Feb 20, 2014
Executives
Tammy Taylor - Senior Manager of Investor Relations and Corporate Communications Andrew Clyde - President and CEO Mindy West - Executive Vice President and CFO
Analysts
Ben Brownlow - Raymond James John Lawrence - Stephens Paul Simenauer - JPMorgan Damian Witkowski - Gabelli & Company Patrick Fruzzetti - High Tower Advisors
Operator
Good day, ladies and gentlemen and thank you for standing by. And welcome to the Murphy USA Fourth Quarter 2013 Earnings Conference Call.
At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at the time.
(Operator Instructions) As a reminder, today’s conference may be recorded. It’s now my pleasure to turn the floor over to Tammy Taylor.
Ma’am, the floor is yours.
Tammy Taylor
Good morning everyone, and thank you for joining us today. With me are Andrew Clyde, President and Chief Executive Officer; Mindy West, Executive Vice President and Chief Financial Officer; and Donnie Smith, Vice President and Controller.
After a few opening remarks from Andrew, Mindy will provide an overview of the financial results. Andrew will then give an operational update and we’ll open up the call to questions.
Please keep in mind that some of the comments made during this call including the Q&A portion will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that the projections will be attained.
A variety of factors exist that may cause actual results to differ. For further discussion of Risk Factors, see Murphy USA’s Form 10 and other SEC filings.
Murphy USA takes no duty to publicly update or revise any forward-looking statements. During today’s call, we may also provide certain performance measures that do not conform to Generally Accepted Accounting Principles or GAAP.
We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release which can be found on the investors section of our website. With that I will turn the call over to Andrew.
Andrew Clyde
Thanks Tammy and good morning everyone. Murphy USA completed the year 2013 and the fourth quarter with a number of significant accomplishments against our strategic goals and priorities.
We added 39 new stores for the year and 18 in the quarter with another 5 completed since year end and we have 15 currently under construction, most of these are larger format stores. Non-tobacco sales grew same quarter-on-quarter by 7.3% on an average per store month basis and non-tobacco gross margin dollars expanded by 10.2%.
We kept our cost lean, reducing per store operating cost by 2.4%. We executed on our commitment to sell non-core assets as the sale of the Hankinson ethanol plant generated over $173 million in proceeds.
We ended the year with close to $295 million in cash and equivalents after paying down a total of $80 million in long-term debt during the quarter. Taken together, these results were key to entering 2014 with momentum, and we continue to track positively through January.
On the fuel side, the fourth and first quarters tend to be more challenging quarters of the year from a volume, demand and margin standpoint. However, when compared to Q4 2012, our retail fuel contribution this quarter fell below the prior year quarter, although this was made up in part by robust contribution from product supply and wholesale.
As discussed in our first call, the quarter-to-quarter volatility for retail and product supply and wholesale tends to smooth its way out over the course of the year, which it did in 2013 as we generated over $110 million in additional contribution from fuel. On an annual basis, we ended 2013 with $495 million in contribution in fuel from retail versus $491 million last year.
Product supply and wholesale generated $68 million in contribution before a LIFO adjustment compared to a $63 million figure last year on the same basis. We are $91 million from RINs for the year compared to $9 million in 2012.
On the merchandise side, we continue to enhance our product mix achieving 5.4% growth in beverage gross margin dollars and double-digit gross margin dollar growth in smokeless tobacco and other non-tobacco categories. When you translate all of this into the bottom line, we had an exceptional quarter and year on a net income, EBITDA and earnings per share basis.
After excluding the Hankinson gain, we earned $0.88 per share for the quarter and $3.98 for the year. I’ll now turn things over to Mindy to review our financial results and then I’ll provide a deeper dive into our operational performance.
Mindy West
Thanks Andrew and good morning. Murphy USA reported net income of $93.6 million or $2 per diluted share for the fourth quarter of 2013, compared to $19.1 million or $0.41 per diluted share for the fourth quarter of 2012.
For the year, net income was $235 million or $5.02 per diluted share, income from continuing operations was $29.5 million or $0.63 per diluted share as compared to $18.1 million and $0.39 in the same quarter of 2012. Our Hankinson ethanol plant contributed income from its operations of $11.7 million net of tax or $0.25 per share and a gain on the sale of the asset was $52.5 million net of tax or a $1.12 per diluted share.
