Christian Pikul - Director, IR Andrew Clyde - President & CEO Mindy West - EVP & CFO Donny Smith - VP & Controller.

Chris Mandeville - Jefferies Bonnie Herzog - Wells Fargo Securities Matthew Boss - JPMorgan Ben Bienvenu - Stephens Ronald Bookbinder - Coker Palmer Damian Witkowski - Gabelli & Company.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Murphy USA Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instruction will follow at time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce you host for today's conference Mr. Christian Pikul, Director of Investor Relations. Sir, you may begin..

Thank you, Chenille. Good morning, everyone. Thank you for joining us today. With me are Andrew Clyde, President & Chief Executive Officer; Mindy West, Executive Vice President & Chief Financial Officer; and Donny Smith, Vice President & Controller.

After some opening comments from Andrew, Mindy will provide an overview of the financial results and then Andrew will open up the call to Q&A after some closing remarks.

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 these projections will be attained.

A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the 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 release which can be found on the Investors section of our Web site.

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

Thank you, Christian. Good morning and welcome to our second quarter 2016 conference call. I hope you have all had time to read through the earnings press release we issued yesterday where we reported net income of $46.3 million or $1.17 per diluted share. This is up from $26.2 million and $0.59 per share in the second quarter of last year.

Earlier in the year we shared our simple formula for driving earnings per share growth, similar to the first quarter call, I'd like to start by highlighting our progress against the key elements of this formula. First, we remain on track to achieve 5% organic unit growth in 2016.

Since the beginning of the year, we have opened 17 new stores and completed 7 raze-and-rebuilds projects in time for summer driving season. Presently, we have 40 stores under construction including 3 remaining raze-and-rebuild sites and we remain on target to add between 60 and 70 new stores to our network this year.

We've already completed all 120 plant super-cooler addition the kiosk locations this year and have accelerated installations on another 60 sites bringing our total plant super-cooler additions this year to 180 sites. Our 300 store refresh program is also on-track.

Second, our fuel contribution this quarter illustrated the benefits of our advantaged fuel supply capabilities.

Margins from our product supply and wholesale group totaled $17.4 million in the second quarter reflecting an upward trend in product prices that created positive timing and inventory variances, reversing prior quarter variances when prices fell.

We also benefit from periods of tighter market conditions driven by pipeline maintenance and high levels of demand. Product supply and wholesale plus rents added an incremental $0.059 on a retail gallon equivalent basis this year, compared to $0.05 a year ago while retail margins of $0.108 exceeded the $0.09 earned last year.

Taken together fuel added an additional $20.6 million in contribution as total volume grew 2.2%. Per site retail fuel volume was below prior year due to several factors. Structurally, we've closed 10 very high performing stores during the quarter to raze-and-rebuild them.

Seven, are backup in Q3 and performing above prior results, we opened a higher number of new stores in Q4 last years which are still ramping up. Unique to the 2015 build-class is a much higher mix of Midwest region locations under the Murphy USA brand. On average and historically, our Midwest locations performed below the chain average.

So on an average per store month basis, these factors led to a larger year-over-year decline than usual. Going forward we will continue to see the short-term impact of raze-and-rebuilds as that program continues in future year.

However, we expect the new store mix to be more favorable in future years with our Murphy Express branded sites under our independent growth strategy. On a same-store store basis we saw softer volumes in April and May due to rising street prices which made it difficult to be more aggressive economically.

Prices began falling in June and we saw positive same-store comps across all regions and continued to see a rebound from consumers in July. We expect this seasonal hike pattern at that time of year and the Carlson effect relationship between relative pricing consumer behavior. However, we can't predict precisely when prices will peak in the quarter.

The third point is that our initiatives to improve our fuel breakeven metric continued to demonstrate significant progress that are falling to the bottom-line.

Merchandize margins of 15.7% expanded 110 basis points year-over-year reflecting not only continued benefits from the Core-Mark supply chain contract which we also saw in the first quarter, but also more favorable shelf rebates and allowances along with enhanced product mix from larger stores.

Total margin dollars were up 10.8% to $92.7 million in the quarter. Same-store margins were up 7% although sales were roughly flat year-over-year. The same-store metrics remain slightly higher than our average per store month metrics, which reflect the same geographic mix to ramp-up new stores opened in the back half of 2015.

