Andrew Clyde - CEO, President and Director Christian Pikul - Director, IR and Financial Planning Analysis Mindy West - CFO, EVP and Treasurer.

Adam Scott - Wells Fargo Securities Damian Witkowski - G. Research Carla Casella - JPMorgan Chase & Co. Christopher Mandeville - Jefferies LLC Daniel Imbro - Stephens Inc. Ryan Domyancic - William Blair & Company.

Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. Thank you. Christian Pikul, Director of Investor Relations, you may begin your conference..

Thank you, Christina. Good morning, everyone. Thanks for joining us today. With me are Andrew Clyde, President and Chief Executive Officer; Mindy West, Executive Vice President and Chief Financial Officer; and Donnie Smith, Vice President and Controller. After some opening comments from Andrew, Mindy will provide an overview of the financial results.

And after some closing comments and a discussion of our 2017 guidance, we will 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 exists that may cause actual results to differ. For further discussion on these risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K and other relevant 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, Christian. Good morning, and welcome to Murphy USA's Third Quarter 2017 Conference Call. I want to start today's call by discussing Hurricanes Harvey and Irma, whose impact and devastation to the citizens of Texas and Florida was also felt here in El Dorado and nationwide.

Our first priority as these crises unfolded was to coordinate and ensure the safety of our employees. All members of the Murphy USA family were safe and accounted for within 24 to 48 hours.

And importantly, we retained 100% of our store managers and assistant store managers and 95% of our hourly cashiers, who quickly reopened most of our locations generally within 1 to 5 days of closure.

Our culture of safety also played a role in determining when it was appropriate for employees to safely return to work; and reopen stores for our customers, many of whom also faced threat on life and property.

During Harvey, we closed approximately 80 stores in the Houston area, roughly 90% of which were operational within 5 days of the storm's passing. All of the remaining stores returned to service within 3 weeks and experienced minimal damage.

When Irma hit Florida equal force, both the general population and our people were better prepared to literally weather the storm, as we were able to reopen 100% of our impacted stores within 4 days, including stores in communities without power.

Our preparation for the storms, the retention of our people and the ability to reopen quickly for our customers reflects our values as a company. We're able to provide need and assistance for employees through onetime grants; and through our need fund, which employees and suppliers have generously supported.

We also took special steps to work with first responders, including staging generators in anticipation of power outages and prioritizing fuel supply to source on evacuation routes in and out of the affected areas. As you have no doubt seen in our release, the per-store comps were noticeably impacted by these events.

There are several points I would like to draw your attention to with respect to the impact on third quarter results. First, the disruption and destruction of the storms themselves materially impacted our per-store volumes. Second, we know consumer behavior differed most noticeably around the preparation and emergency response to the 2 storms.

With Harvey, there was very little prebuying and given the refinery shutdowns that took most of the month of September for supply conditions to normalize.

With Irma, especially given the evacuation orders, there was a substantial number of stores experiencing very high burn rates prior to landfall, followed by a noticeable lack of demand following the storm's departure.

Third, the impact to colonial pipeline shipments impacted markets far down the line into Tennessee and the Carolinas throughout the month of September. These shipping delays created temporary shortages in many markets, some of which we were able to mitigate through optimizing our inventory positions.

Last, demand remains subdued in the aftermath of these 2 storms, and volumes have only recently returned to normalized seasonal levels.

The merchandise side of the business was also impacted from a volumetric standpoint as a function of lower customer traffic due to the storms, coinciding with the period of softer C-store traffic cited by several industry sources.

However, while the per-store metrics were visibly impacted as one might expect given the magnitude of these events, the ensuing strong retail fuel margin environment, coupled with our proprietary supply chain positions, more than made up for the volumetric weakness in the financial results.

Q3 EBITDA was $147.4 million, well above prior levels of $105.3 million, generating earnings per share of $1.90 versus $1.16 in the year-ago period. The storms were impactful on these numbers both from a volume and margin perspective.

Initially, as wholesale prices moved higher in response to refinery shutdowns, we suffered a number of days of very low and sometimes even negative margins. This was followed by a period of higher retail margins as refineries came back online, pipeline shipments resumed and wholesale prices retreated.

I also want to point out that the product supply and wholesale business, including RINs, generated $0.05 per gallon on a retail equivalent basis versus $0.017 in Q3 of 2016. This is up sequentially from $0.015 per gallon in the second quarter of this year and, of course, higher than the $0.00 per gallon we earned in the first quarter of this year.

Results were higher on a year-over-year basis due to the timing and inventory benefits associated with sharply rising prices and to a lesser extent improvement in the spot direct margins. So, at the risk of repeating ourselves, we expect the product supply and wholesale business to generate between $0.02 and $0.03 per gallon over the long term.

