Murphy USA Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2025

Key Takeaways

  • Negative Sentiment: Second quarter same-store fuel volumes fell 3.2%, and second-half volumes could run slightly below the low end of the guided range of 240,000–245,000 APSM.
  • Positive Sentiment: Growth in non-combustible nicotine and digital loyalty efforts drove an 8.9% increase in merchandise contribution ex-cigarettes and lottery.
  • Positive Sentiment: Store operating expenses and home office SG&A are trending at or below the low end of guidance, boosting operating contribution per store despite merchandising headwinds.
  • Positive Sentiment: Retail fuel margins improved by 80 basis points year-to-date, plus 13 basis points from lower credit card fees, highlighting margin resilience in a lower-price market.
  • Positive Sentiment: The new store pipeline is robust with 50 stores under construction and roughly 40 new openings expected in 2025, and recent builds are outperforming pro forma metrics.
AI Generated. May Contain Errors.
Earnings Conference Call
Murphy USA Q2 2025
00:00 / 00:00

There are 8 speakers on the call.

Speaker 6

Thank you for standing by. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question, press STAR one. Again, we do ask that you limit yourself to one question and one follow-up. Thank you. I would now like to turn the call over to Kristen Paykel. Please go ahead.

Speaker 5

Good morning everybody. Thanks Jeannie and thanks everyone for joining us today. With me are Andrew Clyde, Chief Executive Officer, Mindy West, Chief Operating Officer, Jeff Gallagher, Chief Financial Officer, and Donnie Smith, Chief Accounting Officer. After some opening comments from Andrew, Jeff Gallagher will provide an overview of the financial results and performance against our 2025 guidance metrics. Following some closing comments from Andrew, we'll 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.

Speaker 5

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 Investor section of our website. With that, I'll turn it over to Andrew.

Operator

Thank you, Christian, and good morning, everyone. Second quarter results largely reflect the trends previously disclosed in our operations update covering second quarter's performance through May. Fuel prices continue to be range-bound despite remarkable geopolitical events, and we remain in a lower price, less volatile environment. Together with lighter cigarette promotional activity and lower lottery jackpots, this translated to modest pressure on customer traffic, and you can see that in Q2 same-store fuel volumes were down 3.2% ahead of OPIS volume levels reported that noted weakness in demand. July volumes have rebounded and are currently running at 100% of prior year levels with a couple of reporting days left in the month.

Operator

While these trends reflect an environment on the low side of what we would call normal, there are definitely bright spots that may get obscured in the current environment, which should result in significant performance uplift when conditions normalize. Jeff Gallagher will review the 2025 outlook shortly, but it's worth emphasizing a few things that we are excited about. First, while cigarette volumes remain pressured, noncombustible nicotine categories are growing at a rate that fully offsets the decline in cigarette margins, which is remarkable as this category represents only 30% of total nicotine margin contribution. With an uptick in July promotional activity on cigarettes around the 4th of July, we believe a more robust second half cadence will be supportive to stronger nicotine category growth. Moreover, we view FDA Commissioner Dr. Califf's forceful comments about illicit vapor and synthetic kratom crackdowns earlier this week as very positive.

Operator

Second, unlike many of the public QSR industry participants reporting sales declines average per store a month, food and beverage sales at QuickChek have been positive for the third straight quarter, underscoring our value offer and ability to drive traffic to our stores. Investing in traffic and transactions versus taking excessive price increases in the current environment will pay dividends later when food costs subside, resulting in both sales and margin growth going forward. Third, supporting sales and contribution on both brands are the digital initiatives that are creating value for our customers. For Murphy Drive Rewards, we saw a 31% increase in new loyalty enrollments for the quarter and an 11% increase in merchandise transactions.

Operator

In fact, if you remove cigarettes and lottery from the mix, Murphy USA only merchandise contribution increased by 8.9% for the quarter, led by strength in candy and packaged beverages, both categories where we are seeing price increases across the industry. Yet our ability to deliver value to the customer and CPG firms is yielding positive results. At QuickChek, the revamped loyalty program has seen mobile orders double since the relaunch and 35% of in-store pickup items included additional sales inside the store averaging $7 per transaction. We've also seen a meaningful shift in the full-time to part-time labor mix at QuickChek as part of our demand forecasting digital initiative.

Operator

Fourth, a common theme across today's call will be that when merchandise contribution is pressured, which it inevitably will be from time to time, we are able to maintain store profitability from operating cost improvements, a hallmark of our corporate DNA since our 2013 spin. The current quarter is no exception where we saw improvements in overtime, labor rates, loss prevention, and maintenance, and these improvements are complemented by home office efficiencies that are driving our G&A lower. Fifth, in a relatively more challenging environment where we can sustain store profitability, retail fuel margins are proving even more resilient than we would have thought. We saw retail margins up 50 basis points in 2024 and year to date we are seeing an 80 basis point improvement along with an additional 13 basis points from lower credit card fees.

