Tammy Taylor - IR Andrew Clyde - President and CEO Mindy West - EVP and CFO.

Matthew Boss - JPMorgan Bryan Hunt - Wells Fargo Bonnie Herzog - Wells Fargo Ben Bienvenu - Stephens Carla Casella - JPMorgan Damian Witkowski - Gabelli Capital.

Good day, ladies and gentlemen, and welcome to the Murphy USA Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Tammy Taylor. Ma'am, you may begin..

Good morning, everyone, and thank you for joining us today. With me are Andrew Clyde, President and Chief Executive Officer, Mindy West, Executive Vice President and Chief Financial Officer, and Donny Smith, Vice President and Controller. After a few opening remarks from Andrew, Mindy will provide an overview of the financial results.

Andrew will then give an operational update and we will open up the call to questions. Please keep in mind that some of the comments made during this call, including the Q&A portion, will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For a further discussion of risk factors, see Murphy USA's Form 10-K and other SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements.

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

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

Thank you, Tammy. Good morning and welcome to our third quarter 2015 earnings call. We are very excited about our third quarter results, where we earned $1.40 per share from continuing operations on EBITDA of $128.5 million. We're also really proud of our accomplishments in the quarter, as well.

And together, we believe they clearly reinforce our strategic direction and the key messages we have prevented to investors since our spinoff two years ago. So I'd like to open the call this morning by highlighting the important takeaways for the quarter in the context of our ongoing strategy under three things.

First, we continue to drive a number of positive trends that are fundamental to our competitive positioning. We grew same-store merchandising sales and expanded unit margins, reflecting a better mix of larger stores and better promotions, pricing and inventory management execution.

Even with the growing mix of larger stores, we maintained a tight grip on site operating costs by optimizing labor and other costs while taking advantage of lower credit card fees. We grew total volume ahead of market demand, maintaining per store comps within 1% of prior year when we ran the enhanced discount program.

The implication of these trends is that we continued to expand the net contribution between merchandise margin dollars and operating costs while maintaining volume, which improves our fuel breakeven margin and overall competitiveness. This is essential in a world of ongoing volatility. Second, we completed several major milestones.

We wrapped up the $250 million share repurchase program, we opened our 1300th store and are on track to open over 70 stores for the year, and we completed the Hereford ethanol plant sales process, grossing almost $94 million in proceeds.

The takeaway here is that we remain focused on creating the highest value for our shareholders by executing our differentiated strategy of organic growth combined with shareholder distributions and on maintaining the ability to pivot between the two, as opportunities present themselves.

The third point I'd like to make is that we've positioned Murphy USA for continued earnings growth. In the quarter, we entered into a new five-year merchandise supply chain contract with Core-Mark. We will transition services in Q1 next year and expect that to result in expanded margins and lower cost.

Many of our ASAP initiatives are moving from design to pilot to implementation, creating line of sight to savings in multiple areas, quickly paying off the higher SG&A costs incurred in the short term to achieve the ongoing long-term benefits.

And we achieved our goals on site investments, by completing over 300 refresh projects where we are seeing positive early results, installing over 60 super coolers and starting our first raze and rebuild site.

The key takeaway here is that the Q3 EPS growth of 14% from continuing operations that resulted from all of the efforts outlined above is poised to continue in the future. We will provide more guidance around 2016 in our February call, but the point is Murphy USA is a company that is not standing still.

I will turn the call over to Mindy to go over the financial results, and then I will add some color on the operations before we go to the Q&A..

Thank you, Andrew, and good morning, everyone. Income from continuing operations increased 6%, to $60 million compared to 56.6 million for the third quarter of 2014. 2015 third quarter income from continuing operations per diluted share was $1.40, compared to $1.23 in the third quarter of last year.

That increase in income from continuing operations reflects higher retail fuel margins and improved merchandise margins, which were partially offset by lower product supply and wholesale contribution and lower realized sales prices for renewable identification numbers, also known as RINs, in the period.

The effective tax rate for the quarter was 36.2%, and that lower rate was primarily due to state refunds received that were not previously anticipated. Despite lower income tax rate in the current quarter, we currently estimate our ongoing effective tax rate to continue to be approximately 38.5% for the remainder of the year.