I would add that our store managers and staff have been dealing with a lot of changes at the store level, both with a new supplier as well as the full scale roll out of the labor model in the second quarter. And we saw that that impacted up-selling on sales at the margin.

Turning to the cost side of the equation, our average per store direct operating expenses were down 0.9% reflecting a 2.8% decline in labor cost as the store labor model was rolled out in late Q2. Offsetting this benefit was an acceleration of maintenance cost for refresh initiatives as compared to the second quarter of last year.

As a result of continued improvements on both the margin and cost side of the equation, our fuel breakeven margin has declined significantly in the second quarter to $0.0145 per gallon down just under $0.01 per gallon from a year ago. The fourth point is, our initiatives to improve scale efficiencies at the corporate level continued to evolve.

As I mentioned last quarter, we completed the successful reorganization of our finance and accounting groups to help create a more streamlined organization.

We're executing tax efficient handling of gains from asset sales utilizing like-kind exchange treatment and along with other ASaP initiatives we're creating a leaner, more capable and scalable support structure.

We're in the process of rolling out our new store accounting software to the field after upgrading the system in our home office last quarter.

We're also launching new growth initiatives at the corporate level, including the August 1st reintroduction of our proprietary Murphy USA Visa Card which offers an introductory $0.10 per gallon discount through the end of the year.

This offer appeals to the consumer segment who favors immediate sense of discounts and complements other card offers we have at our stores. These four points of our value formula support our strategy to drive organic earnings growth and we're excited about the results we achieved so far in 2016 and the momentum it creates for the full year.

Final point, as we continued our capital allocation program in a labeled manner. During the second quarter, we bought back 244,000 shares at an average price of about $70 per share.

Our steady share buybacks have provided a consistent boost to earnings per share and we expect to continue our capital allocation program in a manner that will accommodate both organic growth and shareholder returns.

We ended the quarter with a strong cash balance of nearly $310 million including 54 million of restricted cash, which will allow us to continue this two-pronged capital allocation strategy. I will now turn it over to Mindy for a closer review of our financial results and I'll touch on some additional topics before opening the call up to Q&A..

Thank you, Andrew, and good morning, everyone. As Andrew mentioned, net income for the quarter was 46.3 million or $1.17 per diluted share. Total revenues were 3 billion in the quarter compared to 3.5 billion in the year ago period. The decrease in revenues was caused primarily by lower fuel prices partially offset by an increase in store count.

Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA was 108.6 million, up from 73.6 million from the prior year quarter, attributable largely to higher fuel and merchandise margins, the effective tax rate for the quarter was 37.5%.

Moving to debt as of June 30th, our long-term debt totaled 648 million reflecting increased borrowings due to the reinstatement $200 million term loan that we put in place in the first quarter. The term loan carries a four-year term and a 5% per quarter amortization provision, the first payment of which was made on June the 30th.

Our ABL facility is capped at 450 million and is subject to a periodic borrowing base determination currently limiting us to 183 million. And at the present time that facility remains undrawn. Cash and cash equivalents totaled 254 million at June the 30th along with 54 million of asset sell proceeds held in escrow for like-kind exchange treatment.

Including cash and restricted cash net debt at quarter end is approximately $370 million. During the quarter, we repurchased 244,000 common shares for 17 million at an average price of about $70 per share under the previously announced program of up to 500 million to be completed by the end of 2017.

Shares outstanding at the end of the period were approximately 39.2 million. Capital expenditures for the quarter ended were about 70 million, which included approximately 54 million for retail growth, 10 million for maintenance capital and the remainder for corporate expenditures.

We expect full-year 2016 capital expenditures to still be in the range of our previous guidance of $250 million to $300 million. That concludes the financial update and I will now turn it back over to Andrew..

Thank you, Mindy. The industry we operate in remains highly competitive and is subject to dynamic challenges, both within from competitors and externally from other sources including regulations. These challenges require great deal of focus, innovation and execution to navigate in the short-term, while staying focused on our long-term goals.

We are currently monitoring and preparing for potential impacts to our business on a number of fronts, issues such as the increase in the non-exempt overtime salary level under the Fair Labor Standards Act or the imposition of EMV at the dispensers requires detailed analysis and a thoughtful response given the mix of formats and geographies on our network.

