Murphy Usa Inc

NYSE:MUSA

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Second Quarter Earnings Conference Call. [Operator Instructions]

Christian Pikul, you may begin your conference.

[Christian Pikul, executive]

Thank you, Sheryl, 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 after some closing comments, we'll open up the call to Q&A.

Please keep in mind that some of these 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 these risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K and other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements.

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

With that, I'll turn the call over to Andrew.

[Andrew Clyde, executive]

Thank you, Christian. Good morning, and welcome to Murphy USA Second Quarter 2018 Conference Call.

I trust you have all reviewed the earnings release, so I will start by reviewing the key themes for the quarter before Mindy provides some additional financial details, and we open the call up to Q&A.

From both an operational and financial perspective, the company delivered solid results in the second quarter. This followed the fairly benign first quarter, from which it's hard to extrapolate performance for the rest of the year. Q2 results showed broad-based improvement across all our major performance metrics, both on a sequential and year-over-year basis.

So given that backdrop, I would like to focus my comments on 4 themes. First, we are seeing strong fundamental performance from the business even in a higher fuel price environment, which can typically create challenging headwinds. The continued run-up in crude oil and product prices, we have seen for most of the year continued in the first half of the second quarter, but reversed in the second half of the quarter leading to volume improvement as evidenced by our same-store sales decline of only 1.5% versus the prior year. These volume trends have continued into July and, importantly, are also having a positive impact on merchandise sales.

The product supply and wholesale business continues to perform as expected, as higher supply margins offset the decline in RIN values and positive timing and inventory variances offset weakness in retail margins caused by rising product prices. Wholesale and blending margins have been incrementally additive to fuel margin on a year-over-year basis as well. And together, this led to $0.037 per gallon, the contribution for the quarter and $0.034 per gallon year-to-date. Murphy USA is well positioned to win in higher price periods, as customers on the margin become more price sensitive and weaker competitors have to price up to offset industry headwinds, pushing their breakeven cost even higher, making their offer less competitive and ultimately less appealing to consumers.

Second, we continue to successfully execute and improve our core business. Merchandise contribution dollars are higher by nearly $5 million in the second quarter, led by nontobacco same-store sales growth of 4.1% and margin growth of 2.2%, while tobacco margin dollars grew 1.9% leading to total unit margins of 16.6%, a new record for the company.

Store level OpEx declined 2.5% on a per store month basis, due largely to efficiencies we have implemented in field level support functions and also improvement in maintenance and supply cost. As a result, our fuel breakeven metric both on a quarter-to-date and year-to-date perspective has improved nearly 50 basis points from 2017 levels. Another reason we win in a high price environment is our lower fuel breakeven, which continues to come down, while ongoing initiatives provide line of sight to further top and bottom-line improvements. This enhances our competitive positioning in the face of higher credit card fees and potential wage and cost inflation. As such, with the $0.01 per gallon fuel breakeven level year-to-date, we are $0.04 per gallon more competitive than the first quartile benchmark from the 2017 NEX data on an apples-to-apples basis.

Third, we have successfully executed the first stage of our loyalty pilot, which launched on June 1 to 200 stores in North Texas and Tennessee. The pilot is intended to determine, if we can create a value proposition through a distinct and dynamic program that engages both current and prospective customers in an economically viable way.

While we cannot yet answer that question, there are several important milestones we can celebrate.

The first and most notable achievement is that we have delivered successful proof of concept from both the technical and consumer adoption perspective. The loyalty program is an organization-wide effort that touches fuel dispensers, in-store point-of-sale systems, back-office systems, legal oversight accounting functions, and of course, mobile app and web functions as well as multiple vendor partners. And after months of intensive planning and development, the platform works as intended, and for that, I would like to thank our marketing and technology services team for their tireless efforts, who have gotten us up in running and ready for a potential national launch.

The second accomplishment is customers are signing up. To-date, nearly 1 million customers have participated in the Murphy drive programming, including approximately 6% of the population of the state of Tennessee. The vast majority of whom were influenced by our greatest marketing asset, our team of friendly and engaged store managers and associates. Sign ups per store per day are an order magnitude higher than our internal expectations and well above other companies according to our third-party technical partners. But what's even more exciting is customers are participating in the program with 15% of customer transactions earning or burning fuel rewards and 40% earning or burning merchandise rewards. This technology platform will help us develop tremendous insights about our customer behavior and how we can improve our offer and their experience at our stores.

