Sunoco LP (SUN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Susser Holdings and Susser Petroleum Partners' first quarter earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would like to turn the conference over to Chip Bonner, Executive Vice President. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us. This morning, we've released our first quarter 2013 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners. Our news release were broadcast to our email list. If you'd like to be add to one or both of those lists, please send your requests via the IR pages of our websites, and we will be glad to add you. A replay of this call will be available on the web for at least 60 days via our telephone replay until May 15. To access the replay on the web, go to our IR pages, either at www.susser.com or www.susserpetroleumpartners.com. You will find the replay instructions in this morning's earnings release.

A reminder that today's call will contain 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 risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in the Company's Form 10-K reports for 2012 on file with the SEC. During today's call, 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 for reconciliation of each financial measure.

A reminder that the information reported on this call speaks only to the Company's view as of today, May 8, 2013. So time-sensitive information may no longer be accurate at the time of any replay. With me on the call today are Sam Susser, Susser Holdings' CEO, Steve DeSutter, the President of our Retail group, Rocky Dewbre, the President of our Wholesale group, and Mary Sullivan, our CFO, and other members of our leadership team. Now I'll turn the call over to Sam Susser.

Thanks, Chip, and good morning, everyone. We delivered solid first quarter performance with same-store sales up 4.2% year-over-year, and up 11% on a two-year stacked comparison basis. Overall, merchandise sales rose 9.5%, compared to a year ago. Fuel volumes were also strong, up nearly 6% for retail and wholesale combined. Average retail gallons sold per store increased 4.1%, versus a year ago. Retail fuel margins before credit card expense came in at a very strong $0.166 cents per gallon, after deducting the $0.03 margin Stripes now pays to the partnership. That's almost $0.07 a gallon higher than the average of the first quarters for the previous five years, on a comparable basis, and $0.033 better than the same period last year.

Consolidated gross profit increased about 20% versus the first quarter of 2012, and our adjusted EBITDA was up almost 39% from a year ago. I should point out that we're going up again an 8% comp in the second quarter of 2012. Also, Easter fell in Q1 this year, versus Q2 last year, so the calendar change will have a negative impact on our second quarter sales performance comparison. We don't spend a lot of time giving the weather report, especially after so many companies have flagged the issue. But like others, so far in 2013, we have had significantly more cold weather days than the prior two years, and that's had a measurable affect on our numbers. The strong economy in our region also is attracting significant numbers of new retail competitors, including expansions by the dollar stores, drug stores, and large box retailers offering fuel. In addition, in certain markets, we're seeing an increase in the number of new convenience stores, being built by traditional operators.

In the wholesale side of the business, we saw an overall 4.4% growth in total gallons distributed, and a 6% sequential increase in distributable cash flow, compared to the previous quarter. We continue to be most pleased with the performance of Susser Petroleum Partners, and remain bullish in our ability to drive growth in distributable cash flow in the years ahead. Rocky will provide some highlights for the quarter in a moment. Our Board yesterday declared a first quarter distribution of $0.4375 per Susser Petroleum Partners common units, to be paid on May 30 to shareholders of record as of May 20. The payout amounts to unit holders -- partners is $9.6 million, and distributable cash flow represents coverage of just under 1.1 times. We mentioned in last quarter's call that we would evaluate increases in the quarterly distribution later in the year. Assuming the business continues to grow on its current trajectory, we could be announcing our first increase to the distribution as early as next quarter.

Looking at the longer term, we remain quite bullish on our regional economy's potential, and we expect a combination of new manufacturing plants, including refinery expansions, new chemical plants and steel plants will help drive the employment base higher in our key markets over the next few years. Now I'd like to turn the call over to Steve DeSutter, President of Stripes, for a more detailed look at our convenient store operations. Steve?

Thanks, Sam, and good morning, everyone. Well, despite the weather-related challenges that Sam described earlier, we continue to see a modest pickup in our same-store average customer count versus the prior year. Same-store average transaction size also grew nicely, accounting for about three-fourths of our comp growth, which reflects both an increase in the basket size and some price inflation. Our merchandise sales performance in the first quarter was led by increases in beer, food service, packaged drinks, cigarettes and snacks. Gross profit was driven by same-store dollar increases in packaged drinks, food service and snacks.

