, kind of when do they fall off? Is it next year, the following year or further on?

Yes. So I'll let Mindy provide any specific details on that. Some of that's in the CapEx as well. I mean, I think if you think about our company, right, as a spinoff subsidiary under a refining and marketing subsidiary of an exploration and production company, we've had to really build some of our foundational capabilities to be a standalone retailing company. And there's just frankly, some areas or especially around IT that we hadn't invested in. In 2017, we rolled out the latest version of our PDI enterprise software accounting system at the field and the home office. The standards for PCI compliance continue to go up, and we're committed to provide secure, safe environments for consumer data. That involves switches at our stores and various things that we have to roll out. There's other homegrown systems that we've replaced, like our fuels pricing systems and others, that we're looking at. And so, just across the board, there's just a series of upgrades and enhancements, some of which are past due, others are just getting up to the right standard. And so, I'd say there's another year or 2 of that kind of spend. And then at some point, you get out of the foundational spend and you start looking at opportunities that could then be even more business-enhancing. And certainly, with our loyalty program providing a successful outcome of that, you start focusing more around marketing analytics and the tools and the data environment to be able to better target customer segments and the like. And so, I would expect more of the nature of the spend to change from foundational to business enhancing than the total amount to spend. I think the -- one of the key things to note is that from a scale standpoint, SG&A per store is going down, and that's something that we're mindful of to make sure we're getting the scale benefits out of our spend.

And Ryan, to answer your question about the actual quantities we're talking about here. So embedded in the G&A guidance on the expense side, somewhere roughly $5 million or so additive to SG&A for those type of projects. The bigger impact is in the CapEx part of the budget because we are able to capitalize a lot of this labor that we are spending. And so we're talking here $20 million, $25 million of CapEx. Not all of that is foundational. Some of it is business enhancing, and some of it, quite frankly, will never go away because you're always going to have things that you need to look at and replace over time. But to echo Andrew's comments, we would expect that the bulk of these larger expenditures will be over this year and we'll be able to turn our attention to more value-enhancing type projects. But I would expect us to always have a layer in both expense and in CapEx for projects of this size.

And there are no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Thank you very much. We certainly appreciate all of the questions as we've wrapped up 2017. We're looking forward to a exciting 2018 and we'll look forward to visiting with all of you again in the near future. Thank you very much.

This concludes today's conference call. You may now disconnect.