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Murphy USA Inc  (NYSE:MUSA)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Q4 2018 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Christian Pikul, Senior Director of Investor Relations, you may begin your conference.

Christian Pikul -- Senior Director, Investor Relations

Thank you, Stephanie, and good morning everyone. Thanks for joining us today. With me as usual 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 give us an overview of the financial results and then we will review our 2019 guidance and open up the call to Q&A.

Please keep in mind that some of the comments made during this call including the Q&A portion will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the latest Murphy USA forms 10-K, 10-Q, 8-K and other 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.

Andrew Clyde -- President and Chief Executive Officer

Thank you, Christian. Good morning and thank you all for joining the call. I will keep my comments brief in addressing the quarter and full year performance to make sure we have ample time to discuss our 2019 guidance and accommodate as much Q&A as time will allow. Obviously, we had a very strong finish to the year. In the last call, I noted if the current trends we were observing in early November did not continue, we would fall below our annual EBITDA guidance, and if those trends did continue, we would meet that guidance. In fact, the trends not only continued, but continue to get better, and as a result, we ended 2018 with adjusted EBITDA of about $412 million, close to the midpoint of our annual guidance range.

If I think about the Company's performance in the fourth quarter and full year, I have a few key takeaways for you. First, we took advantage of market volatility when it counted and delivered strong financial performance. We took market share in Q4, growing average per-store volumes nearly 3% at $0.20 per gallon margins. We reinforced our low-price value position to customers and drove traffic to our stores and inside our stores, helping to surpass $400 million of merchandise contribution for the full year. And we achieved these results by keeping cost in check.

Second, we are competing for the long-term and we're competing to win. With several transformative initiatives under way, we are positioning the business for further step-level improvements in 2019 and beyond. We successfully launched our loyalty pilot Murphy Drive Rewards and we're excited to have this program completely rolled out nationally by early in the second quarter as we start to launch in March. We're making competitive investments in our network through the raze-and-rebuild program and by implementing EMV compliance at the dispensers across all of our stores.

Third, we remain disciplined and patient with our capital. New store growth is complemented by increasingly attractive returns from the raze-and-rebuild program. We remain committed to share repurchase as our preferred use of free cash flow, and while we will remain opportunistic around repurchase activity, we ended the year with a strong cash position, which, when coupled with free cash flow, will give us ample flexibility to execute share repurchases in the coming year. Our balance sheet remains conservative, but is well positioned to support incremental investments in growth, technology, and other initiatives to make our business more competitive over the long term.

I will now briefly review fourth quarter results framed by our value creation formula as has been our custom in the past. We opened 11 new stores and reopened 15 raze-and-rebuild locations in the fourth quarter, growing the network to 472 stores as we entered 2019. We generated strong results from our fuel business in the fourth quarter. With the tailwinds surrounding a sharp sell-off in refined product prices, we were deliberate in our tactics around pricing to help drive customers to our stores. Fuel volumes on an average per store month basis and same-store sales basis were up 2.9% and 2.1% respectively in the fourth quarter at all-in margins of $0.20 per gallon.

I would like to point out, starting in the second half of 2018, our average per store month metric, or APSM as shown on the table on the earnings release, began showing better fuel volume results than the same-store metric, which includes stores in service as of January 1 of the prior year. The APSM metric captures the additional stores opened in the last 12 to 24 months, current period new stores when they open, and the raze-and-rebuild locations throughout the year. This is an important indicator about the significant ramp-up in our 2017 build class, the quality of our 2018 newbuild, and the positive impact we continue to see from stores reentering service after a raze-and-rebuild. As we largely completed the Walmart program in 2017, we are now seeing the benefits of being able to build stores in better strategic locations and markets where our offer is competitive.

With more customers visiting our stores, we also saw a lift in our merchandise business as more customers came inside, capping off a phenomenal year resulting in EBITDA contributions from merchandise of over $400 million. Fourth quarter same-store sales were up 1.3%, driving a 3.5% increase in margins with meaningful growth in both the tobacco and non-tobacco categories.

Store level operating expenses were up 5.6% for the quarter, but only up 1.1% for the full year. We proactively incurred incremental maintenance expenses in 2018 as we prepared the network for the rollout of our loyalty program and other initiatives, which drove operating expenses higher in the second half of the year. However, we expect meaningful savings in 2019 as we continue our maintenance transformation efforts.

Taken together, we improved our fuel breakeven metric for the quarter to $0. 73 per gallon, a 9 basis point improvement over $0.82 per gallon in the fourth quarter of 2017. For the full year, our breakeven improved to $0.83 per gallon, a 38 basis point improvement versus 2017. Importantly, this improvement more than offsets a 28 basis point increase in credit card fees, which means we continued to increase the competitiveness of this company even in a higher price environment, and we intend to continue this trend in 2019. I want to thank our team for all their hard work in 2018. The Company is actively engaged in several high-potential initiatives that can be game changers in 2019, including the national launch of our loyalty program, our work on retail pricing, and our continued quest toward zero breakeven. This management team is very excited about our prospects and we look forward to updating you on our progress throughout the year.

