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Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. It is now my pleasure to turn today’s call over to Mr. Christian Pikul. Sir, please go ahead.

Christian Pikul: Hey. Thank you, Brent. Good morning, everyone. With me today are Andrew Clyde, President and Chief Executive Officer; Mindy West, Executive Vice President and Chief Financial Officer; and Donnie Smith, Vice President and Controller. After some opening comments from Andrew, including a discussion of our 2023 annual guidance, Mindy will provide an overview of the financial results. After a few closing comments from Andrew, we will 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 further discussion of risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K and other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements. During today’s call, we may also provide certain performance measures that do not conform to Generally Accepted Accounting Principles or GAAP. We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the Investors section of our website. With that, I will turn the call over to Andrew.

Andrew Clyde: Thank you, Christian. Good morning and welcome to everyone joining us today. In reviewing the company’s outstanding 2022 results and preparing for this call, I was really struck by how last year’s performance reflected so many of the improvements we have made to the business since our spin in 2013. These results reflect a lot of hard work over the past decade, executing against the key elements of the strategies we established a spin to create a sustainable and advantaged business. We prioritized organic growth, adding over 500 stores to the network since 2012. We improved store productivity, optimizing cost while improving per store merchandise contribution. In addition to substantially reducing our fuel breakeven metric, we enhanced employee engagement and customer satisfaction.

A trifecta, any retailer would be especially proud of. These actions improved our already low-cost position on the industry supply curve, while our relative advantage increased further as costs for the broader industry rose. We also leveraged our fuel infrastructure assets and capabilities to lower our supply cost and maximize our fuel contribution dollars through our retail pricing excellence campaign. Other significant capability investments like Murphy Drive Rewards further heightened our advantage and differentiated positioning with customers and consumers on our core merchandise offer, while the QuickChek acquisition significantly enhanced our food and beverage capabilities, while introducing a new advantaged format for growth. Perhaps the most telling statistic reflects our commitment to disciplined capital allocation.

As a result of our balanced 50-50 capital allocation strategy showcasing steady unit growth, with a consistent and opportunistic share repurchase, we have grown our store count by nearly 50% and repurchased more than 50% of our original shares outstanding. We are proud of these milestone achievements that created significant shareholder value for our long-term investors. These investments, coupled with our relentless focus on operational excellence helped lay the groundwork for the company’s outstanding 2022 results. Importantly, 2022 performance wasn’t just about fuel margins. We leveraged our scale and overall cost advantage, including the benefits from PS&W in a tight supply market to grow per store volumes and gain market share. We also leveraged Murphy Drive Rewards to generate continued tobacco outperformance that also led to share gains, which, along with stronger fuel traffic, helped to grow non-tobacco categories.

We grew food and beverage contribution by $9 million growing legacy Murphy contribution by nearly 50% to $8 million. We extracted further synergies from QuickChek, making excellent progress on our integration as our internal focus transitions in 2023, the enterprise-wide initiatives that will benefit the combined network. We have been very pleased with QuickChek’s performance and are equally excited about the future opportunities we see across both brands. Looking at OpEx, we took substantial costs out of the business leading up to COVID and while we are certainly not immune to the wider inflationary pressures on the industry, our advantaged format and low cost position afforded us the opportunity in 2022 to allocate incentives and employee appreciation programs without permanently impacting our cost structure.

This program helped to financially reward our employees and drive store level engagement, which resulted in strong merchandise sales and higher customer satisfaction. In closing out the 2022 performance discussion, it’s clear to us that our financial and operational results were the product of intentional actions we have taken as a management team. Our relentless efforts to improve the business have positioned us at the right place, at the right time, with the right capabilities and with the right team in place to extract the most value from the opportunity the market provided in 2022. At a time when affordability matters more to more people, Murphy USA is also very well positioned for the future. Looking out over the next decade, we are poised to continue delivering results and making investments that we believe better prepare the company to compete and win in 2023 and beyond.

First, we are preparing for more new store growth, building better stores and strong markets. Looking at the network plan in 10 years, we would anticipate at least another 500 high-performing stores, providing material contributions to the future earnings potential of the company. That is in addition to ongoing efforts to improve the current network through our raze-and-rebuild program and other investments. Second, we will remain focused on improving same-store productivity, increasing efficiency across all aspects of the business and maintaining an ultra-low cost structure, which supports our everyday low price strategy. Third, we are embarking on a comprehensive set of new investments that will help extend and ultimately widen our competitive advantage in the industry.