Operator

This reinforces our view that industry headwinds are translating to higher retail margins over time because the marginal retailer is unable to sustain their profitability without taking up price on fuel. Furthermore, our street pricing on average in Q2 was a penny more aggressive supporting weaker demand, which further reinforces our view that in a more normal price and volatility environment we would likely see further bottom line margin improvement. Last but certainly not least, we are really excited and encouraged by the quality of our new store pipeline and construction underway which is poised to deliver 50 stores over the next 12 months.

Operator

While we have not met our commitments and expectations on the timing of store months, individual store performance for all the most recent build classes are performing well above pro forma. Jeff Gallagher will provide some more details around that program, so let me turn it over to him to provide some updates on our 2025 guidance before returning to discuss our longer term potential.

Speaker 4

Thanks for the handoff, Andrew. Building on your comments, I'm going to discuss our progress against our 2025 guided metrics starting with fuel volumes. First half volumes were down 3% on an average per store month basis, which after adjusting for temporal issues we referenced in the first quarter call translates to down 2% on a normalized basis given first half performance is tracking slightly lower than our expectations. Our second half outlook incorporates a market neutral view characterized by continued low volatility and does not account for anything exceptional that may occur such as supply shock followed by dramatically falling prices. As such, our outlook for the second half suggests volumes could fall slightly below the low end of our annual guided range of 240,000 to 245,000 average per store month. As Andrew mentioned, July fuel volumes are running at 100% of prior year.

Speaker 4

For merchandise contribution margin, we're seeing a similar impact from a slow first quarter with headwinds from two of our largest categories in the first half, cigarettes and lottery. We also expect to be within but toward the low end of our guided range, $855 million to $875 million. It's important to remember on an average per store month basis, Q2 merchandise contribution at Murphy USA branded stores are up 8.9% excluding the headwinds from cigarettes and lottery. This speaks to the underlying resilience we see in the Murphy USA customers and broader center of store categories. In this demand environment, we are actively managing our cost and driving savings across both store operating expenses and home office cost.

Speaker 4

Our initiatives to improve store level operations are showing results and we expect store operating expenses to be at or below the low end of the guided range of $36,500 to $37,000 per store month. Therefore, from a store profitability perspective, due to the sustainable and structural improvements we are making to the business on a net profit basis, we are seeing higher operating contribution dollars per store, not lower. This stronger coverage ratio reinforces the competitiveness of our Murphy USA business model and increases our ability to generate free cash flow. In addition to store operating expenses, we have also made progress optimizing our home office spend, which has resulted in total corporate SG&A also trending below the low end of our guided range of $245 million to $255 million.

Speaker 4

The effective tax rate in the first half was 22% due to a combination of excess tax benefits related to equity compensation and recognized benefits from federal energy tax credits reflected in first quarter results. We expect second half all-in tax rates to be within the guided range of 24% to 26%, resulting in a full year tax rate at or slightly below the low end of guidance. I'll close the 2025 guidance update with two related topics, new store growth and our capital expenditures. We put 14 new stores into service in the first half along with 10 raze and rebuild stores, followed by six more raze and rebuilds opened in July. I'm pleased to report that new store construction activity will remain robust through the end of this year with the pipeline in extremely solid shape to deliver accelerated store growth this year and beyond.

Speaker 4

Forty new stores and eight raze and rebuilds are currently under construction. We're positioned to start construction on an additional 10 new stores over the next 45 days, given any unanticipated supply chain shocks or jurisdictional delays. That means we expect to open around 40 new stores in 2025, up from the 32 stores opened in 2024. More importantly, we have over 45 NTIs in construction in Q3, resulting in a robust end of year delivery and a great start to 2026, where we do expect 15 to 20 additional new store openings in the first quarter of 2026. Accordingly, our 2025 capital plan remains largely intact and we expect to remain within the guided range of $450 to $500 million. Looking past 2025, our new store pipeline continues to grow and accelerate, with 90 stores already in design or permitting and over 50 more in contract negotiations.

Speaker 4

We believe these new numbers and momentum reflect our newly refined store development capabilities and will allow us to increase our NTI delivery capacity in 2026 and beyond. I will close with a brief comment on share repurchase in the second quarter. As noted in our release, we repurchased 471,000 shares, bringing our year-to-date repurchases to nearly 900,000 shares. Share repurchase remains the highest and best use of our free cash flow and we expect to remain active in repurchase of our shares going forward. We will continue to take advantage of the currently misaligned views between investors and management with respect to our ability to drive future value creation for Murphy USA shareholders. I'll turn back over to Andrew for closing comments.

Operator

Jeff Gallagher. That's great perspective on our 2025 outlook referencing our longer-term value creation algorithm and in particular slide 10 of our most recent investor deck. We remain bullish on our ability to create value for long-term investors. We remain well positioned to continue to sustain and improve our near zero fuel breakeven margin with a focus on overall store profitability, addressing merchandise headwinds with operational and overhead efficiencies, and growing categories with our vendor partners. With the right mix of pricing, promotion, and digital activities with advantaged non-fuel profitability per store, we expect to grow EBITDA on a CPG basis as we keep more of the increases we are experiencing in retail fuel margins and as we bring on more new stores that enhance returns and higher volumes per store.