We have been actively developing our response to these and other challenges, which have caused capital implications. However, being proactive for example with our store labor optimization, not only prepares us to manage day-to-day under new or difficult regulations to minimize cost to risk.

It also generates savings which help to offset any cost increases that arrives from such changes. This proactive approach enables us to maintain our cost leadership position and our consumer value proposition.

While we will always face similar issues in the future, I believe Murphy USA can continue to win in this dynamic environment with customers, employees and investors because we have the clarity, coherence and consistency of strategy that has served us well since the spin and will drive shareholder value as we execute our independent growth plan.

We remain excited about future opportunities to innovate and push the boundaries of our business model. Thank you. And with that we will open it up for questions..

Thank you. [Operator Instructions] And our first question comes from the line of Chris Mandeville of Jefferies. Your line is now open..

Andrew, looks like it start, just as it relates to Q3 trends that we've been observing thus far, it sounds as though the decline in fuel prices is seeing are positively affecting consumer trends, we know that Powerball I believe was a top five jackpot in the quarter, and just I'm curious if you could kind of comment or give a little bit of incremental color as it relates to consumer trends on in-store sales this quarter?.

So, as prices fell off, the fuel prices fell off in June, we saw same-store comp improvements across all our regions, we continue to see that strengthen in July, so that's great for traffic.

Clearly we saw in January with the $1.5 billion jackpot that had significant traffic to the stores and we had significant increase in lottery sales and other categories and so we continue to see a very-very strong performance from jackpot and the spillover effect to the other categories as well.

So, on that basis we continue to see strong traffic as we said before the mix of stores in 2015 had a higher concentration of Midwest stores and so we'll still seeing some average per store month versus same-store differential in the third quarter. But we expect to see that begin to dissipate overtime..

Okay.

And then you noted, seven of your 10 raze-and-rebuilds are now up and running and driving better volumes but did those raze-and-rebuilds actually impact Q2 at all or is that an effect that we will see in Q3?.

Very limited impact in Q2 because they were down for most of the quarter, they started coming up in Q2 and ramping up but you'll see that impact in Q3..

And then I guess, one for Mindy here very quickly in terms of the margin contribution breakdown is there any way to kind of split that out between the likes of Core-Mark and maybe better promotion or sales mix?.

Well, we haven't been giving what the particular Core-Mark effect is, that as we saw our margin expanded again this quarter what we can tell you is we would expect for the remainder of the year for our margins to normalize more in the 15.3%-15.4% kind of range as this quarter's margin was particularly high due to some one-off rebates that we don't expect to repeat..

Okay so there was a few one-timers in there?.

There were..

Okay.

And then lastly I guess maybe just looking long-term and kind of keeping in mind that the last two years you had some pretty good tobacco volumes helping generate solid gross profit, dollar growth on a per site basis, but Andrew can you help us put into context to think about what a more normalized annual merchandise margin dollar growth rate would look like longer term?.

Yes, so one of the things with the improvement that we're seeing, we're seeing growth in new stores, the mix of stores continues to change, the Core-Mark benefit we will obviously be comping next year super-coolers we will have more run time on those. The refreshes will continue.

So in this seven plus percent range is something that we're seeing on a pretty consistent basis. I mean Q1 was definitely a strong number, but we've got a lot of initiatives some of those, our Core-Mark as I said it will be comping against itself next year and at some point you do run out of super-coolers and refreshes and alike.

But as long as we continue to grow the mix of new stores, we continue to innovate around promotions and pricing and various other impacts. We believe that we can continue to innovate in the store as well.

And even with declining categories like cigarettes, you continue to see manufacturing price increases and alike that continue to generate margin dollar growth year-over-year on existing stores..

Thank you. And our next question comes from the line of Bonnie Herzog of Wells Fargo. Your line is now open..

Andrew, I do have a quick question something you just mentioned regarding cigarette pricing, you did it sounds like have some of the manufacturer price increased in the quarter so could you touch on that a little bit further? And then in terms of the uplift you might have seen in margin, was that also driven from mix, I am just trying to get a sense of that you saw consumers upgrading to the more expensive cigarettes or premium brands?.

Yes I mean we continue to see that trend Bonnie and I don't think there was anything unique about Q2 on that front. I think the most notable thing I'd point out around and cigarettes is you have got a couple of states Tennessee and Louisiana in particular that have had sustained increases and ease of the minimum mark up or the taxes.