And we now expect to fall within that range this year, albeit probably closer to the lower end. We will address that more when we discuss performance against our guidance metrics later in today's call. As we think about organic growth. We opened 12 new stores in the quarter, bringing the quarter-end store count to 1,423 sites.

Additionally, we opened 9 new-to-industry stores since the quarter ended. Also, we completed 5 raze and rebuilds during the quarter, along with 1 in October, bringing the year-to-date total to 18 raze and rebuilds, with more underway, some of which may land in 2018.

For our fuel contribution for the retail business, per-store volumes on an average per store month basis averaged 243,000 gallons, close to a 10% decline from 268,000 gallons a year ago. We estimated that well more than half these declines were the direct results of the disruption created by the hurricanes.

Retail fuel margins were $0.155 per gallon versus $0.137 a year ago. Including the impact of product supply, wholesale and RINs, all-in fuel margins were $0.205 per gallon, about $0.05 higher than the year-ago results. If we look at our fuel breakeven, let's start with merchandise margins.

Average merchandise unit margins in the quarter were 16.1%, up 10 basis points from 16.0% a year ago. Our total margin contribution on a per-store basis decreased slightly to $23,049 per store month, down from $23,593 a year ago. We look at merchandise through 3 lenses, and the largest is of course tobacco.

Tobacco sales continued to decline with the market, but incremental softness in the quarter was attributable to the downtime associated with the storms and the impact on customer traffic from that, retail price compression resulting from recent M&A activity and competitive intensity that remains persistent in the category but at a more moderate pace than we've seen in prior years.

Despite these headwinds, margin rates continued to expand in the tobacco category due to price optimization, promotional activity and our product mix. In fact, we are likely to see a benefit in Q4 from the manufacturer price increase that came both earlier in the year and at a higher absolute rate than before.

When we look at beverages, our largest nontobacco category, beverage sales have seen a disproportionate impact of lower traffic in the quarter, as it is typically an add-on sale, with particular weakness in carbonated soft drinks.

However, we are continuing to see sales and margin growth in the noncarbonated segments as we invest in larger formats and super coolers. When we look at the center of store activity, excluding beverages, the trend we are seeing is much more positive.

Center of store sales were up 12.8% on an average per store month basis in the third quarter, driving per-store margin growth of 7.6%. Center of store activity is also correlated with our larger-format builds and will continue to drive both sales and margins higher.

Taken together, the nontobacco sales category was up 7.6%, but margins were a bit softer, declining 0.9% to $9,785 on a per store month basis. Operating expenses before credit card fees continued to show improvement, declining 5.4% year-over-year.

This offsets the merchandise compression and fuel volume loss, resulting in fuel breakeven margins of $0.0128 per gallon, essentially flat with year-ago results.

As we mentioned in the prior quarter, we expected these OpEx comps to get a little more difficult as we start to cycle the benefits of our labor model in 2016, which largely took place in the second half. We do expect modest improvements to our break-even metric going forward.

With that, I will turn things over to Mindy and then conclude with an update on our annual guidance..

Thank you, Andrew. And good morning, everyone. Revenue for the third quarter totaled $3.2 billion versus $3 billion in the year-ago period, largely attributable to the higher product prices and to a lesser extent higher merchandise sales. Average retail prices for gasoline were $2.22 a gallon versus $1.98 per gallon in quarter 3 of 2016.

Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA, as previously mentioned, was $147.4 million versus $105.3 million a year ago. The effective tax rate for the quarter was 37.5%, largely in line with the year-ago rate of 36.6%.

Total debt on the balance sheet as of September 30 was $884 million, broken out as follows, long-term debt of $865 million, consisting of $492 million carrying value of our 6% notes due 2023; $295 million carrying value of our 5.625% notes due 2027; and $78 million remaining on our $200 million term loan.

We are also carrying $20 million of expected amortization under that term loan in current liabilities on the balance sheet. Using these figures on the back of strong quarter 3 results, our leverage ratio now approximates 2.1x, which is down from 2.3x at the end of the second quarter.

Our ABL facility remains in place with a $450 million cap and is subject to periodic borrowing base determinations, currently limiting us to approximately $295 million at quarter end. And at the present time, that facility is undrawn. Cash and cash equivalents totaled $169 million, resulting in net debt of approximately $715 million.

During the quarter, we repurchased 1.26 million common shares for approximately $86 million at an average price of $68 per share under the previously announced program of up to 500 million, to be completed by the end of 2017. Approximately $25 million remains under this authorization.