Operator

Growth in total volume provides the free cash flow to deliver our 50/50 capital allocation strategy that has proven to be a winning formula with shareholders. We also believe EPS will be further enhanced through our tax optimizing strategies. When I think about some of the conversations with investors over the past few months, these discussions remain rooted in the long-term potential of our business, particularly in connection with the $1.3 billion EBITDA potential we set for 2028, which we have included in our investor presentations beginning in 2023. This figure was a single point target that represented, in our view, the potential of our business based on a set of factors in a normal environment, some of which are within our control and some are outside of our control.

Operator

Since then, our progress against some of these metrics has been slower than anticipated as we have shared with you during prior earnings calls and investor conferences, while some other metrics have been realized ahead of our expectations. Let's take stock and review our progress against this target. It was predicated on four distinct drivers. First, NTI growth approximating 50 new stores annually starting in 2024. Second, continued upward pressure on equilibrium retail margins approximating 30 to 40 basis points annually. Third, sustaining the higher rate of merchandise contribution growth we experienced in 2022 and 2023, which was about 7% annually. Last, number four, continued operational improvements to make our business more competitive, which is the legacy of our history as a public company.

Operator

Together in a normal environment, these resulted in a five year view of a little over $1.25 billion in EBITDA such that another penny of fuel margin would yield the $1.3 billion of potential EBITDA we referenced. Starting with non fuel performance on existing stores, we were about $20 million behind our expectations for 2028. The largest driver is QuickChek, for older non fuel stores have been impacted the most from the QSR value wars. While food and beverage margins have been hampered by cost inflation and overall weakness in the Northeast, traffic has been persistent impacting center of store performance. As we look beyond 2028, these older non fuel stores are coming off lease and we would expect food margins to stabilize as we continue to drive traffic on our high volume fuel stores.

Operator

Murphy USA branded merchandise contribution was also lower, reflecting the compounding of delays in some of the center of store initiatives last year and cigarette weakness this year offsetting a lower base for compounding on the top line in contribution. Margin growth is better than expected, operating costs and SG&A cost both in terms of what we have realized to date and what we are highly confident ongoing initiatives will deliver, which will also then deliver compounded benefits from a lower base moving to new stores. We are also about $20 million behind our expectations for 2028 due to fewer store months. While the fewer store months creates a drag on fuel volume and merchandise sales, it is offset by lower operating cost and rent. More importantly is the offset from new stores that are performing better than our plan.

Operator

Turning to fuel at existing stores, the shortfall we have seen in same store volumes is offset by higher fuel margins and lower payment fees. In our forecast we expected and continue to expect PSNW's net of RINs to normalize between $0.025 and $0.03 per gallon with a more balanced supply demand outlook based on current market and competitive dynamics, we would expect retail margins to improve about $0.005 per gallon per year, slightly above what we had in our original plan. These updated assumptions generate EBITDA potential of around $1.2 billion in 2028. We also expected and continue to expect to see more normalized fuel prices and volatility levels such that we can claw back an extra $0.01 per gallon where we have been more aggressive to sustain volume in a much lower price environment over the last several quarters.

Operator

That penny would get you back to the original $1.25 billion plan for 2028. If the environment yielded an additional penny above and beyond that, we would realize close to the original $1.3 billion figure. No matter what 2028 EBITDA ultimately turns out to be, in a normalized environment where merchandise contribution offsets OpEx growth and volume pressures are abated at higher fuel prices, we expect incremental benefits on retail margins in addition to the $40 to $50 million of EBITDA contribution expected from each new build class at maturity. The trajectory of the business will look far different in 2028 versus what we see today as we ramp up our NTI program. Outside of fuel margin expectations, we have shown we can manage the puts and takes of our business and honestly believe there's more upside than downside on the merchandise assumptions.

Operator

Given the reset baseline, the range of outcomes is and always will be primarily a function of the level of fuel margins realized. Our investment thesis as the largest single buyer of our shares every year is that prices, margins, and the underlying drivers lead to a bumpy path towards a higher normalized level. With highly disciplined 50/50 capital allocation strategy coupled with a conservative balance sheet, we are well positioned to continue our track record of TSR growth. With that, we will open up the call to questions.

Speaker 6

At this time I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, we do ask that you limit yourself to one question and one follow up. Your first question comes from the line of Anthony Bonadio with Wells Fargo. Please go ahead.

Speaker 4

Yeah, hey guys, thanks for taking our question. I just wanted to ask about gallons. For starters, can you just talk about why trends seemingly worsened throughout the quarter and how your market share trended over that period? If it's an industry issue, I guess why we didn't see more retail margin growth to offset that given those poor volumes would translate to higher breakevens.

Operator

Yeah, the first thing, the trend in the quarter is partly masked by the April May update, which had a different same store base than we had for the full quarter. You know, where June trended around 4% down leading to the quarter where it ended up. There was some deceleration, but not as significant as it showed based on the April May numbers with that different base. In terms of where margins ended up, we see our margins not only improved, but they improved at lower credit card fees and by being at least $0.01 per gallon more aggressive than we were in the past year's quarter. I would say with that, industry margins were up. In a low price environment, we typically put a little bit more on the street to hold volume and continue to drive traffic, stay top of mind with the consumer.