Our Laredo Taco Company concept continued to perform very well in the first quarter. Although we've experienced some food and supply cost pressures over the last year or so, we didn't see meaningful inflation in our food or other costs in the quarter. We are continuing on the outlook for supply alternatives that will allow us to contain our costs in the food business without compromising quality, so we can offer strong value to our customers and maintain and grow our market share.

Cigarette sales increased year-over-year, continuing a multi-year trend. However, cigarette margins were weaker in the first quarter. Even though we outperformed regional and national cigarette sales volume trends, we are not immune to the long-term national decline in the number of cigarettes being sold. Fortunately, our Stripes chain is much less weighted to cigarette sales than most of our competition. About 19% of our total merchandise sales this last quarter, so it will be less of a factor for us as we go forward, than it is for other C-stores.

Retail fuel was a strong contributor again in the first quarter. Total gallons per store increased 4.1%, with growth in gasoline and diesel, both contributing fairly equally this quarter. Sam covered our very strong fuel margin performance for the quarter. As you'll recall, our quarterly margins are unpredictable, but tend to be stronger in following fuel price environment and during periods of volatility, which we experienced in the first quarter.

Looking now at our new store development activities, we opened four new Stripes stores in the first quarter, and opened two more large footprint stores in April. We currently have 14 more under construction, and expect four of those stores to be open by the end of the second quarter. Among the new stores we recently broke ground on are three stores located along Interstate 35 corridor in Waco and the surrounding areas of Central Texas, which is a new market area for us. We still expect to open a total of 29 to 35 new stores this year. While we're pleased with the overall results for the quarter, we did, as expected, encounter significant startup costs associated with the large number of new stores that we have opened in the last two quarters. As mentioned in our last few earnings calls, it normally takes about six months for new stores to turn cash-flow positive. The effects were amplified in the first quarter, since this is traditionally our lowest average per store sales period. Additional training costs, preparing for a higher number of new stores about to open, and increases in benefit costs also put pressure on personnel costs.

On a same-store basis, personnel costs rose about 100 basis points during the quarter, versus the prior year. Our new labor management tools we discussed with you at our Analyst Day and continued management focus on these results will improve progress as we move through the year. Our management remains razor-focused on enhancing our operations, streamlining the new store opening process. We've also increased our attention to reducing employee turnover, which has been a challenge as the economy has gained steam in Texas, especially in markets such as the Permian Basin and the Eagle Ford Shale areas, where we're competing with oil-related companies for workers.

We're making thoughtful investments in technology, recruiting, and on training and building depth in our management team, and improving our skills of our work force, which we believe will help us to continue to improve customer service and drive sales growth in the coming years. We're also making a number of revenue-generating investments in ice making, fresh food displays, and a new fountain wall concept that offers even more variety to our customers. The first one of these will be in operation this quarter, and will be tested in five or six new stores this year. Now, I'm going to turn the call over to Rocky Dewbre for a more detailed look at the Wholesale Fuel segment. Rocky?

Thanks, Steve. Good morning, everyone. A reminder that the wholesale results that are consolidated into Susser Holdings' financial statements consist mostly under the operations of Susser Petroleum Partners. But our overall wholesale segment in Susser Holdings also includes the consignment dealer and fuel transportation businesses that were not contributed to the partnership as part of the IPO last September, and will remain with Susser Holdings.

Now, let me begin with a review of Susser Petroleum Partners' results, comparing the actual first quarter 2013 results against pro forma Q1 2012 numbers. Volume sold to third-party customers, that is independent dealers and commercial customers, increased 1.7% year-over-year, to 115.8 million gallons. Gross profit on these third-party sales increased by 20% to $5.8 million, and margin per gallon increased to $0.05 per gallon, from $0.042 per gallon a year earlier. The margin improvement was largely driven by strong performance in our commercial fuels business. Gallons sold by the partnership to Susser Holdings for resale at Stripes stores and independently-operated consignment sites increased by 5.7%, versus the prior year period to 251.1 million gallons. This growth mainly reflects gallons sold by new Stripes convenience stores. The partnerships' average fuel margin for all gallons sold was $0.036 per gallon in the first quarter, versus $0.034 per gallon a year earlier, on a pro forma basis.

