Sunoco LP (SUN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to Susser Holdings Corporation and Susser Petroleum Partners third quarter 2012 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Chip Bonner, Executive Vice President. Please go ahead sir.

Thank you, operator. Good morning, everyone, and thank you for joining us. This morning we released third quarter 2012 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners, and our news releases were broadcast to our email list. If you would like to be added to one or both lists, please contact our Investor Relations firm, DRG&L at 713-529-6600 or send your request via the IR pages of our websites and we will be glad to add you. A replay will be available on the web for at least 60 days via telephone replay until November 14th. To access a replay of the web go to our IR pages either at www.susser.com or www.susserpetroleumpartners.com. You will find all the replay instructions in the earning releases.

A reminder that today's call will contain various forward-looking statements. That information is based on management's beliefs, expectations and assumptions, and includes the Company's objectives, targets, plans, strategies, costs, and anticipated capital expenditures. These statements involve risk and uncertainties that could cause actual results to differ materially. These risk and uncertainties are described in Company's periodic reports on file with the SEC including our 10-K for the fiscal year ended January 1, 2012, and subsequent quarterly filings as well as prospectives for Susser Petroleum Partners IPO filed on September 21st.

We will discuss certain non-GAAP financial measures that we believe are helpful for a full understanding of our financial condition. Please refer to our news release, which includes a reconciliation of each financial measure. Information reported on this call speaks only to the Company's view as of today, November 7, 2012, so time-sensitive information may no longer be accurate at the time of any replay. Now I will turn the call over to Sam Susser.

Thanks, Chip, and good morning to everyone. For all of those impacted by Hurricane Sandy and its aftermath we hope your families are safe, and we appreciate the extra efforts you are going through to follow Susser's progress this morning. A special welcome to all the investors and analysts who are following Susser Petroleum and who are joining our call for the very first time. With me today in the room are Steve DeSutter, President of our Retail Group; Mary Sullivan, our Chief Financial Officer, and other members of both companies' leadership teams are also on hand including Kevin Mahany who leads our merchandising efforts, and Bob Swan who leads our Human Resources Group.

Two major events took place in the third quarter. Both will help us increase shareholder value. The first was, of course, Wellspring Capital sale of almost six million shares of Susser Holdings common stock which we discussed on our last call. Their secondary offering significantly increased the float and volume of Susser Holdings stock and brought in a large number of new investors.

The second value building event was the IPO of Susser Petroleum Partners, a publicly traded partnership that was created for most of the assets and operations of our wholesale fuel distribution business. We sold 10.9 million shares at $20.50 including the full amount of the Greenshoe which was exercised in late September. Yesterday our shares closed about 17% above that offering price. Since the IPO of Susser Holdings in late 2006, we have believed that the investment community was not giving the Company full credit for the underlying value of our wholesale business. Today Susser Holdings retains control of the partnership as owner of 50.1%, of the limited partner units and also owns 100% of the general partner.

Please note that Susser Holdings share of the MLP is worth $262 million at last night's closing price. Susser Holdings also owns the Incentive Distribution Rights or IDRs. The IDRs provide us an incentive to grow the distribution to Susser limited partners by providing Susser Holdings with the opportunity to receive larger percentages of incremental cash flow once we are able to grow the MLP distributions beyond stated thresholds. Using the master limited partnership structure for the wholesale business provides us with new sources of lower cost capital to grow both the retail and wholesale businesses.

The $206 million of IPO proceeds also provides additional cash we can use to pay off our 8.5% high yield bonds when they become callable next May, and in turn reduces the amount that we will ultimately need to refinance, which should result in significant interest savings beginning in June of 2013. The commercial interrelationship between the two Companies is as strong as it was prior to the IPO.

Stripes accounts for about 59% of Susser Petroleum Partners fuel volumes, so as Stripes grows and prospers Susser Petroleum also benefits. This anticipated retail growth plus additional growth we expect in sales to third party customers through organic expansion and acquisitions provides an avenue for growing partnership distributions to unit holders, which is a major investment driver of the MLP. Our minimum annual distribution as outlined in the S-I for Susser Petroleum Partners is $1.75 per unit. So we believe the current yield is compelling at more than 7.3%.

Turning now to the operational and financial performance of both Companies. We are pleased with the results of both Susser and Susser Petroleum Partners. Although the impact of lower retail gasoline margins was felt in EBITDA and in the earnings of Susser Holdings, we delivered a very solid quarter overall comping up against unusually strong volumes and margins a year ago. I am going to ask Steve DeSutter to cover results of our retail operations in the third quarter. Steve?

Thanks, Sam, and good morning, everyone. We reported another really strong quarter this morning. We achieved same-store merchandise sales growth of 5.8%, and 6.6% year-over-year growth in average retail fuel gallons sold per store in the third quarter. Merchandise margins were solid at 33.8% versus 33.6% a year ago. We continue to see overall positive trends in both customer accounts and average transaction size.

