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Murphy USA Holding (NYSE:MUSA)
Q2 2019 Earnings Call
Aug 01, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA second-quarter 2019 earnings conference call. [Operator instructions] I would now like to turn the call over to Christian Pikul, senior director of investor relations.

Please go ahead.

Christian Pikul -- Senior Director of Investor Relations

Thank you, Kelly. Good morning, everyone, and thanks for joining us today. As usual, with me are Andrew Clyde, president, chief executive officer; Mindy West, executive vice president and chief financial officer; and Donnie Smith, vice president and controller. After some opening comments from Andrew, Mindy will provide an overview of the financial results, and then we'll 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 for results to differ. For further discussion of risk factors, please see the latest Murphy USA Form 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 in the investors section of our website. With that, I will turn it over to Andrew.

Andrew Clyde -- President and Chief Executive Officer

Thanks, Christian. Good morning, and thank you to everyone for joining us today. Murphy USA had a solid second quarter from an earnings perspective delivering $93 million in adjusted EBITDA, but an even better quarter in terms of execution of initiatives that led to strong underlying fundamentals that set us up for the future. I would like to highlight several of the key things that illustrate our long-term view of the business, and how the investments we are making or driving performance.

First, the investments we are making the core business to drive customer traffic and gain market share are paying off with top-line growth as evidenced by fuel and merchandise costs. Second, as with any investment, there is a near-term cost. But these investments are in an efficient and effective way to acquire customers and share wallet for the long term. Third, these investments further improve already strong raze-and-rebuild and new-to-industry store returns giving away for higher weight of sustainable unit growth and accretive long-term earnings growth.

Fourth, based on the results we are seeing and expect to see, we remain committed to our balanced and disciplined capital allocation strategy. And we are taking the opportunity to frontload an investment in our own shares with an up to $400 million share repurchase program. Taken together, these investments differentiate and position Murphy USA very well for continued shareholder returns. So let's start with the investments to drive customer traffic and gain market share.

Same-store fuel gallons grew 3.7% for the quarter on solid margins as we continue to deliver our low-price value proposition across markets. Aided by following prices in April through early June, we realized higher year-over-year contribution from retail even with the sharp price run up at the end of the quarter. Total fuel contribution fell below prior year due to inventory and timing variances associated with falling prices. The exact opposite of what we witnessed in Q1 and thus fuel cost -- total fuel contribution was flat year to date versus 2018.

Our retail pricing excellence initiative are adding greater precision and speed work practices, and we are confident with each quarter further benefits will flow to the bottom line. While June's first tour gallons were the highest in five years. We know some tough comps lie ahead as we cycled the large price follow-up in the fourth quarter of 2018. Yet July volumes are already showing a 2% increase year over year at about $0.04 higher margins, so we remain confident we will continue to see benefits from the sharpened tactics through our retail pricing excellence initiative.

Same-store merchandise sales grew 5.7% for the quarter with same-store merchandise contribution dollars up 3.8%. The strongest category as same-store sales were up 6.5%, and margin dollars were up 6.6% leading to share increases across subcategories and bucking industry trends. Higher traffic along with strong lotto and lottery demands supported same-store sales and margin growth in our other merchandise categories. Our tobacco pricing initiatives and merchandise resets contributed to the strong results.

Building on top of our core category growth initiatives is our investment in Murphy Drive Rewards or MDR, which is both growing and sustaining customer traffic in our key categories as we have fully enrolled 2.2 million members. About one in six fuel transactions are with members and in the original pilot markets members are purchasing roughly eight gallons more per month now versus a year ago. Looking at cigarettes members are purchasing nearly three packs per month more and for other categories we are seeing a basket size increase of nearly $1. These statistics are remarkable for a number of reasons.

First, this is just a start. We have only ruled out the most basic offer and functionality of MDR. We haven't even begun targeting consumer offers a scale or turned on any of the bells and whistles the program. So we are not only far from reaching the potential of the program, we are probably equally as far from defining the potential.

If asked what inning we are in with MDR, we would say we have just finished warming up and are about to take the field. Second, at the launch of any loyalty program you are obviously going to sign up your most loyal members first and at a cost. But our most loyal customers are already exhibiting behavior changes that are highly additive to our business. This is the group we thought we would have to subsidize by gaining a larger share of wallet from less frequent customers and attracting new customers.