Total gross profit for the partnership was $15.6 million, which is up 15.2% from the first quarter of 2012, on a pro forma basis. Adjusted EBITDA was $11.2 million, and distributable cash flow was $10.4 million. We did see an increase in G&A expense this quarter, versus the fourth quarter of 2012. Of the $700,000 increase, almost half is due to additional non-cash stock compensation costs. The balance is largely due to expenses related to running a separate public company that was not reflected in 2012 results. During the first quarter, we purchased six stores from Stripes, at a total cost of $26.1 million, and are receiving the annual rental income of $2.1 million, in addition to the $0.03 per gallon on the fuel sold by these big box stores. In April, we also purchased the two stores Stripes completed to date in the second quarter. Since our IPO, we have dropped down a total of 16 Stripes stores, at a total investment of $65.4 million, which will produce annual rental income of $5.2 million, in addition to the $0.03 per gallon on all fuel volumes sold at the sites.

Now, looking at the consolidated Wholesale segment of Susser Holdings. Adjusted EBITDA was $12.3 million, compared to $5.2 million a year ago. Of the $7.1 million increase, $6.5 million represents the new $0.03 per gallon markup on gallons sold to the Retail segment that we didn't have a year earlier, prior to the IPO. The balance reflects the increased gallons sold and higher margins. Our Wholesale segment added five new dealers in the first quarter, and discontinued five, which leaves our independent dealer count at 579 locations, as of March 31. Although our independent dealer count was flat on a net basis at the end of the quarter, our pipeline of new dealer customers continues to build, and we still expect to bring on 25 to 40 new contracted wholesale sites in 2013. We've also been busy growing our commercial fuels business, with customer count increasing by over 60 during the first quarter, which brings our total active customer count in this segment to over 1,700. We also continue to explore acquisition opportunities to further enhance our growth. And now, I'll turn the call over to Mary Sullivan to walk you through the financials. Mary?

Thanks, Rocky. Good morning, everyone. Before I begin, a quick reminder that our Susser Holdings results fully consolidate the results from Susser Petroleum Partners, with the minority interest share of the partnership's next income deducted as non-controlling interest. So looking at the consolidated results of Susser Holdings.

This morning, we reported a first quarter net loss of $232,000, or $0.01 per diluted share, versus a net loss of $528,000, or $0.03 per share for the first quarter of last year. Adjusted EBITDA was $31.8 million, an increase of $8.8 million from a year ago. As was the case in the fourth quarter, most of the increases in operating expenses in the first quarter were related to the substantial increase in our store count, which Steve touched on earlier as relates to our labor cost. Other operating expenses as a percent of merchandise sales were in line with first quarter last year at 16.2%. G&A expense in the first quarter increased by $3.2 million versus a year ago. The majority of the increase reflects the increased personnel and all the other related costs in accelerating our growth. Approximately $500,000 of the increase is related to non-cash stock compensation expense. And another $500,000 of the year-over-year increase was related to Susser Petroleum's cost of being a public company, which we didn't have the first quarter of last year. The rate of growth will level out as the year progresses. We continue to expect our 2013 effective tax rate to be between 26% and 29%. This rate would apply to pretax income before deducting minority interest.

We're very pleased with the refinancing we initiated in early April that will lower our pretax annual interest expense by $30 million to $32 million. This is reflected in the updated interest expense guidance in this morning's earnings release. The rest of our full-year guidance ranges have not changed. The new revolver includes an accordion feature that allows us to expand it by an additional $100 million. And as a reminder, Susser Petroleum Partners has a separate $250 million revolving credit facility that also has a $100 million accordion feature. Susser Holdings' liquidity position remain the strongest in our history, with a trailing 12-month net debt-to-adjusted EBITDA ratio of 1.1 times. As of March 31, we had nothing drawn on the parents' revolving credit facility. The partnership had $58.6 million borrowed on its revolver at quarter end. Total capital spending for Susser Holdings was about $42 million for the first quarter, of which two-thirds was for new Stripes stores and land. Of that total capital spending, $27.9 million was spent at the partnership level, which primarily reflects the drop-down of stores, Rocky -- Stripes stores that Rocky mentioned. Now, I'll turn it back to Sam.

Thank you, Mary. Operator, we're now ready for any questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Bonnie Herzog with Wells Fargo. Please go ahead.

Good morning, everyone.

Good morning, Bonnie.

I guess my first question is weather-related challenges that you mentioned in the quarter. Could you talk about some of the initiatives that you actually can control during this quarter to offset the colder weather, especially since you're lapping the strong quarter from last year as you've mentioned. And then, can you give us a little more color on what drove your slightly lower merchandise margins this quarter?