Operator

That's our view that when prices achieve a more normal level versus this lower level, we're able to call off some of that back.

Speaker 4

Anthony, quickly. We did outpace OPIS volumes in each of our markets that we look at for the full quarter. While June did decelerate for us, it also decelerated for OPIS. As we mentioned a couple of times on the call, July volumes have returned back to 100% last year. Okay. Just on guidance, I guess, I know you mentioned gallons sort of running below inside at the low end but still in range. You've got OpEx SG&A running below, I guess like net of all that. It sounds like you're more or less reiterating EBITDA, I guess. Is that right?

Operator

We don't give EBITDA guidance because we don't give a fuel margin guidance. As you go through the puts and takes, there's a lot of offsets there. We're on the lower end of merchandise. We're making up for that by being at or below the better end of OpEx and G&A. As you said, volume is slightly at or slightly below the low end. A lot of puts and takes there, if you will.

Speaker 4

Got it. Thanks so much, guys.

Speaker 6

Your next question comes from the line of Pooran Sharma with Stephens. Please go ahead.

Speaker 6

I appreciate the question here. Just wanted to get a sense of the store build. Looks like first half, you know, it seemed like we were going to be a bit behind pace and I know you've talked about getting a more even build throughout the year, but I think you mentioned, you know, still on pace for I believe 40 and you know, I was going to ask what gives you confidence in hitting this number. It sounds like you already have a lot of wheels in motion, a lot in the pipeline already. Just wanted to ask you what's changed in your kind of store build program relative to prior years, just given your confidence talking about the next 12 months and going forward.

Operator

Some of the bottlenecks at some point, if you have so many stores in the queue that have a bottleneck, they're released. I think that's a big part. Whether it's permitting of tanks or some supply chain issues, we continue to build up the pipeline. I think as we've talked about on the last calls, there are a few things where we've taken a different view of risk and cost to make sure that things don't get delayed that are within our control. I think when you look at the number of stores under construction, the numbers of stores we expect to see under construction, and then the pipeline beyond that for 2026 and 2027, that's what gives us the confidence. There's nothing like having the shovel already in the ground to know that you're going to get that store built.

Operator

Whether we said before we weren't going to get to 50 openings this year, we'd have well more than 50 starts. I believe when you add what we do in January to what we close the year at, we're pretty dang close to that 50 number.

Speaker 4

Just to add a little bit, I do want to give some credit to our store development team that's really gone aggressively looking for great sites. Our pipeline, total pipeline now is over 250 stores. Andrew mentioned in the rolling next four quarters, we expect to open 50 stores. The performance we're seeing is outstanding. As we mentioned on the call, since 2021, each class has outperformed their expectations, outperformed the pro forma. We continue to see really good results from the stores that are open, and now we're building the pipeline to open more.

Speaker 2

I would echo that too. I think it's tougher when you come from a lower base to generate that kind of inertia and momentum. Now that we are getting that and filling the funnel with greater numbers of projects in the queue, I think it will allow us to have some momentum to continue that type of build program in the years to follow this year and next.

Speaker 4

Great.

Speaker 4

Appreciate the color there. I guess for the follow-up, just wanted to get a sense of the overall demand environment and then also the degree of cost flex and the optionality you have in the back half of the year to offset markets. I'm only saying this because we do see several weeks of gasoline demand from the Department of Energy down year over year. You did mention that you outperformed OPIS data in several of your markets. Given the lower demand environment, was just wondering if you could help us understand with a little bit more granularity what kind of optionality you have in your ability to flex your costs essentially in the back half.

Operator

Yeah. As it relates to demand, look, we've said it for years. In a lower price environment, there's some consumer on the margin who's not as price sensitive. If you find yourself in a low price environment where unemployment goes up, inflation continues unabated, and you start seeing various corporate changes, et cetera, that changes the dynamic. It's really all about the price sensitivity of consumers and that consumer on the margin. That's why we talk about putting extra penny on the street. That's why we talk about the benefits of Murphy Drive Rewards and QuickChek’s revamped loyalty platform as tools we have now that we didn't have when prices were low in 2015, 2016, and 2017.

Operator

At some point, when you invest in a company that you see fuel margins being the ultimate driver of value and you see some ebbs and flows, this is one of those trough periods where volumes from a demand side are a little bit tighter. We're going to have to be more aggressive from a margin standpoint to winning customer. I think whether it's remote work, whether it's the battery electric vehicle percent of sales changing, it's the car ownership, CAFE standards, et cetera, changing, we're actually bullish on the North American fuel outlook in 2030 and beyond as a lot of changes have taken place as it relates to cost and optionality. I think the current quarter and first half of the year is a great example of that. We've streamlined over time.

Operator

If we see some lower demand, we can optimize even store hours if we have to with our unattended overnight fuel. If you see applicants more than doubling versus the same time a year ago, when you see softness in the labor market, you can be thoughtful on your labor rates, especially around new employees, which was key benefit for us in the period. Loss prevention and maintenance were two other categories. We demonstrated lower costs. There are things that you can do because of the environment. There are levers you can pull, but you never want to pull back too hard on things like maintenance because those things catch up with you in the long run. You don't want to pull back on value.