Total revenues were 3.4 billion in the third quarter, compared to 4.6 billion in the same quarter of last year. That decrease was caused by markedly lower fuel prices partially offset by an increase in store count.

Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA was 128.5 million, up 7.6% from 119.4 million in the prior year quarter. Net income for the Marketing segment for the third quarter of 2015 increased 3.2 million to 65.8 million compared to 62.6 million last year.

The primary drivers of this improvement were an increase in retail fuel margins, higher total retail fuel sales volumes, and higher merchandise margins, partially offset by lower wholesale margins.

After tax results for the corporate section improved in the recently completed quarter to a loss of 5.8 million compared to a loss of 6 million in the third quarter of last year, primarily due to lower interest expense.

As of September 30th, we have completed, as Andrew mentioned, the $250 million share repurchase program announced in October of last year. Our long-term debt totaled approximately 489.7 million, resulting primarily from the senior unsecured notes.

Our asset based loan meanwhile remains capped at its $450 million limit, subject to periodic borrowing base determinations which currently limit us to 221 million. At the present time, that facility continues to be undrawn.

Cash and cash equivalents ending September 30th were 65.3 million providing us with a net long-term debt position of 424.4 million at quarter end. As Andrew also mentioned, we signed a definitive purchase and sale agreement to sell the Hereford ethanol facility for nearly 94 million, including estimated working capital.

We do expect to utilize 1031 exchanges as part of a tax planning strategy, which will result in most of those sales proceeds being restricted during the first half of next year. However, those proceeds will be available to fund new site construction.

At the end of the six-month holding period, any remaining funds will revert back to the company on an unrestricted basis. Capital expenditures for the quarter ended September 30th were 64.4 million, compared to 31.6 million in the same quarter of last year.

Current period expenditures include 54.8 million for retail growth and 7.1 spent on retail maintenance items.

We currently expect capital expenditures for the full year of 2015 to be approximately 210 million to 230 million, which includes 185 million to 205 million for the retail marketing business, 5 million for the remaining ethanol facility that we have just announced the sale for and 15 million for the product supply and wholesale operations and $5 million for corporate.

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

Thank you, Mindy. Let me start with some color around the fuel environment and our performance there. For the first time since around 2007, 2008 macro demand for motor fuel in our markets grew by more than 2%. And for the quarter, we grew our total gallons by 3.5%. So we are growing market share in our core geographies.

Per site gallons are within 0.7% of the prior year, largely reflecting the enhanced Walmart discount in the Q3 2014 comps. So we feel good about the overall volume performance of our network as it continues to grow. Unit margins were a strong $0.181 per gallon for the quarter.

Year-to-date margins of $0.125 are tracking to last year and right in line with our long run target range of $0.12 to $0.13. We will go up against record Q4 comps for both volume and margin, so unless we see crude prices fall to below $40 a barrel, or something significant like that, I don't see a repeat of last year's Q4 finale.

That said, the current quarter had started on the right path to end the year at 4.1 billion gallons on the lower end of our annual guidance. The product supply environment was not dissimilar to last year, as refineries ran at record high utilization rates, so there was plenty of products.

There were a few periods of disruptions that open the arbs that we took advantage of that helped wholesale margins and the sharp fall-off in spot prices created some timing variances that impacted product supply.

Q4 has started off much better, as refineries went into their turnaround season, which tightens supply and that helps our proprietary model. There is still a lot of inventory in the system, so the key to seeing additional Q4 volatility will be whether refineries experience hiccups coming out of their turnarounds or not.

RINs provided a strong offset, as we sold 53 million RINs at $0.38 per RIN. We continue to see RIN values in the 30s; and at present, we anticipate they will stay in the current range going into 2016.

We expect the contribution from product supply and wholesale to be below our annual guidance of $40 million to $60 million, but more than made up for by higher than expected RIN sale volume and prices. Turning to merchandise, performance was really outstanding.

We grew same-store cigarette and tobacco margins by 4.6% on flat sales, which is quite positive in a world of declining carton units. Non-tobacco same-store margins grew 12.1% on a 7.5% increase in sales. This highlights the strength of our core network of stores.

Including the impact of the new stores, total combined margin dollars grew 7.5% on an average per store basis, while total sales grew 1.1%. We expect to end the year at the high end of our guidance of $315 million to $325 million in merchandise gross margin. In the face of growing sales and larger stores, we continue to keep operating cost in check.