Our Laredo Taco Company restaurant offering continues to grow and to drive related sales in high margin categories such as single-serve, package drinks, snacks and candy. Laredo Taco or as we call it LTC, is available in 342 or 62% of our Stripes stores. Food service primarily LTC fountain, frozen beverages, and coffee continues to account for 20% of merchandise sales and approximately 30% of gross profit. Sales performance in the third quarter was lead by increases in beer, package drinks, cigarettes, snacks and candy. Gross profit was driven by strength in package drinks, food service, beer, and snacks partly offset by the impact of lower cigarette gross profit versus a year ago.

As we experienced in the second quarter strong commercial activity in Texas and our capital investments in our stores drove higher retail fuel gallons. Retail fuel margin in the third quarter was $0.201 a gallon as compared to $0.277 in the third quarter last year and our five year average third quarter margin of $0.217. If you deduct credit card expense our net retail fuel margin dipped $0.074 from a year ago to $0.145 a gallon. We typically see retail fuel margin compression during periods when oil and refined product prices are on the rise and that was certainly the case in the third quarter. On a year-to-year basis with average retail fuel margins of $0.22 a gallon we are still running ahead of our guidance of $0.18 to $0.21. As result we have raised the bottom end of our retail fuel margin guidance by $0.01 to $0.19.

The pace of our new store development program has been intense since mid year. In the third quarter we opened eight new large format Stripes stores and converted one store to a dealer consignment location giving us a total of 552 at the end of the third quarter. This was a record number of new store openings in a quarter for us. So far in the fourth quarter we have converted two additional Stripes stores to dealer consignment locations. We currently have 14 new stores under construction and expect to have another four stores to six stores started before year end.

Year-to-date we have opened 15 new stores, and we expect to open another 10 or 11 before year end, which would put us at either 25 or 26 new big box stores for the full year. We expect to build another 29 to 35 new stores next year in response to stronger economic activity in our core Texas markets and the success of our building program. We are continuing to invest in our land-bank and in our people to drive more aggressive store development.

I would offer one item of expense guidance that would apply to Susser Holdings for the next couple of quarters. We have an unusually high number of new stores that will come into the system over the next several months. We expect to open 10 to 11 in the fourth quarter and four to six are planned to open in the first quarter of 2013. We are investing in employee training, recruiting, startup and other staffing expenses associate with these stores. 14 of our next 17 sites are our largest format stores, some of which have dedicated 18-wheel truck diesel. These sites are larger, they are more expensive, they employ more people and typically have higher volumes than other sites.

Today we currently have about 300 staff and management personnel on payroll in training to prepare for these openings. Traditionally it takes four to six months for a new store to become cash flow positive, so with so many new stores opening in the next two quarters versus the same quarters a year earlier we may see short term pressure on earnings, which we would estimate to be around $100,000 per store. Now I will turn it back to Sam.

Thank you, Steve. Rocky Dewbre a 20 year veteran of the Company who has lead Susser Petroleum for last 13 years is traveling on Company business today and unfortunately can't be with us. So I am going to cover myself some key results of the wholesale segment.

Let me start first with a review of Susser Petroleum Partners results which for simplicity I will refer to as The Partnership. We have presented combined financial statements for The Partnership and its accounting predecessor in our press release this morning. I would like to focus your attention on the pro forma results table, that is the first of the financial statement schedules. This schedule was prepared as if the new partnership structure and related contracts were in place as of January 1, 2011, and therefore presents a better period over period comparison.

Just as a reminder the wholesale results that are consolidated into Susser Holdings consist mostly of The Partnership operations. But our wholesale segment reported at the Susser Holdings level also includes the consignment dealer and fuel transportation businesses that were not contributed to The Partnership and still remain with Susser Holdings.

Third quarter fuel volumes sold by The Partnership to third party dealers and other commercial customers were up 17% year-over-year, which is partly attributable to an acquisition we made in the Dallas area last October of 121 dealer contracts and 26 unbranded accounts. Third party fuel revenues were up 19% which reflects both the higher volumes sold and a $0.05 per gallon increase in the average wholesale fuel selling price. Gross profit on these third party sales for the quarter was $0.047 per gallon up from $0.044 per gallon in the prior year reflecting a favorable change in the mix of the customer base.

Affiliated gallons sold by The Partnership represents sales to Susser Holdings for resale at our Stripes convenience stores and by independently operated consignment locations. We grew these gallons by 8% for the quarter versus the prior year. The Partnership now earns a $0.03 per gallon margin on these gallons which is fully reflected in the pro forma schedules. The actual results reflect only six days under this structure.

The Partnership's pro forma average fuel margin for all gallons sold for the quarter was $0.036 per gallon versus $0.034 per gallon last year. Total pro forma gross profit for The Partnership was $14.6 million for the quarter up almost 15% from a year ago. Consolidated wholesale segment gross profit of $13 million coincidentally increased by 13% from the prior year and adjusted EBITDA for the wholesale segment was $8.3 million, an increase of 17% of the entire year.