And with that, I will turn it over to Mindy.

Mindy West -- Executive Vice President Fuels and Chief Financial Officer

Thank you, Andrew. Firstly, let me apologize for my voice. This is not how I typically sound, but I am trying to recover from an illness, which inconveniently coincided with this call. Revenue for the fourth quarter and full year 2018 was $3.5 billion and $14.4 billion respectively. This compares to $3.4 billion and $12.8 billion in the year-ago period. These increases were largely attributable to higher retail gasoline prices, higher fuel volumes sold, and higher merchandise sales. Average retail gasoline prices per gallon during the quarter were $2.34 versus $2.27 in 2017. And for the full year, retail gasoline prices were $2.48 per gallon versus $2.19 in 2017.

Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA was $148.9 million in the fourth quarter versus $99 million in 2017. And for the full year, adjusted EBITDA was $411.8 million this year versus $405.9 million last year. Adjusted EBITDA for the fourth quarter was higher than the year ago period due to higher volumes, higher margins in addition to higher merchandise contribution. And for the full year, EBITDA was above the prior-year period due to higher volumes offsetting slightly lower margins and higher merchandise contribution dollars. However, due to the $89 million deferred tax benefit recorded in the fourth quarter of last year, net income and earnings per share for both the fourth quarter and full year '18 are below the prior-year period.

The effective tax rate for the fourth quarter was 22.9% and 22% for the full year, and going forward, we are planning on federal income tax rate of between 24% and 26%.

Total debt on the balance sheet as of December 31st, 2018, $862 million, broken out as follows; long-term debt of $842 million consisting of $495 million carrying value of notes due 2023; $296 million carrying value of the notes due 2027; $51 million remaining on our $200 million term loan, and in addition, we are carrying $20 million as expected amortization under the term loan in current liabilities on the balance sheet. These figures result in adjusted leverage ratio that we report to our lenders of approximately 1.85 times.

Our ABL facility remains in place with a $450 million cap, subject to periodic borrowing-based determination. Current borrowing (inaudible) are approximately $177 million as of the end of the year. And at the present time, that facility is undrawn. Cash and cash equivalents totaled $184.5 million at the end of the year, resulting in net debt of approximately $678 million. And there were 32.2 million common shares outstanding at the end of the quarter.

Looking at CapEx, capital expenditures for the quarter, approximately $41 million, bringing our year-to-date spend to approximately $194 million. That total spends are below our guided range of $225 million to $275 million, primarily due to timing around various corporate initiatives. We will address our 2019 capital program in the guidance section later during the call.

That concludes the financial update. So I will now turn it back to over to Andrew.

Andrew Clyde -- President and Chief Executive Officer

Thanks, Mindy. I'd like to wrap up the call with a quick review of our performance against 2018 guidance metrics and then discuss our outlook for 2019. Starting with our organic growth, we ended the year with 1,472 stores, representing 26 new-to-industry locations. Additionally, we've razed and rebuilt 27 stores for the year, replacing the kiosk in high-performing locations with a 1,200 square-foot store while adding dispensers and the ability to offer more fuel grades and products.

Looking at fuel contribution, total fuel contribution for the year -- contribution dollars for the year were $686 million toward the upper end of the guided range of $575 million to $700 million. Annual and per store volumes of 4.23 billion gallons and 244,000 gallons per store month fell within our guidance range of 4.1 billion to 4.3 billion gallons and 235,000 to 245,000 gallons per store month respectively. On a cents per gallon basis, all-in margins ended up at $0.162 per gallon, also closer to the high end of our guided range of $0.14 to $0.165 per gallon.

Looking at the other fuel breakeven components, merchandise margin contribution topped (ph) $400 million, just above our guided range of $390 million to $400 million. Merchandise sales of $2.423 billion were right at the midpoint of our guided range of $2.4 billion to $2.45 billion. And retail station OpEx excluding credit cards on a per site basis was held to a 1.1% increase, just above the midpoint of our guidance range of a flat to 2% increase.

From a corporate cost perspective, SG&A expense of $136 million was at the low end of our guided range of $135 million to $140 million. Our effective tax rate came in at 22% for the full year, which should approximate 25% on a go-forward basis, as Mindy mentioned. And all of these combined resulted in full year adjusted EBITDA of $412 million, just below the midpoint of our guided range of $390 million to $440 million.