I would never want to compare a gas station to Amazon, but the behavior we are seeing from our loyal customers is quite similar. Third, the program is healthy. We continue to attract more than 0.5 million participants per expense per month now four months after the national launch. These customers are earning and burning points at similar rates, and getting the immediate satisfaction they seek.

In fact, 90% of the members who joined in June of 2018 remained active in the program compared to other loyalty programs that experienced 40% attrition within the first three months. Additionally, there is still huge opportunity to convert over 7 million non-member participants to members. Many of these non-member participants are gaining value by accessing tobacco programs, and we believe there are significant upside as we gradually convert them to members and engage them. Growing our existing customers sure wallet and acquire new customers has some costs, but we still believe it is still more efficient than acquiring customers by buying someone else's old stores.

So let's look at some cost we have incurred to support our investment in the business. MDR cost impacted fuel margins by approximately $0.04 per gallon or about $4 million and merchandise unit margins by 40 basis points or about $3.2 million. As members burn through non-transactional points from sign up, we are quickly reaching the stage where the monthly earn and burn are in sync, one of the best signs of a healthy program, and these costs will decrease. We also have initiatives that will enable us to deliver the benefits more efficiently over time as well.

While every day low price has tried customers to the stores and MDR helps keep them loyal and sticky, you still need to have great-looking stores and to ensure the best customer experience. We launched our new maintenance management system earlier this year, and that has led to a decrease in the service calls dispatched per incident and a lower cost per dispatch, but the effectiveness of the capability has led to more incidents being called in by our stores who appreciate the better service and responsiveness. And with -- coupled with efforts to proactively address the Spencer uptime and prepare for the MDR launch, we incurred higher than planned maintenance cost in the quarter. Water related environmental costs were also elevated due to storms leading to higher unplanned costs, and we do expect these costs to normalize in the second half of 2019.

Outside of these transitory cost increases, ongoing initiatives to sustain our cost leadership position and drive toward a zero breakeven margin requirement saw good progress in the quarter. There are three ways to drive the breakeven metrics toward zero. We can increase merchandise contribution, which we have done; we can decrease cost, which were temporarily higher than planned; and you can decrease fuel gallons in the denominator, which we are also doing. This quarter despite very strong mindedness performance in higher gallons, our fuel breakeven metrics was $0.81 per gallon versus $0.58 per gallon in the prior quarter -- prior-year quarter, however, on a year-to-date basis, we are about flat with prior year, and we remain committed to driving the fuel breakeven lower on a full-year basis.

When year-to-date labor costs are up 1.1%, reflecting in part more larger format stores, this is well below inflation, and better than our planned target where cohort optimization has yielded better-than-expected results. Year-to-date reductions and shrink from new loss prevention initiatives also highlight that the opportunity said to further drive productivity from our cost base remains robust. Investments driving top- and bottom-line performance create more opportunities to build and rebuild our network for the long term. We opened three new stores since April 1st and returned 10 raise and rebuilds back into service 1,400 square-foot stores.

These new stores are performing at a higher level out of the gate building on the improvements we have seen in the 2018 build class. Better store opening, procedures and sharper new store pricing tactics have been key. For example, the 2018 and 2019 build class are currently delivering fuel volumes about 25% higher than the network average, and raise and rebuilds are showing a 15% lift in fuel volumes, and 30% higher merchandise sales. Also key to our future success is the ability to target stores in key markets versus limiting our focus to the halo around the Walmart supercenter, and this is partly responsible for the improved performance I just mentioned.

Looking at returns like capital from our express locations prior to 2017, we see material improvements within our independent growth plan. Similarly, as shown in our most recent investor deck, the larger 2,800 square-foot format also showcases better returns. Going forward, we will be adding square footage at a higher rate and at higher returns when compared to the post-spin period when we built 60 to 70 stores per year. Over the past two years, we have built a quality pipeline of locations for the 2,800 square-foot format stores, and that will support growth at 30 stores in 2020, and 30 to 50 stores thereafter.

If you think back to 2016 when we built 70 new 1,200 square-foot stores and began our raze-and-rebuild activity with 10 locations, we added about 95,000 square feet of retail space. At our projected 2021 forecast of about 50 locations with 25 raze and rebuilds, we will be adding about 165,000 square feet of retail space per year. But we will be using our cash flow to grow the company at a higher square footage rate then you have historically seen, and based on the performance of our 2018 build class and target markets, where increasingly confident that the returns will also be higher. Last of our investments, but certainly not least is our commitment to repurchase our own shares.