And when you see that you do have higher gross margins but you do see a more precipitous fall off in volume in one or two states like that. So, we continue to price each store appropriately for the market and balance the margin volume trade off knowing the systemic declines you expect in cigarettes..

And then I've a little bit a different question on your raze-and-rebuilds that was asked earlier, I guess, could you remind us of your expected return on your raze-and-rebuilds and then the incremental sales you expect to generate from these? And then could you compare that with the average expected return from your new store builds? I guess I'm trying to hear from you what is the greater priority and opportunity?.

Right, so, on the raze-and-rebuilds, these are locations where we have very small kiosk, where we have significant available land underneath that to expand. And the economics warrant a complete raze-and-rebuild as opposed to just a refresh. We started with some of the highest volume returns that were just simply under pumped.

I mean we had stores that were delivering 500,000-600,000 gallons at our four to six pumps. And so with a larger number of dispensers diesel at every pump coupled with the 1,200 foot small store versus the kiosk you are basically going in and replace everything.

Yet the returns on those are going to be more in the 20% to 30% unlevered after tax range because they're just fantastic stores and if you went out and built -- found a location that looks just like those today and built a store you would get exceptional returns as well.

Obviously there's a finite number of those for were all the conditions around the current format, the available land, the baseline economics to do reinvestment add up, but we're going to do those in a ratable way and we've talked about doing approximately 20 next year.

I think the returns that we have shown in our pro forma's on the analyst report etcetera are in that 12% plus range on an after tax unlevered basis. I will add none of those return metrics include our any product supply and wholesale uplift associated with that.

So, if you allocated the $0.025 to $0.03 margin that we get across our network on average to one of those stores, you would have significantly higher returns than that.

So, we know that we need to continue to add new stores and there's opportunities and we're going to do those with our independent growth plan and our markets where we can generate those higher return but we got to continue to reinvest in our network, and raze-and-rebuilds is just a part of that..

And then my last question, I was hoping to touch on PS&W, I was hoping you could drill down a little bit more on the contribution this quarter, it seems like an anomaly given how healthy it was and above your annual guide.

So, maybe you could walk through for us the specific contribution from say the transfer wholesale and any timing variances, just to give us some insight on current market conditions and how they may roll-on on your Q3 PS&W contribution?.

Sure, and by the way if you noticed the $0.059 on a retail equivalent basis compared to $0.05 last year which was above the trend and so look I think this is one of those areas in which I would ask everyone to remember to do two things.

One is always look at it over any rolling 12 month period because you're going to have the rising and falling price environments and so in a rising environment the way inventory transfers to cost of sales create a positive benefit just like it did last year and you typically see a rising environment in Q2.

You could see it falling environment part of Q3 and Q4 and Q1 in a rising environment, so you can't look at a quarter you have got to look across any 12 month period. The second thing I would say is that the relationship between RINs and the spot prices in the market and the wholesale prices in the market need to considered together.

The spot to wholesale price differential has decreased during this period of higher RINs on a pretty significant basis where the difference in the two is sort of the net that we're looking at.

So people shouldn't get overly excited in our earnings if RINs are at $0.90 versus $0.50 because you see that impact in the tradeoff because spot prices are higher and that's something I think the EPA and RFS anticipated.

So we haven't been even though we track them separately and report them separately for transparency purposes, we have consistently encouraged people to not look at those as purely additive, so you have to look at all of that in combination.

Our transfer to retail kind of absent the impact and the RIN does benefit from periods of tight market conditions and so we saw more pipeline maintenance activity in allocation along colonial in Q2.

We saw the ARBs open more in Q2 and so that tight supply environment does positively impact our business and those proprietary barrels as well and so that was more favorable in Q1 than in the prior year period.

Just one topic mine, we can just keep it going on, there is a lots there but I think the key is look at it over any 12 month period on a rolling basis and look at it in its totality..

No, that makes sense and I know we have discussed this quite a bit, so that was help I appreciate it. Thank you..

Thank you. And our next question comes from the line of Matthew Boss of JPMorgan. Your line is now open..

You did a really job of keeping store expenses in check this quarter, can you just update us on where you stand today on your ASaP initiative and have you embedded any increase for wages or overtime into your back half guidance and estimates?.