As we looked at 2019, we intentionally restructured our forward-looking guidance to encourage investors to view the business through a longer term lens and provide insight into operating metrics that we as a management team can influence and improve. Perhaps the most notable change is that we are no longer providing any guidance around all-in fuel margins, which can be volatile, but have resided within an arguably narrow range of $0.15 to $0.18 per gallon since the spin on a calendar year basis, averaging about $0.163 per gallon over that time period. If we look at quarterly margins, we see a much wider range of $0.10 to $0.23 per gallon, and if we broke that down even further to monthly basis, we would see an even wider range still. The point is, while the future results may and likely will fall outside these ranges, it is clear that margin variability in and of itself does not have a meaningful impact on our ability to create long-term sustainable shareholder value.

While the change in our guidance format will render the market no less volatile going forward, investors should expect the market to remain characterized by both very high margin periods, as we saw in the fourth quarter of 2018, and very low margin periods, which we witnessed in the first quarter of 2018. These periods of high and low margins do not always coincide conveniently within a 12-month calendar year, and as such, we encourage investors to evaluate the business based on their own outlook for the relative direction and long-term equilibrium level of fuel margins. We believe our repackaged guidance will help to mitigate short-term investor anxiety around margins while encouraging a longer term view with a better understanding of how we will compete and how we will grow shareholder value.

With that being said, let's review our new guidance metrics for 2019. Starting with organic growth, for the next several years, we expect to maintain a 40 to 50 store pace of construction projects, consisting of both new-to-industry stores and raze-and-rebuild that address both end-of-life assets, network optimization, and enhancement opportunities at some of our higher performing stores.

From a fuel contribution perspective, we will simply provide an average per store month range around our retail fuel volumes. Variances within this range will largely be attributable to existing store performance, and to a lesser extent, timing of newbuild construction and the number of the raze-and-rebuild opportunities we choose to undertake. As I mentioned previously, we'll continue to drive traffic when it is economically viable to do so. Despite this strategy, absent a prolonged period of falling prices, we expect flat to slightly lower per store volumes in 2019 with our guided range of 240,000 to 245,000 gallons per store month.

For the other components of the fuel breakeven metric, we are guiding merchandise contribution margin to a range of $410 million to $415 million. Our target for per store operating expenses excluding credit cards remains unchanged. We expect to beat inflation and forecast a flat to 2% increase in 2019.

For corporate cost, SG&A is expected to approximate $145 million to $150 million as we continue to invest in appropriate technologies and capabilities that support our key strategic initiatives to maintain competitiveness over the long term and provide both our home office and our stores with the best tools to engage and win with our customers.

For capital allocation, we expect to spend between $225 million and $275 million this year. We are allocating roughly $140 million for organic growth, representing 15 to 20 new-to-industry stores and 20 to 25 raze-and-rebuild locations. This represents 65,000 square feet of new retail space versus about 70,000 square feet of increase in 2017 with 26 new stores and 27 raze-and-rebuilds in 2017. Although we are building fewer stores currently, the majority of the new-to-industry stores will be 2,800 square-foot stores or larger, which represents a higher per store cost that comes with improved economics due to higher selling square footage and higher merchandise contribution margin for the incremental cost.

We expect to spend about $30 million on maintenance capital, which is representative of our ongoing usual break-fix level of expenditures to keep the stores running. And we've allocated another $30 million for corporate initiatives, including technical systems and IT infrastructure upgrades, including some projects deferred from 2018.

Last, we're also earmarking $60 million for EMV compliance. This spend consists of major investments in new dispensers and dispenser upgrades to further secure our network and avoid fraudulent charge-backs from the credit card companies. This amount includes roughly $10 million of dispenser upgrades we would normally replace on an annual basis.

Strictly from a modeling standpoint, to give you a frame of reference when considering various fuel margin scenarios, we make the following statement. At the midpoint of the above ranges and at a $0.16 per gallon all-in margin, we believe that the business will generate about $405 million of adjusted EBITDA. Importantly, we are not guiding to $0.16 margins, nor are we guiding to $405 million of adjusted EBITDA. This is simply a mathematical outcome of a single scenario around the $0.16 per gallon fuel margin using the metrics for which we are providing guidance.

The point is, the margin environment is not the yardstick by which we measure company performance against our strategic goals. It obviously impacts financial performance, but you'll see our commitment to continuous improvement show up consistently in different areas of the Company over time, putting us in a better position to win in any margin environment like we saw in 2018.

Equally important, the guided ranges we have provided above do not include expected benefits from major improvement initiatives under way in 2019. These include the national rollout of our loyalty program, our retail pricing initiatives, and ongoing cost savings we expect to realize as we invest internally in improving our network. While these initiatives do have both capital and expense associated with them, those expected costs are largely already baked into the above guidance. As a result of timing and a wide range of other variables on expected outcomes, we expect to see the bulk of these strategic initiatives benefit in the second half of 2019 with the full impact less one-time 2019 rollout cost realized in 2020.