The first of these digital transformation will help evolve the reach and effectiveness of our Murphy Drive Rewards loyalty platform, leveraging customer shopping habits to customize more impactful offers at scale and trigger point-of-sale upselling opportunities. In addition to customer-facing opportunities, transaction data will help inform pricing and assortment optimization at the local and store level. These learnings and capabilities will inform a redesign of the QuickChek Loyalty Program to increase brand awareness and attract new customers. These are just a few early examples of what we look to deliver from our digital transformation campaign. Another new campaign in-store experience involves a comprehensive redesign of the inside of new and existing Murphy stores, leveraging critical insights from consumer research, QuickChek’s food and beverage expertise and analysis of subcategory performance.

This effort goes beyond routine category resets, the resets represents a fundamentally different experience for our customer that will better showcase the breadth and accessibility of our product offerings and drive higher in-store sales. In turn, we will take full advantage of these combined learnings and synergies in the imagination and design of our Store of the Future, which we expect will enhance new store performance and returns over the next decade. Importantly, these initiatives go beyond technology and capital investments, but involve investments in people with new skills and experience sets in the home office as we build new muscles and data science and data analysis. Like prior capability-building investments such as MDR, retail pricing and our zero breakeven campaigns, success wasn’t realized overnight.

But as we have seen from our 2022 results, the tangible benefits we realized were achieved from seeds planted in prior years. Similarly, we expect these new investments to deliver significant tangible benefits in the coming years. With that context in mind, let me take you through the elements of our 2023 guidance. Starting with organic growth, which remains the centerpiece of our growth strategy, we completed a total of 36 new stores in 2022, including two QuickChek stores and completed 32 raze-and-rebuilds, a notable improvement compared to the 23 new stores opened in 2021. While new store additions fell short of our internal target of 45 new stores, we were able to backfill with a few more raze-and-rebuilds and enter 2023 with nine stores scheduled to open in the first quarter.

Putting new stores into service remains challenging from sourcing electric panels and concrete to local delays in hooking up to permanent power. Nonetheless, we maintain a robust inventory of high-quality new store locations and expect 2023 activity to eclipse that of 2022. As such, our guidance remains up to 45 new store additions and up to 30 raze-and-rebuilds. Moving on the fuel contribution, we are pleased to report 2022 average per store month fuel volumes were in line with the high end of guidance, just under 245,000 APSM, representing 7% growth versus 2021 as our everyday low price value proposition attracted more customers to our stores. Looking ahead, we don’t expect the same level of market share gains in 2023, given we are not expecting a once in every six year to eight years mega-price drop in our forecast, but we do expect to hold on to many of the new customers that came to our stores looking for value.

As a result, we are forecasting a slightly tighter range of volume guidance between 240,000 gallons per store month and 245,000 gallons per store month in 2023. Looking at store profitability. We delivered $767 million of merchandise margin in 2022, above the guided range of $740 million to $760 million due to strong performance from categories attached to fuel that benefited from higher customer traffic and a highly impactful promotional events in the tobacco category. In 2023, we expect to continue to take share and deliver growth for merchandising initiatives, driving contribution dollars to a range between $795 million and $815 million or an increase of about 5% at the midpoint. This growth is primarily attributable to increases in the non-tobacco merchandise and continued growth in food and beverage categories.

Operating expenses, excluding payment fees and rent came in at 31,700 APSM in 2022 within our adjusted guided range of 31.5% to 32.5% APSM, which included the impact of our WayPay supplemental incentive program we provided our employees over the summer of 2022. While many of the factors impacting OpEx growth in 2022 will persist into 2023, including labor and service cost inflation, which are stickier in nature, not all of last year’s cost increases are built into our structural base. As a result, we expect a range of 2.6% to 7.4% increase in operating expenses, excluding credit card fees and rent or 32,500 to 34,000 on a per store month basis. This forecast does not assume a repeat of the special incentive program we implemented in 2022. For corporate cost, general and administrative expense adjusted for the $25 million contribution to the Murphy USA Charitable Foundation was $208 million, within the guided range of $200 million to $210 million.

2023 guidance of $235 million to $245 million reflects the aforementioned investments in people and technology around digital transformation and in-store experience, in addition to higher planned costs to extend a richer package of retirement benefits deeper into the organization as we sunset QuickChek retirement programs and fold them into Murphy USA. Similar to the early stages of developing and launching Murphy Drive Rewards, which laid the groundwork for significantly improved long-term performance from our merchandising business, these new investments come with significant upfront costs, but they are critical to maintaining our competitive advantage in the marketplace and further monetizing the benefits of our advantaged model over the next decade.

At this time, I will hand it over to Mindy to cover the capital allocation portion of the guidance, along with our normal review of the financial component of our results. Mindy?

Mindy West: Thank you, Andrew, and good morning, everyone. I will begin with CapEx, which for the fourth quarter and full year was $82 million and $306 million, respectively, at the low end of the adjusted guided range of $300 million to $350 million, primarily due to the new store delays and also timing around certain IT projects and ongoing improvement initiatives. Looking into 2023, given a higher level of expected new store and raze-and-rebuild activities, coupled with investments in some of our transformational campaigns, we expect total spending to be in a range of $375 million to $425 million. Turning to financial results. Revenue for the fourth quarter and full year 2022 was $5.4 billion and $23.4 billion, respectively, compared to $4.8 billion and $17.4 billion in the year ago period.