So, Matt, I can speak to ASaP as you know we're currently in the two of our three year timeline and some of the benefits from ASaP were already embedded in the 2016 guidance and also in our corporate goals and we're already starting to see there is a period in the quarterly results and those should be amplified as we go through the third quarter and through the end of the year.

So we're still expecting to generate approximately 50 million of recurring benefits this year primarily from the rollout of Core-Mark that transition as well as the store labor model. And then we also on top of that expect to reduce working capital by about 50 million throughout our chain by implementing more efficient inventory practices.

So, that guidance remains consistent and you won't see that appearing all in one place. It will be reflected and expansion of merch margin reduction and by labor cost as well as an expansion of our anticipated fuel margin. So, it's not all in one place but it is all embedded within our annual guidance..

One thing I'll add Matt on labor rates, we've actually been able to hold total rates fairly constant and impart because of mix and so with the store labor model we optimize a number of the system store managers, we have lead cashier positions that are creating and so we're balancing that out across the roles and that's helping on that front.

In terms of overtime, if you're speaking to the specific FLSA regulation, that's kicking in December, we did not expect a material change in December over times and then as we developed our plan for 2017, at present we would expect that any increase associated with that can be offset by other improvement levers that we have available to us..

And then how do you think about timing of your share repurchase? What was the rationale for the slowdown in activity this quarter? And if RINs remains at today’s elevated levels could we expect excess free cash flow to go towards share repurchase?.

So, to answer your second point, I'd repeat what I told -- answered Bonnie’s question.

If we have continued high RIN prices, we would expect to see it continue to offset the differential between the spot and rack prices in that part of the business and so, it's going to be -- if there's positive net increase for that, we've got to continue to evaluate what that is and how much of that is just invested in additional capital that goes into adding E85 E15 dispensers etcetera to support renewable fuels.

In terms of the timing, yes we were clearly aggressive in the prior quarter coming out of a launch of the independent growth plan and put a major dent with the $150 million share repurchase. And so, we took a more measured approach, we started the program late in May, so there wasn't as much time in the quarter for that.

But we continue to be in the market with the program and set parameters and clearly the stock has had a major run up if you set some of the parameters, you may not be buying as many shares under certain tranches of the program..

Thank you. And our next question comes from the line of Ben Bienvenu of Stephens Incorporated. Your line is now open..

If I think about your -- you guys have talked about your new store opportunity, collocating Murphy Express stores near high traffic Wal-Mart areas, if I think about the Little Rock market there's a Murphy Express store that's going up, I think half mile away from the nearest Wal-Mart and just in on a nice quarter in front of Target and Home Depot so a nice high traffic area, is that the type of site that we should be thinking about as a potential Murphy Express site that maybe in your future pipeline or should I think of that is something beyond that type of store sell opportunity?.

Yes, so for those you on the call who don't have Ben’s benefit of getting to Little Rock or Arkansas for that matter on a regular basis.

This is going be a 3,450 square feet store and so as we said before, we're building a handful of more those a year in selective market you typically have seen those in Arkansas, Louisiana, Colorado and a few other markets.

And so we continue to do that in markets where we think that offer can be distinctive and competitive and meet the consumer needs and frankly keeps a foot in the door on the bigger box model.

The predominance of the Express stores you should expect to see are the 1,200 square foot models within the halo effect of this demand aggregator of price sensitive consumers and that will be the predominance of the mix..

Okay, great.

And then if I could just a question on the RINs, I know this is always a difficult question to answer, but the RINs prices are obviously very elevated subject whatever the mandate might look like the pro mandate in November, but I think it's fair to say your annual guidance range for RINs is going to be look to be quite low, how do you guys think about the RIN market, do you care to hazard guess around what you think prices may look like going forward and how sustainable this price level is? And then secondarily I think if I recall, you guys have held over some D4 RINs that you've not sold, I am curious if you still have those in inventory or if you’d sold those?.

So won't hazard to guess on future prices, I will go back to the discussion we had in February around the guidance where we gave guidance of $0.30 to $0.50 on the RIN but we also gave guidance I believe of 25 to 45 on product supply and wholesale.

And if we said if RIN prices were above that we would expect our contribution from product supply and wholesale to be lower because there is direct offset there and we continue to see that with elevated spot price and the spot to rack price differential being compressed.