Compared to the basis used for consensus estimates which would exclude only the gain, we delivered $0.88 per share for the quarter and $3.90 for the full year. This compares very well to the $0.41 per share in quarter four of 2012 and $1.79 for the full year of 2012.
The improved results in continuing operations for the current quarter were primarily driven by increased values received from the sale of Renewable Identification Numbers otherwise known as RINs compared to the prior year period and improved results from the Hereford ethanol plant along with no repeat of a prior year asset impairment at that same plant. Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA was $78.2 million compared to $114.8 million in the prior quarter, including a $13.4 million LIFO charge as ethanol layers eliminated due to the Hankinson sale for value higher than the diesel and gasoline increments that were added.
This compares to a $2.5 million benefit in 2012. Upon the sale of the Hankinson ethanol plant, our business will now be organized into only one reporting segment which will be marketing.
Net income for the marketing segment for the fourth quarter of 2013 decreased to $33.2 million from $58.4 million in the same period of 2012, primarily due to lower fuel volumes and margins which were partially offset by higher merchandise margins. After-tax net income for corporate increased in the recently completed quarter to a loss of $3.7 million compared to a loss of $40.4 million in the fourth quarter of 2012.
The increase is partially attributable $2.8 million in net income generated from the Hereford ethanol plant which is now included in the corporate segment and again no repeat of the impairment that we had at that plant last year. In order to make the requirements of our debt covenants, we use the portion of the proceeds from the sale of Hankinson to raise $65 million on our term loan, brining the remaining balance down to $70 million.
At year end 2013, our long term debt totaled approximately $570 million comprised of the term loan and the senior unsecured notes. Our asset base [lending law] remains capped at a $450 million limit subject to periodic borrowing base to terminations which currently limit us to $390 million.
At the present time that facility continues to be undrawn. Cash and cash equivalents for the quarter totaled $295 million at year end with the net long term debt position of $253 million at year end.
For the quarter, we incurred $42.9 million in capital expenditures of which $38.2 million was spent for retail growth, $2.8 million for retail maintenance items and the remaining amount for product supply and wholesale, and corporate. Last year in the same period, we spent $35.2 million in the fourth quarter including $24 million for retail growth, $10.8 million for retail sustaining capital and $1.3 million in the ethanol segment.
Now that concludes an overview of our financial results. So I will turn it now back to Andrew to discuss operational performance.
Andrew Clyde
Thanks Mindy. I will go over the operational performance for the quarter and year-to-date and will start with our fuel performance.
We sold 967 million retail gallon this quarter, down 6.3% compared to 1.32 billion gallons last year. On an average per-site month basis, we sold 270,000 gallons per-site month in Q4, which was flat to this Q3, but down 9.2% compared to 297,000 gallons last Q4.
For the full year, we held total volume flat at 3.8 billion gallons, on a per-site month basis we averaged 268,500 gallons for the year, which is down 3.1% compared to 277,000 gallons in 2012. As we discussed on last quarter’s call, we have a good sense of the drivers of our per-site volumes.
Not repeating the Walmart $0.10, $0.15 program in the fourth quarter of this year definitely impacted same quarter comps, while having one last month of the promotion for the full year impacted the annual volume comps. We saw less volatility in the underlying wholesale price environment for the full year and we saw a market lead different environment in Q4 this year where prices rose almost $0.20 in the quarter versus a significant drop last October where prices fell by over $0.40 for the quarter.
We also continued to see our value oriented consumer impacted by the sluggish economy and other factors which impacted vehicle miles travelled. As many retailers starting this consumer segment have already reported, this consumer wasn’t materially better off in Q4 and it showed up in weaker sales volumes.
For the full year average volumes fell below the low-end of our guidance range of 272,000 gallons per-site month. And these three factors combined largely explain that.
Turning to retail fuel margins, we earned $10.04 per gallon for the quarter bringing our average year-to-date unit margin to $0.13 slightly ahead of last year $12.9. This remains on the high-end of the $0.12 to $0.13 historical average that we use for capital allocation and long range planning purposes.
When you take our retail fuel volume and unit margin performance together, total retail gross margin dollars for the full year improved by 1% to $495 million. We are off to a good start in 2014 as January’s retail fuel gross margin dollars are tracking well ahead of last year, up 31%.
Product supply and wholesale contributed $41 million in the quarter before the LIFO charge. And this compares favorably to the Q4 2012 contribution of 33 million on the same basis.