To wrap up, we are very pleased with the progress we made in 2018, and we're very excited about the potential for the 2019 initiatives to continue to move Murphy USA's business forward.

And with that, operator, we can open up the call to Q&A.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Chris Mandeville with Jefferies. Please go ahead.

Blake Altman -- Jefferies -- Analyst

Good morning. This is Blake on for Chris. I was wondering about your operating expenses per store. Looks like for the year, you talked about they are up only 1.1%, but the 4Q is a little higher at 5.6%. You talked about the higher maintenance. Now you're guiding growth of flat to 2%. So I was wondering what would cause you to be able to hit that flat -- the lower part of that range? Any initiatives you can talk about or maybe expenses going away such as less maintenance?

Andrew Clyde -- President and Chief Executive Officer

Yeah. So the maintenance cost in Q4 and frankly for the full year represented step one of our maintenance transformation work and we started the year with a lot of open tickets work that hadn't been done at the stores, and new leadership in that area proactively got caught up on all of those initiatives. And we also prepared the business for the national rollout of Murphy Drive Rewards et cetera. And so what you see is kind of the accumulation of that expense item.

One of the benefits of the maintenance transformation initiatives, besides having a backlog of work completed in 2018, is clear work standards for our vendors, new vendor rates, new vendors for a lot of projects, and a more disciplined process to that break/fix work. And so we actually expect savings relative to the maintenance in 2019. Labor and other costs for the quarter, we actually had a net benefit on a per store basis. And so I would say we've continued our trend of more than beating inflation since the spin and we expect to be able to continue to do that in 2019 as well.

Beyond the maintenance savings we expect in 2019, we have initiatives related to loss provision -- shrink, LP, we have a new uniform program that's saving money, but also providing a new branded uniform to our store associates, and we have other labor initiatives as well. So as we've talked about before, we still have line of sight to continuous improvement and believe that we will just simply continue our track record of beating inflation that we've done since the spin. And I would just encourage you and investors not to look at one quarter of maintenance as a trend to higher cost, but rather look at our track record, full year results, and our guidance on this area.

Blake Altman -- Jefferies -- Analyst

All right. And then just lastly, can you talk about just generally impacts you expect maybe on your business for IMO 2020 regulation maybe from demand and maybe expense?

Andrew Clyde -- President and Chief Executive Officer

Yeah. So as we've talked about at -- with investors and others, we believe that the implementation of IMO 2020 in January of next year with full compliance et cetera is going to increase diesel prices. It will put pressure on light sweet crude, which will raise the price of crude overall. You'd see an accompanying price increase in gasoline as well. I think the key question we had when we first started taking about this (inaudible) the middle of 2018 is if you saw a $0.50, $0.60, $0.70 per gallon increase in diesel prices and $0.30, $0.40 per gallon increase in gasoline prices, at what price level would that start from, right? Is it going to start from the higher levels we saw in August and September of last year or is it going to start from the lower levels that we saw at the end of 2018?

And so if you think about a higher price environment that we will start seeing getting line of sight on in probably late Q3 and early Q4, if you're looking at the forward curve and other metrics, what does that mean for our business? Well, all you had to do is look back to 2018. You'll see higher credit card fees because it's based on the cent per gallon price you're buying, while we have initiatives in place implementing in 2019 that will actually help us reduce some of that. One of the other things, by focusing on our fuel breakeven metric is we more than offset the credit card increase that we saw in 2018 through our continuous improvement efforts.

The other thing about a higher price environment is customers become more price sensitive. And I think we started to see some of the trends associated with that in Q3 in higher prices as customers on the margin become more price sensitive and go to lower price retail outlets on the margin. And we still have the majority of our stores in more rural locations where we are absolute low price leader with less competitive dynamics where we are able to kind of take share in that type of environment.

So higher prices raise cost to everybody. The winning firms are able to offset those higher costs through the ruthless focus on continuous improvement and low-price value players gain share in that type of environment. I think that sets up nicely for us on a relative basis. What would that Q3 or Q4 look like? It would look like a rising price environment. And so what I would encourage all of you to do is go back in history and look at analogous rising price environments to see what that does to the relative fuel margin and other metrics including PS&W in modeling that for our business. And we'll see the impact when it actually happens, but right now we're anticipating that it will be implemented on January 1st and we'll see higher prices.

Blake Altman -- Jefferies -- Analyst

That's very helpful. Thank you very much.

Operator

Your next question comes from Bonnie Herzog with Wells Fargo. Please go ahead.

Bonnie Herzog -- Wells Fargo -- Analyst

Good morning.

Andrew Clyde -- President and Chief Executive Officer

Good morning, Bonnie.