And there are days where best spot to rack differential is negative several cents. And so it encompasses a 100% of the RIN value at that time. So again I want to be very-very clear guidance holistically gets to you about $0.025 to $0.03 incremental contribution from our proprietary sourcing and spot contract barrels, right.

And we could just put that in our fuel margin and set up reporting $0.11 margins this quarter we could have reported $0.16 margins, but we've broken that out historically, we did that at the spin, we continue to do that from a transparency standpoint.

But there are offsets within that and so if we continue to see higher RIN prices, we would expect to see higher spot prices and compression in the spot to rack differentials that comes to basis of the transfer price..

And then just last one if I could, Andrew, you mentioned that these cents all program for your card that you've coming in place.

Should we expect a similar reaction to that program that we've seen from prior seasonal cents all programs that you would do in concert with Wal-Mart or is that card user based proportionally to this the same or smaller?.

So, we're three days into it. I will tell you that the number of card applications is -- on a daily basis is greater than it was on a monthly basis before because it had not been a priority to promote them, when we had a very attractive cents all program with the prior card that was available.

Our market research shows that more consumers that shop at our stores prefer an immediate cents all discount and so we would expect to see both consumers gravitate towards that card and that offer which will be great and continue to drive traffic to our store and the store behind us as well.

So, it's just -- basically it's kind of replacing an all offer that was there, while maintaining other cards that provide different types of discounts, so, we do expect to see some uplift there, but it's really too early to tell..

Thank you. [Operator Instructions] Our next question comes from the line of Ronald Bookbinder of Coker Palmer. Your line is now open..

While you talked about an increase in fuel prices drives a decrease in volume but given the positive miles environment are you losing market share, are people less price sensitive and how do you look at the volume versus margin in this current environment?.

So, if you think about consumer behavior, there're some consumers that'll always say I'm going to drive out of my way two or three miles to get an extra penny or two off right. And those dedicated loyal price sensitive customers are our loyal customers and we can kind of count on them day-in and day-out.

It's the differential to the surrounding area in a rising price environment compresses and the reason it would compress is that the branded marketers are only selling one or two tanks of fuel a week, because they're high price low volume stores and so not having their tanks replenished as often meaning their cost of inventory in the tank is lower than someone who is turning their tanks every single day like Murphy USA or other high volume retailer.

And so, being aggressive in holding a $0.10 differential say to the state average in a rising price environment would mean that you'd be given away significant margin with little volume upside, it would uneconomic to do that.

So, as that differential closes you maintain your very loyal customer but there's a customer on the margin that says I'm going to go out of my way to buy the lowest price, but what if prices get within some range, I am not going to be as price sensitive on the margin.

The other thing we know is in very high price environments the number price sensitive customers goes up and in a very low price environment people don't go as far out of the way on the margin, so if you break it down into the relative price sensitivity of customers you can explain and see how in a rising price environment you shed a little volume.

The cents for gallon you would have put on the street to keep that volume would be lost on every customer and it would not be economic to do so.

In a falling price environment where you are typically starting with very large margins you can afford to put an extra $0.02 to $0.03 on the street and pick up the additional volume across the stores and the customer base.

And so that's how we think about it and look at a month like June when we have same-store comps that are positive in every region that kind of reinforces the view that you shuttle them on the way up, you pick it up on the way down.

As it relates to total market share, we've been consistently growing total volume at the network level at or above the level of total volume growth in the markets that we're in, it's largely done by adding new stores, right.

And so as we add no stores, we're taking volume away from competitors but other advantage retailers add new stores as well and they take some volumes away from us if a high volume retailer opens within a mile of one of our stores. But from a market share standpoint we have been consistently growing market share year-over-year..

And do you see the Company or the industry moving more towards E85 and how do you believe that would impact RINs and fuel profits?.

So the journey towards E85 has been very steady, it's obviously started with a small base but it's continuing to grow, it's growing more in certain states where there are maybe additional spinners or in the Corn Belt in those areas.

There are a number retailers out there that including Murphy USA that has been adding E85 and E15 to their stores and if you look at any of our new stores they have the flexibility to add enhance renewable fuels including the biodiesel at every dispenser. And so that is one of the things that we continue to look forward to.

Consumer adoption varies in different geographies and I think that's another thing when you talk about the value of the RIN depending on where ethanol is priced relative to gasoline.