Historically, buying back shares in advance of getting full credit for our performance improvement initiatives has generated superior returns, providing balance to our overall capital allocation strategy. This has been and remains a core element of our value proposition to investors. In our latest investor presentation, we noted that continuing our track record of shareholder value growth would require buybacks of around 1 million shares per year. Given our view of Murphy USA's future potential, the ability to fund future capital projects from operating cash flow, our current liquidity and debt capacity, we have opted to front-end load that requirement.

And pursuant to that view, the board of directors approved a share repurchase program of up to $400 million through July of 2021. We had the flexibility to execute any time during this period based on available cash, market conditions and covenant compliance. This will be incremental over our most recent repurchases where we bought back approximately $17 million worth of shares in Q2, and another $9 million since quarter end prior to receiving the new authorization. As noted in our earnings release, our debt structure provides ample flexibility to facilitate this program.

Our term loan matures in March 2020 and our original $500 million notes are callable at a reasonable premium given current rates. This quarter reinforces the key messages we have been communicating to investors, they remain significant potential to improve the productivity of our existing stores, both top and bottom line. Second, there is a growing inventory locations with attractive economics to build and rebuild stores in markets where we have the right to win with our customers. And last, we will remain balanced and disciplined in our capital allocation strategy.

This quarter provides another proof point of what we aim to accomplish over the next three to five years. And with that, I will turn it over to Mindy for our financial review.

Mindy West -- Executive Vice President and Chief Financial Officer

Thanks, Andrew, and good morning, everyone. Revenue for the second quarter was $3.8 billion versus $3.8 billion in the year-ago period. The flat revenue is attributable to lower retail gasoline prices offset by higher fuel gallons and higher merchandise sales. Average retail gasoline prices per gallon during the quarter were $2.48 versus $2.61 in 2018.

Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA was $92.7 million versus $112.7 million in 2018. Adjusted EBITDA for the second quarter was lower than the year-ago period due to lower power supply and wholesale contribution, higher station and other operating expenses, partially offset by higher retail fuel contribution. The effective tax rate for the quarter was 24.5% versus 25% in the year-ago quarter. Total debt on the balance sheet as of June 30th, 2019, was $854 million, which includes long-term debt of $834 million, and in addition, we are carrying $20 million of expected amortization under the term loan and current liabilities on the balance sheet.

These figures result in the adjusted leverage ratio, which we report to our lenders of approximately two times. Our ABL facility remains in place with a $450 million cap and subject to periodic borrowing-based determination, currently limiting us to proximally $280 million as of June the 30th. At the present time, that facility is undrawn. Cash and cash equivalents totaled $179 million as of June the 30th resulting in net debt of approximately $675 million.

There were 31.9 million common shares outstanding at the end of the second quarter. Capital expenditures for the quarter were approximately $60 million, about $36 million of which was for retail growth and the remaining $24 million consisting of maintenance, general corporate and strategic initiatives, including our EMV program, where we expect to spend about $50 million in total for the year. We still plan to execute a total capital budget between $225 million and $275 million for the full-year 2019. That concludes the financial update, so I will now turn it back over to Andrew.

Andrew Clyde -- President and Chief Executive Officer

Thank you, Mindy. Operator, I think we can now open it up for Q&A now.

Questions & Answers:


Operator

[Operator instructions] Your first question come from the line of Bobby Griffin from Raymond James. Please go ahead. Your line is open.

Bobby Griffin -- Raymond James -- Analyst

Good morning, everybody. Thank you for taking my questions and congrats on a good strong comparable sales quarter. So my first question here is around station opex. A little bit higher than previous trends, and you give some color in the prepaid remarks, but can you maybe attach any numbers to how big some of the transition cost was -- were during the quarter? And how much of the year-over-year growth was driven by some of these one-time costs?

Andrew Clyde -- President and Chief Executive Officer

Sure, Bobby, and first of all, welcome to the coverage group as well with Raymond James. You know, maintenance and environmental were the two biggest numbers and as we talked about this new maintenance management system that we implemented led to some noticeable improvements in terms of having fewer dispatches per incident and a lower cost per dispatch. But the reality is that the improved service levels of the store we only -- we almost became a victim of our success as a stores relies higher service levels, etc., so that drove some higher cost there. In addition, we've really been focused on our fuel metrics and a couple of maintenance related issues those have to do with slow flow and the Spencer uptime.