EBITDA for the fourth quarter of full year 2022 was $230 million and $1.2 billion, respectively, compared to $216 million and $828 million in the year ago period. Net income for the quarter, $117.7 million versus $108.8 million in 2021, resulting in reported earnings per share of $5.21 versus $4.23 in the year ago period. Net income and earnings per share for the full year was $673 million and $28.10, respectively, versus $397 million and $14.92 per share in the year ago period. Average retail gasoline prices in the fourth quarter were $3.19 per gallon versus $305 per gallon in the fourth quarter of 2021 and for the full year averaged $3.63 in 2022 and $2.77 in 2021. The effective tax rate for the fourth quarter was 22.3% and 23.9% for the full year, and for forecasting purposes, our 2023 guidance remains within a range of $0.24 to $0.26.

As mentioned in the earnings release, we repurchased $240 million worth of shares in the fourth quarter, which left us with $61 million of cash and cash equivalents at year-end. You may have noticed that the balance sheet reflects two new categories, marketable securities of $17.9 million under current assets and non-current marketable securities of $4.4 million in long-term assets, which collectively are comprised of T-bills and high-quality corporate bonds, which can be converted to cash in one day to two days, if needed. These investments, of course, help us to earn a higher rate of return with any excess cash balances given the upward move in interest rates over the past year. Total debt on the balance sheet as of December 31, 2022, remained at approximately $1.8 billion, of which approximately $15 million is captured in current liabilities, representing our 1% per annum amortization of the term loan and the remainder is a reduction in long-term lease obligations as they are paid through operating expense.

Our $350 million revolving credit facility had a zero balance at year end and remain undrawn — and remains undrawn currently. These figures result in gross adjusted leverage ratio that we report to our lenders of approximately 1.5 times. And with that, I will turn it back over to Andrew.

Andrew Clyde: Thanks, Mindy. In closing, I do want to remind investors of the rationale behind our decision to discontinue fuel margin and consequently EBITDA guidance since 2019. This choice was the outcome of our intent to refocus investor conversations away from short-term fuel margins and to emphasize the long-term potential of the business. We believe shifting this conversation has helped investors become better informed about the true performance drivers that impact our valuation over time. Nevertheless, we have typically supplemented our guidance with an EBITDA marker for investors, primarily to assist with buy-side and sell-side modeling, which suggests a single EBITDA outcome at a specific fuel margin assumption. This year, we have opted to provide a range of margins with the book ends of that range representing $0.26 per gallon and $0.30 per gallon or about a $0.02 swing around the midpoint, which is representative of the historical annual margin volatility of the business prior to 2020.

To avoid zeroing in on a single reference point that elicits disproportional consideration and undue emphasis from investors for modeling purposes only using the midpoint of the official guidance metrics we discussed and attaching $0.26 and $0.30 all-in fuel margins to these forecasts, the outcome should approximate $800 million and $1 billion, respectively, of adjusted EBITDA. I appreciate you do not have a crystal ball, we don’t either. The biggest determinant of how much margin and volume we generate in any given calendar year is a function of a number of factors, the shape of the price curve, the magnitude and amplitude of the curve, which measure volatility, how different competitors behave in those environments, along with geopolitical events and other externalities that impact demand, restrict supply and shift the actual and forecasted supply-demand balances for the relevant commodities.

As we have noted, the magnitude and volatility of last year’s price curve created significant opportunities as input costs change dramatically on a daily basis, likely influencing how competitors responded. Where we do have a high level of confidence and do not need a crystal ball is how we are going to perform in the different environments that we are presented with, and looking at January 2023 results, they reflect what we would expect in a rising price environment. We have seen prices increase about $0.60 per gallon since mid-December, which typically results in depressed retail margins in a more difficult environment to grow volumes and capture share. While this kind of environment may be interpreted as disappointing to investors, I can tell you January volumes were up about 4% versus prior year January and retail only margins were in the neighborhood of $0.19 per gallon before adding the typical benefits we see in PS&W when prices rise.

As a result, total integrated contribution looks to be running ahead of January 2022, and we all know a kind of year 2022 turned out to be. In short, we are carrying over the momentum realized in 2022 across our business, generated from the essential advantages we built over the past decade. We feel great about how the year is starting off and there are still 11 months to go. With that, Operator, let’s open up the call to questions.

Operator: Your first question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is open.