If ethanol is higher than the price of gasoline, the way you will consistently drive volumes for D15 and E85 is to use that RIN value to lower the street price to create adoption. And so an E85 where there is lower energy density needs to be priced below an E10 on a consistent basis to drive that consumer adoption and that’s what we do..

Okay.

And lastly you mentioned new pricing promotional effectiveness could you add some color on that as to exactly what the program is? What categories it's focused on? And how many basis points of margin improvement it drives?.

So, the promotions effect and this really cuts across every single category including fuel.

This is taking a much more analytical based approach to our promotions and so having built that capability last year, it's just a new mindset towards evaluating on the front-end what do we -- what's the expected breakeven of the promotion, how should we think about pricing it what's the level of vendor funding to make it attractive, what might be incremental waiver be associated with, that product, damages, signage cost, etcetera.

And so it's just taking a much more analytical and comprehensive view of it and when you think about for example some of our candy promotions, they may drive anywhere from a 500% to a 1000% uplift on units right.

And so making sure that the pricing and the inventory availability in all that is there in place to make it an economic program versus just driving more units and volume is key. So, that's been pretty systematic and it's been improving contribution, $2 million, $3 million, $4 million a year to the bottom-line. So, that's kind of an example of that.

Around pricing again it's just being more systematic with some of the talent we've been able to hire and some of the tools that we've been able to develop to just measure elasticity and cross-elasticity across individual items and baskets to get better overall economics from that.

And so if you look at the total year-over-year improvements we've had, a portion of that's obviously from new stores and a portion of that's obviously from Core-Mark and other investments like Super Coolers, but a significant amount of it still remains from pricing and promotions merchandize mix optimization that we do.

And we feel -- and we believe we still have more opportunities on that front..

Thank you. And our next question comes from the line of Damian Witkowski of Gabelli & Company. Your line is now open..

A few quick questions, if you go back to the market share on the fuel side, for getting how you get to it, the negative 1.3 on the same-store sales basis based on what you decided to do on pricing, do you have a sense in terms of looking at your markets on their current economic conditions if the overall volumes are actually positive and growing in those markets?.

So, we get data and it lags from various agencies, etcetera they give us a really good sense of it at the state level being able to break it down to specific store levels is pretty difficult.

We do have models that help us understand relative performance across those markets and so for example some of the variables we look at are population density, population growth etcetera and so if you evaluate those markets using census data if you know the population is declining and becoming less dense and other factors in rural areas are negative you would expect to see that market declining in volume.

Now we may actually pick up volume because a couple of very weak stores end up closing on the margin and we pick up that volume, so we understand that at the state level and the change is there but getting it down to a local market area would be pretty difficult..

Okay.

But on the state level, is there an answer on that or is it positive on average or is it still difficult?.

We are rolling market share on average across the state we are in, there are certain states that have a greater level of competitive intensity and in those states depending on the number of stores you add, you may actually be losing share in those markets.

If you're not growing in certain Midwest states at the same rate in the future and others are growing maybe with a different type of model, that is less fuel dependent they may pick up share in that market relative to you..

Okay, that makes sense..

Certainly in markets like the southwest add southeast that are very-very strong markets for us. We see very positive trends there across our stores and the state as a whole..

And maybe just going back to your comment on the stores in the Midwest the new stores that aren't performing below the Company average and you say that one of the remedies is that the new Express stores.

And I am not sure if I follow that, is that because they are geographically in different out of the Midwest or is it because they're down at in different corners so that that will actually help them kind of be at par or even above the Company average in terms of volume?.

Yes. It's a really good question Damian, so there are two things that we talked about, one was the timing of the new build, so we had 44 locations open in Q4. Q4 is not a great time to open stores for us, it's kind of lower volume, it's typically you are going into Q1 and Q2 it's a rising price environment.

It's harder to be more aggressive with your introductory price.

And so having in the future more control over the timing of when we can start construction on a store that we will have with our Express stores as well as then being able to load level those throughout the year will result in a favorable comp because in the future, because we'll have more stores opening in Q3 which is typically a falling price environment and so you're just going to be further along in your ramp-up in the future.

So that's kind of point one that the timing impact there on the USA sides were you have more constraints about when you could open versus the Express model where you have a much greater degree of control.