And with MDR being launched, etc., frankly we just got very proactive on those fronts and those drove us to some higher costs, and we expect both of those to normalize over the period. As we mentioned also, the environmental related cost for water and [Inaudible] etc., was usually high due to stormwater. We also implemented a new alert system there, and so we are a lot more productive on those as well, and so we expect those to normalize in the second half of the year, and normalize next year as well. We also saw some higher employee benefit costs around workmen's compensation.

Some of these related to claims from several years ago that are now coming through so there were some, you know, higher cost there and that will be something to look at from an ongoing accrual standpoint. That will probably edge up a little bit higher. What we were excited about though were the areas where we had very conscious initiatives and saw the results. So the cohort optimization that determines how many assistant managers, lead cashiers, the right mix of labor cohorts at the store generate the results better than expected and that helped keep our labor cost in line.

Shrink had been an area where we've seen successive increases for a couple of years in a row, and now with new leadership and capability in that area, we are seeing improvement as we focus on that. And so I hope that provides a little bit more color on that front. Certainly, it was a higher number than we would have liked to have seen, but we believe that certainly on the maintenance side we'll see those numbers normalize again in the second half of the year.

Bobby Griffin -- Raymond James -- Analyst

OK. Yes, that's very helpful. I appreciate it, Andrew. And I guess just as a follow-up, I understand it's still early for Murphy Drive Rewards, but clearly having a nice impact with the strong comp sales growth in a couple of categories.

I guess when you look at the data, what are you seeing in their that surprises you the most, that you think is the most upside, you know, if you look out over two- or three-year period?

Andrew Clyde -- President and Chief Executive Officer

Well, as I mentioned in the call, I mean, when we went into this, our hypothesis was that we already had actually loyal customers, and that we would just be reporting them, and we are going to have to make that up by attracting a lot more brand-new customers, and getting a lot more out of our low share while the customers. And what we found is that these loyal customers are giving us an extra trip on the fuel side about 8 gallons more per month that we're seeing other higher purchases in both tobacco and the overall basket size going up, but that loyal customer base is already immediately additive and accretive to the business. So that was kind of the first surprise that we are seeing from them. Certainly, that just the sheer number of customers signing up was significant and if you look at the number of members per store, that density is orders of magnitude higher than others, and you know we looked at some public comps over the companies where we could see the data, and our numbers on a member participant per store or higher than the next four or five combined, and that's going to allow us to then go back to our manufacturer, supplier partners, and etc., and say look, we've got the opportunity engaging customers in a more efficient and effective way than any other program that you will have.

And so that allows us to further differentiate ourselves as a high-volume retailer in a high-marketing ROI investment partner for those providers. We're pretty pumped that we've got over 9 million participants, but only 2.2 million of those are fully enrolled. There's another 7 million that are still actively engaged in the program, and there is over to 2 million of those that have never bought fuel from us, right? And so we have the opportunity to continue to convert non-member participants into full members and continue to engage them. And I guess last, and I made this comment, you know, we're not even in the first inning, I mean, we basically just turned on the basic features and functionality, and we've been able to get this response.

And so when we start doing targeted consumer offers at scale, we've done a lot on a smaller-scale basis to demonstrate the capability to improve ourselves and our supplier partners that these are highly attributive marketing investments for us and them. And when we act on the other bells and whistles, etc., we just believe there is more and more potential. And there is also potential to get the cost down. We talked about the 40 basis points on a cent per gallon on fuel and the 40 basis points on unit margin if you compared to prior year at 16.6% versus our 16% unit margin, 40 bps of that was MDR, another 20 bps of it was just higher mix of tobacco and lottery.

Those costs are also influenced by the high level of non-transactional points and so those burn off, and then we expect the program to be more and more efficient over time from a cost standpoint. So we'll be able to get the upside at a lower cost, but still believe these are very early days for the program.

Bobby Griffin -- Raymond James -- Analyst

Thank you. I appreciate all the detail and you answering my questions. Best of luck in the back half of the year.

Andrew Clyde -- President and Chief Executive Officer

Great and welcome to the team again.

Bobby Griffin -- Raymond James -- Analyst

Thank you.

Operator

Your next question come from the line of Christopher Mandeville from Jeffries. Please go ahead. Your line is open.