These early results allows to quickly move on to and focus on stage 2 of the program, where we seek to change customer behavior in a mutually beneficial way.

We've always said an everyday low-price loyalty program must be distinctive since we would not be able to raise prices to some customer but then only discount just to our members. We can now see through Murphy Drive that our members are more engaged and their behaviors have shifted in a positive manner, which is an encouraging step towards creating greater share of wallet and changing the customer journey to more fully experience and participate in our low-price value offers.

The beauty of being an everyday low-price retailer is your customer feedback is pretty straightforward. Price-sensitive customers seek the lowest prices and share that knowledge with their friends and family. In a world of potentially higher prices and inflation creating additional value for our customers is a winning formula.

In fact, we have customers in markets adjacent to our pilots asking us when it will be coming to their store, which is very encouraging.

The fourth and final theme, I want to discuss is our ongoing commitment to shareholders. During the quarter, we repurchased 1.1 million shares at an average price around $68 per share for a total investment of $73 million. This brings our year-to-date total to about 2 million shares at an average price of about $71, representing an investment of $144 million. This continues our track record of buying shares at a discount when multiples are well below our expectations, evaluation that does not reflect our view of Murphy USA's business model advantages, or our view of the further potential of our business.

Ongoing crude and fuel price volatility will continue to occur in an unpredictable manner and lead to shifts in short-term margin outlook, which will inevitably result in share price volatility. With strong fundamentals and sustained execution in innovation around our core business, we will continue to pick our spots and be opportunistic around share repurchases to win with our long-term shareholders.

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

[Mindy West, executive]

Thanks, Andrew, and hi, everyone.

Revenue for the second quarter was $3.8 billion versus $3.2 billion in the second quarter of 2017. This was largely attributable to higher product prices and, to a lesser extent, higher merchandise sales.

Average retail gasoline prices per gallon during the quarter were $2.61 versus $2.14 in 2017.

Adjusted earnings before taxes, depreciation and amortization or EBITDA was $112.7 million in the second quarter versus $129.2 million in the same period last year. EBITDA for the quarter was lower primarily to lower fuel margins, which ran $0.167 per gallon versus the $0.181 per gallon in the prior year.

Accordingly, net income was also down slightly to $51.8 million from $55.5 million. Earnings per share of $1.58 however, were higher than a year ago's earnings per share of $1.51 and that's due to fewer shares outstanding.

The effective tax rate for the second quarter was 25% and that was in line with our guidance, and a lower rate than prior year due to the lower federal tax rates now in effect.

Total debt on the balance sheet as of June 30, 2018, was $870 million, broken out as follows: Long-term debt of $850 million, primarily consisting of the $494 million carrying value of our 6% notes due 2023; $296 million of carrying value of our 5.625% notes due 2027; and $60 million remaining on our $200 million term loan. In addition, we are carrying $20 million of expected amortization under the term loan in current liabilities on the balance sheet.

These figures, results and adjusted leverage ratio, which we report to our lenders of approximately 1.9x. Our ABL facility remains in place with a $450 million cap, subject to periodic borrowing base determinations, currently limiting us to approximately $310 million as of June 30. And at the present time that facility is undrawn.

Cash and cash equivalents totaled $71.9 million as of June 30, resulting in net debt of approximately $798 million.

During the quarter, we repurchased 1.1 million common shares for $72.7 million and an average price was about $68.

Echoing Andrew's comment, we do remain committed to share repurchases, and we expect to conduct future repurchases in the same disciplined way, framed by our shareholder value model as opportunities allow, subject of course, to available cash balances and other demands on capital as well as price sugars, which may not be activated. There were $32.2 million common shares outstanding at the end of the first quarter.

Turning to CapEx. Capital expenditures for the quarter were approximately $47 million, bringing our year-to-date spend to roughly $91 million. And at this time, we do expect our capital spending to remain within our guided range of $225 million to $275 million.

That concludes the financial update.

So I will now turn it back over to Andrew.

[Andrew Clyde, executive]

Thanks, Mindy, and operator, with that, we can go ahead and open up the call to Q&A, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Christopher Mandeville of Jefferies.

Our next question then will come from Ben Bienvenu of Stephens.