Excluding credit card fees, per site operating costs increased by 0.7% in Q3, yet remained down 0.6% year-to-date, as we continue to achieve our target of beating inflation in this commodity business.

While every company is seeking to grow their top line sales and margins, the key to do that efficiently and not let labor waste and other cost offset the gains. We believe our unique operating model, combined with the improvements, initiatives underway enable us to do that well and we still have a long runway to make further improvements.

As discussed, the short-term SG&A increases are largely due to our ASAP project cost, which supports building the capabilities to sustain and grow these improvements. A couple of points on our investments - we expect to end the year around 70-plus sites, so right in line with our 60 to 80 store annual guidance. We plan to maintain this pace next year.

We've completed the 300-store refresh program, and very early results look promising on both volume and merchandise uplift, as we provide a facelift on some of our oldest stores. We plan to continue this program in 2016 and we are working closely with Walmart to align our program with their own refresh program.

We've started our first raze and rebuild site, and we have identified 10 stores for next year. We are working with closely with Walmart to establish the process for scaling that up further.

I will close by addressing the question I know that is on your mind, which is, where do you stand with Walmart on future new site growth? As noted on the last call, we did not expect to have an outcome by this time, and we don't.

We are in active discussions around our reinvestment plans for 2016 to improve our existing network and we look forward to beginning that work. We continue to believe that Murphy USA offers Walmart the best option to deliver a low-cost fuel offer to their customers on Supercenters that in turn generate sales uplift for them.

My personal take away from their last analyst day was they are focused on reducing investment capital on low return businesses and driving traffic to their stores. We believe that we fit perfectly into that objective and that we're a proven, trusted partner to work with.

I appreciate your patience as this plays out in the natural progression of complex discussions like this one. So with that, let me take this opportunity to thank our team of close to 10,000 employees who not only delivered this quarter's great results, but are working hard to enhance our capabilities to sustain and grow our business into the future.

Operator, at this time, we are open for questions..

[Operator Instructions] Our first question comes from Matthew Boss from JPMorgan, your line is open..

Two questions.

The first is on store growth going forward -- and that's helpful on your comments where you stand with the Walmart negotiations, what's your current land bank availability for next year? And then if you could just talk about that comfort with 60 to 80 new stores annually, I guess my question being, what's the comfort level regardless of whether a Walmart agreement is announced?.

Exactly. So we will bank from this year, either close this year or in early Q1 next year, close to 40 sites that would be Murphy Express sites. The majority of those are adjacent to Walmart Supercenters in our core markets.

And so if we are able to maintain that, that coupled with the remaining sites from the December, 2012 deal will allow us to continue a pace of 60 to 80 sites for the next two years, before that ramps down to a more modest growth rate of 40-plus sites.

So we still have ample runway and time to hopefully establish a much larger pipeline through a bigger deal, or position to ramp up the land bank through real estate acquisitions..

Great. And then my second question goes to whether it's store growth or capital allocation. So your buyback authorization is complete. You have an additional $100 million from the ethanol plant sale.

How should we best think about go forward capital allocation priorities? And in addition to all of this, any potential appetite to potentially take on any leverage to opportunistically buy back even more shares?.

I think, Matt, as we've talked to you and others on this call and our investors in this interesting period where we believe we have this game changing opportunity to build out the remaining Supercenters, and we really want to maintain our capital structure and flexibility to be able to do that.

As we had in 2015 excess available cash and knowing that it would be well through 2015 or 2016 before anything was announced, we couldn't have that excess cash just sitting on our balance sheet and so we did the share repurchase program.

And the same would hold true in 2016, if this dragged on and on and on and we didn't have an outcome in sight, we would not sit there with a lazy balance sheet. And I think we demonstrated that in 2015. We will be able to fund operations, fund capital growth out of operating cash flow and existing cash balances. We've yet to draw on our ABL.

So we're in a good position to do that. So I guess the bottom line is we want to remain flexible in our approach, knowing we have a track record of doing the right thing with respect to shareholder distributions when we are sitting on excess cash..

Our next question comes from Bryan Hunt from Wells Fargo. Your line is open..

Thank you very much. I was wondering if you could give us an idea of what your 300 refresh projects did for you in terms of same-store gallons and same store merchandise..