Christopher Mandeville -- Jefferies -- Analyst

Good morning. Andrew, could we start off just on the tobacco momentum that you are seeing here. Really strong result obviously. Is there an ability to maybe break that down in respect to just the various initiatives that you've got going for between strategic pricing and outside vendor support, as well as MDR, obviously, and to what extent does jewel and vapor plans to comp as well?

Andrew Clyde -- President and Chief Executive Officer

Sure. You know, on the cigarette subcategory this is one where I believe MDR played a significant role. So you know the manufacturer programs that we had in place I believe rolled off in March, and so we would have expected to see more significant kind of fall off in April and May, but we didn't, right? The loyalty program created that stickiness where especially in those states where we can earn on tobacco and burn on fuel. And so that allowed us to retain customers that we attracted during the more intense periods of the loyalty program, and then when that rolled back on, I believe in June, those numbers picked back up again.

So we're excited about that. You know, the timing of the price increases was a little bit different this year, and so that probably didn't help as much on the unit margin standpoint. Smokeless, we were up both in sales and margins, and we had some good promotional programs that were going on there. On jewel and vapor, we didn't roll out jewel at our stores nationally until July of 2018.

And so Q2 still represents a good year-over-year comp from that standpoint. Certainly, as we get into Q3 and Q4 we'll be facing those stronger comps there. But overall, I would say this is a category that we've been a leader in. We've focused our pricing precision with some new capabilities on that front.

Certainly, the store resets have helped as well, and I think, when you look at MDR and our ability to concentrate and focus investment dollars, that gives us a leg up certainly over retailers that can't participate in the -- you know, certain programs.

Christopher Mandeville -- Jefferies -- Analyst

Great. And then I just as my follow-up, in light of all the success you're having on the top line both in-store and at the comp. I'm just curious what the competitive response has been thus far? And maybe if you could, I'd enjoy hearing a little bit about if it's at all different from chain and independent?

Andrew Clyde -- President and Chief Executive Officer

Yeah, so I'm a little hesitant to talk about competitive response to pricing tactics and the like. You know, certainly from the tobacco side, I mean, where we gained significant market share, I mean, some of that is through means that are difficult to imitate. Certainly with MDR, and I think, certain competitors when they think about the programs they're on or having to make decisions, do they get off some of the every day low-price programs. And I believe some of them are likely doing that.

So you know the major competitive shift on the tobacco side is, what kind of program you're on and if you can't get the volume associated with pricing at certain levels, you're much better off pricing up or going to a program that rewards you for pricing up, and doesn't penalize you for pricing down. So I think that's probably the most noticeable shift there. YOu know, I would say on the fuel side, in many ways we're just going back and taking customer traffic that was ours to begin with that we atrophied over the last couple of years, and those customers have now come back, and they're back to stay with Murphy Drive Awards. And I think you get to a similar situation and you can read the public press releases of others, but if you're going to be a low-price high-volume retailer, you need to be generating the kind of volumes we do with 250,000 gallons per month or higher.

That's three -- 2.5 times the industry average. If you're getting 1 times the industry average, you should probably think about a different pricing strategy and price up. And so I suspect that as we get sharper, others have to face certain independent decisions they make on their own, but you know I would say largely we're going and getting customer traffic that was originally ours and getting it back, and keeping it.

Christopher Mandeville -- Jefferies -- Analyst

Great. Thank you, Andrew.

Andrew Clyde -- President and Chief Executive Officer

Thanks, Chris.

Operator

The next question come from the line of Ben Bienvenu from Stephens. Please go ahead. Your line is open.

Ben Bienvenu -- Stephens Inc. -- Analyst

Hey, thanks. Good morning.

Andrew Clyde -- President and Chief Executive Officer

Good morning, Ben.

Ben Bienvenu -- Stephens Inc. -- Analyst

Mindy in particular, just -- I'd love to hear more about the fuel strategy. What has changed under your leadership? You know, I always think of you guys as being best-in-class, but you know Murphy USA is also not typically associated with complacency in their operation. So I know there's opportunity that you're uncovering, I know you guys are working hard to make that business even more efficient than it is. And so to the extent that you can talk about it, I would love to hear, kind of, the some of the things that you guys are working on strategically and operationally.

Mindy West -- Executive Vice President and Chief Financial Officer

Sure, Ben, and I appreciate the question. We believe that we have one of the most attractive market positions out there being a high-volume ratable short in the market and in an otherwise market that's long on product. So our emphasis has been on, how do we create the most value, how do we leverage our relationships and those asset positions that we have. We're doing work around how we optimize our carrier mix and our optimal supply pull point.