After completing the existing repurchase program, the company may elect to repurchase additional shares utilizing existing available cash balances if we believe that prices are favorable. Common shares outstanding at the end of the period were 35.1 million.

Capital expenditures for the quarter were $74 million, which included approximately $54 million for retail growth, $9 million for maintenance capital and the remaining for other corporate expenditures. Year-to-date capital expenditures were $212 million. And Andrew will address how we are tracking versus our guidance next.

And for CapEx, we do expect to remain within our initial guidance range of $250 million to $300 million. That concludes the financial update, and I will now turn it back over to Andrew..

Thanks, Mindy. It's a great segue to discuss our annual 2017 guidance that we announced in February of this year, which we subsequently revised in April following weak Q1 results and prior to our $300 million bond offering. So, let's start with fuel.

Our annual fuel volumes are projected to fall below both our guided range of 4.3 billion to 4.5 billion gallons as well as full year 2016 volumes of 4.195 billion gallons. With the impact from the storms, we are forecasting 4.15 billion gallons in total for the year.

On an average per store month basis, retail fuel gallons will fall short of our guidance range of 255,000 to 265,000 gallons. We are currently forecasting full year volumes to average around 245,000 gallons or an approximate 5% decrease from the 259,000 gallons in 2016.

If you do the math in your models, that suggests Q4 volumes between 240,000 and 245,000 gallons per month, which includes the subdued retail demand in October from certain storm-impacted areas in Florida and Texas, our 2 biggest markets. And in the month of October, volumes were down approximately 5% on a year-over-year basis.

On a brighter note, retail fuel margins are expected to come in at or above the high end of our original guidance of $0.14 to $0.16 per gallon, which includes the impact of RINs and our product supply and wholesale business.

We are forecasting full year average retail margins of about $0.14, coupled with about a $0.02 contribution from product supply and wholesale including RINs, which will get us pretty close to $0.16 on an all-in basis.

Notably, these results will exceed our revised guidance of $0.125 to $0.15 we issued in April following a very difficult first quarter for the industry. And despite the run-up in crude prices in late October, October margins will be several cents per gallon higher than a year ago.

In merchandise, we guided total merchandise sales of $2.4 billion to $2.5 billion, and we will likely fall short of our target in this case. We are on track for a figure closer to $2.37 billion due partially to the impact from the storms and also attributable to lower customer traffic.

On merch contribution, in conjunction with softer sales, we are also likely to come in at or just below the low end of our merchandise contribution margin guidance of $380 million to $390 million, which still approximates a 4% improvement over full year 2016 results of $364 million.

For retail station operating expense, excluding credit card fees, we provided guidance of staying flat to 2% savings. And we are close to track and land closer to the 2% benefit side of that range.

We are continuing to see the impact from the year-over-year benefits of labor model, coupled with continued store-level improvements in other areas, as well as adjusting labor hours for lower traffic. For G&A, our guidance on a selling, general and administrative expense was $135 million to $140 million.

We are likely to end the year at or below the low end of that range, including the $2.1 million charge incurred in the first quarter.

While we are likely to under-spend on G&A this year, we do expect an increase in 2018 as we continue executing technology-related investments to improve the long-term productivity of our business, so this is more of a timing issue as some initiatives are pushed into 2018.

On new store growth, we provided a range of 45 to 50 new stores and 15 to 20 raze and rebuilds, and we remain on track for both of those targets. On CapEx, we provided a range of $250 million to $300 million, and we will likely end the year slightly above the midpoint of $275 million but within the guided range.

Net income, we provided an initial guidance range of $140 million to $190 million, which was revised lower in April to $90 million to $160 million. However, we are now forecasting $145 million to $155 million, which is back within the initial guided range.

For adjusted EBITDA, initial guidance was $400 million to $450 million, which was subsequently revised lower to $340 million to $410 million in April. As the year plays out, we expect to gravitate towards the low end of the original guidance while remaining closer to the high end of adjusted guidance; or about $400 million, in line with 2016 results.

All in all, 2017 has been a challenging year given exceptionally weak Q1 market conditions; and the hurricane-related disruptions we experienced during Q3, the impact of which is still resonating into Q4.

Nevertheless, while the underlying per-store metrics are showing some pressure, our advantaged business model remains competitively positioned to capture profits in a variety of market conditions.

As we plan for 2018, our continued focus is on improving the core business while allocating capital in a responsible manner towards the highest-return projects, including new stores, raze and rebuilds, technology-related investments and share repurchases, that maximizes value for our long-term shareholders.

In summary, we will maintain strategic clarity around our priorities and operational mindset around improvements while continuing to allocate capital in a highly disciplined manner.