[Ben Bienvenu, analyst]

I want to ask about the gallons in particular, that was the single strongest standout metric relative to our expectations for the quarter. Just any color you can provide around what might have shifted in the operating backdrop for your company-specific initiatives, whether it's raising rebuilds or general positioning within the market that might have helped lead to strengthen that metric, particularly on a 2-year stack basis, it was pretty strong?

[Andrew Clyde, executive]

Yes, I think we've noted before that some of the competitive intensity had, had its effect and tempered, and so not expecting to see the same level of year-over-year impact of that. Just continued execution our end from a pricing standpoint. Certainly, the second half of the quarter was positive from a falling price environment. 2017 was a pretty flat price year, and so we're starting the -- with the run-up in prices, you get more of that downside volatility, which is beneficial. So I think that coupled with decent macro factors, all contributed there. So I think those probably explain the majority of it, Ben.

[Ben Bienvenu, analyst]

Great. And then on the merchandise side, margins continue to outperform, but what are the key drivers in this period and then year-to-date, what have you seen? And then what do you think the longer-term opportunities looks like? I think you've exceeded well beyond what we would have thought possible relative to the mix of the business, it's been pretty impressive execution thus far.

[Andrew Clyde, executive]

Sure. So tobacco category, the other tobacco products and some of the electronic vapor products performed very strongly in the quarter. And really helped offset just the normal decline we see on the cigarette side, although we got some better cigarette promotional manufacturing dollars on some of the products there as well. Beverages had a very, very strong quarter. And then some of that is pricing and promotion relate as well as we just continue to optimize our offers there. So those were probably the 2 biggest components. Lottery with the large jackpot just continues to add incrementally as well. So as we've said, we still see further improvement opportunities as we optimize our center of store and really start implementing some of our visual merchandising and space management capabilities that we've been working to build.

[Operator]

Your next question comes from the line of Bonnie Herzog of Wells Fargo.

[Bonnie Herzog, analyst]

I had a question about pricing. So a lot of consumer companies are needing to take price increases, given commodity inflation and rising transportation cost. So curious to hear your thoughts on how willing you have been to accept these higher prices? And whether or not you think they'll stick? In other words, do you think the consumer is strong enough to accept these higher prices right now? And then just think about it from your perspective and your strategy of being the low-cost provider. How do you think about your position in this environment as other retailers may be facing greater pressure to raise prices?

[Andrew Clyde, executive]

Sure. I would say, we look at pricing through 2 lenses: customer-facing and competitor-facing. And so where you have categories like fuel and tobacco, we have got to be always positioned in the consumer's mind as that everyday low price offer. And we need to do it responsibly from a competitor standpoint. And so we have to look at those 2 hand-in-hand closely to maintain that position. As I said, in a higher-price environment with inflation and so forth, the weaker players tend to price up more quickly and create the environment where the bottom of market pricers can increase pricing and preserve margin there. But we're always going to be focused on maintaining that distinct positioning. There are other categories like beverage that are more kind of impulse or associated with the trip. We've seen the carbonated soft drinks move from $2 to $3 to $2 for $3.29 and those price increases have happened and consumers have not shifted behaviors any more dramatically than the normal shift away from CSDs to other products. And so I think we're going to continue to see those kind of increases, but hopefully, will be innovation across the categories and we'll still be able to create value for the customers. But imagine, you'll see a lot of the typical CPG products moving up. We in the past with some of our center store items didn't do as good a job of moving up our prices in line with those, where holding a lower price really didn't add any value from a volume standpoint. And So some of the gains that we've seen have come from being smarter about which ones we can take price increases on versus once we had to be just razor-sharp on.

[Bonnie Herzog, analyst]

That helps. And then just my second question is on your full-year guidance. It still implies a decent ramp in the back half. So what gives you the confidence, you're going to be able to hit your guidance ranges may be specifically for net income and EBITDA possibly absent, I don't know, a natural disaster? And then I just want to understand how much visibility you have right now, given everything that's going on?