To remind folks our product supply and wholesale operation is tasked with the primary goal of providing secure, ratable, low cost supply to our retail network, while earning a modest contribution. We recognize this part of the value chain can be quite volatile from quarter-to-quarter.
And if you recall gross margin for the third quarter 2013 was negative $17 million compared to positive $7 million in Q3 2012. This quarter’s positive results show how the quarter-to-quarter swings tend to average out over the course of any 12 month period.
This quarter reflected a very tight product supply market where the arbitrage between the Gulf Coast and other major markets like the New York Harbor was open for extended periods coupled with constrained logistics along Colonial pipeline and lower inventory levels. This caused wholesale rack prices to be elevated relative to the spot prices, so retailers like Murphy USA buying on a spot index basis were buying and shipping proprietary barrels having advantage of retails buying at the rack.
In this model we also collected and sold the RINs from blending and captured a portion of RIN value in our supply contracts. This environment contract sharply with the long backward aided market in Q3 where very high RIN values placed additional pressure on refiners to dispose the product through deeply discounted wholesale rack prices.
In both quarters, we benefited by capturing additional RINs as we optimize our supply sourcing mix and RIN capture based on the total value to the company. As such, we recognized that reporting all of the RIN value from blending and other income doesn't accurately capture the exact gross margin for retail and for product supply and wholesale as we make conscious trade-offs especially in periods where RINs are inflated.
However, we see more value in optimizing the supply mix in the dynamic market to capture more total margin than spending that time allocating RIN value amongst the gross margin line items and transfer prices. Turning to merchandise, we are very excited about the sustained performance of our non-tobacco categories as same quarter-on-quarter growth and gross margin expansion helps to offset headwinds in cigarettes.
Total sales were $534 million for the quarter, down 0.6% from $537 million in Q4 2012. For the full year, merchandise sales were up 0.7% to $2.16 billion.
Tobacco sales totaled $425 million in the fourth quarter 2013, down 3.1% overall. On a per-site month basis, tobacco sales averaged $119,000, down 6.1%.
Tobacco unit margins were relatively flat at 10.3% versus 10.5%. And tobacco margin dollars totaled $44 million this quarter compared to $46 million in the prior year.
The lower tobacco sales and gross margins were primarily driven by the continued industry decline in cigarette unit sales. Offsetting the decline in cigarettes was a strong increase in smokeless products where sales per-site increased by 6% for the quarter and gross margin dollars increased by 27%.
Our mix of tobacco sales to non-tobacco sales shifted from 81.6% to 79.5% for the fourth quarter. This was a result not only from the decline in cigarette sales, but from the ongoing improvements made in non-tobacco merchandising and more large format stores.
Our mix of gross margin dollars improved as non-tobacco merchandise contributed 39% of total margin dollars compared to 34% a year ago. Non-tobacco sales totaled $109 million for the quarter, up 10.7 from last year.
On a per-site month basis average non-tobacco sales were up 7.3% for the quarter and 6.3% year-to-date. Non-tobacco gross margin dollars were up 10.2% for the quarter and up 3.6% for the year.
There are number of categories to highlight that have sustained this momentum. Beverage sales continued to perform well as we followed our successful buy three get $0.10 off fuel promotion with Coke with similar promotions partnering with Pepsi, Monster and most recently Dr.
Pepper in January. Beverage sales per-site month increased 4.2% quarter-on-quarter outpacing industry growth in this category with gross margin dollars expanding 5.4%.
This trend has continued into the New Year as January carbonated soft drink sales are already up 13.1% on a per-site basis. Every other category showed strong sales per-site improvements and double-digit growth in gross margin dollars.
Beer sales per-site grew 8.6% with the 20.2% increase in per-site gross margin. Candy sales and gross margin dollars increased 20.9% and 11.7% respectively for the quarter, as the category was prominent in our promotions’ calendar during the period.
Lotto and lottery sales per-site in commissions increased 9% for the quarter with 11.6% gross margin growth, general merchandise sales per-site increased by 6.2% with the corresponding 15.2% increase in gross margin. We exited 2013 with strong momentum in our non-tobacco categories and we expect to see continued growth to offset the headwinds in cigarettes.
We have a full calendar of our three for $0.10 off programs for 2014 as these programs move the needle for us and our category partners. Combined with our larger 1,200 square foot stores, we will be able to further accelerate the shift in our mix of merchandise this year.