Our wholesale segment added 12 new dealers in the third quarter and discontinued seven, which brings our independent dealer count to 572. This includes 484 dealer supply sites which are served directly by the new partnership and 88 consignment sites which are supplied directly by Susser Holdings and indirectly by The Partnership. Year-to-date we have added a total of 26 dealer sites and discontinued 19 for a net add of seven. We have increased our guidance for the year and now estimate we will add a total of 32 to 37 dealer locations in 2012. We may discontinue supply to a few more sites by year end and estimate net additions of seven to 14 for the full year. It should be noted that the dealer sites that are discontinued tend to be lower volume.

Our wholesale team continues to work on organic growth opportunities, and we already have a healthy pipeline started for next year. We estimate we will bring on 30 to 40 new branded sites in 2013. I also want to add that we continue to be very encouraged by the momentum of the Texas economy. In the Gulf Coast area we have seen numerous announcements of new commercial and industrial development worth billions of dollars. That means new jobs, higher levels of disposable income and the opportunity to drive further growth through our convenience channel in the coming years.

Key economic indicators continue to improve. Housing construction is making a strong comeback in Texas. Single-family building permits were up 19% year-to-date. Texas housing starts were up 24%. Our jobless rate in Texas fell from 7.9% a year ago to 6.8% in September, and remains a full percentage point below the national jobless rate. Texas has added a remarkable 264,100 jobs this year representing 3.3% annualized growth and the number of folks working.

Now I will turn the call over to Mary to review the financial highlights.

Thanks, Sam. Good morning, everyone. As Sam indicated, we are very pleased with the solid financial performance from both Companies. A reminder that since Susser Holdings owns more than 50% of Susser Petroleum Partners and 100% of the general partner we fully consolidate The Partnership into Susser Holdings financial statements. I am going to go through the financial highlights very quickly and mostly drill down into some of the details of our new public Company structure.

To summarize the consolidated results of Susser Holdings this morning we reported net earnings for the third quarter excluding one-time deferred tax charges of $10.5 million or $0.49 per diluted share. After deducting the one-time non-cash charge net earnings for the quarter were $6.8 million or $0.32 per diluted share versus $18.5 million or a $1.06 per diluted share a year ago. Please note that we have 3.9 million more diluted shares than we did a year ago.

Adjusted EBITDA was $41.3 million in the latest quarter which was down 19.6% from a year ago primarily related to lower retail fuel margins. On a trailing 12-month basis adjusted EBITDA is $168.8 million versus $167 million for fiscal 2011. One of the key metrics we use internally to measure our performance and to set compensation is fuel neutral EBITDAR which removes the impact of fuel margin volatility from the relative comparisons.

We have provided a schedule at the end of this morning's press release for Susser Holdings that shows the long term trend calculations. For the latest 12-month period we have increased fuel neutral EBITDAR by 11% compared to fiscal 2011. This measure is a great indicator of the Company's long term trajectory and true operating momentum as fuel margin swings have zero impact on this calculation.

Summarizing the results of Susser Petroleum Partners combined net income from The Partnership and its predecessor for the quarter was $3.6 million. The limited partners interest in net income for the last six days of the third quarter after the IPO was closed was $574,000 or $0.03 per common units. Adjusted EBITDA for the full quarter was $7.7 million with $666,000 allocated to the six days of partnership operations.

Distributable cash flow, which for those of you who may be new to MLP investments is one of the key metrics to look at, was $644,000 for the six days of operation. We define distributable cash flow as adjusted EBITDA less cash interest expense, state franchise expense, maintenance capital expenditures and other non-cash adjustments. Six days is too short of a measurement period to get a sense of our true operating performance, so we would suggest you focus on the pro forma Q3 and year-to-date results.

I am not going to cover the expense items in detail as I usually do on our calls, but if you have questions feel free to raise them during the Q&A or follow up by phone. As a reminder the Susser Holdings consolidated financials will continue to look very similar to the pre-IPO financials with a few exceptions. We have estimated that we will incur an extra $2 million of G&A expenses for additional public company costs. These will start to show up in the fourth quarter, but likely will not be fully reflected until 2013.

The minority interest deduction on the Susser P&L will reflect the 49.9% ownership of Susser Petroleum Partners net income by outside unit holders. This minority interest income is not taxable to Susser Holdings, and we estimate an effective tax rate for the balance of 2012 to be approximately 36.3%. For 2013 as we will have a full year of minority interest income we estimate an effective tax rate of between 25% to 28%. That rate would be applied to pre-tax income before deducting minority interest.

I would like to touch on the capital structure changes resulting from The Partnership IPO. The financing details for each Company are provided in this morning's news releases, so I will not walk through each one. In summary The Partnership has no net debt as its cash and short term marketable securities of $195 million exceeds funded debt of $182 million. The Partnership has $237 million available on its new $250 million revolver. The Susser Holdings balance sheet fully consolidates The Partnership cash and debt balances which result in total cash and marketable securities of $494 million and total debt of $617 million or net debt of $123 million.