Bonnie Herzog: Thank you. Hi, Andrew, and everyone. I had a — my first question, I guess, is on your station OpEx guidance. I mean, I think you highlighted a lower increase that you expect this year than maybe what you reported last year. So, first, I just want to make sure I heard that correctly. And then maybe you could walk through some of the key puts and takes regarding this? And then could you give us a sense of how this dynamic is possibly impacting breakeven margins, especially for the smaller or marginal operator right now? Is it — I guess, is it possible that as inflation peaks and pressures start to ease cost pressures that is? Is it such that these marginal players may not be forced to price so high at the pump, which could start to squeeze fuel margins a bit for the industry?

Andrew Clyde: Sure. So, yeah, let’s start with OpEx. One of the most transformational things that we are doing is building bigger stores, both at QuickChek and at Murphy USA, and then raising and rebuilding 25 to 35 plus stores a year. And so one of the big drivers of cost is the fact that we are building bigger stores that have a higher labor component that have higher fuel volumes, merchandise contribution, very attractive returns, even more attractive in the current environment. So that is one of the big drivers there. The labor component, as we noted, we didn’t build permanently into our cost structure with higher salary or hourly increases, but had the WayPay appreciation bonus over the summer, many other competitive competition, et cetera, that allowed our staff to earn more and sell more.

One of the changes with the QuickChek acquisition is, from a benefit standpoint that we are extending deeper into the organization as our IRS transition period has us consolidate those plans and some of that’s in G&A. With respect to other costs, we certainly had some favorable contracts. Some of those will be renewing in 2023 versus 2022 and so there may be some upward pressure there. If there’s one area of deflation, it might be in areas where hydrocarbons are consumed like garbage bags, et cetera, but those typically make up a smaller portion of the expenses. How does this really impact ultimately breakeven margins for the industry, for the marginal player and for us. What — I think your point is, inflation, the year-over-year rate of change is peaking, but I don’t think anyone is out there forecasting that we are going to see deflation.

We are not going to see year-over-year changes go negative. I think we would be happy to see those changes get down to the 3% to 4%. We have a long way to go just to get it down to the Fed’s target rate of 2%. So while I see some of the cost pressure increases easing, we are starting from a base, I mean, if you want to do a one-year, two-year, three-year, four-year stack, you are just going to have smaller increases on significant increases from prior year. So I really don’t see anything from a cost pressure easing that is going to help this marginal operator. Let me tell you what we are seeing. In January, merchandise transactions are accelerating. Food and beverage transactions after a challenging fourth quarter accelerating. We just talked about the OpEx rate increases year-over-year is going to be lower and our fuel volume is sustaining it up 4%.

The result of that is our business is getting better. But when I look across the industry, some of the other reported numbers by firm or across the industry, we are not seeing those trends at the same level and so that would suggest to me that the industry breakeven is probably continuing to go up. I am not seeing anything that’s suggesting for the entire industry, merchandise and food and beverage is accelerating, data points to the opposite and the same with fuel volume. And so one of the proof points we would look at is, we — what are we seeing in January year-over-year margins and they are actually increasing versus a year ago. So I hope that answers your question. I understand cost pressures might ease, but there’s still going to be smaller increases on a significantly higher cost base that’s built up over the last two years to three years.

Bonnie Herzog: Right. No. That’s super helpful. Andrew, I know this is incredibly complex and there’s this dynamic of the structural change that you are kind of talking through within the industry? And I guess that’s maybe a little bit on my second question and final question that is, just in terms of the fuel margin range you provided for modeling purposes, I guess, first, I am a little curious why you chose to provide a range this year? And then, second, I guess, it does beg the question about what gives you maybe the confidence that your margins will be in that range? Just even given the dynamic we are seeing play out so far this year with, I think, industry margins down 57% in January versus December and you just kind of touched on where your margins are trending.

And again, I know it’s one month so far, but just trying to think through how the rest of the year may play out, and again, how much confidence do you have in that sort of that modeling purpose range? Thank you.

Andrew Clyde: Yeah. First of all, I would encourage you and everyone else not to make judgments based on sequential margin changes. I mean, if you have done that back in September to October and you see the huge margin when prices fall off significantly, you would come to just an erroneous perspective. So I would say, look at the broader trends. Look, prior to COVID in 2019, we were having a discussion at Murphy about sustaining $0.16 margins and there was probably as much disbelief around that is there is around current levels. But what have we seen over the last three years? Structurally, when we do our analysis, looking at sort of the NAC’s fourth quartile and adding cost inflation, volume reduction, merchandise changes, I mean, there’s at least a $0.10 per gallon increase that sustains itself and the NAC survey doesn’t represent the entire industry, especially the smaller players.