Thank you. We have early data on the first 100 that we did, and the look back period and the look forward comparable period isn't as long as I would like it to be. So we'll have better numbers in February.

From what we've seen so far, looking at control sites within the same district in adjacent areas, we're seeing at least 0.5% uplift on volume and merchandise lift from those older stores. That's what the early indication has. We'll have a better number on that in February when we'll have a larger time period to look at. But we're encouraged by that.

As we've said also, the maintenance costs from the improvements that we made will go down. So we'll get a payback from that, as well. So we're probably looking at a payback of less than 3 to 4 years..

That's a strong ROI.

Next question -- and I think it's been asked frequently over the last couple of quarters -- as gasoline prices have come down, is there any metric you can give us on how the extra change that's put in the pocket of the consumer translates into merchandise sales for you all?.

There's two metrics that we see that I have looked at over 20 years that I do believe are relevant to lower prices. The first is people upgrade from regular gasoline to mid-grade and premium. I think there's a recent study from one of the banks that did some analysis on that. We've seen that every time prices go down.

And we see an equal and opposite effect when prices go back up. We see something similar on tobacco products, as well. People upgrade to more premium brands. As so as you see the shift in the product mix, you do see a higher range on the tobacco products.

What is difficult is to then attribute other factors, given that you're making improvements to your store, you've got other competitive dynamics taking place.

When you look at the amount of savings, how much is putting to savings and paying off credit card debt and spreading it across lots of merchants, it's hard for us, given all the other promotions and initiatives that we have, to isolate some other amount. But we definitely see the upgrading of product and that's a trend that's recurred over time.

You also see the opposite effect when prices skyrocket..

Very good. And then my last question is, and you alluded to it, I think, in your script and also in your press release, the volatility coming into Q4 on oil and wholesale fuel prices has led to a favorable margin environment, but not quite as good last year.

Is there any way you can give us a read, are the margins going into Q4 as good as what you posted in Q3, or at least in the ballpark?.

We started Q4 strong. We've seen an uptick in prices more recently, in November. I think the key for the quarter is really going to be what happens in December. When product prices fell $0.60 in two months and another $0.60, I think, in December last year that was the real finale that drove the margins and allowed us to get the volume, as well.

A good start to the quarter but too early to tell, the fourth quarter historically has had a lot of volatility, either on the retail side or on the product supply side. And things can swing wildly positive for the other direction without a moment's notice..

Our next question comes from Bonnie Herzog with Wells Fargo. Your line is open..

Good morning. I just have a couple of questions pertaining to your relationship with Walmart. First, any potential to renegotiate a new discount program with Walmart? And then second, Walmart recently discussed stepped-up traffic at their stores gaining from Dollar Store.

So could you talk about how that has maybe benefited your stores? And then finally, you touched on this a bit, Andrew, but could you maybe give us a little more color on why you think you're in a position of strength today versus back in 2012 when you signed the last agreement with Walmart for store builds?.

Sure. So the first point on loyalty programs is, as we said before, we didn't do it this year, Walmart's focused on their store improvement initiatives and wanted all hands on deck to execute their refreshed offer in customer experience for October. And I've actually been pleased with our volume performance, despite not having the discount program.

We are looking at sort of the world of customer appreciation discount loyalty programs, however you might want to call them to see what would be a winning model, given our business model and product mix and what would fit with in the world of Walmart's EDLP philosophy. So we're doing that work ourselves.

That's one of the things that we'll be talking about. Whether that is part of a subsequent real estate deal or something separate remains to be seen. But it was clear when the decision was made for the summer, that that did not exclude the possibility of doing the same or something different in the future. So I hope I addressed that for you.

On the traffic at Walmart, everything they do to make their business stronger, to improve their traffic benefits us. And I would say the same for us. If we're doing things that drive more traffic to our store because we've refreshed it or have a better offer that in turn helps them.

And I think that's something very synergistic about our relationship and how we can work to improve each other's model.

What I would need to do to be able to understand how their traffic increase has impacted ours would to be to know the traffic increase store-by-store, to compare that to our store-by-store traffic increase because there is a lot of other variables that happen out in a marketplace that might determine why we had an increase or a decrease.

For example, if a new competitor opened or closed, we might have an increase or decrease of traffic at that store and it had nothing to do at all with Walmart traffic. And so it would be an analysis we could do. We would just need that store level data to do it, and we can't do it. But the bottom line is, if their traffic's improving, it's good for us.