Sure. We are paying particularly very, very, very close attention to what's going on in our market. Pricing promotions from our competitors. We are tracking sales trends for each of the core categories of our business. What's happening within the industry within our region. We are working on driving growth in the food service. There is a certain region of the Company, for example, that is underdeveloped, with respect to the breakfast day part. And we have a very significant initiative working there, to bring that up to where we believe it ought to be.

The initiatives include sampling, television advertising targeted at this one region. So we're very one store at a time, one community at a time, paying attention and trying to respond. We are upping the ante on our local store marketing efforts. And for better or worse, this is--there's not one big idea that creates success in the convenience store business. It's blocking and tackling, and getting hundreds of little things lined up. And we are definitely paying attention, because there is some softness out there. And we're trying to be sure we're not leaving anything undone.

With respect to the margin, over the longer term, Q1 is generally the softest margin quarter for our Company. We feel pretty good about the outlook for merchandise margin as the year rolls on. There were some timing differences in rebate recognition, especially as it relates to the cigarette category. So we had--there's just going to be some lumpiness for us in that recognition, and we expect cigarette margins to improve and stabilize a little bit from where they were in Q1, although the long-term trend in the category, as you know as well or better than anyone, it's a tough category. But there's some timing differences that impact the margin in Q1.

We feel pretty good about the outlook for merchandise margin for us. It's very, very solid. We hope to see a return to big strength in comp's when Texas summer finally arrives. It hasn't shown up yet, and it was supposed to have been here six or eight weeks ago. But the margin side of the business feels real solid.

Okay. And then speaking of cigarettes, I actually had a question for you regarding the potential for sharp federal excise tax increase. Although I think the probability that this happens is low, if it were to occur, what impact would this have on your business? I guess I assume traffic would be negatively impacted, and therefore, merchandise sales. And I guess I'd be curious to hear how you--your business was impacted in 2009, when the SET increased to $1.01 per pack, and what initiatives you implemented to try and offset some of that.

Yes, we did see a down-shift that kind of killed off the end of the carton business.

Right.

That last month. And our profits weren't really impacted that much, because the customers moved from the carton to the much more profitable single pack. That trend, though, is--it is behind us. And I think an increase in excise tax would be a slight headwind for us, for the reason you cited, because a little bit fewer people buying cigarettes. And we obviously are mindful of that.

I think longer term, we're going to be in the cigarette business. We're going to be a very big committed player, because of the traffic it drives and the related sales that come with it. I think though at some point, there'll probably be some retailers that ought to get out of the cigarette business. Not the convenience store side, but in some other formats, because the profitability seems to be kind of leaving the sector for those that are low market share players. The convenience store industry, I think, is going to continue to represent this segment well.

Okay. Just a final question. Is--on the loyalty program potential, you've alluded to this as being an opportunity for you. And I'm curious, are you any closer to being able to discuss this potential?

Bonnie, this is Steve. I--we're not--no. We're not close enough to discuss its potential. But you should expect that we'll have a program in place before the end of the year.

In test--

In test. And we're evaluating what we see other retailers and other retailers in the channel are doing. And we're moving on with our plan, but it will take a while. You've got to be thoughtful about a program like that. When you make a promise to consumers, you need to be able to keep it. And we want to make sure we do that.

All right. Thank you.

Thank you.

Thank you. Our next question comes from the line of John Lawrence with Stephens. Please go ahead.

Good morning, everyone.

Hi, John.

Sam, would you discuss a little bit the competitive framework and the landscape, and maybe a deeper dive into which markets, which categories have you seen over the last three months. Is some of that competition in certain categories intensifying? Which one would they be? And what type of player are you seeing most of that competitive stress on?

The competitive landscape, this is the double-edged sword of being in the great state of Texas. We have great demographics, real strong economic outlook, but it's no secret. And there are lots of big national players that are increasing their square footage and the variety of formats. And the traditional truck stops and convenience stores are starting to plant more flags. When that happens, often the grand opening impact, as these competitors get their stores going is--can be felt within a region, and that'll be cross fuel, cigarettes, beer and soda, usually. But the biggest impact will be on fuel.

I would say looking at the retail landscape, Walmart seems to be very, very, very focused on some of these big core categories that they're wanting to increase their share in. Beer would be an example, where we see them being very, very committed to growing their share, and also plenty aggressive on the packaged beverage side of the business. Not that our well-regarded regional supermarket chain is trying--is prepared to cede any ground. It's a battle of the titans down here. They're very strong.