Operator

As we mentioned, QuickChek’s had three straight quarters of food and beverage growth, which is unlike a lot of the big QSR industry players who pull those levers and give up a value proposition. We are keen and well positioned to weather a cycle of lower demand, lower prices, managing it for the long run. We know in the long run our everyday low price value model is going to be a winning model with consumers. We have a balance sheet capital allocation strategy that allows us to continue to build stores in more difficult times so that when they are up and running and the cycle shifts, you are taking full advantage of that. We do not get too wound up about any one year demand picture. We are more bullish about the long term.

Speaker 2

Demand and forum just adding to that, particularly about the cost side of the business. We do have multiple activities underway to improve the productivity of our store. Some of those are business led, some are initiative led. Benefits are showing up. As you saw, we're controlling OpEx to the low end of our guided range. That's despite opening those new stores, which incur full expenses day one while the revenue ramps over time. This quarter we did see the improvement on several fronts: maintenance, labor, loss prevention, as Andrew mentioned. We expect to continue to be able to drive value from all of those efforts. We know that, look, despite whatever's happening on the demand front, we know that over time, ensuring that our stores are well supplied, they're in stock, they're clean, our equipment's working, our staff is friendly and helpful.

Speaker 2

Those are all the ingredients in the recipe that make a successful store and allow us to be able to attract and retain the customers. That is what we're focused on. Our operating model is one of the lowest costs in the industry, and we will continue to squeeze additional costs from our business to enable that EDLP strategy, as Andrew said, which is so important to our customer who needs that.

Speaker 4

Great.

Speaker 4

Appreciate the color.

Speaker 6

Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Please go ahead.

Speaker 6

All right, thank you. Good morning everyone. I had a question on merchandise contribution. You did just talk down your guidance this year, but it does still imply a healthy acceleration in the back half. Just curious to hear from you, what gives you the comfort that this new guidance is achievable despite what remains a pretty challenging operating and macro environment. I am also curious to hear any specific initiatives you have in place to drive faster growth. Is your merchandise contribution guidance predicated on continued improvement at QuickChek? Thank you.

Operator

Great. On the merch side, I think Jeff Gallagher and I both mentioned that if you take out cigarettes and lottery, the Murphy branded stores are up 8.9%. That's incredible growth in the context of the environment you described, Bonnie. We're seeing chocolate candy price increases. We continue to see packaged beverage increases. We've just taken a different approach working with the manufacturers around value, helping them drive their base load volume. Those are two categories, packaged beverage and candy, where we showed significant upside in the quarter. Other nicotine continues to do very, very well. Where we had tobacco weakness on cigarettes in the first half because of the promotional cycle, the promotions were running in the second half and we've already started, which gives us confidence around that front.

Operator

Other initiatives that we have as it relates to getting more customer reach: we had a significant increase in new enrollments for Murphy Drive Rewards. We've got some initiatives underway to further drive that enrollment and we see those members' baskets and frequency and contribution to the business greater than participants and non-members. That's one of the initiatives and we continue to have innovation on the QuickChek side in terms of our sub, which is our more value offer, as well as the continued success of our premium offers there. I would say there's just a lot of things going on. Part of one thing that's frustrating on the QuickChek side is we're driving the sales. We continue to see some headwinds around food cost and the like.

Operator

We believe when those abate, it'll be a lot easier to demonstrate higher margin contribution because we won't have to go back and win back the customer, because we priced and gave them value during this period so we didn't lose them. If you follow some of the other QSRs, they're really struggling to figure out their price per check increases that ran off so many customers. I don't know if others have anything they want to add on initiatives.

Operator

That was really helpful. I appreciate that color. Maybe just a quick follow-up because you touched on it, is nicotine, and you highlighted some of the pressures was promotion related in the first half. It sounds like you just mentioned you have some sense of what it's going to look like in the second half. Should I understand that to mean that you feel better about the contribution from nicotine maybe being a little again stronger in the second half versus the first half? I just wanted to hear if you're seeing any improvements on that business from the so-called stepped up efforts to crack down on illicit e-cigs. Is that still kind of a headwind for you as well? Thank you.

Operator

Yeah, no, we're definitely more bullish on the second half than the first half. First half we were just confident in some really significant promotional activity. You know, last year, we also had a strong Q2 comp last year as well. I'm sure you listened to Dr. Mark Marque a couple of days ago when he was interviewed in the morning. He said something big is coming as it relates to illicit vapor and synthetic kratom. I don't know what that something big is. I know our industry partners have been doing a frontal all-out campaign with the FDA. I was encouraged by his discussion around risk and the continuum of risk and not going to attack these broad categories broadly, but really focus on the area where there's the greatest risk.

Operator

That's a very positive sentiment coming out of the FDA that we haven't heard in a very long time.

Operator

Fair point. We will see. Thank you. I'll pass it on.

Speaker 6

Your next question comes from the line of Bobby Griffin with Raymond James.

Speaker 4

Please go ahead, everybody. Thanks for taking the questions, I guess.