The second point is the mix, right, and so when we took a portfolio approach towards the store, you're going to have in your mix great stores, good stores, average stores, weak stores and some very weak stores. The 2015 build plan had a lot more Midwest stores which historically have underperformed.

In that 44, 22 were in the Midwest right and so there are some great stores in the Midwest and out of those we opened some great stores.

But with our Express model we know what are the markets and the geographies and the conditions that separate good and great performers from weak and very weak performers and we'll not be acquiring on our own in the Express independent growth model, weak or very weak locations.

And so, the rationale that we provided this quarter about the timing and the mix should have an equal and opposite effect in future years under our independent growth strategy..

And then just, lastly Andrew, if you can just help me think through the overtime pay issue. Just looking at, I mean I assume it affects everyone. So, your competitors are going to be affected just as you are.

And then considering your cost structure, would you actually be at an advantage versus your competition?.

So, there's a couple of ways to look at it. One is our business model is simpler than, take one of the big box store models that has 7,000 square foot stores.

I'd venture to get that every manager that would fall under this regulation, the potential exempt employee at a big box store is making well over $47,000 a year in salary, right, and so I would think those exempt store managers at those bigger stores are probably less affected than we would in our simple model.

And that said the majority of our store managers are within a breath of getting to that number when you think about changes like the annual merit increase and reallocation of other benefits that we pay out in cash form that aren't considered salary. So, we've got levers that can get the majority of the stores very close to that.

What we have that's probably different than many of the competitors is a high number of kiosk in world geographies where the average wage rate is 5% to 7% to 10% below the national average. And so the number established by this regulation doesn't take into account geographic pay models.

And so there's a subset of our stores where there is a gap and that is where we're evaluating what is the best approach to do that.

What I'll say is our store manager turnover rate is exceptional impart because we have benefits like 401(k) and others that many other retailers do not have and so I think we've been as a company able to have good retention because of benefits. Unfortunately some of those benefits don't count in the way this regulation is designed.

So, we want to be thoughtful about how we comply both from a cost and economic standpoint but even more importantly from an employee engagement and retention standpoint. I will tell you there are other levers that we have that have nothing to do with salary or pay related to kind of face the next wave of sort of store labor optimization.

That could more than offset any incremental cost that we have. And so, there may be some incremental costs, we think it's going to be in the low single-digits under any scenario and we believe we have the ability to offset that through other levers that don’t impact employee engagement and retention..

Thank you. And I am showing a follow-up question from the line of Chris Mandeville of Jefferies. Your line is now open..

Just a quick follow-up for Mindy here, can you just let us know what the spent on the ASaP program was in the quarter, I think you had kind of been in that 22 million at the end of Q1?.

I understand you want both the expense side and the capital side, so I'll give you both.

For the second quarter we spent approximately 1.7 million which was expensed and then another 1.6 that was capitalized for a total of 3.3 for the quarter and that brings that program to-date spending of around 26.5 million of which 16 million we've expensed and another 10 that we capitalized..

Great.

And then just one for Andrew, I suppose everyone is kind of heard of it already, Dollar General having acquired 41 former Wal-Mart Express locations that's really a small number relative to your store base and at least it looks from our advantage point that there is only less than a dozen within a five mile radius of you guys, but I guess I was just kind of curious about your thoughts there what you think their intentions are? I know that you've tested one out a few years back with Manfield having run the operation there, but do you consider this just an expansion of their tests or do you think this is maybe an initiative with some staying power?.

So my knowledge and understanding of the Wal-Mart Express stores that were closed were that they were stores that were kind of in that 10,000 square foot range.

They were in very-very rural markets when we do our market cluster analysis they were in kind of our seventh and eighth out of eight clusters in terms of the makeup of the markets and they would have been the kind of markets generally we would have not gone in because of the population density growth and other parameters, so I would -- if had to classify them they were very rural Dollar Store competitors and I think that was the intent of the model.

And so if they put, if they acquire a few of them they have gas in front of them I don’t think it's going to have any significant impact at all. I don’t see the Dollar stores getting into gasoline in a material way for just core economics focus capability reasons..

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Mr. Andrew Clyde for closing remarks..

Right, well thank you for your support, we're really proud of this quarter, we're excited about the initiatives and the ongoing work our engaged team has going on and we look forward to speaking to you in another quarter. Thank you very much..

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