Susser Holdings' leverage and liquidity improved significantly this quarter. Our trailing 12 month net debt to adjusted EBITDA ratio dropped from 1.8 times as of the end of the second quarter to 0.7 times. Available liquidity on the combined credit revolving credit facilities was $322 million at quarter end. Capital spending was $47 million in the third quarter, and we raised our guidance for the full year to between $165 million and $180 million to reflect increased growth spending between now and year end. Most of this additional CapEx will be spent during the fourth quarter to start construction on new stores that will be opening in the first half of next year as well as for additional land purchases for future new stores.

The Partnership has an option to acquire 75 new build retail stores over the next three years and lease them back to Stripes at an 8% lease rate. On a consolidated Susser Holdings level this intercompany sell lease back will eliminate, but this mechanism allows The Partnership to grow its distributable cash flow while providing less expensive capital to finance the Company's growth. We plan to start dropping down new retail stores into The Partnership as they are completed with one or two likely to happen later this month. We expect to drop down the first 15 stores by the end of April next year.

As noted in our earnings release for Susser Petroleum Partners we declared our first distribution to the limited partners which is prorated to capture just the final six days of the quarter during which The Partnership was a public entity. Our annual minimum distribution is $1.75 per unit, and we expect to grow that as our distributable cash flow grows. And finally in this morning's Susser Holdings news release we made some updates to our full year 2012 guidance to reflect our strong performance. You will find details of these updates in the earnings release.

Now I will turn it back to Sam.

Thanks, Mary. Operator, we are ready for questions.

Thank you, sir. (Operator Instructions). Our first question is from the line of Sharon Lui with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Sharon.

This is in regards to The Partnership performance. With regards to the third quarter gross margin for third parties of $0.047, that is a little bit higher than the guidance in your S-1. Just wondering if that number is sustainable going forward?

Sharon, the third party of $0.047 which is pro forma for the third quarter. In our forecast we had estimated about $0.045 to $0.046 per gallon, and this is up a little bit from last year primarily due to favorable mix in the customer base.

In this past quarter we sold a little bit more to dealers where we have higher margins and not quite as much to lower margin commercial accounts and that was a driver, so based on current conditions this level of margin is give or take what we would expect to continue but mix will change from time to time. We are not expecting any big changes to current performance at all.

Okay. That is helpful. Then in terms of your commentary on the drop down of stores, did I hear correctly you said it is going to commence later this month with one to two stores?

Yes. And we expect to have 14 or 15 stores done by next April, drop down by next April, based on current outlook and what we are seeing that would be the timing.

Okay.

I would also add, Sharon, as Steve mentioned many of the stores that are under construction are larger format than the average of what we have built the last few years. They are going to be some pretty significant stores, more expensive and we would expect a little higher fuel volume as well.

Okay. Great. Thank you so much.

Thank you.

Thank you. Our next question is from the line of Kelly Bania with Bank of America Merrill Lynch. Please go ahead.

Good morning. Thanks for taking my question.

Hi, Kelly. Good morning to you.

Just a couple (Inaudible) a little bit more on the retail merchandise comps. Any (Inaudible).

Kelly, you cut out on us. Could you repeat your question. I apologize.

Sorry. Can you hear me now?

Yes, you are back.

Just wondering if you could dig in on the merchandise comps on the retail division -- any color you can provide on either some regional commentary. I think you mentioned traffic and tickets were both kind of positives. And then I was also wondering if you could talk about (Inaudible) highlighted as strong in terms of the growth profit contributions, but I was wondering how sales for food service were during the quarter?

Kelly, this is Steve DeSutter. I apologize; we only caught part of the question. Let me address the part I heard which was around the ticket and how to break it up. The ticket was obviously strong at 5.8%. About 40% or so of that we would attribute to more units and items per ticket, so the average purchase itself going up. And then the balance of that about equally split between inflation and customer count. I apologize; that was the only part of your question. If you would try it again the second part, maybe we could hear you.

Kelly, the one thing I would build on that is that we are seeing strong demand in the higher margin single-serve package beverage category which that is a great thing. When we were going into the recession three or four years ago, we saw people trading away from that and they were buying low margin multi-pack items and kind of stuffing their cupboard with that and it is trending to the positive now. So that is helping our margins. A lot of strength in snacks driven by the unit growth in our food service business.

So as we are selling more and more tacos and other items it is driving related items that are higher margin that are helping us, and that is a good thing, because there has been a lot of pressure in the cigarette category and we are staying aggressive and leaning in and we are growing the number of cartons we sell over the prior year, but cigarette gross profit continues to shrink at Stripes and today for this most recent quarter reflected 7.7% of our gross profit whereas last year it was 8.7% of merchandise gross profit for the same period.

That is helpful. I do not know if you could hear me better now, but I was also curious about regional trends in terms of your merchandise same store sales.