As a low price leader we have worked hard to say ahead of the curve on operating cost and overheads. Total site operating cost averaged $30,000 per-site month in the fourth quarter of 2013 compared to 31,000 in 4Q, 2012.
Excluding credit card expenses, which were down 1.5%, all other site operating costs per-site were down 2.7% quarter-on-quarter. SG&A cost totaled $27 million this quarter including $1 million in non-recurring spin-related cost compared to $26 million a year ago.
Turning to non-core assets, we are very pleased with the progress made in 2013. As we highlighted at the beginning of the call, we sold Hankinson plant at a price reflecting the upper-end of comparable transactions for ICM plants.
We are seeing positive results from our yield improvement projects at Hereford, which generated $2.8 million in net income for the quarter. Additional work is planned Hereford during our normal mark shutdown at which point we expect the plant to be running at its potential.
We have already been informally approach by potential buyers for the plant, but plan to wait to see the results of the March turnaround before starting a formal sales process. Organic growth from new store build continues to ramp up, we act at a 2013 with 1,203 stores adding 39 new locations in the year and 18 in Q4.
We've opened five new stores at year-end with another 15 under construction, this is in line with the 60 new stores we projected for the year, we’re permitting and other delays pushed some into 2014. We are geared up to do 15 to 20 stores a quarter provided all the permits third party approvals and other factors come together as planned.
And we certainly have a financial position liquidity to do this many or more. In summary we are very pleased with the overall performance for the quarter and for the full year.
We made great progress in executing our strategy in the tangible results prove it. New site growth non-tobacco sales and margin growth lean cost structure, non-core asset sales and a strong balance sheet to fuel future growth.
We also demonstrated how our distinctive fuel model can take advantage of dynamic market conditions and capture additional value over the course of the year. We would like to now provide some guidance for 2014.
Please note that we will not be providing quarter-by-quarter guidance. However we will seek to provide a sense of how the current quarter has performed during our earnings calls covering the just ended quarter, where we have good insights to add some additional transparency and seek to avoid surprises.
Our annual approach reflects the inherent volatility in our business and the fact that major swings and commodity prices can occur sooner or later in one year versus the next year. And as we saw in 2013 that volatility tends have a greater impact on quarterly performance versus the full year performance.
Starting with retail fuel performance, we expect to grow total annual fuel gallons by 2.5% to 7.5% and look to sell between 3.9 billion and 4.1 million retail gallons based on our new site additions, expected level of promotions and other key assumptions. As site we are setting guidance of between 267,000 to 277,000 gallons per-site month.
We expect to earn an average unit margin before credit cards of between $0.12 to $0.13 per gallon which is the historical range we use for strategic resource allocation. The mid point of these ranges would yield about $500 billion in total gross margin dollars from retail fuel, up 1% to 2013.
In addition we expect our product supply and wholesale activities to contribute an additional $0.01 to $0.015 per gallon to the total margin pool or $40 million to $60 million in additional gross margin dollars. We are expecting lower RIN values in 2014 and we have conservatively budgeted $0.05 to $0.10 per RIN in our cash flow plans.
We did sale 13 million RINs in January at an average price of $0.385 per RIN and year-to-date RIN prices have ranged between $0.30 and $0.55. So we hope to be surprised this time next year but are being very conservative in our planning.
We are targeting to grow total merchandise sales to $2 billion to $2.25 billion an increase of 2% to 4% over last year while growing total merchandise gross margin to $285 million to $290 million an increase of 1% to 3%. On an average per-site month basis we expect to continue to have a small decline of about 1.5% in 2014 for merchandised gross margin with projected cigarette declines continuing to inch ahead of the projected gains in non-tobacco.
We expect to see this relationship reach an inflection point in 2015 where gains in non-tobacco gross margin will begin to exceed cigarette declines. We have a full promotions calendar for 2014 and over 8,000 enthusiastic associates in the field upselling product to reach that inflection point center.
We have plans to hold our average per store operating costs flat for the year with the potential to reduce site operating costs by 1% on a per site basis. Similarly we expect total SG&A costs to be around $130 million, which is consistent with the recurring cost run rate we established at the time of the spin.
This plan anticipates opening between 50 and 70 sites in 2014 depending on the timing of third-party approvals. On the high end, we would project to spend $195 million in capital of which $171 million would be for retail growth including raise rebuild sites, land purchases for future year growth, major site upgrades and the balance for sustaining retail projects along with terminal preferred and corporate projects.