The food service competition--it is very competitive, but not materially different than a year ago. It was hand-to-hand combat a year ago, and it still is. But the value that Laredo Taco offers with homemade, delicious food at compelling prices is doing well, and it remains a real strength of our business, and we're grateful to be in the category. I think that--you know, I would say that our fuel is volatile, largely because of the direction of fuel prices, and everybody's aware of that. But it's also volatile because of what happens on the street, with gas wars and grand openings, and that sort of things. So the competitive landscape there is not different than in the past, but with more new openings out there in the marketplace, fuel margins are likely to be plenty volatile over the next year or two, as people move in to take advantage of the growth here in our region.

And Sam, just to follow that, would the Houston marketplace, where you've got maybe less density, be--would it be more of an issue in that market maybe than down in South Texas?

I think the market dynamics of any of the many markets that we are in are a little bit unique, John. But I think where we have lots of stores, we go to market a little bit differently than where we have fewer stores. And so, Houston kind of falls into the latter category, but I think it has more to do with our penetration, as opposed to the dynamics of the city itself. I'm not sure I got to the heart of your question, John, but--

That's fine. That's fine. That's helpful. Thanks, Sam.

Okay. Sure.

And our next question comes from the line of Irene Nattel with RBC Capital Markets. Please go ahead.

Thanks and good morning, everyone.

Good morning, Irene.

Just following on John's question, you know, you're in a bit of a Catch-22 situation here, because as you roll out your store base and as you expand into new markets, by definition, you're going to have fewer stores in those new markets. So as you plan your expansions, I think you said you were going to have three in Waco, or on the corridor near Waco. Is that really how we should think of you doing it, sort of really going--going in with what you perceive to be minimal critical mass on store counts, so that you can establish that footprint and be a presence in those markets?

Yes, Irene. This is Steve. That market, as we said in our comments, is three under construction. There are more planned. So over a one or two-year period, there's a--that region up and down I-35, Stripes will become a well-known brand. It's just a matter of pacing and timing. So you should expect to see us go in, in a bigger way than any one market opening a new market with just three. Our plans are for more than that. We just haven't been specific with the marketplace about how many more.

Okay. And presumably you're not going to be, Steve? (laughter)

(laughter)For competitive reasons. We still have lots of profit in the negotiation process. We just--we don't want to give a lot of guidance on how many stores are in the planning cycle for what particular market. But we certainly don't enter a new market with a view to being it three or four stores. That's not enough to be efficient. And take--or take advantage of the strengths of our brand and our offering.

Understood. Thank you. If I could just ask a question about competitive activity. The roll-out of cigarettes into some of the dollar store players has certainly been a topic of conversation. And just wondering whether within the context of this competitive intensity that you're talking about, Sam, whether those dollar stores are a big factor, really whether it's more some of the other cate--some of the other sect channels.

Yes. The--we were with one of our key suppliers yesterday. And they said just a few cigarettes times 15,000 stores is a lot of cigarettes. And--but they aren't--I don't think they've enjoyed a meaningful success yet with their roll-out strategy. But they're such big companies, their expansion into these categories like salty snack and soda, and dairy and cigarette, it is definitely having an impact, but it's not huge. It's really a combination of multiple channels. Some like the dollar store are broadening their offering to go after that core convenience-driven customer. Some are putting down more stores. The drug store channel is a very good example of that.

We continue to see rapid acceleration amongst these big footprint drug stores that are also, like us, seeking to fill that in-between shopping occasion between visits to the great big, giant retailers. And you know, end growth from a number of other formats that I've previously talked about. So it's a little bit dollar store, it's a little bit drug, it's a little bit traditional convenience, it's a little bit of the great big boxes being more aggressive, trying to drive their own same-store sales growth. In a consumer environment that is feeling the pinch of higher payroll taxes and employers that are feeling uncertain with the impact of health care reform next year, it's--it's a challenging environment. We remain so grateful to be in this part of the country, but we are not immune to the headwind's that consumers and businesses are feeling across the country.

That's great. Thank you. And finally, one last one, if I may. As you look at the stores that have opened recently, are you seeing any impact on the way they're ramping? Are you still very happy with the way they're ramping?