I would like to thank all of our Murphy USA family for their support during this quarter and the challenges they faced and the resilience they showed in difficult circumstances. And I thank all of you on this call for your interest in Murphy USA. And we'll open up the call to Q&A..

[Operator Instructions]. Your first question comes from Bonnie Herzog from Wells Fargo..

It's actually Adam on for Bonnie. Just a quick question related to the traffic. I think that the big focus this quarter was obviously the huge gallon decline.

And I know you touched on it a bit in the - your prepared remarks, with it being about half of the contribution, which would imply about still a mid-single-digit decline in volume; and which seems to have carried through into October, where I believe you said it's about 5% decline in volume.

So, I would classify that as generally running a point or 2 below what I would say is your run rate. So, I was hoping if you could just comment on, a, if that's true.

And b, what are the factors that have contributed to that? And then also, do you think that there is anything that can bring you back, whether it's Q4 or Q1 next year, to maybe closer to a low single-digit decline where you've been trending recently?.

Good question. And I think clearly, we've anticipated the question around traffics and trying to tease out in a quarter where you've got a lot of moving parts what's sort of the systemic trend versus what's storm impact. And I'll tell you right now I can't give you a level of precision on that.

What I will do is draw you back to the last call, where we talked about a number of impacts to volume and traffic that we were seeing. We talked about competitive intensity from new players.

We talked about behaviors after the M&A activity, where stronger brands were pricing differently than the weaker brands they acquired; and how they were pricing prior to their acquisition. We talked about loyalty and its continued importance to a certain segment of customers.

We've also talked about how the industry has priced in Q1 and even in the storms in terms of, when there are periods of expanded margins, how aggressive people are pricing. And so, I think, underlying any seasonal storm, market structure impact, you do have those ongoing trends and you continue to see those out there.

I think, as we think about the second part of your question, which is what - how are we thinking about this going forward, I'd really put it under 3 categories. The first one is we know we have to capture demand from underserved segments.

We've talked about loyalty before and how important that is to customers who buy gasoline from grocery stores or mass merchants and how we have not had a loyalty program. So, it's an important segment.

We will be launching the pilot of a highly distinctive, unique loyalty program in Q1 of 2018; and we think that's going to be an important contributor towards capturing that segment of underserved customers.

During Q4, we got some insights into just how our customers might respond to something like that through a digital loyalty program on a much smaller scale for tobacco, where we got close to 1 million customers signing up in a single month.

And it tells you something about the value orientation of our customers and the fact that they seek out loyalty programs as much as others. And so, while many retailers pat themselves on the back for getting 1 million to 2 million customers in a year, we were highly encouraged by what we were able to do in a very short period of time.

There are also some segments like the fleet customer, where we know with our everyday low price and that discount it's a competitive offer. We do not have a go-to-market model that's effective for that. We've got an incredible sales force out there.

Their focus has been on the walk for excellence and the improvements Renee talked about at our Analyst Day improving our stores. And we expect to be able to divert some of their attention towards that important segment and get incremental sales.

And there's also some things we can do around niche products to optimize share of those segments in certain markets. So, the first point out on this is just capturing underserved segments, and we see a lot of opportunities there. The second is around us optimizing our competitive positioning. And we've talked about the impact of competition.

What we are seeing year-over-year-over-year, though, is a deceleration of the new builds for competitors. And one can simply look to Walmart's Analyst Day and the 2019 projections they laid out for supercenters and neighborhood markets.

And while clearly adding fuel in front of so many neighborhood markets in prior years had an impact on us and others, this is a rapid deceleration of that, when you look at about 25 stores in 2019. The M&A trends we talked about in prior years have largely had their impact in those markets. It's certainly not over.

We know QuikTrip's announced 100 new stores in Austin and San Antonio.

We think our model in front of the supercenters and those traffic areas is always going to be impacted by those additions; just like, when we go into a market, others are impacted, but it will be much less impacted than the former CST and Stripe brands in those markets and those who have acquired or are in the process of acquiring those brands.

The other thing we look at very carefully store by store is - when you have these falling price environments is where we can go put price on the street and get volume.

And where is that just immediately matched, and you just erode the market and you just chase it down? And I think the sum of competitive activity over time has made some of those opportunities fewer.

And so, faced with immediate matching and some of the shifts that you see, you see us and others just less aggressive in taking prices down as aggressively in those periods. And frankly, with our new fuels pricing system up and running at every one of our stores, we've got better data and tools and insights to optimize our pricing.

I'll give you an example, I was in Memphis on Monday. We had a store that was doing over 400,000 gallons in 2015 and 2016, making $0.075. And when you'd strip out the credit card fees associated with that, you've got a low variable margin.