While we won't be reporting on ethanol as a segment in 2014, we plan to complete the ongoing yield improvement efforts at Hereford and fully expect to be in a position to start a formal sales process later in the year. In the current environment, we expect positive EBITDA will more than cover the remaining plant improvements.
At the corporate levels, we will incur $30 million interests on our 6% ten year bonds we can expect to continue to whittle down the remaining $70 million balance on the term loan. And based on our base case projections, we expect to fully fund our CapEx through operating cash flows while maintaining sufficient cash balances to manage working capital fluctuations throughout the year.
This concludes our prepared remarks. In closing, I would like to thank our entire team of over 8,000 employees who helped make the quarter as success.
We remained focused on our organic growth plans and we’re especially proud of our continued growth and impact from our core strategic focus areas, which provides the foundation for long-term shareholder growth. We’re also excited about the momentum as we start 2014.
At this point we would like to open up the discussion for questions.
Operator
Thank you, sir. (Operator Instructions) All right.
And it looks like our first question will come from the line of Ben Brownlow with Raymond James. Please go ahead.
Your line is now open.
Ben Brownlow - Raymond James
Hi, good morning or good afternoon.
Andrew Clyde
Good morning Ben.
Ben Brownlow - Raymond James
On the RINs I guess our $53 million sold in the fourth quarter and $13 million you said in January. How should we think about that run rate going forward?
Should we think of the $13 million and you just give some color on what drove the higher RIN sales in the fourth quarter?
Andrew Clyde
Sure. So this is a function of the amount of proprietary barrels that we ship well we then blend and collect the RIN.
I would expect the low end of that to be about $12 million RINs per month. That number increases during the summer driving seasons when overall demand is higher that number can also increase based on our mix proprietary barrels versus spot index or rack purchases that we make.
So as we optimize our mix based on total value to the company, that number could change as well. So $12 million would be a conservative number.
I believe we did about 170 plus million RINs last year for the full year. We also try to maintain a balance at month end as well.
That is pretty consistent.
Ben Brownlow - Raymond James
Okay. Great, thank you.
And on the fuel saver program, can you just discuss the reason for not repeating that fuel promotion in the fourth quarter that you had in your prior and is the current reason per gallon discount that you have with Wal-Mart, is that comparable to the prior year?
Andrew Clyde
Yes. So for your first question, the fourth quarter program that we ran in 2012 was replaced with a program in 2013 that ran from April to early July so a little over three months.
So that was just a timing issue on that fact. And so if you have it at different times during the year, it certainly reflects on the year-on-year comps.
If you have one month more, one month less it will affect your annual comps. And we are looking the [Hereford] program this year and we are still working out the details on that.
The $0.10, $0.15 program is the higher level program we run a continuous $0.03, $0.05 program that we are currently running and that’s consistent with the prior years.
Ben Brownlow - Raymond James
Great. And just one last one from me.
The switching over to the new 1,200 square foot format, how many stores are there in that format now that that current format? And do you have any updates on sales data or return, anything that you can give us there, thank you?
Andrew Clyde
Sure. So I believe there is around 50 stores that are in the 1,200 square foot format for the ones where we have a full year of operating performance and so those built prior to 2013, those stores are performing right in line with our pro forma expectations.
They are doing 310,000 gallons per month or more, they are approaching around $175,000 to $180,000 in merchandise sales, their operating costs are in the $42,000 per month range and the capital is in line with the numbers that we showed at Analyst Day, varying depending on the land purchases. So Ben, when you had all of that up, it’s coming out right in line with that 9.5% after tax cash on cash invested measure or return on invested capital.
Ben Brownlow - Raymond James
Great. Thank you, guys.
Operator
Thank you, sir. Our next question will come from John Lawrence with Stephens.
Please go ahead your line is open.
John Lawrence - Stephens
Thanks, good morning.
Andrew Clyde
Good morning, John.
John Lawrence - Stephens
Andrew, would you talk about, just go into a little bit more detail and remind us and clarify, what you said about the January trends and what would be that acceleration sort of a focus on that, is there another promotion that’s driving that strength?
Andrew Clyde
On the January, what?
John Lawrence - Stephens
On the results in January, how it was gone in the first year?
Andrew Clyde
So, we had a higher fuel unit margin on the retail side in January versus the prior year. We had very strong non-cigarette merchandise, sales and gross margin expansions are really continuing the momentum that we saw in Q4.