Regional trends remain strongest in the Permian Basin and in the Eagle Ford area, and I would also say the Houston Victoria markets have been very strong. Job growth there is terrific. Corpus Christi has been on a great roll over the last couple of years. We have very meaningful job growth and sales tax growth and strong sales trends in the greater Corpus Christi area that are helping the business. It is positive pretty much everywhere across our markets, but more positive in the markets I mentioned.

Thank you. If I can just follow up with one more. Just curious about the new stores. For this year it looks like it might be coming in a little bit lighter than expected, so I am wondering if you have any color on why that is and your confidence in the expected number of new store openings for 2013?

Thanks, Kelly. We started the year with most of the land purchased in the land-bank but not 100%, and each of these projects is like developing a small office building. There is site infrastructure and permitting and zoning and sewage and utilities. And we have hit some snags that have delayed our construction two weeks in one case, two months in another case. They are just one off shaggy dog stories in each and every case and we just have not been able to hit the pace that we were hoping for.

We are going to cross the end of the year with 25 or 26 stores complete. We will have a few more that if we do not get them open by December 31, we expect them to open immediately after the first of the year because they will be 90% done by Christmas. And we have increased the lower end of our guidance for next year because we are very confident in our ability to get those bought. This year we will have 100% of the land-bank owned, purchased, closed on our balance sheet for next year's program. So we are further ahead for new store development than we were last year, and the construction schedule will not be as backend loaded in 2013 as it was in 2012.

Thank you.

Thank you, Kelly.

Our next question is from the line of Irene Nattel with RBC Capital Markets. Please go ahead.

Thanks, and good morning everyone. Sam, you alluded to one of the shifts that you are seeing as a result of greater consumer confidence and job gains, and of course that is some of the shift in volume back to single packs from multi-packs, but can you walk us through other indications of the trade down behavior that you saw when we went into the recession and what you have seen in the past in terms of trade up again as job growth accelerates?

So a good example would be in the beer category. We are seeing more premium beer, more singles, brands that are strong would include Michelob. Kevin, you may comment further on that.

Bud Light, imports. We are seeing the trends increase in our imports and the specialty super premium categories from that standpoint.

It is a 180 from where we were three or four years ago, 180-degree different trend.

Now, do you see it also, Sam, in terms of the mix at Laredo Taco?

We are. We have a super value menu of kind of two-for items at $1.19 depending on which market, which items. As a part of our mix we are able to grow the higher reign lunch plates and more breakfast plates and less of the fried items and the items that are super low price points. So we will have every customer whether they come in at two for $1.19 or $3.99, but the trade up towards these higher price points has a double benefit for us; the correlation of related purchases is much higher when people buy breakfast plates and lunch plates and lunch tacos than when they buy the less expensive fried items.

So as we are growing the number of units we sell, we are selling more expensive items within Laredo Taco, and those items drive a higher proportion of co-purchases. We are seeing better results in energy drinks, high-end beer, food and the whole basket is shaping the right way. These are very small amounts but obviously on large numbers.

Absolutely. Thank you for that. And can you also talk a little bit about what you are seeing in terms of the competitive environment in the metropolitan areas on gas pricing?

We see big box retailers as has been reported in the national press getting very aggressive with $0.10 and $0.12 a gallon price off promotions using one of their cards for purchase. There are some national supermarket chains that are more aggressive than ever on their loyalty programs, which obviously the more merchandise you buy the more cents off you get on fuel purchase. We are continuing to see growth from the national drug store chains, especially one of them. And there is continued growth in the dollar channel and both of the two biggest dollar stores are expanding the number of consumables categories that they put in the store, so more milk, more cigarettes, in one case, one is putting beer in.

So there is increased competitive pressure on both fuel and merchandise. We are seeing a lot of dollar item pricing in the QSR channel against the food. I think the competitive pressure remains fairly intense but manageable for us.

That is great. Thank you.

Thanks, Irene.

Our next question is from the line of Jeff Birnbaum with UBS. Please go ahead.

Good morning everyone. Can you hear me?

Yes, we can. Thank you very much.

Okay. Great. Thanks. So for The Partnership rent and depreciation in the quarter were fairly higher than we expected based on some of the prior pro forma numbers. Can you just briefly touch on what was driving those in third quarter versus the historical? Thanks.

Hi, Jeff. This is Mary. Keep in mind the actual third quarter results are primarily the accounting predecessor which is our wholesale segment and there is only six days of true MLP operations in there. So I think my best guidance would be to still use the forecast that we provided in the S-1 as the operations going forward. We did not do a full pro forma through the expenses on the quarter for the MLP operation.

Got it. Okay. Thanks a lot.

At the core there is a very slight difference in what the assets are between the predecessor and what is in the S-1 and that is driving a little bit of a difference.

Yes.

Fair enough. Thanks a lot.

Our next question is from the line of Scott Mushkin with Jefferies & Company. Please go ahead.

Hi, guys.

Good morning.