We are really pleased with the sales ramp. Our labor efficiency is not great in the first three, four, five months. But we're pretty optimistic that it will improve, as other stores have. They work through the maturation cycle. But we're very pleased with the overall volumes that we're getting, especially with food, and we've been pretty pleased with the fuel volumes. We're--it's taking us a little longer to build the core merchandise categories, the non-food service categories. There are certain markets where they don't know Stripes, and they don't know about the consistently good value we offer on a lot of take-home packages that other convenience stores don't go after in the way we do. And with the passage of time, our experience is, we will--we will earn that vote of the customer by being consistent out there. So a little slow on the merchandise side, good on food and fuel.

That's great. Thank you very much.

No, thank you.

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

Hi. Good morning. Just wanted to--

Hi, Kelly.

Hi. Just wanted to touch on expenses for a second. They just seemed a little bit elevated this quarter, and I know you guys have talked about that. But I think you mentioned, you know, personnel expenses, at least in your same-store base, also deleveraged by about 100 basis points. I was wondering if you could touch on what's driving that? And then, if you still expect to leverage expenses in the second half.

Yes. I really appreciate the question, Kelly. It's something we would like to expand on. We were hit with a big change in the weather pattern in January, and we had a foot fault. We did not adjust our labor spending as quickly as we should have, and as fast as the standard at which we told ourselves, and our expense controls started off not where it should have been. And Steve and Richard and the team are making progress, tightening those sales, and it continues to get better, and we do expect to get leverage. As we've talked about in prior calls, really starting in the second half or fourth quarter of this year, because at that point the rate of acceleration of new stores will have worked its way through the system.

You know, we're adding 800 to 1,000 new employees a year now, and we have to bring them on board in advance of when the stores open. So there's quite a bit of labor that's in our same stores before they move into the actual opening of the new stores. And as you know, they're not efficient in the first six months of a new store operation. So we've definitely ramped it up, and it's going to be a full year of ramp-up. And we'll start turning that corner, we think, pretty for sure beginning the fourth quarter, hopefully a little before that. But we have visibility that efficiency ought to start getting really sharp on the operating expense side from the fourth quarter forward. One headwind, health care next year. And before we start thumping our chest about efficiency and operating expenses, we should caveat that, that's going to be a challenge for all retailers next year.

Is there--is there any additional color you can provide on, you know, some early estimates on how the health care will impact you?

Not reasonable estimates, Kelly. It's millions of dollars. It's not tens of millions of dollars. Probably, it is going to be direct health care expense increases, but it will also result in pressure on wages, because of shifts in the workforce. And workers going to have to move from basically being the one company and holding down two or three jobs. The way the rules are being created, there's this unintended consequence that's going to put pressure on employees and companies.

So it's probably--I would rather not quantify a number at this time. We just don't have enough visibility. But we're working it really hard. We're trying to be really smart and thoughtful. And we want to take care of our tenured store employees that are great at customer service, great at delivering food. We don't want to run them off because of the way we go about implementing the letter and spirit of health care reform.

Great. That's helpful. And then--and then, just another one on same-store sales, or a few more on same-store sales. One, I guess, can you quantify, if at all, what you think the impact of the Easter shift was? And then two, can you comment on any regional differences that you're seeing, if any, in your same-store sales trends?

Sure. I'd say kind of 0.5% to 1% on the impact of the Easter holiday. For us, it's a little more than Easter. It's a big holiday in Mexico, when customers take the week off and come up to the South Padre, North Padre beaches. And so, it's a pretty big shift for us, with all the tourist traffic.

In terms of regional differences, there are--there's bumps to every quarter, so I'd rather share more than a one quarter observation. Strength from Houston, Victoria, Corpus Christi, Odessa, Midland, and all the parts in between. Softness in Oklahoma, couple of pockets of North Texas where we are at, and down in the lower Rio Grande Valley, Brownsville, Harlem and parts of McAllen would be kind of the trend we're seeing. So a lot of correlation there to the parts of the region that are benefiting from oil and gas activity continue to have strong trends on volatility, quarter to quarter. And the other areas are seeing patterns that are more consistent with national data.

Thank you.

(Operator Instructions)

Our next question comes from the line of Sharon Lui with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Sharon. Thanks for participating with us.

Sam, I guess given the competition in the market, have you experienced any trends in M&A opportunities, especially maybe a desire for some of the smaller operators to sell?

Sharon, this is Rocky. We're actively looking at the growth opportunities throughout our footprint, and we are seeing opportunities. You know, we--we're looking to grow in a prudent way, and just don't have anything to announce at this time. But we're working it hard, and we--we're hopeful that we'll have some good news sometime in the future to report.