Obviously the RIN values at $0.385 for the month on average were strong. And I think current RIN values are in the $0.50 to $0.55 range.
Right now the cost, operating cost and improvement efforts are continuing. So, it’s just all tracking.
And I think wholesale margins especially around diesel and premium remain strong also.
John Lawrence - Stephens
And if you look at -- you mentioned non-core assets and you’ve talked about the ethanol plants, anything else in the asset base, terminals, pipelines or anything else that you could give us more of a sense of as you look forward to capital deployment?
Andrew Clyde
Right. So beyond Hereford, we do have a Tampa terminal that we talked about.
We’ve not completed the sales process on that asset and are continuing that process, no other terminals that we are looking at, at this point and no other assets that we look to dispose off in the next six months. There is one other pipeline asset for which some work will be done before we are in a position to look at alternatives for that asset.
John Lawrence - Stephens
Right, and last question, Wal-Mart just announced this morning acceleration of the neighborhood market format and indicated that they would like to have fuel in all of those locations. Does that fit in with -- on expansion do you think as far as discussions with them?
Andrew Clyde
Yes. So we talk to Wal-Mart every week, we share the same consumer base and our goal is to add value to that consumer through our low price fuel and merchandise offerings.
And so we talk with them about operational issues, promotional activities as well as further growth beyond the 200 stores. So, I will just leave it as we are always having discussions about future growth and how we can partner to add more value to our share of customer.
John Lawrence - Stephens
And the end result of that conversation is just more collaboration than there had been say a year or two ago?
Andrew Clyde
I would absolutely say that.
John Lawrence - Stephens
Great, thanks. Good luck.
Andrew Clyde
Thanks John.
Operator
Thank you, sir. And our next phone question will come from Carla Casella with JPMorgan.
Please go ahead. Your line is now open.
Paul Simenauer - JPMorgan
Hi, this is Paul Simenauer on line for Carla Casella. I was just wondering to what extent the Wal-Mart traffic drives your volume overall?
Andrew Clyde
Yes, we have done over time co-relations between the two and there is not a -- you can’t find a strong statistical co-relation between their foot traffic in numbers and our transaction count in numbers. So, we talked a little bit about this on the road show, someone try to do that co-relation, you’re not going to find a strong.
I think we’ve tried and they’ve tried and we don’t see a strong statistical co-relation there.
Paul Simenauer - JPMorgan
Great. Thank you so much.
Operator
Thank you, sir. Our next question in the queue will come from Damian Witkowski with Gabelli & Company.
Please go ahead. Your line is now open.
Damian Witkowski - Gabelli & Company
Hi, good morning.
Andrew Clyde
Good morning.
Damian Witkowski - Gabelli & Company
Just want to go back to RINs. So your low end production for the year is about 144.
What would be the high end?
Andrew Clyde
I would say the number is similar to what we did in 2013 which is around $170 million.
Damian Witkowski - Gabelli & Company
Okay. And then I mean you sort of implied that you think it’s -- the RINs are overvalued.
Is that based on the fact that -- if you look at the chart, they’re obviously at a much higher than they were 18 months ago, or is there some sort of -- I mean do you have a way of thinking about how much they should be worth?
Andrew Clyde
Yes. So I guess I would say we’re taking a position that they’re overvalued; we’re taking a position that for cash flow planning purposes and thinking about our capital expenditures, we’re just being extremely conservative in our cash flow planning.
We don’t want to count on $0.40 RINs and wake up and find out we’ve only got $0.05 to $0.10. So, I would say that that’s more of the perspective.
I think as long as the regulatory environment has uncertainty in it, we’re going to see volatility in the RIN prices. And until that becomes more a certain, we may see higher numbers and then have it stabilized once we see more certainty in the regulatory environment.
Damian Witkowski - Gabelli & Company
Okay. And then just going to fuel gross margin for pennies earned, 10.2 cents for the quarter, is it the -- I mean do you, would you say the competitive environment was irrational?
I know that wholesale -- I mean the price of oil was going up and that’s always a difficult market to make more money in, but would you say that competition down the street was also sort of maybe not exactly rational?
Andrew Clyde
I would say that the major driver in the lower margins versus the prior year was due to the difference in what the wholesale price environment was doing. So last October wholesale prices fell off significantly, very sharply and so for all retailers you had a period of margin expansion that sustained itself for a long time.