Good morning. I have way more than a couple, but I am going to limit it because I know there are a lot of people on the call. Fuel profits $0.21, whatever it was, $0.20 something cents, $0.20ish cents, OPIS data has usually been pretty good directionally, you usually run about $0.05 over there would have suggested you have been nowhere near that number in the third quarter, so I just want to understand a little bit about what you thought drove pretty good margins on gas or petty profit on gas even though it was probably the worst operating environment you could be in. And when I translate that into the fourth quarter which is obviously a much better operating environment although we have a competitive situation with people getting pretty aggressive on gas and how we should think about the fourth quarter.

Scott, there was tremendous variation by store or by region on fuel profitability in the quarter that just ended, and the quarter started off tighter than where it ended up. We did not have any back margins at any time throughout the quarter, but it kind of improved as the quarter went along especially at the very tail end. Unfortunately we do not track the OPIS data internally, so I really do not have much help on that. We strive to not talk about quarterly margins on a go forward basis, but still believe strongly that there is an inverse correlation.

When our cost of fuel goes up, that squeezes our margins and vice versa it goes down the other way. Diesel continues to be a little bit better than gasoline margin long term and we are growing our share of diesel. It grew from 20% of our retail mix up to 21% in the quarter, so that should be a little bit helpful to us as that trend extrapolates out into the future. Call about five years ago diesel was only 10% of the mix.

Sam, as a quick follow-up to that before I ask my second question. You guys have done a lot of work pricing to the store on gas. We have estimated it is probably worth about half penny normalized. Do you think it is more than that at this stage? Do you think the effectiveness of your pricing to the store is actually giving you more penny profit permanently? Not swings here, but as we look out over time? And then I have an expense question that I wanted to get in.

We cannot prove to ourselves exactly what the technology changes are worth. But my feel for it is it is worth more than a half a cent for sure. The tools that we are using to optimize our margins and our gallons are so much more powerful than where we were three years or four years ago. I think it is definitely worth more than a half a cent. Maybe it comes in volume, maybe it comes in margin, but long term when there is a lot of volatility especially when prices are going down our margins are going to be strong and vice versa when it goes the other way.

Okay. And then switching gears to expenses quickly. I know you guys flagged a lot of new stores, big stores coming on line is worth about $1 million to $1.5 million I guess a quarter. First of all, is there any offset there? And then the second thing is as expenses go you guys have a lot of, I believe, full time employee with Obamacare now going into effect it looks like. Talk to me a little bit about what that is going to do your expenses this year. And I am forgetting when Obamacare really kicks in. I think it is 2014. And then next, do you have to make substantial changes on how you deal with your employees?

On the first point I do not have an offset that comes to mind around the expenses that we are experiencing as we accelerate our new store growth. I think those are real legitimate expenses that are part of our operation as we are opening up more new stores than ever, we are also having to build up our staff to be able to manage the huge increase in number of land purchases and development work that is happening here at Susser. With respect to the impact of the new healthcare frame work, it will not have a material impact in 2013. In 2014 we think it will, and it will be inflation that we will realize in the benefit line, or if we try to create incentives to move our work force from less full time to more part time than we probably would experience wage pressure in the part time labor line. We are spending a lot of time thinking about this issue.

But we do not have enough information and the framework is not defined enough to begin to really quantify what the potential impact is or how we should best respond in the market place. Today we feel that our benefit programs which are very, very highly rated by our employees are a huge competitive advantage. And unfortunately we may not be in a position to maintain that competitive advantage against the retailers and other businesses that we are competing for on the labor front. It is a challenge for our business and we are going to work hard and creatively and sort through it over the next year.

Thanks very much.

Our next question is from the line of John Lawrence with Stephens. Please go ahead.

Good morning, guys.

Hi John.

Sam, would you just touch base a little bit, I do not know if you can segment the legacy stores versus the larger stores and give us a sense of the capacity at those smaller stores is continuing to do fabulously well, and give us an idea of the sense of the split of the growth and the capacity at each one of those models and I know there are several variations of that, but basically those legacy stores and then the larger ones please.

Okay. So directionally the legacy stores tend to be about 2,400 square feet to 2,800 square feet. 90% of them do not have food service. The strongest of those stores can do maybe $2 million in merchandise based on today's pricing, but they average much less than that. The 5,000 square foot model that we have built so many of, we have built over 100 of them over the last 12 years, the highest volume of those stores and this is off the top of my head, John, would do $3 million in merchandise but would average again less than that. But where they get limited is the amount of food service that we can push through the box.

The format that we are building a lot of right now especially when we are in rural areas and small towns with the 6,800 square foot box allows us to do, we think, $3.5 million to $4 million a store, but we could do a $1 million of that in food service which is maybe twice as much as we can comfortably do in the restaurant operation at the smaller box. So the big change for us is kitchen capacity and an increased serving line and increased seating for our customers. The bigger box really helps us deal with higher volume food operations which as I mentioned before always drive related sales.

And you can still comp somewhat even in those legacy stores on the base products?