[Andrew Clyde, executive]

Yes. On the things that we can control, we have good visibility on, but as you know, Bonnie, the bottom line is going to be a function of fuel margins. And we have absolutely 0 visibility on that. I think Dan and maybe a couple of other analysts said, "Oh, you can hit your guidance if you have seasonally normal margins." That's how we build our plan, that's how we set our guidance. We don't look for seasonally abnormal events to happen. And so I know there's a lot of angst about, are we going to hit our guidance or not? Are we going to have seasonally normal numbers to achieve that. If we do, we're going to achieve it. If we don't, we may have a follow-up like 2014 and below our guidance out of the water, or we can have a continued run-up in prices and miss our guidance. And so we're going to consider the angst the analyst, investors have around this guidance as we think about 2019 guidance because if we gave you guidance plus or minus a cent per gallon, which isn't an unreasonable RIN, you would find it completely unproductive and non-informative about the business, right? If we try to narrow it to $0.005 a gallon, right? We get a lot more angst and anxiety around it. So in a normalized margin environment, which we have no line of sight on a year in advance, we do know we're going to continue to make significant improvements to our business, top line, bottom line, margin dollars, cost, et cetera, and that's how we're going to grow this business. And normal and abnormal effects from weather, storms, regulations, et cetera, that impact our business, frankly, are just bumps along the road to driving long-term shareholder value. And so we're going to think hard about how we provide guidance next year, but it might look different given the ongoing angst that we continue to get, given the question. I hope that's helpful. But I have zero visibility into the rest of the year, what margins are going to do. And if you have got better, I'd sure we'd love to hear it.

[Bonnie Herzog, analyst]

That's really helpful. And yes, I think we all completely understand what you just expressed as we try and build our models for your company. Appreciate it.

[Operator]

Your next question comes from the line of John Royall of JP Morgan.

[John Royall, analyst]

So you drew down cash this quarter, which appears to have essentially funded the buyback, given that you are near 2x on net debt to EBITDA, and the cash balance seems to be at relatively low levels, is this fair to expect that buyback should be roughly in line with free cash in 2H?

[Mindy West, executive]

Yes, that's the kind of model, John, that we've always talked about. And when we feel we have extra free cash flow, we will allocate that to share repurchase, subject to price conditions obviously. So what I would say is, we are -- we have wound down our cash balances from asset sales that we did previously, which allowed us to buy big chunks of stock in the past. And so right now, as we are nearing more of a CapEx cash flow parity. We're not going to have as much free cash flow left to do share repurchases. So we're going to be judicious with those. Taking into account quarter-by-quarter what available cash we have, what are our other calls on capital as well as instituting those disciplined price triggers as we always do, and those may not, in fact, be activated. So we may have some quarters, where we purchase quite a few shares and then we may have somewhere we don't. We are still committed to share repurchase. And in fact, we're nearing that $1 billion of share repurchase right here at our fifth anniversary of being a public company. And I think that's really a testament of the strength of the business and also reflects our balanced approach as we have also opened over 250 new stores during that same period. So we're continuing with the same emphasis that we have in the past. We just aren't going to have those large floods of cash that we enjoyed when we had those big asset sales, earlier in our public company life. But we are still committed to doing that.

[John Royall, analyst]

Great. That's helpful. And then can you talk about the strength that you guys have had last couple of quarters and the PS&W plus RINs margins, even the face of falling RINs that implies, obviously, very strong PS&W margin. So is there anything structural going on with the entire levels? Or is there anything maybe more transitory?

[Andrew Clyde, executive]

So John, I don't want to sound like a broken record, but it's the same thing we said on this call, the same thing we said to the EPA, the same thing we talk to investors about is that the price of the RIN is built into the price of gasoline at the refinery gate. And so as you go towards lower RIN prices, the spot-to-rack margin increases and that's exactly what we have seen happen. Our big concern about changes in point of obligation wasn't that, that relationship didn't exist, but that you could have distortions in the market as you move towards the different regulatory scheme. So we have no idea what RIN prices are going to do, but given they're baked into the refinery gate price, we expect to see the spot-to-rack margin improve and that's exactly what we've seen happen. Now there are other factors that impact the spot-to-rack margin, whether the market is long and loose or short and tight colonials allocated, et cetera. And so those things do continue to move independently of each other, but the political and regulatory uncertainty that affected RINs disproportionately in Q1 last year and positively maybe in Q3 of 2013. We're seeing less noise in the system from that standpoint. And so that margin is within the range. But to be clear as well, in a rising price environment, the timing and inventory variance that was reported within the PS&W piece does provide an improvement to the business and it offsets the decline in the retail margin that you see in a rising price period and conversely a falling price environment, where we have stronger retail margins that timing and inventory variance resulting from the difference in the trading cycle and the accounting cycle work against the retail margin. So in a rising price period, some of that benefit that we had was associated with that. We also made improvements to our terminals over the years in terms of biodiesel, ethanol expansion and more recently butane blending, and we continue to get more value out of those when those opportunities arise. And so there's a whole set of things on the margin that are also contributing towards that.