And that’s typically the type of periods in which high volume retailers can expand their differential to the competition and pick up some additional volume share. This year, we saw prices run up $0.20 in the same quarter.
And so you didn’t have this sharp expansion period, you had this constant catch up period. In terms of competitive dynamics, we didn’t see anything especially unusual in Q4 relative to other periods of price increases.
It was just a fundamentally different market environment than Q4 a year ago.
Damian Witkowski - Gabelli & Company
And just, because if I look at your gallon comps on a per store base is down 9% year-over-year, is it a low price on the block, I mean I’m assuming people aren’t driving 9% less than they were a year ago, so where is that traffic going?
Andrew Clyde
So we have actually said that were three things that we think throughout most of that, number one is the Wal-Mart discount program not repeating that. So people who buy gasoline from supermarket brands are the most price sensitive and they are most sensitive to promotion.
So not having that promotion on, on the margin, those customers who buy their groceries from Wal-Mart and buy their groceries from other supermarkets also have a choice as where to buy their gasoline. We got less of that share of wallet from that consumer making that trade off.
Relative to share in the industry, Q4 2012 was a period in which we could have increased our relative share in the down market. We didn’t have the opportunity to be as aggressive in pricing in Q4 this year because of the rising price environment.
And I think the third factor is this overall sluggish economy and the value oriented consumer and their impact on that.
Damian Witkowski - Gabelli & Company
All right. And then I mean should I look at this if gallons were down 9% plus and I assume traffic was probably about the same then, I mean the fact that cigarettes are down only, as high 6%, but I mean in a way, is that sort of surprising because I would think that people step in and if you get 9% less traffic you would almost have a corresponding decrease in cigarette sales?
Andrew Clyde
Well, you have other factors there and you have the same sort of pricing and price elasticity with cigarettes. So you had MLP program going on throughout 2013, you had different competitors in choosing how to price a cigarette; you had price increases at the end of the year.
So I wouldn’t draw a tight correlation, print the dynamics affecting cigarette purchases and others. And I think in terms of overall traffic, we did see very solid growth in non-cigarette categories as well.
And so I think if you just isolate the fuel category, we have less promotional activity, we had a less favorable environment to be more aggressive on pricing on an economic basis to take share.
Damian Witkowski - Gabelli & Company
Okay.
Andrew Clyde
And I think vehicle miles travelled were just impacted in the quarter generally.
Damian Witkowski - Gabelli & Company
And just lastly, can I just ask you talked about the 1,200 square foot store and its economic in term of cash and cash return, but if I think about the 175 to 180 per month in merchandise sales, considering that's a typically higher mix of higher margin stuff like cold and hot beverages. Do you have a merchandise gross margin number versus your current average for the year, for the current store base?
Andrew Clyde
Right, we would expect the merchandise numbers to be in the 16% to 17% range for the larger format. And so they have a much better mix, but they still sell a lot of cigarettes.
Damian Witkowski - Gabelli & Company
Okay. Well, thank you and congrats on a nice year.
Andrew Clyde
Great, thank you.
Operator
Thank you, sir. Our next questioner in queue will come from the line of Patrick Fruzzetti with High Tower Advisors.
Please go ahead. Your line is open.
Patrick Fruzzetti - High Tower Advisors
Good morning. I just have a couple of questions.
My first one is unrelated to the others, but you have stated in your filings that you have obtained insurance coverage as appropriate for your business, have you provided any specifics as to size and tenure or could you -- and does it cover for pre-existing new environmental events? I am just trying to get an idea of the protection on existing properties and properties you eventually acquired?
Mindy West
Well, we have the regular size of insurance that you expect a standalone company to have, so we have about $5 million in liability, $10 million fruition, we do have excess liability of about $150 million along with the standard workers’ comp and directors’ and officers’ type insurance.
Patrick Fruzzetti - High Tower Advisors
Okay. Thank you.
I guess just switching gears just a question on tobacco, how do you view CVS’ decision to end the sale of tobacco products and what’s the probability in your view that someone like Walmart follows you? And then after your 200 store expansion is complete what do you expect tobacco sales to be as a percentage of your overall merchandise sales?
Andrew Clyde
So I can’t say specifically why CVS did what they did, but if they were promoting themselves as a health oriented company that could be one reason. There is also talk of regulations that companies and the pharmaceutical business are not going to be allowed to sell tobacco.