We continue to show ratable supply to our stores, and avoid the outages. And also importantly, and as we talked about a lot, how do we become sharper on our retail pricing capability at a store-by-store level. So it's after all, we are known to our customers based on price. So we need to be very good at pricing execution.

So all those things really together formed the assortment of opportunities that me and my team are looking at, as we are calibrating, prioritizing and sequencing property all the initiatives that we have in our business, that's what we're really focused on.

Ben Bienvenu -- Stephens Inc. -- Analyst

That's great. And this could be a question for both Mindy and Andrew, but on the capital allocation front, and specifically the share repurchase program beside the capex spend. So you've allocated $400 million for a multi-year buyback, which you know at today's prices are approaching kind of mid-teens percentage of the flows. Over that timeframe that you've committed the buyback stock over, that's pretty consistent with your historical buyback pattern.

So clearly signals your bullish view on the business. And you might have mentioned this in the prepared remarks, but your thoughts there on why now is the right time to activate a program like that? Or reactivate a program? And also does the outlook for capex, it sounds like there's going to be accelerated unit growth with really good returns so understandably accelerating. Could you talk about the capex and ultimately the free cash flow trajectory over the next couple of years?

Andrew Clyde -- President and Chief Executive Officer

Sure, Ben. One of the pages in our investor presentation and sort of the public comments we made, on one of the last investor conferences spoke to our historical track record, and it's really about driving shareholder value over time. And you know, we kind of look back and said look, we've gone from $300 million or $400 million of EBITDA, we've bought back almost a third of our shares, you know, that has led to an improvement in the multiple of six to nine, and that allowed for a 14% CAGR on our share price since our spin. And we posited the question on what would you have to do to maintain sort of double-digit shareholder value growth.

And we said we would have to continue to grow earnings and we have to break out of this $400 million period we have been in to something that starts with the $500 million. We could probably buyback 1 million shares a year and doing all that would both draw the confidence that would probably give us an extra turn of the multiple. That's all we need to do. And so we sit back and say, well, how are we're going to do that? We say we're going to keep doing what we have been doing.

We're going to go productivity improvements from our stores and those take time, and there is ups and downs, and there's a fuel pricing cycle that goes with that, and there's investments that go with that. But historically, we have generated more productivity out of our existing assets than other retailers and we believe there's more opportunities to do that. We're going to build and rebuild where we have the right to win. I mean, if you think about 50 2,800 square-foot stores a year at a 14% return on investment, you're going to be adding $20 million of EBITDA per year when those hit that run rate, right? So you've coupled a trajectory in a pipeline along those lines, coupled with our productivity initiatives you can check off the first box, right? One million shares a year within our operating cash flow, that doesn't seem like a big number, right? The reality is, right now we're sitting on $175 million of cash, and we have plenty of liquidity and coverage to be able to do that.

So were not front-end load that and you are going to be able to buy better prices than if you drag it out over a five-year period. Ultimately, the market is going to reward us with the multiple, right? And -- But we believe those things all taken in together, allow us to continue our track record of driving double-digit shareholder value growth, and so were committed to that. You know, the capex, if you think about the operating cash flow from this business, we've called it a free cash flow machine in the past, the current free cash flow coupled with the improvements, etc., generate plenty of cash flow to cover our capex in the future even if our growth capex gets closer to $300 million, right? So we believe that this is an and, not an instead of. It's just a matter of timing, we can afford to buyback shares in the near term and our or pipeline suggests we're only going to be able to do 30 NTIs next year, but as we ramp up to 30, 40, 50 in the following years, we'll have the free cash flow to do it.

So we think it remains a very attractive investment proposition from that standpoint, which is why we're investing in our own shares.

Ben Bienvenu -- Stephens Inc. -- Analyst

Great. Thank you, all.

Mindy West -- Executive Vice President and Chief Financial Officer

Thanks, Ben.

Operator

Your next question come from the line of Donnie Herzog from Wells Fargo. Please go ahead. Your line is open.

Patty Kanada -- Wells Fargo Securities -- Analyst

Hi there, it's Patty Kanada on for Bonnie Herzog. I just wanted to ask on a couple of questions, one on tobacco pricing. Just curious if you are seeing some pushback from consumers on the Feb and now June list price increases on cig. Are using evidence of increased smoker migration away from the cig category? And are you finding yourself needing to adjust shelf allocations to follow that migration?