Credit to our team we have been generating single-digit comps out of those legacy stores for 24 straight years now. The stores with food service, the bigger boxes have a 100 basis point to 200 basis point larger comp over the long term than the smaller ones. But we have been able using technology, investing back in the stores upgrading, remodeling, keeping them fresh, putting in new or different beverage equipment, we have been able to squeak out positive increases year after year and we work very, very hard to maintain that track record.

And not to belabor that point, but you mentioned you called out the Houston stores. We have seen some of those larger stores north of Houston. Would that be just coming out of the ground at stronger volumes right out the box, is that really what you are calling out there?

The food operation is coming out of the ground very, very strong in that area, John. We are very, very pleased with the way that market is responding to Laredo Taco Company. In terms of what markets are producing the strongest fast starts for new boxes it is the Eagle Ford Shale and it is the Permian Basin, and the stores we are opening in those markets, they're hard to get to. So a lot of miles from any commercial airport, but they are doing tremendous business. It is very challenging operationally. Labor is in very high demand, but we are figuring out a way and just ecstatic about the sales results in those regions.

Great. Thanks for your help. Good luck.

Thank you.

Our next question from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good morning. My first question is in regards to the store openings. So far you have opened 15 year-to-date; wondering how many of these are in your largest format meaning those that include the capacity to serve 18-wheelers, and if you could talk about how many of the future and new store openings through 2013 will be in that largest format and could you also just remind us as to the difference in fuel volume for those locations versus the smaller locations?

We have been building so far this year about 50% of the stores are the larger format, but only a few of this year's stores will have dedicated truck diesel. Next year about 75% of the stores we expect to be the larger format with a handful of them having the dedicated 18-wheel diesel program. Did I get at the heart of your question, Anthony?

Right. I just wanted to know also the difference in fuel volume if you could quantify.

I am sorry. So stores with the dedicated truck diesel large format, they could do 4 million gallons, 5 million gallons, 6 million gallons a year; some have even done 8 million gallons or 10 million gallons. Pulling those stores out of the mix entirely the new stores do about 2 million gallons to 2.5 million gallons. If you average all the new stores together they have been averaging about 2.75 million gallons a year.

That is helpful. Just a quick other question in regards to cigarettes. If you could perhaps quantify the same-store sales excluding cigarettes and also what the margin impact or how much of a drag was attributable to cigarette margins, that would be great. Thank you.

Same-store sales excluding cigarettes for the quarter were up over 8%, about 8.4% -- I am sorry, this year was 6%, same-store sales excluding cigarettes. Same-store cigarette sales were up about 4.8%, and that is a reflection of more units per store in a very small amount of inflation in the cigarette category primarily driven by increased units of cigarettes. And the cigarette margin, Kevin, can you help me with that for the quarter.

For the quarter it was just a slight impact, nothing major. About maybe 10 basis point to 15 basis points reduction.

Reduction of the total merchandise margin because of the impact of cigarette margin.

Got it. Thank you very much.

Thank you.

Our next question is from the line of Ben Brownlow with Raymond James. Please go ahead.

Good morning. Just to follow-up on the last question the cigarette margins, can you discuss where you are competitively on cigarettes and how you are expanding cartons? And is that a result of being more promotional or more competitive in that category or do you think it is a result of other categories outperforming?

Ben, we have been striving for years to price our stores one store at a time, and not every single store has unique cigarette pricing but many of them do, hundreds of them do. And that by-store work has helped us maximize the category for sure.

Okay.

Ben, this is Steve. I would add that the oil and gas markets and low unemployment, new people moving in, lots of growth demand too is also helping unit sales. So overall we have bucked the national trend significantly in terms of demand and sales which has also driven cartons.

The other thing in the category cigarettes for us are showing a little bit of growth and we are very grateful for that. We are seeing substantial growth in what we call tobacco or smokeless categories, and that is probably a long term trend that we are seeing and will continue. I think people are going to shift from cigarettes to the smokeless area and that is a real healthy, bad pun, that is a strong trend positive for our business.

Great. And just one more for me. I believe you mentioned earlier in the call $100,000 per store near term OpEx pressure as they open. Can you give a little more color on the timing and the flow of that, and is that all personnel deleverage short term?

It is largely the associated efficiencies, new crews. We want to staff the store appropriately while we are building that initial volume and we probably are more aggressive as a pricer typically when we open that volume too, so all of that tends to combine to affect the cash flows in the early days as we establish a store, establish it in a neighborhood, make sure that the service is excellent, establish first impressions, and that investment is a story for us; it has paid us really well. When we look back at the class of stores that we have built the last year and a half they continue to meet our long term objectives in their first, second and third years and it just happens to be that we are in a period where so many are moving through the system at once that you can feel the effects in the financials.

Great. Thank you.

Our next question is from the line of [Jarron Holder] with Barclays. Please go ahead.

Good morning. You alluded to the first 15 stores being dropped into The Partnership earlier than expected. Is it fair to assume that the remaining stores may also be dropped in sooner depending on construction plans being completed earlier than expected?