[Operator]

Your next question comes from the line of Ryan Domyancic of William Blair.

[Ryan Domyancic, analyst]

So my first question builds on John's last question a bit regarding capital structure. And is 2x the rate leverage for this business? And would you ever consider taking it higher?

[Mindy West, executive]

We've been consistent in what we've said in that we think this business needs to be within 2.5x leverage and that also coincides with some of the covenants we have within our bank agreements that, if we are below that, we can unrestrict on an unrestricted basis buy back our shares. But we also think that ties nicely to where we actually need to be from a leverage standpoint. Taking into the account that there is some volatility in this business quarter-to-quarter, so we need to be able to withstand periods of rising prices, which could crimp our margins. And still remain consistent with the way that we do business and the way that we spent our capital, deploying it in new stores. And so we would not want to be above 2.5x, but we would be comfortable being slightly higher than what we are now. And as we go into next year, we're just beginning to have discussions about our CapEx budget for next year. And so we're going to be looking at a kaleidoscope of things, various calls on capitals for new stores, raise and rebuilds our various initiatives, and then we will look at what kind of share repurchase seems reasonable to us. And then look at what we are expecting from a cash flow basis. And then decide from there whether we need to, for instance, top-up our term loan or leave the leverage where it is. But we're still in the early days of that, so we don't have any fully baked plans for next year, but those are some of the things that we're going to be working on in the coming months. But for right now we're happy being at 1.9x, but if we were at 2.25x, that wouldn't bother us at all either.

[Ryan Domyancic, analyst]

Mindy, that overview is very helpful. And then the next question would be, in the past, on the retail side, you've talked about using software and maybe getting a bit sharper on pricing even at the expense of gallons. So as you look at the second quarter of this year versus last year, is any of the better retail fuel margin, can you parse it out as a result of kind of that sharper pricing, was that more logical pricing even when it comes to the expense of gallon growth?

[Andrew Clyde, executive]

I would say, yes, and then some specific areas, we focused on, it came also with volume growth, where we got both higher volumes and margins from being sharper about it.

[Operator]

Your next question comes from the line of Ben Brownlow of Raymond James.

[Benjamin Brownlow, analyst]

On the loyalty program, thanks for the initial data points that you gave. Can you tell us what the -- just kind of the ballpark total number of stores that are on that program now? And the timing around the national rollout as well as that step into the stage 2, could you just comment around the timing of that and kind of elaborate on the strategic initiatives that will entail?

[Andrew Clyde, executive]

Sure. So it's roughly 200 stores in North Texas and the entire State of Tennessee. What's been amazing is the customer response to this, to get almost 1 million customers, who've signed up and registered in 2 months. And as we've said before, it's 6% of the State of Tennessee has signed up. We know that it's a platform that works, that our great sales associates can sell it and our customers want it. The key is to create value from it, right? This isn't just a raise your price and discount offer like many have out there or buy 6, get the 7th for free on proprietary items that have 50%, 60% margins. And so what we've got to feel very confident is that we can drive incremental gallons and incremental trips inside the store and bigger baskets from our existing loyal customers, who have come out in droves to support this, right? Because we're giving them an additional value on top of the value we've already giving them. And then we need to then create more new customers and get greater share of wallet from the customers who don't visit us as often. And the way we set up the platform, the background information we're able to get -- we're able to kind of uniquely segment customers and then create these unique journeys for the different segments, so that we can then see, are we driving the desired behaviors that create more value for them and then make it economically viable for us. So it's too early to say, hey, we're going to have a national launch in October or national launch in January, but what we have done at a faster rate and a better rate of execution than expectations was standing of the technical platform, engaging the customer and then seeing the level of sign-up associated with that. So those are the sort of issues that often challenge programs like this. We're not experiencing those challenge, so we're now getting to the heart of how do we make the economics of this work and with the platform we've got, we're going to have tremendous insight into that and are very encouraged by the early results. We can see just from June to July that the loyal members are increasing their gallons and increasing their baskets, et cetera. So it's still very early days, but we are seeing shifts in behavior that we know were needed to make this economically viable.

[Benjamin Brownlow, analyst]

That's helpful. And just one quick one. On the same-store sales within the cigarette and tobacco category, can you give any color around the unit movement there in pricing?