Speaker 4

Andrew, first I want to circle back on the guidance moving parts that you guys discussed. Understanding that you guys don't guide for a fuel margin, if you were to take the range that you gave us at first and just assume the business ends up in that fuel margin range for the year, would you still generate the level of EBITDA that that range implies? Basically, what I'm trying to get at is just to understand if the OpEx offsets are fully offsetting the merchandise pressure we're seeing in the gallons. Just trying to understand that range and the sensitivity there.

Speaker 4

Yeah.

Operator

If you add all of that up and you have our original fuel margin range, you're going to be below that EBITDA number that was put out there. Largely that's driven by Q1 and the impact that we had there. OpEx is more than making up for challenges on the merch side as we referenced on tobacco SG&A having a significant impact as well. It's really going to be end of the year predicated on where we land with the fuel margin in the second half. If you just adjust for Q1 and kind of the trajectory on the volume side in this low price environment, you know that it's going to have a bigger impact than the offsetting effects that OpEx and G&A have on the merch side. Understood, that's helpful.

Operator

Gallagher, and by the way.

Operator

Just one other point. You know, with Q1, PS&W being below that, that's kind.

Speaker 4

Of a.

Operator

We're still seeing a very long, loose environment with a lot of high refinery utilization and a lot of exports.

Speaker 4

Yes, good point.

Speaker 4

Nice to see that bounce back this quarter versus the one Q. I guess my second question is more near term. Just want to make sure I understand the comments. July back to 100. I believe that is on an APSM basis for.

Speaker 4

For fuel.

Speaker 4

Fuel volume. Correct. I don't think you gave any comments on just July retail margins as we typically talk about, but anything you can share with us there?

Operator

No, it's on an APSM basis and with adjustments and these different calculations you do only at the end of the month, it's just premature to give a fuel margin number for July. If we'd been doing this call a week from today, we'd have more confidence in that number.

Speaker 4

Understood.

Speaker 2

We would expect it directionally, though, to be somewhere in the high 20%.

Operator

On the retail only.

Speaker 2

On the retail only side.

Speaker 2

Thank you, that's helpful. I guess just lastly for me, this really impressive OpEx performance across the P&L here. Just curious if you can unpack that a little further. Is that, you know, some timing aspects, or is that more of the work, Mindy, you and the team and everybody's been doing on productivity that we've talked about on these lower quartile stores starting to actually now move into harvest stage and flow through.

Speaker 2

As I said earlier, you know we are seeing the benefits show up in the results through both business-led and initiative-led because we're really trying to tackle on all fronts our store productivity. Yes, I think you're seeing the fruits of those efforts come to bear and I think that there's more that we can do. We continue to identify larger opportunities and maintenance from both incident response as well as vendor accountability. Also, opportunities in team effectiveness. Now keep in mind though, these benefits are going to show up in multiple ways. Some of them are going to be very difficult to attribute. What I mean by that is on some levels we're going to have cost savings through things like doing self-maintenance at our stores versus calling in a technician. Other things are going to be more cost avoidant.

Speaker 2

For example, by keeping fuel dispensers better maintained, that will result in fewer breakdowns. Also, things like customer loss avoidance. You know, using fuel as an example, if we have a dispenser down at one of our stations, does that mean customers drive away or do they use one of the seven others that are actually working? Probably you're not going to lose those customers initially, but eventually, if that is a chronic problem, then you are going to have certain customers who are going to look at the long lines and go somewhere else. That is why we know that over time we're working on the right things. It may be hard to attribute that as a financial impact quarter to quarter, but we know that that is the recipe for success in our stores.

Speaker 2

Yes, I think you are starting to see the green shoots really resulting in us being able to keep our OpEx under control and within the lower part of our guided range.

Operator

Thank you, Bobby. I was just going to say a couple other things. The loss prevention opportunities have been something we have been working on for quite a while, just taking a targeted, more analytical approach to how we address that. Labor rate is a big thing. QC, with a better demand forecasting model, we shifted from full-time to part-time labor where it makes more sense with the enhanced labor model. Doing the same thing at Murphy USA, enhancing its labor model. In an environment where your applicant flow is more than double what it was, you do have the opportunity to be thoughtful about starting rates, rate increases, et cetera, as you maintain a competitiveness to your business but stay in the sweet spot of where you want to be price wise in the market. One more quick build.

Speaker 4

Thank you, Bobby. Just on your point, as in a challenging demand environment like this, there's a couple things you do while you try to spur demand. One, and Mindy's team has done a great job in operations, you manage cost. Right? We're doing that in our stores, doing it in the home office, and those are sustainable. As she talked through, we're not expecting this to be a one-time effort. We're continuing to manage cost. The second is you optimize cash, and we're spending our cash on the things that will pay off in very long term, such as the new stores and the share repurchase. We're expecting the demand environment to come back, and we will have a lower cost structure when it does.

Speaker 4

Thank you, guys. I appreciate the time and best of luck in the second half.

Speaker 4

Thank you.

Speaker 6

Your next question comes from the line of Jacob Aiken-Phillips with Melius Research. Please go ahead.

Speaker 4

Hey.

Operator

Good morning. First, I wanted to talk a bit more about PS&W last quarter. There is a lot of focus on it. You went through the temporal, cyclical, structural factors, etc. You already spoke about retail margins. I'm just curious if you could speak about why the flip in Q2 and what we can expect for the rest of the year and going forward.