$0.26, actually $0.264 was our 2021 result. It’s a solid $0.10 above 2019 and the kind of that three-year average. I think the stake we are putting in the ground today is, we believe that represents kind of the new floor for us from a margin standpoint that has persisted and shows up in every way in which we can kind of triangulate the industry supply curve, the marginal players cost structure, et cetera. You book in that with the $0.34, again, actually $0.343 or $0.344 for 2022. But I think you have to walk that back $0.04 for the unique once in every six-year to eight-year price fall off that we had that we frankly hadn’t seen except in 2014 and 2008. And so that gets you under that $0.30 range, right? Now there are plenty of people that are saying crude prices stay between $70 and $85.

There are others we talk to that say they are going to be north of $100. I believe a $0.26 to $0.30 range provides a nice set of bookends based on what we have seen, what we can back into as a base case. And where, frankly, when we look at sort of the trends we are seeing and the trends it means for others, given we are gaining share. Once again, there may be more upside than downside within that range. But anyway, that’s how we got to the range. It’s kind of a 2021 base case, 2022 actual minus kind of a once in every six-year to eight-year effects and provides a nice range versus a single point. So thank you and we will move on to the next question

Bonnie Herzog: Thank you. Appreciate it.

Operator: Your next question comes from the line of Anthony Bonadio with Wells Fargo. Your line is open.

Anthony Bonadio: Yeah. Hey. Good morning, guys. Thanks for taking my question. So I want to start with the gallon guidance number suggests flat, I think, to slightly down on per store gallons. I realize you are lapping some potential benefit from elevated prices last summer and we have obviously seen quite a bit of share move around, but within trade down and general consumer softness sort of help you offset that to some extent. So can you just elaborate a little bit more on your assumptions there?

Andrew Clyde: Sure. So you go to the price structure, we don’t expect a big falling price environment that allows us to really differentiate our positioning. I think there is a question around total demand and how much sensitivity we might see. We don’t predict recessions, down trends, et cetera. But recognizing there’s some pressure there. The flip side of that is when there’s pressure there, we gain customers, because more people need affordability and that’s what we deliver. So those are probably a couple of the biggest factors, but the biggest single one is just not expecting that repeat of the price fall off.

Anthony Bonadio: Okay. And then on merchandise margins, that 19.1% you put up in Q4, looks quite a bit below what we have been running at, say, the last five quarters or effectively since you acquired QuickChek, it seems like cost inflation on the food side is playing a part. But can you just dig in a little bit more on what drove that and talk about how you are expecting that to trend as we move into 2023.

Andrew Clyde: Sure. I mean we absolutely saw cost pressure, including outages on ag’s led us some other commodities at QuickChek and that certainly impacted that and the good news is that’s improving. The second thing is we are really establishing QuickChek as the high quality value brand for the products it serves. And so from a price pressure standpoint, we held price longer than the broader market and it showed up in transaction results. I will give you an example. Breakfast represents about 37% of our transactions and in Q4, where we were down 1.7%, the broader QSR industry was down 7.3%. That has paid off, not only in that differential, but January foodservices, transactions at QuickChek are up 6% and that is after making strategic price decisions as well. So we felt the cost pressure, we maintained our price longer in the broader market, it paid off in establishing that brand position that showed up in transactions and that momentum is continuing over into 2023.

Anthony Bonadio: Helpful. Thank, guys.

Andrew Clyde: Thank you.

Operator: Your next question comes from the line of Bobby Griffin with Raymond James. Your line is open.

Bobby Griffin: Good morning, everybody. Thanks for taking my questions and Andrew and the team, congrats on another solid year.

Andrew Clyde: Great. Thanks, Bobby.

Bobby Griffin: I guess, first off, just you gave some details about the step-up in the SG&A. I think it applies probably 15%, 16% growth year-over-year versus 7% this year in 2022 ex the donation. Is that the right way to think about just a one-time step-up or is this kind of a multiyear investment that’s going to take place on the wage on the benefit side as you talked about?

Andrew Clyde: Yeah. So two components there. One, these capability-building investments. If you remember back to the Murphy Drive Rewards days. There were some peak costs, right, in terms of build required to stand up the capability that then goes away as you move into operate mode. So there are some peak costs in here, but as we build up a deeper bench around data science, data analytics and the like, on top of some of the great capabilities we have already built, some of that will sustain. Certainly, on some of the in-store experience, there’s some one-time costs there as we leverage some third-party support. Benefits is an interesting one. It does go into G&A where we had to align some of the retirement plans. And in the early years, over a five-year to 10-year period, the costs are higher.

But as you think about just normal attrition and where we set the benefit for new employees, by the time you get to the outer years, our actual G&A cost on those line items go down as a result of the new plan design. So, hopefully, those two examples give you some sense. They are both kind of investments to the future. One is just a peak that goes into operating mode. The other one is in alignment, but it shifts over time just with normal attrition, retirement, et cetera.