Bonnie Herzog -- Wells Fargo -- Analyst

Hi. I have a question on your strategy. It seems like you're planning on building fewer new stores in the future, but not necessarily returning as much cash to shareholders right now given no buybacks. Yet as you mentioned, you've got the cash balance pretty healthy. So maybe help us understand what the long-term goal is. And then in the context of that, what are your priorities for free cash flow and have these priorities changed at all?

Andrew Clyde -- President and Chief Executive Officer

Bonnie, they really haven't. And I would just encourage everyone to kind of look back over the prior calls and how we articulated this. We are going to continue to be opportunistic around share price repurchases. Certainly in the last quarter, there were certainly a period where there was a massive market correction in debt, and just because of where we had some trigger prices, we missed out. And you could say maybe we're overly conservative on that, but it was certainly something we didn't anticipate. I think the fact that in prior calls, we suggested, like in 2018, we more than met market expectations acquiring over $140 million of shares in the first half of the year that it might be lumpy from quarter-to-quarter and that we're going to be opportunistic about doing so. So there has been absolutely no change in any of our discussions around our change in philosophy around capital allocation.

Part of a lower number of stores this year as well as as we move away from the Walmart stores, we build up a portfolio and land bank of stores that accommodate the 2,800 square foot stores, we target the handful of target markets that we referenced on other calls, take a little bit of time then to build that up and get the permitting and everything in place for that. The majority of our stores built next year will be the larger formats in those target markets, and you could expect to see a higher number in future years associated with that, but it may be offset with a slightly lower number of raze-and-rebuilds as we try to modulate the amount of capital.

And so I think you'll continue to see this balanced capital allocation between growth and major improvements to the network and distributions to shareholders. And please do not look at any one quarter of not buying back shares as a shift in the strategy. We've been very, very consistent in saying that as our primary method for returning cash to shareholders and we will do it in a opportunistic timing way across any time period during the year. And we may get a little more right one quarter and we may get a little bit less right one quarter, but overall, I think we've been pretty good at timing the market.

Bonnie Herzog -- Wells Fargo -- Analyst

Okay. That makes sense. And then just in the context of that, in terms of priorities for cash, I mean, what about acquisitions? I don't think of you guys as necessarily going out and looking to acquire, but is that something that is you are open to doing?

Andrew Clyde -- President and Chief Executive Officer

Yeah. So I think our stated priorities have been to focus on organic growth and continuing to build the capabilities that allow us to win with customers. Certainly there is a number of capabilities that we've been working hard on to have in place and there are some new ones that we're rolling out in 2019, that if you apply those to another business, you would be able to get the kind of synergies that would justify control premiums et cetera.

We would also believe at some point in time, the market would recognize the improvement efforts that we've made to our business and award a higher multiple, which would make those acquisitions, given the high state of multiples for acquisitions of good stores today, more accretive and less dilutive. So certainly, building capabilities that allow you to add value to someone else's business could be a way to think about future M&A, but right now, that's certainly not in our plans for 2019 or 2020. We're looking to build strong capabilities focused around improving the productivity of our existing stores and creating the significant upside from that.

Bonnie Herzog -- Wells Fargo -- Analyst

Okay. And then just maybe my final quick question is on your PS&W and RINs, the fuel contribution. It was negative in the quarter, which I expected, but a fair amount, I guess, lower than what I was looking for. So could you walk through that for us? And I'm thinking about in the context of looking back in history for you guys. I think it was fourth quarter of '14 where you had to really outsize retail fuel margins and certainly the negative contribution, but maybe not as negative back then. So just help us understand what went on there. Thanks.

Andrew Clyde -- President and Chief Executive Officer

Yeah. Bonnie, so here's the thing. If you and your peers had gone back in history, like you said, and said what is the most analogous period for what we're going through at the time you're writing your updates for our Q4 performance. And you would have done exactly what you did. You would have said, well, 2014 fourth quarter looks remarkably similar. We've got about a $0.40 price drop et cetera. And if you look back in performance for that period, you would have seen the following. You would have seen 2.7% volume growth on an average per store month basis; you would have seen about $0.24 retail margins, and you would have seen about a $0.04 per gallon offset in product supply in wholesale.

And we would have gone to about the exact number we hit this quarter, 2.9% volume growth on an APSM basis at a net $0.20 margin. And instead of talking about some miss, what we would have done was your estimate would have been a lot closer to our actual, right, we would have been discussing a little bit higher maintenance offset by a little bit of SG&A, and we've been having a high-five discussion about the merchandise contribution from all the people going through the stores.