Andrew Clyde -- President and Chief Executive Officer

Hi, Patty. I would say given our performance in the last few quarters, which have been bucking in the industry trends, we're not really changing our shelf allocation because we are frankly taking share. And so the consumer migration we are seeing from our competitors stores to our stores, not so much to other products. So as we're growing sales and margins, units and market share across the categories, you know, we're certainly not seeing that.

I think the entire category continues to face trends, but when you start breaking that out across different states and the regulations in those states, I think we're generally a more attractive markets in general. I don't think we noted anything particular from these more recent price increases versus prior ones. Certainly on some of the flavors, we relate to roll out jewel nationally in the first place, and we haven't really seen a follow-up related to flavors as the menthol products are still available. So really nothing noteworthy on that side other than sort of the market share gains that we've gotten.

Patty Kanada -- Wells Fargo Securities -- Analyst

OK. Thanks a lot. And just in terms of cash flow and getting to that next level of EBITDA, and the $500 million range. Can you talk a bit more about what you're doing on the price optimization side and fueling tobacco to help you get there? And at the same time, you're building customers, you're gaining share, how do you think about balancing these margin versus market share priorities?

Andrew Clyde -- President and Chief Executive Officer

Sure. Well, I would say on the retail pricing excellence initiatives around the fuels pricing. You know, it's one thing to implement a system and another thing to build the playbook store by store, build the capabilities within the team, have all the data and analytics, and insight you need to price with precision every day, every product, every store in flat up and down markets. And that's a capability that we have been seeking to build for a while that Mindy and Lester Tran, and their teams have now really begun to put in place in the last 12 months, and you see it in the result.

Have made some trade-offs emphasizing volume over margin the last couple of quarters? Absolutely, yes. Right? First thing we wanted to do was demonstrate, can we get those customers back that we lost when we were being a little sloppy on the margin. So now it's -- you know, we have the ability to get both volume and margin as we're seeing in July, and I think just a precision by which we can do things store by store in any kind of environment is going to allow us to continue to grow fuel contribution. Are we going to have a fourth quarter second half like we had in '17 or '18? I don't know, right? We had a major hurricane that impacted supply in '17, we had the crude fall off in the last year, and '16 we had OPEC come together and saw prices rise in the third quarter.

And so I would just urge everyone to continue to look over this category over any rolling 12-month period. Our focus is get sharper on our pricing to be able to gain both volume and margin, and do that in a responsible way. But we've certainly emphasized regaining customer share of wallet in the first half of the year, especially, as we're rolling out Murphy Drive Awards and that initiative.

Mindy West -- Executive Vice President and Chief Financial Officer

And Bonnie, I can provide some additional color on retail pricing in excellence, because we've really been emphasizing three main areas there. One is just around refining our strategy. So reaffirming who we are, which is a bottom of market pricer and in doing so, we have optimized the tactics that our network on a store-by-store basis, then we've have also improved our execution at the same time. So making sure our competitors sets are up to date and selectively using automation features within our system and also reducing the time it takes for us to initiate a price change here, and how that take affect out the store.

And then lastly, implementing a tighter performance management. So tools to improve decision-making and our consistency in our accountability. So it's really been tight coordination between all three of those areas, which is helping us to ensure that every site is priced optimally every day, and I think we can see those improvements are showing in the results.

Patty Kanada -- Wells Fargo Securities -- Analyst

Great. Thanks. That's very helpful.

Operator

Your next question come from the line of John Royall from J.P. Morgan. Please go ahead. Your line is open.

John Royall -- J.P. Morgan -- Analyst

Hey, good morning, guys. Thanks for taking my question. Both of mine were answered, I just have one quick one. Are you guys seeing any uplift from the outage of the Philadelphia energy refinery in terms of your position on Colonial? Just any benefit there from price arbitrage as those gallons are coming off the market?

Mindy West -- Executive Vice President and Chief Financial Officer

Not really. What we saw was pipelines space turned positive very briefly in that first week following that refinery outage, but since then imports have been filling up that gap as a weak demand in Europe is displacing a lot of product supply over there. And so actually the arbs been open to contract those supplies globally, and they have been filling that gap so really there hasn't been any significant impact on our business.

John Royall -- J.P. Morgan -- Analyst

Great. That's all I had. Thank you.