Bobby Griffin: Okay. Yes. That’s very helpful. And then, secondly, maybe just to touch on, I think, in your prepared margin, you mentioned a new store design and maybe just sort of expand a little bit on that. Is there a remodel program that’s going to take place on the existing stores or is this kind of a new store of the future that you are going to start rolling out for the 2,800 square foot stores. Just anything, how to think about that and timing wise, and as retail analysts, we typically like to hear, but I get pretty excited about the type of new store designs that could be rolling out?

Andrew Clyde: Yeah. So think about the 2,800 plus or minus some square footage, right, but not jumping that chasm to QuickChek, which is in prepared food and beverage, right? So we are not adding a kitchen at the Murphy stores. But if you think about how consumers want to engage with brands like ours, where do we have the right to win on packaged prepared food and beverage, what kind of innovation are we already implementing a QuickChek on dispensed beverage and frozen dispensed beverage. What are the things when we survey 10,000 Murphy USA customers that they say about our store in terms of how it’s laid out, the lighting, all the different things they are looking for, we have taken a huge body of work and now we are translating into that, within that box, plus or minus some square footage.

How would you oftenly lay that out for the customer experience, for the player experience to drive higher sales in the growing categories where maybe we are not participating as much, but doing it all in the context of where we have the right to win versus where we don’t. I think as I have mentioned before, we are out of roller grills right? The customer did not give us sort of the right to win in that space or even the right to play. But we are known as the retail brand with the best value on regional and national package brands. And so as we think about our open air cooler, grab-and-go, grab-and-repeat and go , how to re-imagine how the customer wants to interact with that and some of the results that we are already seeing from some of the resets.

The team has gotten incredibly good at resets within the same fixture layout, but how might you lay things out differently in terms of traffic flow, while making it easier for the store operator and the like. So that kind of gives you a broader sense. The big opportunities around the new 2,800s, but there will also be lessons that we translate into our 1,400 square foot raze-and-rebuild stores as well.

Bobby Griffin: Thank you. Best of luck here in 2023.

Andrew Clyde: Thank you.

Operator: Your next question comes from the line of Ben Bienvenu with Stephens. Your line is open.

Ben Bienvenu: Hey. Good morning.

Andrew Clyde: Good morning.

Ben Bienvenu: I was hoping to revisit fourth quarter results a little bit on the in-store, and to the extent if you could, I’d love to hear commentary on cadence during the quarter and then you talked about the initial start to 1Q. As we contended with weather in the fourth quarter and now weather across the Southeast in the first quarter, is that creating variability in the results month-to-month or is that a nonfactor?

Andrew Clyde: Yeah. Look, weather ultimately becomes a nonfactor because you got pre-buying, you got post-buying and the like, and so unless you have a much more extended event it’s usually not a big factor. Look, certainly, from a gallon standpoint, October started off stronger, because of where it was in the price fall off versus December. That in turn impacts the traffic inside the store over that same period as well. So there’s probably some deceleration within the three months. I think what has really got us excited about the start to the year. If I look at January then, on the Murphy side merchandise transactions in total, are up 10%, leading to sales and merchandise margin up 9.5% and 10.3%, double-digit trip growth on top of the 4% volume growth is really impactful.

Look at QuickChek, we are seeing transactions up 5% and some of that’s still being weighed down by nicotine products and our Murphy centralized team has been working within some of the state minimum constraints that we deal with in New Jersey. So, certainly, a little deceleration within the quarter, but as we start the new year, we are seeing nice acceleration across the Board.

Ben Bienvenu: Okay. Great. Shifting gears a little bit to the cash flow statement. CapEx was up — you talked about new investments in SG&A. You also talked about kind of long-lived investments in the CapEx side of things. Is this kind of $400 million CapEx midpoint, the new normal would you expect us to continue to grow? Is it the peak kind of give us some sense as we look out several years from now for what your CapEx spend might look like?

Andrew Clyde: Yeah. I think it’s probably more in line with the new normal. What I would expect if I look across the buckets, Mindy went over between growth sustaining corporate and initiatives, some peak around some of the IT capitalized, around some of the initiatives like digital transformation. Those things tend to be a little bit more episodic like Murphy Drive Rewards. We also have our, we call it, our Common Systems Environment project, where we are looking across both QuickChek and Murphy USA, and making the choices for the future about the systems environment. So some of that corporate initiatives could come down as we get some of that one-time work done. From a sustaining standpoint, the more new stores and raze-and-rebuilds, we have those programs that are in growth, reduce some of the programmatic things from a sustaining standpoint.

But if you continue to build the network, there’s some puts and takes there. From an overall growth standpoint, we are still not at, I think, what our true potential is in terms of new store opportunities. Fortunately, we have had the opportunity to backfill that gap and maintain the productivity of our launch are building partner or general contractors through raze-and-rebuilds. But for us, even with the cost inflation that we are having, this is an attractive time to build stores. One of the things we talked about on the last call was we may be seeing inflation of $400,000 to $600,000 for our raze-and-rebuilds and our new builds, but for every $100,000 of capital, you need about $0.04 per gallon margin to cover that. So maybe you need another $0.02, $0.025, but we have consistently seen well over $0.10 margin.