We've optimized that store around 300,000 gallons, still well above our industry average and well over 4x the industry average. And it's earning $0.13 per gallon in line. That's a 31% improvement in gross margin dollars.

So, there are some things we're doing there that will both improve our volume performance but may also reduce our volume performance at some stores. I think the third thing we're going to really focus on in 2018 is just increasing our uptime around operational excellence.

We talked about the supply outages in Q3 on a wide-scale basis, but how do we minimize those day to day in smaller regional situations? How do we minimize store outages; carrier cross-drops, where they drop the wrong product in the tank; product spec issues.

Maintenance and our support center incident management has been something on the radar screen to improve for over year, and we've started an initiative to address that. That will lead to better uptime at our stores. And we're also looking at our credit card and network outages and the impact that has.

But Adam, that was not just for you but for everyone who I know has had some questions about the volume, the underlying trends and what we can do about those. And we'll have a better perspective on what that means for 2018 guidance in our February call, but I hope that addresses that important question..

Your next question comes from Damian Witkowski from Gabelli & Company..

Just to follow up on the competition for fuel volumes. A, is it - you think about Walmart and what they are doing.

Are they actually pricing - where they are opening gas stations in front of neighborhood stores, are they actually pricing below you? And when you talk about competition, increased competition, obviously you had some M&A in your bigger state, but are they also just closing the gap between you and them? Or are they actually pricing now below you? And do you expect that to continue? And the same goes for the remaining states and competition there..

Yes, so I would say we seek to be the lowest or matched below in our markets, with the exception of some of the specialty cost club operations that have unique membership requirements. So, if somebody who has a big box or a grocery store or another type of offer in front of us, we will be at or below their price.

I think that answers the first competitive dynamic. On the second one, I mean, if you think about brands like The Pantry, before that high break-even requirements, high fixed charges, they were clearly pricing for cash margin. With a stronger ownership and financial structure, they're going to optimize that price-volume differential.

So those stores that we are competing with are not going to be below us. And in rare cases, are they going to be priced with us? But the top of the market-to-bottom of market gap will have closed somewhat as a result of that.

And so, you've got to look at your absolute price relative to the other low competitors, but you also have to look at the differential to the top of the market. When you look overall across all of our markets, we continue to price actually slightly more aggressive to the low in our markets.

And the differentials to the state across a wide period of time are actually the same or higher. It's just that you have more of the lower-price competitors in that market. So, they have actually become more convenient to go to in those markets.

You also see some high/low pricing from some of the major brands with the loyalty programs, where some of them raise their prices significantly to those customers who do not have their loyalty program then to get cents off per gallon either through their program or maybe some affiliated grocery store program.

So, I think, Damian, at the end of the day, it - what you're just seeing is just a continued saturation of more new competitors who price low and then some of the weaker brands being taken out.

That said, depending on where those weaker brands are, as those new competitors come into those markets like the Texas example I gave you, those M&A decisions will look different in hindsight now that those stores will be differentially impacted significantly more than the volume impacted our store, in part because of the significant merchandise impact it will have to those competitors.

That will then put pressure on their break-even requirements and cause them to think about whether they can afford to price down; or they need to price up as they lose volume, in some cases even more differentially than we will..

And then when you talk about increased competition in cigarettes, is that a similar driver? Is it the better operators sort of looking at that category and....

It is. And it's the various programs the manufacturer offers and who are on those programs, but we've also seen sort of a deceleration in the number of new competitors that have come into the markets versus prior years on that.

I mean a lot of these markets are now saturated with dollar stores, saturated with C-stores, where you see the new entries coming in.

Many of the competitors are not able to participate in some of the loyalty and digital loyalty programs that the manufacturers offer, and so that gives us and some other larger-scale competitors who can invest in that technology an advantage.

So, I think what you're going to see across the sector is a continuation of kind of winners and losers, haves and have-nots.

And that's why we continue to make investments in technology in our existing stores and highly disciplined capital allocation around new stores given the fact this is going to continue to be an industry where we're going to see persistent competition..

Okay. And then lastly, just, Andrew, you called out CSDs as weak in the third quarter.

Any reason why you think that is? And is that continuing into the fourth quarter here?.

I think it's just the overall trend. Bonnie and her team certainly write a lot about that in their piece as well. Certainly, as we noted, it was an add-on category of - and when you saw traffic down as a whole, you lose that add-on sales.

I can tell you we sold a lot more bottled water than carbonated soft drinks as people were preparing for these storms. So Q3 was unique there.

What continues to be impressive is the innovation and partnerships that the major carbonated soft drink companies have in terms of introducing new products and categories that our larger stores and our super coolers are able to take advantage of. And so, whether it's fuel or tobacco or carbonated soft drinks, there are headwinds in those categories.