Operator

[Operator instructions] Your next question come from the line of Christopher Mandeville from Jeffries. Please go ahead. Your line is open.

Christopher Mandeville -- Jefferies -- Analyst

Hey, thanks for the follow-ups. Andrew, I just want to make sure that I'm understanding it clearly for the back half of the year. With how you pursued MDR in the first half more so for market share and volume. Should we expect a better balance with respect to the top line and margin profile, and store in the back half? Or do we need to maybe wait for that as we approach more so 2020?

Andrew Clyde -- President and Chief Executive Officer

Yeah, So I think there's a number of factors that will influence the back half. The most significant one I mentioned is, what kind of market environment are we're going to find ourselves in, and as you know, Chris, that is going to dwarf pretty much anything, right? But given that environment, I would say the following. We're going to be sharper on our pricing that will get both volume and margin, right? So if you're going to error one side I'd say we would probably erred on the volume side on the first half. The goal here is to reduce the errors or any sort of unforced errors to use our baseball analogies.

The MDR member behavior, we've got some really cool data analytics and where you can see the customers that sign up any given month, how their behavior changes over time. You know, we're seeing every new group behaving like the group before them. So is -- you know, we're not signing up 1 million a month, but we're still signing up 0.5 billion a month. So as we add new customers and they exhibit the same type of behaviors, and existing customers maintain or improve their behaviors, we expect to see that.

But as we mentioned, the non-transactional points as they get burned off, we expect our cost will eventually be lower on a merch and fuel basis from that standpoint. And I think some of the other programs that we have should be supportive as well, but as we mentioned around jewel and some of the other things, you know, we'll be comping some challenges there given the timing of rollouts. So we're looking forward to the second half of the year. The biggest biggest comp challenge will be, as you know, Q4 where we had the precipitous fall off last year, and if we're unable to see something similar to that.

You'd would have a difficult time comping against that without some help from the market.

Christopher Mandeville -- Jefferies -- Analyst

Right, that all makes sense. And just a follow-up from Mindy, it was mentioned in the press release that you might potentially contemplate refinancing. So just as relates to the senior notes, what do you envision could be the potential interest rate that you would be able to receive? And then just in that practice, is there any ability to actually adjust your current covenants, especially on the buyback where maybe you can get some greater leeway on a go-forward basis?

Mindy West -- Executive Vice President and Chief Financial Officer

Yes, I'm glad that you picked up on the language that we might perhaps think about one day refinancing. As most of you guys know and obviously, in 2018 those original notes became callable at a premium of 103. In August of this year, that premium declines to 2%. Obviously, we have no requirement to act with four years of the 10 are left, but we still still elect to do that.

For a couple of reasons, to lengthen our maturities and also to take advantage of lower rates, which I think at a 6% coupon currently if we even carve that back to 5.5% that would stay on an annual basis $2.5 million of interest expense. So I think that that's kind of in the range that we're in. And so we would be able to take advantage of the current low rate market structure, and also take advantage of our track record of strong execution that we've built in these six years since that original issuance, which I think would allow us to settle over rate than the 6% current one. Both of the current ones have very high demand at issuance.

Both trade above premium, so we think that the new assurance would have strong demand. And with regard to the covenant, the 2017 issuance actually has a three times leverage covenant before we start restricting our ability to do share repurchase. And so we would expect that on any new reinsurance we would mirror the covenant that receive in 2017. So that will give us additional freeboard above and beyond what we currently enjoy.

Christopher Mandeville -- Jefferies -- Analyst

Perfect. I really appreciate it.

Mindy West -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And there are no further questions at this time. I will now turn the call back to Andrew Clyde for closing remarks.

Andrew Clyde -- President and Chief Executive Officer

Great. Thank you, everyone, for joining the call. As you can tell, we're pretty enthusiastic about our Murphy Drive Award program, the capabilities that we're building and the initiatives, and the future that we see before us here at Murphy USA. Thank you again.

Bye bye.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Christian Pikul -- Senior Director of Investor Relations

Andrew Clyde -- President and Chief Executive Officer

Mindy West -- Executive Vice President and Chief Financial Officer

Bobby Griffin -- Raymond James -- Analyst

Christopher Mandeville -- Jefferies -- Analyst

Ben Bienvenu -- Stephens Inc. -- Analyst

Patty Kanada -- Wells Fargo Securities -- Analyst

John Royall -- J.P. Morgan -- Analyst

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