[Andrew Clyde, executive]

Yes, so on -- you want to talk about cigarettes or overall tobacco?

[Benjamin Brownlow, analyst]

Both actually, if you don't -- if you have it.

[Andrew Clyde, executive]

Yes, so smokeless volumes and other tobacco volume products were both strong and the other tobacco products is where you see some of the new vapor products out there and we've got that now rolled out across all of our stores. And so we'll continue to see strength in there. The cigarette volume declines are within sort of the normalized ranges that we've seen, but we continue to saw -- see margin dollar growth from that because of pricing or promotion effectiveness activity.

[Operator]

Your next question comes from the line of Chris Mandeville of Jefferies.

[Chris Mandeville, analyst]

Andrew, can you hear me?

[Andrew Clyde, executive]

I can.

[Chris Mandeville, analyst]

Also apologize if I repeat anything that's already been answered. But maybe starting on what you've seen in consumer demand for fuel and your comments on the second half of Q2 seemed positive trend, actually first half. Was the latter an absolute or relative comment versus the first half of the quarter?

[Andrew Clyde, executive]

Sorry, could you repeat that last part, again?

[Chris Mandeville, analyst]

Just in terms of you're having referenced that the second half of Q2 saw positive trends, was that an absolute or relative statement?

[Andrew Clyde, executive]

So with the falling price environment, we had kind of extended periods where volumes on a same-store basis were 100% or greater on a year-over-year basis. So with new stores, it was kind of 100% on a same-store basis. And with new stores, we actually grew total volume. And so I think from a broader macro standpoint, we're not seeing the level of fuel demand growth that we saw 2 or 3 years ago with the 3% range. But we are seeing steady growth at the 1% to 1.5%, 2% type range, with improvements we're making and getting rid of some of the abnormal effects, we believe we're going to perform well in that environment. As prices go higher, consumers get more price sensitive, so we'll start gaining back share that we lost in the extended low-price environment that we've seen over the past few years as well. And that's why it's so important to continue to focus on metrics like our fuel breakeven metric, which more than offset the credit card fees increase associated with higher prices. It was announced this morning that they're going to freeze the vehicle efficiency standards that were projected for 2025, 2026. And so if you go back to our analyst day presentation from 1.5 years ago, where we showed, what did we think macro fuel demand was going to do over the next 10 years, that's all positive from that standpoint as well. And so despite the higher price environment, we think we're actually well positioned in that as consumers get a little bit more price sensitive.

[Chris Mandeville, analyst]

And so I assume that given the really quite easy compare going into Q3 on the fuel comps. Given what type of impact you had seen from the prior year's hurricane that we could kind of continue the actual positive same-store sales momentum and that would presumably also bode well for in-store sales?

[Andrew Clyde, executive]

Yes, as I said, at your conference in Nantucket, if we can't beat our third quarter comp, we're going to have a different discussion.

[Chris Mandeville, analyst]

Okay. And then turning to OpEx per store less credit card fees. You're really well ahead of your current guidance that was originally calling for I think flat to up 2% year-on-year. So how should we view that line item going forward? Are you ahead of your internal expectations or are you right on plan and we should anticipate a pickup in second half?

[Andrew Clyde, executive]

Yes, so on the internal expectations, we've got a team of leaders now that are just consistently building upon prior initiatives and just honing in further and further in terms of site-level execution of prior initiatives and looking for the next set of initiatives. So we've consolidated 1 division. We've consolidated some districts, as we brought on more experienced people and current staff are taking on greater responsibility. So we're probably a little ahead on some initiatives year-to-date, but we already have line of sight into initiatives for next year as well both from a margin standpoint as well as a cost standpoint. So I think you almost just have to step back and just say, "Look, there's an ongoing trajectory for which we're going to improve this business, top line and bottom line." And we're just continuing to focus on that, and as we knock through 1 set of initiatives, we're immediately positioning ourselves for the next wave of opportunities.

[Chris Mandeville, analyst]

And the last one for me. Just with respect to some of the recent vintages of raising rebuilds. Any comments on performance or returns there?

[Andrew Clyde, executive]

The raise and rebuilds continue to perform very well. These are again some of our highest volume stores that are often selling out of 4 gas and 1 diesel dispenser, so when you get 6 to 8 gas and 6 to 8 diesel dispensers on a -- with a 1,200 square foot store, you're just increasing the benefit to the customer, increasing greater access to diesel products, which we have at over 90% of our stores and probably lead the industry from a convenient store standpoint. So we continue to see the positive improvements from them.