And we think if our traffic's improving, it's good for them, also. Versus the position in 2012 from a strength standpoint, I think we just know a lot more about our business as a standalone company. I think we know a lot more from doing the last deal, in terms of the process.

When we did the first 1,100 stores, we were building out Supercenter parking lots as the Supercenters were being built. And so it was a much smoother process. There were fewer delays. Permitting was much simpler and the like. And so when this last tranche of sites, where you're retrofitting, we learned a lot about that.

And so from a speed of execution, roles and responsibility, who's best positioned to do what, I think we're in a much stronger position to execute the next deal better, faster, quicker than we did the last time, which is again good for both Walmart and Murphy USA.

I think as it specifically relates to our strength, I believe we also have a very strong alternative plan. We've demonstrated that we can acquire and grow sites through our land bank program, through the Expresses and a similar model, and those sites give the same level of returns on capital.

They leverage our same capability, so we're not getting into a different business where we have to stretch our capability set. This business generates a lot of free cash flow and so it gives us opportunities to both have organic growth and strong shareholder returns.

And if you couple our core business, even with a more modest growth scenario, with all of the improvement initiatives we have underway and if we didn't do a landmark deal with them, we would have the opportunity to restructure our balance sheet for a Plan B. And all of those together give us a very attractive return on equity.

So if you think of that as our worst case alternative, I know a lot of companies who would take that to the bank every single day. So I think we have a strong core business and we have the opportunity to have transformational growth, but the worst thing that's going to happen is we're going to handsomely reward our shareholders..

And then if I may, just a quick question on your expenses. Your OpEx decreased overall but then increased on an SSS basis, excluding credit card fees.

Could you drill down a little further and talk about some of your cost-cutting initiatives and then how much of a runway you have to lower your costs further? And also, you noted your SG&A expenses increased again in the quarter, but primarily due to the higher professional service fees for the ongoing projects.

Could you give us some color on what these special projects are and when they might be completed?.

Let me handle the OpEx and I'll let Mindy talk about ASAP, as she's the executive sponsor for that project. Our per site costs increased in the quarter, but they remained down for the year-to-date and expect that to be the case for the year. In the current quarter, there were some increases in maintenance and environmental.

You tend to do a lot of that work in the summertime. A lot of that is to do with the refresh program, as well, where we expense most of those items and then there's capital as well in that. Year-to-date is driven by the fundamentals, getting sharper around our labor and this is before the labor opportunities Mindy's going to talk to around ASAP.

It's improvements around shrink that we've had. We implemented a new security system last year across our entire network and we're seeing the benefits there. And then some other areas. We continue to make improvements in those fundamental categories.

The fall activity, there was largely refresh and then some environmental work that we did during that period. So if that addresses the OpEx, I'll turn it over to Mindy, who can talk about SG&A, but then some of the outcomes that we expect..

Bonnie, our goal for SG&A is to keep that flat. However, as you mentioned, overall SG& A is trending higher and it was up $3.3 million versus same year prior quarter, as we spent about $4 million in what we call our ASAP initiative, which stands for Advanced Systems and Processes.

That's where we are addressing our processes, work flows, analytical capabilities. We have 12 of 17 projects which are incorporated in that initiative now in flight. We talk a little bit about it at analyst day. And what we said back then is we do expect the entire cost to be around $30 million, spent over a three-year period.

And we were projecting annual benefits, at full run rate, at about $15 million. That said, as we get further into our timeline next year, we expect to be able to re-quantify both the spending by period along with the benefits expected. Really not comfortable in these early days now to re-quantify either of those at this time.

But I can say that we have been very pleased with early indications from multiple projects under this initiative, which are currently in the piloting phase. So I think when we're able to come back to you with more refined numbers, you will be pleased with the performance and also the speed with which we expect this investment to pay off..

Let me just give a little color, just around an example of that. We had kind of a lean, mean, frugal operation when I joined the Company. But as you dig down deeper into, say, site operations, we found we didn't have a lot of standard operating practices at the site, a lot of tribal knowledge, things done in different ways.

So if you apply best practices around all the activities, utilize your downtime better, you actually need fewer hours at the site. You can then optimize the roles and responsibilities to improve the mix of the different cohorts at the site. And you end up reducing your hours and your wage mix as a result of that.