It's how you manage around those and how your business model is able to take advantage of the opportunities to manage around those..

Your next question comes from Chris Mandeville from Jefferies..

Andrew, with respect to product supply and wholesale, the guide of being nearer to $0.02 for the full year, can you talk about that a little bit, just the dynamics there as it relates to today? And I'm just trying to understand that as - at least from what we've seen thus far, as the arbs do seem to be quite open quarter-to-date while we finally started seeing them allocate line space on the colonial.

So, I'm just trying to understand why we should ultimately fall out on the low end there maybe versus potentially the mid- to high end?.

Yes, well, I think the biggest reasoning to fall into the low end is the 0.0 contribution in Q1. That's just really, really hard to make up. And so, we've had other Q, quarters like Q3 where we've made $0.05, but it's really hard to offset a $0.00 quarter. If you go back to Q1, we kind of talk about the 3 core dynamics that kind of impact that number.

The first is just around the market structure. And is it positive or favorable or negative for our kind of transfer to retail, the spot-to-rack number. And let's just assume spot-to-rack is going to be negative, as long as you have positive RINs of greater than $0.20, $0.30. We were oversupplied for an extended period. And the arbs were closed.

Line space on colonial was trading at a negative. Crack spreads were positive. And so, you had all these very, very, very favorable conditions for people to get product to the rack and discount that product at the rack. And we've said, clearly if we just bought all our product at OPIS low or OPIS low 2 at the rack, we would have made more money in Q1.

In Q3, we would have been out of product everywhere in the Southeast, right, through that model. So, over the long run, our proprietary supply chain is going to be advantaged. We saw with the tightness in the marketplace in Q3 those conditions improve. We saw 20% of the U.S. refinery capacity largely concentrated in the Gulf Coast go off line.

We saw exports halt, coming out of the country, as the country actually showed its resilience, but we continue to be in a refinery long, inventory long, unconstrained environment. So, I think you're going to continue to see some pressure on the spot-to-rack business.

And that's where our team is looking at our mix, how we contract, how we optimize around that to take advantage of it but knowing that having ratable, secure, low-cost supply over time is distinctive and advantage to our business.

And as I said in Q3 last year and Q3 this year, we would have been in a world of hurt had we not employed that model for a business of our scale. Otherwise, we would have been allocated and shut off. The other thing in Q1 that we saw was a lot of speculation around the regulatory outcome of RINs. I didn't say speculation in RINs.

I said speculation in the regulatory outcome, which led to RIN prices being depressed. I think we have regulatory clarity on that now. RIN prices are back at equilibrium.

And there's some equilibrium between the spot-to-rack and RIN prices, as that RIN is embedded in the refinery spot price, and you clearly see that in the very high crack spreads that refiners are earning today. And so, we expect that to stay more in equilibrium now that we have some resolution on those matters.

And the third part is just are you in a rising or falling price environment and what does that do on your timing and inventory variances and how has that offset your retail position. And so that's just going to kind of fluctuate with time. So, 9-month kind of year-to-date, we're at $0.022 per gallon, but that compares to $0.035 last year.

So, we think we're going to be above $0.02 this year, but a lot can happen in a very short period of time on the product supply side. And so, we'll see where we shake out, but we think this is a business overall that's going to continue to earn that $0.14, $0.15, $0.16 per gallon on an all-in basis..

Right, yes.

I appreciate that, but just maybe in summation here, so with the $0.022 quarter-to-date - or year-to-date, excuse me, are we just to simply assume that market conditions for PS&W are maybe less favorable in Q4 versus Q3? And is that really just you being conservative or what you're observing thus far in October, November?.

I think transfer to retail certainly started more favorable, but as the supply conditions resolve themselves, inventory gets built back up. You'll see that moderate. RINs certainly have come back to equilibrium.

There was probably some extra buying that drove prices up as people had to cover positions, who were perhaps short anticipating a different outcome. I think the big wild card, though, is going to be around pricing. So, as you saw crude prices run up at the end of October, typically you would see prices then fall off at the latter part of the year.

And I think that could swing things enough to say, "Do you end closer to $0.02, $0.022 or $0.025?" I do think the retail margin is going to be higher than kind of that $0.13 normalized margin that we've talked about for the year. And in some way, that offsets some of that as well.

And so, to the extent we're buying a little bit more at rack, and rack prices are subdued, we're picking up that benefit in our retail margin, the way those barrels get priced in. So, I would just encourage everybody to think about the $0.14 to $0.16; and the fact that we think we're going to come in solidly around the $0.16, if not a hair higher..