So our capital return projects look even more attractive. Raze-and-rebuilds that were below an economic threshold, even though they had the land and the economics are now above that threshold. And so that is the one area that I think we could continue to see that cadence play out as we grow more stores, we get some of the bottlenecks that we talked about behind us and we continue to evaluate the opportunities on our raze-and-rebuilds going forward.

Ben Bienvenu: Okay. Thank you.

Operator: Your next question is from the line of John Royall with JPMorgan. Your line is open.

John Royall: Hi, guys. Good morning. Thanks for taking the question. So my first one is on capital allocation and so you have drawn down cash in the past three quarters, you have been buying back stock in excess of your free cash flow, your balance sheet is certainly in a good shape. But should we think about 2023 as another year where you might buy back more stock than your free cash and particularly in light of the higher CapEx budget, and as you pointed out, there’s actually a good return on holding cash right now. So just looking for thoughts on just currencies and buybacks can be maintained?

Andrew Clyde: Sure. We certainly front-loaded the $1 billion authorization we got from the Board, and frankly, no different than the $500 million authorization we got before that. We are certainly — we are confident buying at $280 for the long-term and part of that is evidenced by the fact that our weighted average cost of treasury stock is about $103. So we are focused on the long-term. As we think about free cash flow, we talked about the margin, where is there more upside than downside on that. We have typically seen events that are adding more pressure to the marginal retailer, not less, more volatility versus less. So there’s a of wildcards there that can continue to generate excess free cash flow above and beyond what our base case plan might be.

So as we have said in the past, our number one priority for allocating excess free cash flow when we get it is share repurchase and that is what we did in 2022. When we earned it, when we received it, when we put it in the bank, we allocated that. So you should look for that same cadence going forward. Look, I would also say, leverage as part of our long-term algorithm, Mindy highlighted our ratios that are very conservative. The business is still a free cash flow machine. We have a conservative balance sheet with a lot of free board and so we always think about our entire balance sheet and how we want to manage our growth algorithm for both new stores and the balance part around share repurchase. So I hope that provides some insight into how we are thinking about it.

John Royall: Yeah. That’s helpful. Thank you, Andrew. And just wanted to go back to the fuel volume side, you have maintained a very healthy same-store comps on the fuel side and I think you noted when you are looking sort of midyear last year, you picked up some market share from people trading down to lower price players. In the 4Q comps would suggest and I think, Andrew, mentioned it in her comments that, you haven’t given that share back as steel prices have come back down. So maybe you can talk about those dynamics at holding on to that share and strengthen the fuel comp?

Andrew Clyde: Yeah. Look, I mean, one of the things that we pay very close attention to is our consumer and we are just blessed through Murphy Drive Reward to have great insights into them and we have talked about this panel of close to 100,000 consumers who have bought something from us every month since 2019. Their basket of goods that they buy at Murphy USA doesn’t cost as much as it did during the peak, which is good. And we are not seeing any significant changes in their behavior in terms of buying from us and as we noted that the fact that we are holding them steady and growing volume means we are bringing on new consumers. I think we have a target consumer that continues to be under pressure. They feel inflation more so than higher income consumers.

They feel the gap between the wages they earn and inflation more than the higher end consumer and these are the consumers that really don’t have a lot of alternatives for how they get to work, et cetera. So I think as we think about the economic outlook, we feel very confident that, we are going to be there from an affordability standpoint for both these current consumers, but continue to grow them like we did in January, even with the lower prices, because John, while prices are lower versus the peak, they are still significantly elevated from the low price environments we saw in 2015, 2016 and 2017. So I think you raised all those factors in, higher interest rates that are impacting rents and the like. This consumer is going to need us more than ever and I think there are going to be more consumers like that out there that we are going to be having the opportunity to serve with our affordable model.

John Royall: Thank you.

Operator: Your next question is from the line of Rob Dickerson with Jefferies. Your line is open.

Rob Dickerson: Great. Thanks so much. I just have kind of, I guess, a follow-up question just in terms of the competitive activity component and kind of how that might flow through into the CPG rate this year. I remember you had said this was maybe a year or so ago, right, where we had costs were materially inflating, is trying to feel like coming out of COVID, maybe at some of these other independent players on a national basis, we are increasing prices maybe at a kind of an accelerated rate maybe relative to history. Now you are seeing prices come down a little bit, but I guess some of the data that we see, it also looks like RAC has maybe gone up a little bit more quickly than some of the retail prices have gone up over the past month or so.