And so I would just encourage, we've gone through painstaking detail in many of the prior calls to lay out the market conditions around price structure falling, what it does to different parts of the business, our consistent strategy on taking share certainly in a significantly sharp falloff in prices, how the PS&W offsets that. And I think there's enough analogous quarters now in our history and we provided enough color around the quarters. And I think this quarter is very remarkably similar to that period and that might be a better way of helping your investors if you guide them toward your best estimate of what you think our actual is.

Bonnie Herzog -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

Your next question comes from Ben Bienvenu with Stephens. Please go ahead.

Ben Bienvenu -- Stephens -- Analyst

Hi, thanks. I want to ask about the tobacco sales results in the quarter, which were quite better than we've seen year-to-date certainly. And I wanted to ask about maybe what's driving that improvement. And then to what extent is your guidance for next year of continued strong merchandise contribution predicated on a continued improvement in tobacco trends.

Andrew Clyde -- President and Chief Executive Officer

Yeah. Good morning, Ben. I'd tell you a couple of things. One, certainly the increased traffic helps that environment. Second, the programs that we're operating under with the manufacturers continue to benefit us in part because we return those -- for those programs, higher sales and volumes to the manufacturers. On the other tobacco products including the vapor products, that continues to be strong. And frankly, we were later in sort of the dual implementation versus some other retailers as well.

If you think about 2019, we expect to continue to have strong traffic, we continue to have strong programs. We continue to believe Murphy Drive Rewards is also a unique way for Murphy USA to increase value additionally for adult consumers of these products, and in the very near term, we don't see any significant material impact from any of the FDA regulations. So we do believe that we'll continue to see good performance from that category in 2019 as we continue to execute against the programs, Murphy Drive Rewards, and other traffic-building activity.

Ben Bienvenu -- Stephens -- Analyst

Okay. Thank you for that. And then as it relates to the SG&A guidance for next year, and I might have missed this in your prepared remarks, but how much of that spend is earmarked for the Murphy Drive Rewards loyalty program you build out? Is that synonymous with the IT investments that you mentioned in your press release, or are those two mutually exclusive?

Andrew Clyde -- President and Chief Executive Officer

No. So about $5 million of the increase is associated with the Murphy Drive program and some of that represents one-time cost. And there is also about $5 million associated with some of the other strategic initiatives. We're adding capabilities, and in some cases, human resources to those efforts.

Ben Bienvenu -- Stephens -- Analyst

Okay. Great. And then last quick question if I could, Mindy. I hate to be greedy because you did just provide your CapEx guide for this year and gave a nice detailed breakdown, but I wonder should we expect to see CapEx over the next several years moderate? I want to ask that question in the context of Andrew's comments around changing the mix of raze-and-rebuild versus bigger stores and just managing your spend with returns in focus versus the absolute dollar necessarily.

Mindy West -- Executive Vice President Fuels and Chief Financial Officer

That's a great question, Ben. And I would not expect a dramatic departure from the CapEx levels that we have seen. I think that our maintenance cost will likely go lower because we are spending some money this year for EMV-compliance. We're going to have those dispensers under an extended warranty. So we will have less dispenser replacements first of all. And then those dispensers that we have replaced will be under our warranty. So we will see a slight reduction, we would think, in that part of our maintenance budget. And then for growth, we're reloading our pipeline, as Andrew said, for new NTIs. We still have an extended list of raze-and-rebuild activities. So I would say certainly you won't see our CapEx drop (ph) below $200 million in future years. I think somewhere $200 million, $250 million would be a reasonable range to expect.

Ben Bienvenu -- Stephens -- Analyst

Okay. Thank you. Best of luck.

Andrew Clyde -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from Carla Casella with JP Morgan. Please go ahead.

Carla Casella -- JP Morgan -- Analyst

Hi, you have been breaking out your expenses excluding the credit card. How should we think about the credit card going forward?

Andrew Clyde -- President and Chief Executive Officer

Carla, one way to -- sorry, one way to think about is, it's about 1.1% of revenue, and certainly the revenue fluctuates with prices. And so that's probably the simplest way to think about that number.

Carla Casella -- JP Morgan -- Analyst

Okay. The total revenue, not just the petroleum products or it includes the merchandise and the gas?

Andrew Clyde -- President and Chief Executive Officer

Yes, yes.

Carla Casella -- JP Morgan -- Analyst

Okay. And then are you seeing any impacts from this -- the weather craziness we've had just recently, this cold whether? Does that impact the pipeline, the delivery, anything within the supply chain?

Andrew Clyde -- President and Chief Executive Officer

No, it really hasn't. And in fact, if we think about January this year versus January last year, I mean, the winter storms that we saw last year impacted our markets in a much more significant manner, a lot more snow in the southern market that disrupted driver traffic and so forth. And so while we've got cold temperatures in some of our markets, we have so many fewer stores in the markets hit most hard by this polar vortex and we're not really experiencing the same kind of supply chain disruptions that we did last year.