Great, great. And then the last one from me, I appreciate the color on the hurricane impact to gallons and expectations going into Q4, but just looking at the merch guide, I think you said it was $2.37 billion or somewhere along those lines for the full year.

If that was the correct number that I'd heard, it seems to imply again for Q4, assuming maybe similar tobacco revenue trends on a per-metric - on a per-store basis, that the nontobacco trends are going to then decelerate sequentially.

Is that accurate? And if so, why?.

Yes, so I mean we're actually seeing in Q4 on the tobacco side kind of a deceleration in the kind of the decline versus Q3, one, the traffic, from the storm; the digital loyalty; the competitive side of that. And so, I wouldn't attribute it to that and to Q4 per se.

It's just generally it's kind of that overall subdued traffic and part kind of on the fuel side of that flowing through.

I think, in 2018, on the merchandise store there's still a lot that Rob and his team are working on in terms of the center of store optimization, pricing sharper on the tobacco side, the impact of the loyalty programs, our ability to participate in some newly announced longer-period programs next year. So, I'm not bearish on the category.

I'm certainly not expecting anything accelerating versus what we've seen on that front. Just some of that is just a continued traffic impact, as we move from September into October, that's reflected in that guidance..

Your next question comes from Carla Casella from JPMorgan..

One question on one of your - one of the items of guidance you talked about, the - you guided to minus 2% station operating expense.

Is that - have you looked at your station operating expense on a per-average-store basis? Or is that just overall total?.

That's on a per-store basis..

Okay. And so then how much of that is driven more by the mix of the size format store versus just overall cost....

Yes, so the improvement, if you think about it, the newer stores are all bigger, so they have a higher cost. So, if you looked at it on a kiosk basis, those are getting smaller and smaller in the mix. So, these are real operational savings.

And if you will, sort of the headwind is the fact that you're building bigger stores that incur higher costs, right? So, the actual improvement on a same-store basis is actually greater than that..

That's great. Okay, that's helpful. And then did you give an idea of the store builds for the future? I know you gave the rest of this year.

Did you - did I miss it? And did you give, '18 or beyond, what's a good run rate number for new builds and raze or rebuilds?.

We have. And if you look in sort of our kind of Analyst Day, we've talked about ranges in the kind of 50 to 70 range. We said, in some years, it may be more new builds; other years, it may be more raze and rebuilds.

And so, we're going to be really thoughtful around that from a market standpoint and a capital discipline standpoint where we're putting new stores, and certainly the same on the raze and rebuild.

Certainly, the challenge for the raze and rebuild is you take it out of commission for 4 months, all right? And then you take a store that has very little book value left on it that you write off, and you add $2 million in new capital to it. So, we love the outcome from the sales, the fuel volume, the better offer and all of that.

We're also mindful of the impact on total returns on capital at the portfolio level when you do those. So, we're providing that guidance in February in terms of the specifics on that mix..

[Operator Instructions]. Your last question comes from Ben Bienvenu from Stephens Inc..

This is Daniel Imbro on for Ben. So, you guys showed nice merchandise margin leverage in the quarter despite some difficult comparison.

Andrew, I think you called out somewhat where those improvements are coming from, but how should we think about that trajectory going forward kind of through the end of this year and to out-years?.

Yes. So, if I look at where some of the margin rate comes from, clearly, we continue to see improvement on the tobacco side because you're seeing the manufacturer increases.

The team has done a great job around the optimized promotions, so some of the more promoted categories like candy, we're able to improve sales, but we're also able to grow our margin dollars significantly through better programs there. Some of our areas like dispensed beverages, we're managing better and better and have a bigger portion of our mix.

And then just the center of store having higher margins, the store mix is improving there. So, some of those factors will continue to improve year-over-year. And again, as I've said before, I think there's still a lot more optimization that can take place in our business to expand our unit margins.

We're always going to have this larger base of tobacco, so you're never going to be able to compare us to a retailer that does 20%, 30% in tobacco sales. It's going to be hard to get the kind of onetime impact we got from the Core-Mark shift a year ago, but there's a lot of incremental improvements we can continue to make across the categories..

Okay. It's helpful color. Kind of transitioning to unit growth, you ended the quarter with a pretty full pipeline of stores under construction.

How long should we think about that until they come online? And are these more planned as infills in existing markets, or are you planning at new markets? Or kind of what's the mix there?.

Yes, so these are mostly existing markets that we're in. The stores that we talked about in construction, expect most of those to get delivered this year. We had a few delays and setbacks in permitting, in construction starts, power connections et cetera due to the storms, but we wouldn't expect those to be material.