[Operator]

[Operator Instructions] Our next question comes from the line of Matt Niblack of HITE.

[Matt Niblack, analyst]

So just in understanding the shifting PS&W margin, which again was stronger than I think a lot of us expected, quite positively. How -- if we look at the midpoint of your guidance range for this as well as for the retail margin, does that give us a sense of what do you think the sort of normalized through-the-cycle margin is at the current cost structure? Or is your view of normalized different than the midpoint of the range?

[Andrew Clyde, executive]

Yes, I think as we have talked about $0.02 to $0.03 for products find a wholesale net of RINs, $0.12 to $0.13 -- $0.125 to $0.135 for retail, that midpoint is a probably good sense of what that normalized range is. And you can get to that range in a lot of different scenarios from a market structure or price structure standpoint. But thinking about the business longer term, despite the short-term fluctuations, we've built a business that's going to perform very well at $0.15 to $0.155 margin levels. And believe that's the long-run sustainable level. And then we continue to make improvements on that. So we talked about some of the investments in the terminals, some of the wholesale improvement, some of the carrier optimization performance that we have. And I think the challenge sometimes is the improvements get masked by rising or falling short-term margins, where it just makes it difficult to see the underlying structural improvements we make. Conversely you could say, well, it makes it harder than see some of the structural impairments that one might project. So if people talked about colonial pipeline. Is that advantage going away or staying? We saw earlier this year with that advantage, played out in a very important way for us. But I think, if you're using those kind of midpoints that's a good cue for long-term value.

[Matt Niblack, analyst]

And so then if we're trying to understand the net improvement that you've made over time. I guess, if we go back and we look at several years of what your guidance has been, that kind of can give us a sense of what your internal view is at least of the sort of structural improvement you've been able to make in your margin structure?

[Andrew Clyde, executive]

Yes.

[Matt Niblack, analyst]

And then last question on this, so the excess in PS&W this quarter versus that midpoint, in fact, year-to-date versus that midpoint is generally attributable to the movement in commodity prices mostly then, is that a fair interpretation?

[Andrew Clyde, executive]

Yes, a more than 50% reflects the inventory and timing variance associated with the trading cycle and the accounting cycle, which then -- if you netted that against the retail margin, which would be wider in a rising price environment. You can almost think about those 2 together, they move more hand-in-hand with the price structure. But there is other improvements from selling more wholesale gallons at a higher margin. The butane blending we talked about in the first half of the year, which is only a seasonal play, higher levels of throughputs at our existing product terminals and renegotiated supply agreements where we got more favorable netbacks. And those are the sort of things that would then be offset positively or enhanced positively or impacted negatively by market structure. If the market's oversupplied and the rack prices are depressed and our proprietary system may not perform as strong as say just buying everything at the low rack price.

[Matt Niblack, analyst]

Right, right. Actually one last follow-on. So if we go back and look at that history of structural improvement you've been able to make, which I think is, we're going to find, it's really impressive. To what extent do you think that, that can continue? Is the low-hanging fruit sort of done at this point or do you just continue to see opportunities kind of commensurate what you've been able to do in the last several years?

[Andrew Clyde, executive]

Yes, I would say across-the-board, across every part of our business there are more opportunities to improve our top line margin structure and bottom line cost structure. Whether you describe things as low-hanging fruit or not, I mean, none of this is easy or everyone would be doing it.

The opportunity set just starts looking different. It's less about spending capital for blending or the like and maybe more optimization that's requiring capabilities, systems and tools. Some of the breakeven opportunities around the Core-Mark contract. And the first round of labor, you pull a different type of lever then saying "Okay. Here's the distribution of 1,454 stores" How do we get the bottom quartile on 20 metrics up to the average performance, which is about district managers working with store managers and their walk for excellence and their performance discussions to get them there. So none of it's easy. It's just -- the levers are just different, but we don't see any kind of end in sight in our ability to improve and enhance this business over the long term.

[Operator]

There are no further questions at this time. I will now turn the call back over to presenters for closing remarks.

[Andrew Clyde, executive]

Great. Thank you, operator. Thank you, everyone, for joining in this quarter. And we look forward to talking to you soon. Thank you.

[Operator]

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