Speaker 2

I can take that one. When we look at the first quarter results, PSNW of around $1.73, I think it was in a quarter that was really characterized by very low volatility, a much longer supply environment than this quarter. Although this quarter is still very long and loose, it was worse actually in the first quarter. There were all the storms with hundreds of stores down, which impacted our demand profile. When we look at this quarter and why the difference, it is still a pretty well supplied market. Yes, there were higher RIN values, but there was also correspondingly offset results in our transfer to retail. Price is 10% lower on absolute levels.

Speaker 2

Part of the difference between the impact this quarter versus last year, last quarter, is just the amount of length in the supply market and also the direction and movement of pricing, which impact what we call our non controllable. The timing of pricing and inventory variances, as well as the length of supply in the market, was a little bit tighter this quarter versus last.

Speaker 4

Thank you.

Operator

On share repurchases or I guess capital allocation, it seems like you may have levered up a little bit or took out some debt to do that level of repurchase. I understand the valuation dynamic, but can you walk through how you're like balancing leverage tolerance versus growth and capital returns given like the softer fuel volumes?

Speaker 4

Yeah.

Operator

We don't borrow money for any one particular purpose. We have a 50/50 capital allocation strategy. You could have asked the question differently and said it seemed like you levered up to get all those stores in the pipeline. We have a long-term commitment to that capital allocation strategy. Our financial framework is geared to that. For every dollar we borrow, 50% is for growth, 50% is for shareholder distribution. Don't think about leveraging up to buy shares. It's just whatever leverage we need to maintain that 50/50, and we said we'd probably be hitting the balance sheet a little bit in 2025 and 2026. In 2027, 2028, 2029, and beyond, your excess cash flow is going to be going in the opposite direction.

Speaker 4

Jacob, just to reiterate, we're very purposeful with our balance sheet. We took on some additional financing early in Q2 to make sure we had the flexibility to run our strategy for the next three plus years. That strategy, as Andrew mentioned, is investing in new stores, continuing to repurchases. We've said we're comfortable at leverage around 2.5 or below. We're going to be right at 2.0 Q2 right now. We're very comfortable with our balance sheet and it gives us a lot of flexibility as we go forward.

Speaker 4

Thank you.

Speaker 6

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Good morning. Thanks for taking my question. I wanted to follow up a bit on the fuel volume trends and was just wondering if you could touch on the competitive landscape. Curious if you feel like you're seeing anything different there, and as you look at the locations of stores, wondering if any difference geographically or perhaps those more co-located with Walmart versus those not. You might be seeing any differences.

Speaker 4

Thanks.

Operator

No real differences between Walmart versus non-Walmart locations. Our customer behavior is pretty consistent across formats and markets and proximity to different retailers. I would say that other everyday low price retailers experience the same thing we do from a convenience standpoint. On the margin, there's some customers that may go to a more convenient store, certainly in some of our markets. DFW is a great example. There's just a lot of low price retailers there, so it's pretty convenient to find the next one. Nothing really different from a dynamic standpoint in big established markets where competitive entry has taken place a few years ago.

Operator

What we see every year somewhere is a high volume retailer emerging in a new market area, and when they move in there's greater competition, just like when we move in to certain markets and sometimes we move in at the same time as someone else. You may see some downward pressure on margins as you establish a new equilibrium and then margins restore. Unfortunately, these are markets that are growing markets, which is why we're investing in them and others might be investing in them. In any given year, there's going to be one or two pockets geographically where you see market entry at scale and there's greater competition. I would say in a lower price environment, generally we're not the only one that's probably being a little bit more aggressive trying to retain customers.

Operator

That's helpful, Andrew. As we think about OpEx and the success that you've seen here this quarter with some initiatives, can you help us just think about does that take on a growing importance for you if volumes remain a bit weak in the near term? How do you think about the opportunities in front of you on that aspect of the business?

Operator

Yeah, that's a great question. Look, at the last investor conference we went to, there were a lot of questions, kind of short term, long term. We just kind of got everyone focused back to Slide 10 of the presentation we delivered at the Raymond James presentation in March. It's really simple. We run highly productive, low cost stores and we have a zero break even target. If we were at full ramp on our new stores, we'd be doing better than that. It's basically the merchandise contribution covers the OpEx and field and direct G&A. To the extent we can make improvements there, especially if we're seeing some temporal headwinds on the merchandise side, we maintain that zero break even.

Operator

When you see a fuel margin that's being structurally resilient and growing, we're able to then, with reductions in our non-direct G&A, keep more cents per gallon on an adjusted EBITDA basis. It kind of goes back to that long run thesis where I kind of did the reconciliation. We've put an extra penny or two on the street over the last few years in this low price environment. We're not even capturing the full extent of that structurally resilient margin that we're seeing. At the end, that EBITDA margin on cents per gallon, it's all about growing your fuel volume. We know that we're going to see some same store declines in mature rural markets where we may be doing raise and rebuilds, but demographics are shifting.