So, it could just be a preemptive move to get on in front of that. I really can't tell, but certainly as they exit, we also had 4,000 additional retailers in our zipcode begin to sell tobacco in 2013 from dollar stores et cetera.
I won’t pre-suppose what Walmart may or may not do on the category. Our mix is going to change overtime, if we go back to 2009, I think our mix was somewhere in the 84%, 85% range, we're now in the 79% to 80% range in terms of mix of sales.
I think what's more important is the gross margin dollars from non-tobacco rising from 34% to 39% this year. And so as we add more of the 1,200 square foot stores, we do more raise and rebuilds, we continue to have success with our existing stores and promotions and the like.
I expect both of those numbers to be moving in a more positive direction. But that's kind of give you our sense of a radar change over the last few years.
As we say we expect to see an inflection point in 2015 where the growth in non-tobacco merchandise gross margin eclipses and exceeds the decline in the tobacco gross margin dollars. And at that point in time we'll be able to start adding significant year-on-year increases in total per-site gross margin dollars versus the decline we’ve seen because of cigarettes.
Patrick Fruzzetti - High Tower Advisors
Okay, thank you. That’s helpful.
My last question is and there was a question earlier about Wal-Mart accelerating their neighborhood format and wanting more fuel and that you’re always collaborating with Wal-Mart. I guess since [Sam’s] Club for instance 75% to 80% of their storage have retail fuel operations, I mean is there any opportunity there some point down the road for growth with the [Sam’s] Club segment in Wal-Mart?
Andrew Clyde
There could be. And as I said we talk to Wal-Mart weekly on a variety of matters and we’re just not going to get into the details of those conversations on these calls.
Patrick Fruzzetti - High Tower Advisors
Okay. Thank you.
Operator
Thank you, sir. Our next phone question will come from David Windish with News Management.
Please go ahead. Your line is open.
Your questions please.
Unidentified Analyst
Hi. How are you doing?
Andrew Clyde
Good.
Unidentified Analyst
I was just curious if the $40 million to $60 million of product supply and wholesale gross profit in the guidance for 2014 excludes the RINs?
Andrew Clyde
It does.
Unidentified Analyst
Okay. And then my question would be, I believe on the third quarter conference call the company said that you expected product supply in wholesale business to contribute $20 million to $40 million of gross profit excluding RINs on an annualized basis given the guidance includes $40 million to $60 million, have your long-term projections for this business changed or is there something specific about 2014?
Andrew Clyde
No. Windish, just to clarify so when we talk about the $40 million to $60 million, that’s the gross margin so that’s before certain operating spaces overhead allocated et cetera and so when you back those out because we have terminal costs and so forth that translates into more of a $20 million to $40 million gross profit number, so that was favorably unclear on our part, I apologize for that.
Unidentified Analyst
So the prior $20 million to $40 million included the $20 million of operating expenses?
Andrew Clyde
Exactly. So you think about $40 million to $60 million in gross profit margin, $20 million to $40 million in net contribution from that.
Unidentified Analyst
Great, thank you.
Operator
Thank you, sir. Our next question in queue comes from the line of Victoria Constantino with THB Incorporated.
Please go ahead. Your line is open.
Unidentified Analyst
All right. Thank you for taking my questions.
Andrew Clyde
You are welcome.
Unidentified Analyst
Just a quick one on existing store base (inaudible) timing of the stores are (inaudible) resulting to the bigger format?
Andrew Clyde
Yes. We are actually going to an initiative right now, to be able to identify which ones are most suitable from a land standpoint, so do we own 4/10 of an acre or do we own a full acre where we could build a larger format, which ones we think are raising rebuild is appropriate just from a asset life cycle standpoint and which markets do we think this will move the needle the most as we start to raising rebuild program.
So we will be working through and identifying how many where and where do we kind of concentrate those efforts and we will be doing better over the next two to three months.
Unidentified Analyst
Thank you.
Operator
Thank you, Ma’am. (Operator Instructions) Presenters at this time I am showing no additional phone questions in the queue.
I would like to turn the call back over to management for any additional or closing remarks.
Andrew Clyde
Great, well thank you all for joining. Again we are really excited about our Q4, our first full calendar year and the momentum we’re entering the New Year.
Thank you very much.
Operator
Thank you presenters. And thank you ladies and gentlemen.
This does conclude today’s call. Thank you for your participation and have a wonderful day.
Attendees you may logoff at this time.