There is a couple of stores that we pushed off from '17 to '18 just due to the fact that we couldn't start them before a certain point in time, but I think, as we go forward, you're going to continue to see concentration in our existing markets where we can build up scale, and with loyalty that continues to be even more important; continue to go into high-traffic areas.

And that doesn't necessarily have to be right in front of a Walmart, but it - that's always been a good proxy for a high-traffic area. But we have success away from that but typically with a little bit larger format.

So, I would expect to continue to see, as we've talked about, modest growth in our core markets, in high-traffic areas with a format that generates attractive levered returns and staying within our capability set..

Okay, great.

And then last one from me, kind of continuing on the growth topic, how have the raze and rebuilds this year performed relative to your expectations? And maybe what are some of the learnings you've learned from those so far, this year that you can utilize going forward as you continue to do this to your store base?.

Yes. So, they've absolutely met or exceeded expectations. I mean you got to remember these were 112- to 150-square-foot kiosks. I mean we really didn't start doing the 208 larger kiosks until 2007. Many of these had 4 pumps, maybe 1 diesel dispenser. And so, I mean the volume performance exceeds the prior volume performance.

All of these were high-performing stores. I think there was only 1 out of the entire mix where the volume came down, but that's because there was a large, new format store that was built very close by that would have impacted that store whether we did the raze and rebuild or not.

The categories like tobacco that are high frequency where customers have their store they go to, they tend to go somewhere else for that 3- to 4-month period, so you've got to earn them back.

And certainly, in nonstate minimum states we're able to get them back, but it's a little bit harder in state minimum states where you can't be as differentiated in your pricing. But the customers love it. We get great feedback from them, and overall, we've been very pleased with that.

As I said, you're writing off some remaining book value and you're adding $2 million of capital on top of that, but it's the right thing to do for a business that's investing in the long term versus trying to fight increased competition with the weak asset that you have on the ground.

So, continuing to do those at a modest pace continues to be part of our overall plan, and there is good pipeline of those remaining..

Your next question comes from Ryan Domyancic from William Blair..

So, a hypermarket competitor recently announced that they're exploring strategic alternatives for their C-store business. I think they have a decent-size footprint in one of your largest states, Florida.

So, I mean, off hand, do you know what the overlap you have with that competitor is? And then depending on what happens to those assets and whose hands they go into if the asset is sold, would it be easier to compete against those assets under a new competitor going forward?.

Yes, it's all public data, so we know precisely how they overlap. And you guys can look at that as well. A high percentage of the stores are in Pennsylvania, where there is 0 overlap. And that's not a market from a market attractiveness standpoint we're pursuing. And similarly, there is some on the West Coast.

A lot of the markets - a lot of their Florida stores are actually in the panhandle, along the Alabama border, where we have some unique proprietary supply assets. I would say, other than the ones in California that do about 177,000 gallons per month, I think, the ones in the rest of the markets, the average is closer to around 130,000.

And so, I would largely say these are kind of undifferentiated convenience stores with a kind of undifferentiated food offer that are consistent with what others have been selling.

And I think it makes a lot of sense to go try to get a really, really high multiple from someone if they will pay you for that in the market, unlike some of the networks that have been acquired that have had financial challenges.

These have not, and so I would not expect to see a whole lot of difference in terms of how they're operated from a pricing or branding standpoint in fuel or tobacco or other categories in someone else's hand.

It will naturally be synergies that people will go after, but it's a little bit different than the dynamic I described with Damian's question around someone who's pricing high for cash margins versus getting that in check. I think these stores are probably pricing optimally in fuel and tobacco and other things, to start with..

And there are no further questions at this time. I turn the call back over to the presenters..

Great. Listen, I appreciate your call and questions today and your participation. There are lot of questions around sort of the underlying volume of the transactions et cetera. And we highlighted a number of things that we're working on around attracting new customer segments and continuing to optimize our business.

What I would like to end with, though, is just kind of a reinforcement of the Murphy USA model. There's a number of retailers out there that are focused on top line categories like food, and there's a lot of attention played to that without regards to costs.

There's a lot of retailers out there that are talking about adding lots and lots of new units in a market that's very competitive without maybe the same regard for returns.

What is Murphy USA's model? This is a free cash flow generating machine that is very focused on allocating capital between unlevered, high-return ROIC stores and share repurchases; and the capital discipline there.

And our focus is on continuing to drive EPS performance in the 15% to 20% range year-over-year to sustain the return on equity that we've generated since the spin.

And as we demonstrated in this quarter and will continue to demonstrate, that mindset and our business model is well positioned to address the headwind challenges that this industry faces as well as for one-off headwinds that happen in any quarter like Q3.

And we'll look forward to sharing more when we provide our guidance for 2018 on our February call, but thank you for your time today..

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