Operator

As Mindy West and Jeff Gallagher said, our new stores are performing not only at a much higher level, but much higher than our expectations and especially on a gallon basis. With 50 stores at ramp, we keep growing that total fuel volume on a growing EBITDA margin. That's what creates the cash flow machine this business is, and that beautiful virtual cycle of then reinvesting into future growth and then having the cash flow to buy back shares, pay our dividend, and any other priority. That's really how we think about it. We're less worried about the ebbs and flows of the cycle, any temporal effects. We've got the structural business, we've got the structural advantage because of our low operating and overhead cost.

Operator

With that zero break even, we'll be able to keep over the long run more of the fuel margin versus the marginal player and continue to grow EBITDA and Brad.

Speaker 2

I would say that the OpEx mathematically may in certain cycles need to be more important. What I would hope is that culturally it doesn't feel more important because it needs to always feel important. Right. We are running an everyday low price model for our customer who depends on that, and we cannot do that without underpinning that with everyday low cost. Regardless of the environment, we have to be ruthless on our cost, and it should just be part of our DNA and what we do every day.

Speaker 2

That's very helpful. Thanks, Andrew. Thanks, Mindy.

Speaker 4

Thanks.

Speaker 6

Your next question comes from the line of Corey Tarlowe with Jefferies. Please go ahead.

Speaker 4

Great, thanks. Andrew, just wanted to ask a question on the long term. As you think about the 2028 target that you put out, what are some of the big changes that you want to highlight? What's different, why make the update today, and how you're thinking about the building blocks of getting to that new target from where we're at currently?

Operator

Yeah, I think in terms of building it today, it's kind of been out there. With some of the headwinds that we've had, people just ask the straightforward question, is that target still intact? When you hear investors ask a question enough times, you go back and say, okay, let's update that target and reconcile the assumptions that we had with the new assumptions and provide a new view of that. It's just really as simple as that. We've broken it down kind of similar to that slide 10. If you think about same store performance outside of fuel, we're behind on QuickChek merchandise and Murphy USA merchandise. Unfortunately, OpEx and G&A covers most of that gap in the 2028 view off about $20 million. Both are going to be compounding in the future off of a lower base.

Operator

As Mindy noted, if you're able to kind of keep that relationship intact, that's what's different for us versus other retailers. They may be shrinking their merchandise contribution and growing their OpEx. That's really positive. The new stores, the impact there isn't as big a difference in 2028. We will miss those store months in 2029 and 2030 when they're at full ramp. The good news is that goal was to start in 2024. We're going to hit 50 starts in 2025, 50 openings if you include January. The good news is those stores are performing at a better rate. The same store volumes have been really offset by the improvements that we see and expect to see in retail margins without clawing that penny back, without getting that extra penny and just, you know, getting back to a $0.025 to $0.03 range.

Operator

That kind of gets you back to about a $1.2 billion EBITDA. We expect to see a more normal price environment. It's going to be a bumpy trail to $1.2, $1.3 billion to 2028 to 2029 to 2030. We're really thinking about what does the business look like on a sustainable basis. Certainly when we build our longer range plans and set expectations and present those to our board, as we think about capital allocation and reaffirming our 50/50 objectives, we need to do that in a normalized environment. We also need to understand there are going to be periods that are better, like 2022 and early 2023, and there are going to be periods that are.

Speaker 4

A little bit softer.

Operator

That is why the balance sheet stays conservative, as Jeff Gallagher talked about, because we want to win in any environment. We want to build in any environment. We do not want to be slowing down growth in a weaker part of the cycle. The point is, when those stores are up and running, you are back to a normal environment or better, and the stores ramped up. You are getting even more out of it and a better return. That is the philosophy we have had since the spin, right? We are going to be capital disciplined. We are going to invest in the best of times and the worst of times, as long as we believe that we have a proven winning model, which we do.

Speaker 4

Got it.

Operator

That's really helpful.

Speaker 4

I just wanted to ask another question on the back half. As you think about the dynamics that you've seen in the first half, is there anything that maybe sticks or changes or goes away? As you think about what the back half might look like, I know that there is some change in the tobacco expectations, but would be curious to know if there's anything else that you expect from either an operational or financial perspective that would shift as.

Operator

We kind of turn the corner into.

Speaker 4

The back half year.

Operator

Not at this point. I think given some of the areas that were weak in the first half, we'd like to think there's more upside than downside in those areas, especially relative to some of the comps from last year. As we noted, despite some pretty remarkable geopolitical events, we didn't see a high level of volatility. Could that change? I don't know. If you see the heightened level of geopolitical activity, is it going to really show up in crude prices as it didn't in the first half of the year? We're going to be a taker of those inputs and we're just going to execute our model around them because those are the things that are outside of our control.

Operator

We're just focused on the things that we can do within our control, and we continue to have a lot of arrows in our quiver to continue to improve this business.

Speaker 4

Okay, great. Thank you so much.

Speaker 6

There are no further questions at this time. I will now turn the call back over to Andrew Clyde for closing remarks.

Operator

Great. Thank you everyone for joining in. Appreciate the opportunity to provide an update on our guidance, as well as how we think about long term value creation for shareholders. Thank you very much.

Speaker 6

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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