So you improve your site labor cost and you have more sustainable processes that leads to a better customer offer, better safety and the like, because everyone's doing the same thing the same way. If you think about going from 1,000-1,300 sites and potentially doubling that, you want to have scalable processes when you roll those out.

In that same process, we found that we had excess merchandise inventory at our sites because of the old mindset of you can never have a stock out.

Then when you really get to the right merchandise inventory management systems that we're implementing and you take that out, you can reduce your working capital, you end up having less audit fees when you go out, because there's less to count, there's less store labor because you're not counting as much inventory, you have lower shrink.

And what we'll see, and we will get more into it in February with guidance and at analyst day, is these things have a tendency to compound on each other.

But given that they are fundamental, as Mindy said, around the core systems, we're rolling out a new back-office accounting system, we're rolling out new home office analytical systems and supporting systems, etc., this is a welcome to the 21st century systems tools processes and really going to be able to turbo charge this business.

There is some short run pain, both in terms of cost and manpower to achieve this. But this is going to lead to a quick payoff and nice benefits that not only hit the bottom line, but allow us to really scale up this business if you have transformational growth..

Our next question comes from Ben Bienvenu from Stephens. Your line is open..

Just touching on the pricing landscape in the quarter. You had a lot of margin to play with. I'd be curious to what extent you balanced incrementally higher fuel gross profit margins with gallons, given the difficulty of the compare last year at the lack of the Walmart discount program this year.

You put up what I thought looked to be nice gallon performance in the quarter, and I suspect you'd prefer to have sustainable gallon growth rather than one-time fuel margin growth. But any color there would be helpful..

Sure, Ben. A lot of things happened in the quarter, when you think about the comp versus the prior year. So as you said, we didn't have the discount program. We had macro demand growing at a higher rate than last year. We're somewhere probably 2%, 2.5% this year versus 1%, 1.5% last year. And we had a sharper decline in prices.

You're absolutely right, you want to have sustainable gallons year-over-year. And what we do is take advantage of the market environment that is given to us by the market and optimize within that. The big difference from year to year is largely going to be that market environment.

We had favorable demand, we had a sharp falloff in prices that helped on the positive side. And I would say we didn't do anything markedly different than we did in the past periods that look like that. And then we didn't have the comp on the discount program. So I think those all translated out pretty well and which is why we felt pretty good.

If we hadn't had the discount program last year, we would have posted, I think, a pretty nice growth for the quarter, largely driven by the larger fall off in prices and the overall higher macro demand..

That's helpful. Thanks. In your opening comments, you talked about this partnership with Core-Mark. To the extent you can provide any sense of magnitude of the benefits you might get, that would be helpful.

If not, it would be helpful to understand what they've said that resonated with you, why you ultimately decided to make the shift, and then at least the categories in which you see the opportunity for greater efficiencies..

Great. So we will wait until February to incorporate the benefits into our 2016 guidance for the year. With respect to Core-Mark, they are a growing company. They are a public company. And as a result, they are very transparent in how they work. This was an incremental account for them, but it's a large, substantive account.

The largest volume in terms of revenues that they distribute is tobacco products. And it's the lightest, easiest to queue product for a merchandise distributor to manage through their system.

So if you think about companies out there with available capacity and looking at this on an incremental basis, they were able to look at this for the opportunity it was. And they also, I think, see the potential for our growth going forward with our model. So I feel really good. We've got a strong team working through the transition.

They recently announced another large deal on the West Coast that's not going to be implemented until October of next year. It's in different markets. They've been very, very professional and thoughtful about what this transition is going to look like. I think net-net, we're going to be in a good position. Where you will see the benefits is in tobacco.

Because that's obviously the largest category, so any improvements would naturally go there. You'll also see it in the profit margin and the other categories. It's just not going to be as meaningful as on the tobacco side..

Great. And just one last one.

When you look at the merchandise margin improvement in the quarter for the second consecutive quarter, do you have a sense of how much the contribution, how much of that improvement was contribution from the larger store format, or are those lines blurred as you try to parse out the benefit from higher tobacco margins and the larger stores?.