In fact, if you want to look at where we are this year January to date versus last year, last year we were starting at lower margins and rising prices and the major storms, we were down about 8% year-over-year last January. This January, we are up 10% year-over-year, and so we're not only offsetting the storm-related impacts from last year, but by having kind of the halo effect from December and customer traffic rolling into January, stronger margins et cetera, we're continuing to take share as we enter the year. So no customer disruptions, no supply chain disruptions, and certainly stronger performance year-over-year as we start the year.

Carla Casella -- JP Morgan -- Analyst

Okay. And then on the merchandise side, we're hearing from a lot of food and consumer product companies of increase in their logistics costs. Have you had any of that been passed on to you through the year? And are you seeing any changes there as we go into 2019?

Andrew Clyde -- President and Chief Executive Officer

No, look, other then fuel surcharges that are in our transportation contract, which we actually proactively renegotiated when price levels were lower, so when we return to higher prices, we would be advantaged relative to prior high price environment. We really don't see that. So we'll see price increases on packaged beverages, for example, the same as in the industry. And some of that, I guess, is due to transportation costs, but other parts of it is just due to the fact of declining broader demand for some of those products as the manufacturers manage unit decline with higher prices to continue to grow gross margin dollars, but a kind of limited effect that we actually see in the pass-through.

Carla Casella -- JP Morgan -- Analyst

Okay. Great. Thank you.

Andrew Clyde -- President and Chief Executive Officer

You're welcome.

Operator

Your next question comes from John Royall with JP Morgan. Please go ahead.

John Royall -- JP Morgan -- Analyst

Hey, good morning. Thanks for taking my question. Just wanted to see if you had any color on how the fuel margin tracked in January. You had rising crude prices all quarter, which I think would suggest some compression certainly from 4Q levels, but any other color there would be helpful as we look forward to 1Q.

Andrew Clyde -- President and Chief Executive Officer

Yes. So for month-to-date, we started with stronger margins coming out of December on the falling price environment. We saw an increase earlier in the month and we saw a little falloff, we've seen another increase, but generally it was stronger environment to the more steady increase environment that started at a lower level for last year. Look, February and March, the next two months for the quarter do, I don't have a crystal ball on what Q2, Q3, Q4 do. This is why we're kind of out of the fuel margin guidance business because there is just so many factors between the geopolitical supply demand of crude, IMO 2020, and the demand for low-sulfur crudes et cetera. We know it's going to remain volatile, and there's certain environments we win in and where this can take advantage of those when they come.

John Royall -- JP Morgan -- Analyst

Okay. Thank you. And then maybe just wanted to approach the capital allocation question from a different angle. Do you guys have a targeted level of cash that you try run the business on? That I think would help us think through, I guess, generally how much you have available to deploy.

Mindy West -- Executive Vice President Fuels and Chief Financial Officer

John, we don't really have a target level of cash. We always have a certain number -- amount of balances of cash in transit, but as long as we have capacity under our ABL, we really could operate on a zero cash basis as far as that goes. So no, we don't have a designated target of cash that we have to have.

John Royall -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Your next question comes from Ben Brownlow with Raymond James. Please go ahead.

Ben Brownlow -- Raymond James -- Analyst

Hi, good morning.

Andrew Clyde -- President and Chief Executive Officer

Good morning, Ben.

Ben Brownlow -- Raymond James -- Analyst

On the loyalty program, I was just hoping you could give maybe some data points or updates around there. Can you -- and you may not want to give this out, but same-store sales trends around the pilot stores? Just any data points around the success of that program.

Andrew Clyde -- President and Chief Executive Officer

Yeah. So I'd just share the same things that we've been seeing. Our most loyal customers are increasing trips, increasing gallons per trips. On the tobacco side, we're running the unique program in Texas where you can earn points there. We're seeing a higher spend as well, as well as larger baskets. And so that's really encouraging from that standpoint.

One of the other things that's a good measure of a loyalty program is are people accumulating all their points or are they transactionally using up those points on a ratable basis. And they're actually using them on a very ratable basis, which we find very encouraging. So we've got a high level of engagement with customers on the program. The number of folks registered is well north of 1 million, the number that have actually gone through and become fully qualified members continues to go up, and the number that give us a lot more information for age verification purposes, so we can interact with them around certain age-restricted products continues to go up. And so we're really excited about that potential as we roll out nationally.

And just to be clear, our plan is to begin rolling this out nationally in March, and we expect to have the national rollout completed early in Q2. So if there is anything not clear about the timing, we're not delaying the launch. We just had our national leadership conference in Orlando with 1,470-something store managers and they are thrilled to have it coming to the markets, their customers are asking when are we going to get it, and our best store managers have already set the stage to sign up. Over 83% of our members signed up based on point-of-sale interaction with our store managers, and I've always talked about them as being one of our greatest assets. And as you think about how others roll out these programs spending millions and millions and millions on social media and digital advertising, we're not doing that. We're leveraging our greatest asset, which is our store associates.