So I am just curious like if you think about the competitive dynamic right now kind of vis-à-vis a year ago, right, would you say maybe the market isn’t as quick to move those prices back up if wholesale goes back up, because everybody kind of wants to try to hold some share and the consumer obviously is not maybe in the best spot? Thanks.

Andrew Clyde: Yeah. Look, there’s always a lot of moving pieces. There’s also a lot of different markets and different actors out there. So it’s kind of hard to generalize. I would say one and we have talked about it from the very first question, the rate of cost inflation, the rate of the industry breakeven requirement for the marginal player it’s gone up significantly. The rate of increase probably isn’t going to go up at the same rate you wouldn’t expect it to. But all the pressures on that retailers are still there and so it continues to go up, but at a more normal pace. And we have lower prices, but the consumer health isn’t really that much better, at least the consumer that we serve. One of the things that you do see is versus, say, the peak prices is credit card fees are down and that’s largely a pass-through.

I would say that we have got some advantage there, because of the debit routing investments the team have made over the last three years where we saved several million dollars as a result of that and there’s more work that we are doing on that front that our scale affords us versus the other player, but that’s largely a pass-through. So if you say, well, margins are down a little bit, compare the year-over-year pricing and the credit card fee impact of that. There’s always some competitive promotional activity out there where someone may wake up and say, hey, I have lost some share. Let me try to go grab it. What I would say is, if I look at January, we are up 4% year-over-year margins all in from a contribution basis is higher and so while you might see that episodically, I think, you continue to see rational behavior across the Board.

Mindy West: And Rob, something else

Rob Dickerson: Okay.

Mindy West: I would add to Andrew’s comments, particularly with January from a retail pricing perspective, not only has the pricing environment been relentlessly upward with essentially the market’s been in restoration mode for five weeks, but it’s also similar to what we saw in May of 2022. So it’s also a function of when prices are rising during the week. So if you start with the last week of December and go through January, in those five weeks, three weeks of the five weeks had price jumps of double digits heading into the weekend and that essentially trolls your intended margining position and freezes a lower margin in place, sometimes multiple days until the following week when the market begins to restore and you can get back on the right track.

So we saw that same dynamic occur last May, leading many to worry that margins have peaked and structural pressures we are alleviating versus what it really was, which was just end-of-week price jumps. So our May margin, for example, on the retail side was below $0.20 a gallon that month, but it rebounded to above 30% in June. So as Andrew said, ironically, it’s Groundhog Day and we have seen this pattern before. So we are not really concerned with the January results or even the rest of the year as it’s really a logical function of the pricing and timing dynamic that’s just occurring right now.

Rob Dickerson: Okay. That’s extremely helpful. That’s kind of where I was headed. We summed it up. And then I guess just kind of for clarification and maybe my own thinking . I think you had said kind of so far in January, you are seeing kind of the all-in fuel margin do a little bit better than last year despite the retail coming down because PS&W and RINs kind of have a different relationship and maybe they go up some. So like maybe just simplistically, just kind of explain quickly kind of how PS&W and kind of RINs might be a little bit higher, which is obviously a separate piece and you just explained. That’s still helpful. Thank you. That’s it.

Mindy West: Yeah. So, the timing impact on PS&W in a rising price environment is typically positive. So we would expect any pressure that we are seeing on the margin side to be made up for within product supply. Also, RIN prices are elevated over what they were at least at the end of the fourth quarter. So we would expect on balance that our first quarter results, again, we are just looking at January, but we would expect those first quarter results to be comparable to what it was last year.

Rob Dickerson: Got it.

Mindy West: And certainly, January’s results should be comparable to what they were last year or a little higher.

Rob Dickerson: Perfect. Thank you, guys.

Andrew Clyde: And the retail-only margin is slightly higher than a year ago as well.

Rob Dickerson: Yeah. Yeah. Got it. Perfect. Thank you.

Operator: There are no further questions at this time. It’s now my pleasure to turn the call back over to Mr. Andrew Clyde.

Andrew Clyde: Great. Great call. Great questions. I feel like we spent a lot of time talking about kind of short-term, near-term margins and I think as we talk about the January environment and the acceleration we have seen across the business that it’s further reinforcement as to why we think about the long-term of this business. As Mindy highlighted wonderfully, one month doesn’t make a quarter, one month doesn’t make a year and kind of the comparison of January and May, I think, is a great example because of what follows that. I do think this longer term view of where the fuel breakeven requirement is going for the marginal player for the industry as a whole, for advantaged players like Murphy USA and other advantaged retailers is really the area that to be focused on.

And we feel really good about 2022 is a year and the outlook that we have, not just for 2023, but the investments that we are making on top of the last decade of investments gets us really excited about the next decade ahead. So, with that, we look forward to any follow-up calls from people and have a great rest of your day. Take care.

Operator: Ladies and gentlemen, thank you for participating. This concludes today’s conference call. You may now disconnect.