No. A good percentage of it does come from the larger stores. When you think about the kiosk, the center of the store categories, like candy, snacks, et cetera, are fairly limited. When you add the super coolers, you do get a nice uplift on the beverage side. And we're able to see that, as well, through the promotions.

Tobacco is an area where we had strong margin dollar improvements. And you see a lot of that at the small stores, because you have so many of them. It's largely a function of the improvements in tobaccos, and the contracts, and the pricing execution, and how we manage that, coupled with the large store mix..

Our next question comes from Carla Casella from JPMorgan. Your line is open..

Hello. One clarification question on gross margin, you talked about tobacco margins improving.

Did you say what a big driver of that was? And do you see that going forward?.

It's a variety of things. There is the contracts we have and what we're able to do to earn against those and achieve those. We have some new pricing capabilities that we've been executing and getting sharper around that.

The promotions that we're executing and getting sharper around the execution of that and then just some of the competitive dynamics as well. So it's a host of things that can contribute to it, Carla..

And then given that you restated your numbers to pull out the Hereford sale, are you going to provide the quarterly restatements for the last four quarters?.

We're not in a position to be able to do that yet, Carla. We will be unveiling them, obviously, throughout your next year. That was really our plan, was to be showing those as we report each quarter through the year next year. If we need to take it off-line, though, we can give you an idea of what the earnings and EBITDA was by quarter for the plant..

Your next question comes from Damian Witkowski from Gabelli Capital. Your line is open..

Good morning. Can I just go back to Walmart, and if I look at your discussions, I know they're progressing and it's not unexpected that the deal is not done.

But, two part question; first, can we just talk about the top two or three things that are the biggest issues that are sort of holding up negotiations? And maybe it doesn't have to be precise because you probably can't disclose that, but just give us an idea of what those might be? And then secondly, if you are able to come to an agreement, maybe in the next couple of quarters, would you then be able and willing to go beyond the 60 to 80 stores per year, in terms of new developments, if you had the ability to do that?.

Good. I think there is only one thing that's holding it up, which is Walmart internally deciding is this an area that they want to invest in themselves or do they want to have a trusted, proven partner like Murphy USA to do it for them? So you can go back to April, when Walmart presented their analyst day and they talked about three adjacencies.

There was only one line in the presentation on it, but gasoline was mentioned as an adjacency. They are doing their neighborhood markets. It makes sense, given the amount of traffic at those and the challenges for a standalone retailer to do those.

But retrofitting Supercenters is a different challenge; and historically, the view was it would be difficult to get a return on those. And so ultimately, they have to decide whether this is going to be a business that they want to invest in to get the uplift on the stores.

And they are doing some pilots at some Supercenters and they are still evaluating those. Again, my personal takeaway is that's a lot of capital to invest. This is a lower return on capital business than the core business. And we know that having a Murphy USA in front of a Supercenter generates traffic and sales uplift to that store.

So that is the issue and the timing on that is a function of them concluding their internal work. In terms of ability to ramp up, we can scale this business up very easily. I mean if you think about what we're going to open, just in the last few months, it's more sites than we did in all of 2012, 2013 for the whole year.

And so our ability to ramp up to 100, 125, 150 plus stores is not a challenge and those are levels that we've done in the past. The key is having the pipeline through the planning permitting process, so that you can manage at that rate.

But we've proven once we've been able to build up the pipeline, we can ramp up our construction partners and other third parties to deliver to a higher rate..

And then if you are able to come to an agreement and they decide that it's better to outsource those than to do it themselves, would you envision an agreement where you're not sort of going incrementally 200 to 300 stores per agreement, you actually try to sign up majority of the remaining white space with the remaining Supercenters?.

Damian, that's the preference. And the main reason why is at the growth rate that we talked about, you would go through 200 sites in under two years. It's hard to scale up your business and scale up a third-party partner without that commitment.

So I think that's the direction we would certainly want to take it, because the benefits that you get from scaling up, knowing you've got that pipeline in sight. You can also then take the entire portfolio view. In the past, and even in the last deal, neither Walmart nor Murphy cherry picked sites.

They were a distribution of markets across the various geographies and clusters based on performance etc. And so we've always look at this as a portfolio approach. And having a larger scale certainly allows you to do that..

At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Andrew Clyde for closing remarks..

Great. Thank you very much. Thank you very much for your questions today. Again, we're very excited about the quarter, and everyone have a great day. Thank you..

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