The MLP has the option acquire 15 stores in the first 12 months, but it is definitely possible and probably likely that in the first 12 months it will exceed 15 stores. That will be timing of construction and other things. But right now what is visible to us we expect to get 14 or 15 stores dropped in by the end of April next year.

Okay. Also can you comment a bit on the M&A landscape for both Susser and The Partnership and any potential joint deals maybe that are out there that you could do?

We continue to explore various opportunities. If we are able to move forward on a project, most scenarios that we could envision would be a shared acquisition for both entities with the wholesale distribution being acquired and probably funded by the MLP and obviously any on the retail side would be of Susser Holdings. We do not comment on any particular opportunities but that is our approach.

Okay. Thank you.

Thank you.

Our next question is from the line of Karen Short with BMO Capital Markets. Please go ahead.

Hi, there. Just a couple of questions following on the unit growth for next year. How many of the stores are in markets where you already have a pretty good penetration, meaning I know you pointed out the expense pressure, but you have also said in the past that when you open stores in markets where you have good penetration they ramp a lot faster; just trying to get a sense on that.

We have five or six stores targeted next year within the state of Texas that are probably over 100 miles from any of our existing locations, so there is one region that we are looking at that would be a new market entry for us, but we are starting to get more and more penetration in our other markets, so I would leave it at that. Of about 30 stores next year about six of them are really expected to be in totally new markets.

Okay. Are you getting to the point where there is any impact of cannibalization from opening new stores or we are still a long way from that?

The short answer is, we are a long ways away from that. This is an enormous area. Houston has added 97,000 jobs just in that city this year. That is almost as many people that work in Corpus Christi. It is tremendous growth and there is a lot of opportunity to continue to invest and grow in this market.

Okay.

Not just Houston overall.

Right. Are you at the point where you can give a range of CapEx for fiscal 2013?

Karen, it is going to be a big number, but we are not at that point. We have not gotten through that approval process and review process with our Board of Directors, so we are not in a position to give that number yet.

Okay. And then just two housekeeping did you give what diesel margins were and if you did not could you give those?

Diesel margins were in line this quarter with our fuel. They were about --

Karen, they typically run a few pennies higher than gasoline and this quarter was in line with that.

Okay. And last question just on the interest expense it sounds like the May 2013 bonds you will use the proceeds is it fair to say a large portion of the cash balance will be used to pay down those 8.5 bonds or how should I think about that?

That is our plan, Karen, and short of something significant developing on the M&A front that is the plan we have for using that cash and we hope to effect a very strong refinance that lowers our cost of capital substantially.

Great. Thanks.

Thank you.

Our next question is from the line of Lee Giordano with Imperial Capital . Please go ahead.

Thanks, good morning. Can you talk about Laredo Taco performance in the quarter and how that has been trending ? Is it comping inline with the overall merchandise comps, and then also what can you say about food costs are you seeing any inflation there? Thanks.

I will take the inflation first, modest. There is some pressures out there as we continue to grow our store count and grow our units per store we have been able to get into a little bit better and better brackets and have been buying a little bit better and that has mitigated the inflation, but there is some in inflation in the food service arena for us. Not enormous, kind of low single-digit inflation pressures which we have been able to manage. Our key focus is not worrying about taking price and covering inflation it is driving unit growth and improving quality and trying to deliver on fast, fun, friendly and delicious. Our food service growth has generally been in line with the rest of business over the long term, some quarters it is little above some it is a little below. But it is very, very in line with our trends.

Thank you.

Thank you.

Our final question is from the line of Ben Brownlow. Please go ahead.

Thanks for taking a quick follow-up. You may have mentioned this earlier if you could give what are the net closures on wholesale dealerships for next year?

We do not have visibility into closures this far out. I spoke with our team in advance of this call and we really do not have visibility into it, but it would not be surprising to have 15 to 20 closures in a given year, but they do tend to be much lower volume than the sites that stay in the portfolio.

Wonderful. Thank you. And great quarter. Thanks again

On average we are losing about 15 sites a year from the net work on a long term average basis.

Ladies and gentlemen, that does conclude the question-and-answer session. I would now like to turn the call back over to Mr. Susser, President and CEO. Please go ahead, sir.

I am sorry we weren't able to take all the calls today. Please do not hesitate to reach Mary myself or any member of the management team with your follow up question. We decided to combine the Companies into one earnings call today on this first call to ensure that investors and analysts had a good understanding of the ongoing operating financial relationships between Susser Holdings and Susser Petroleum Partners. We wanted to try to help answer your questions regarding how to accurately model both Companies.

I hope that our prepared remarks were helpful. We know they were lengthy. We will shorten them for sure going forward. We are available to help with any questions you have, and we would appreciate your feedback on this call and how we can make it better and more effective for you. You guys are our shareholders and our stakeholders. So thank you for your time, and please come down and see us and come try the tacos. Take care.

Ladies and gentlemen, this conclude the Susser Holdings and Susser Petroleum Partners third quarter 2012 earnings conference call. A replay of today's conference will be available in this morning's news release. ACT would like to thank you for your participation. You may now disconnect.