Ben Brownlow -- Raymond James -- Analyst

Great. Thanks for all the color. That's all I had.

Andrew Clyde -- President and Chief Executive Officer

Okay. Thanks.

Operator

Your next question comes from Damian Witkowski with Gabelli Company. Please go ahead.

Damian Witkowski -- Gabelli & Company -- Analyst

Hi, I just had a question on the new larger stores. Are we -- going forward, is that all you'll be building from now on, the larger Express stores?

Andrew Clyde -- President and Chief Executive Officer

That's our primary format. It's a modular building. So if you think about sort of our 1,200-1,400 square foot stores today, this is also a modular building, one of the bigger additions. It does have a beer cave. It does have more prepared made to stock food, it's got a larger fountain, coffee, beverage program as well. There are still locations we know about where if it's in front of a Supercenter and we're able to get that from a third party and it may be on a smaller lot where we can't build the 2,800 square foot store, we would still be able to go do the 1,400 square foot store. And by the way, most of our raze-and-rebuilds now are a 1,400 square foot store that has the bathrooms on the interior versus the 1,200 that did it on the exterior entrance, but hopefully that helps.

Damian Witkowski -- Gabelli & Company -- Analyst

Yeah. No -- and I mean, just in terms of economics, how much are you spending for the stores that are, I guess, twice the size on average of the other ones? And is there a change now? Are you looking to buy the real estate or are you still leasing...

Andrew Clyde -- President and Chief Executive Officer

Yeah. On the leasing, it's about 50-50 and that's just a function of what is available out there. The 1,200 square foot stores cost roughly $2.5 million, $2.6 million; 2,800 square foot stores, really only about $0.5 million more, at a little over $3 million. And so the incremental selling space and merchandise margin from that more than covers that cost. You don't need that much more land to be able to do it and the labor costs aren't significantly different either.

Damian Witkowski -- Gabelli & Company -- Analyst

And just -- and just in terms of -- obviously we have a lot more -- the stores have a lot more merchandising. Are you doing this from within the Company or are you hiring from the outside to sort of -- to get the expertise of running the bigger stores?

Andrew Clyde -- President and Chief Executive Officer

No, I mean, given that we haven't crossed that line around getting into prepared food, the stuff we're selling in these larger stores is consistent with the stuff we're selling in our existing 3,450 square foot stores and 2,750 square foot stores, of which we've got a number in the portfolio. So I think the key thing is are you changing your business model by getting into prepared food, in which you've got a kitchen and a commissary and all of that? The answer is no. We're not doing that. It's a different capability. And if we did go down that path, we would probably be building even bigger stores and we would need to bring in capabilities, but this is right in the bull's eye of our capabilities set today.

Damian Witkowski -- Gabelli & Company -- Analyst

And then lastly, remind me, what's your debt-to-EBITDA target? Have you said what your comfort level is and where would you go to if need be?

Andrew Clyde -- President and Chief Executive Officer

Yeah. Our original bonds have a 2.5 times leverage. Our newer bonds have a 3 times leverage in terms of the restriction on share repurchases. And so we can operate the business comfortably within those levels.

Damian Witkowski -- Gabelli & Company -- Analyst

Okay. Thanks, Andrew.

Andrew Clyde -- President and Chief Executive Officer

You're welcome.

Operator

There are no further questions at this time.

Andrew Clyde -- President and Chief Executive Officer

Right. Look, I'd like to just wrap up the call and -- with one point about the guidance. I really do want you to look at the emphasis behind this is the focus on the long-term. I hope this didn't come as a surprise to anyone. We've shared this on the last two conferences calls. We shared it in any of the conferences we've attended, any of the investor meetings we've attended as well. And we believe this will allow us to have less short-term anxiety around margins and really have us focus more around the long-term things of our business. And we're really excited about the long-term potential of the business and look forward to sharing more as the initiatives roll out in 2019. Thank you very much.

Operator

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

Duration: 55 minutes

Call participants:

Christian Pikul -- Senior Director, Investor Relations

Andrew Clyde -- President and Chief Executive Officer

Mindy West -- Executive Vice President Fuels and Chief Financial Officer

Blake Altman -- Jefferies -- Analyst

Bonnie Herzog -- Wells Fargo -- Analyst

Ben Bienvenu -- Stephens -- Analyst

Carla Casella -- JP Morgan -- Analyst

John Royall -- JP Morgan -- Analyst

Ben Brownlow -- Raymond James -- Analyst

Damian Witkowski -- Gabelli & Company -- Analyst

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