I think that probably the deal flow is on the upcrease--uptick, in terms of how many opportunities we see. But I think there's some seller expectations that are very, very, very, very pricey. And we would really like to continue to grow back proficient. We're working hard on it. And there's some great businesses out there with people and assets we'd really like to bring into the family. But we're going to remain price disciplined.

Okay. That's helpful. And I guess also for the--in the real estate market, given that it's picked up, have you faced increased competition to replenish your land bank?

Sharon, this is Chip. We are seeing competition for corners, both from convenience stores and drug, and so yes, that is--it is heating up. And we remain disciplined about what we're willing to pay for a corner. And we've got a great real estate team out there, turning over all the rocks. So that's just--

We're buying a little bit bigger site. Sometimes that's how we're dealing with it in the marketplace.

We will buy sites that are five acres, and then develop the corner, and then sell off the balance to bring down our total cost. So it's just every corner has a different set of facts and circumstances, and yes, there is competition out there. And we will reach out and buy more greener sites that won't be developed in '14, but may be developed in '15 or '16, but at least we're out on the front end and being able to secure those locations.

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

Good morning. Can you just comment, give us a little bit of an update on the labor hour management tools that you have in place. I know it's a longer term initiative, but just an update on the tests, what you're seeing with the roll-out there.

Ben, this is Steve. We are in the final stages of preparing our training and our execution to fully roll it out to the rest of the business by early third quarter. And what we're seeing is we've learned through our beta, which is why you do them. And we figured out how to make it a more--even more user-friendly and put more usable data in the tool. Our store managers now, when they are going to be able to schedule their labor, they'll create a sales plan. And from their sales plan, they'll schedule their labor, and they'll see their percent of sales right there, in real time, based upon their actual store hours and their actual store labor hour cost.

Tests have been great, very successful. And we realized we had to get them bigger screens and put bigger screens in the stores, so they could see all the information and schedule it quickly. We're making those investments. So it's right on track. We like it, and we and our store managers love it.

I'd like to add one thing, Steve. You and Bob and Richard have developed a very enhanced, robust, general manager training program that we started with in Houston, as we were opening--beginning to open up in that market. Now I've expanded it to West Texas, which is a market that has been the toughest for us for employee retention and turnover.

Yes.

And the initial results there are bringing turnover rates down. And--but we're spending more money in labor. And one thing that I think is relevant here is that we last year were very efficient labor-to-sales in that market, but we just didn't have enough hands on the floor to do the job right. And with the--in this second test market with this program, retention's starting to come in. We're getting better trained people on the floor, making it a better place to work. And yes, it's--we're spending more money, but it's the right money. And I'm glad we're doing it.

Okay. Then just one follow-up. On the higher margin, other revenue category, it was roughly $13 million, the growth was a little bit lower than on modeled. Can you just talk about the dynamics there, and what was driving the growth?

Ben, you're just--you're asking about the growth in the food service category? So higher margin.

Other--other revenue.

I'm sorry.

Part of that, Ben, you get a little bit of lumpiness on lottery, depending on when the big jackpots are.

We cite--last year, there were a couple of enormous Mega Millions sort of jackpots that weren't--jackpots just didn't get as high this year, so we haven't seen the same volume and other income as there was last year. But that is something that's totally random. I know that we are relative to other retailers, performing well in this area. And we're continuing to improve customer service, and investing in new glass screens and so forth. So I think our business is intact there, but I think it probably more relates to the timing of some of those big jackpots.

Thank you. Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good morning. I may have missed this, but what were same-store sales, excluding cigarettes in the quarter?

They were 4.6%, and cigarette sales were up 2.8%.

Okay. Thank you for that color. And also I think, Sam, you mentioned that there was a timing issue with the rebate recognition. Could you perhaps quantify or at least give us more color about the magnitude of that?

Forgive me for slagging here, there's a lumpiness that affected about five categories, the biggest of which was cigarettes. And directionally, about 50 basis points on margin. That's probably Q1 to later in the year.

Okay. So as a result, you do expect that you'll be able to certainly be well within your guidance for merchandise margin, despite being below that range in the first quarter?

Yes.

Right, right, okay.

Anthony, it's a timing difference.

Okay. Got you. Okay--

Our guidance is annual guidance by design, and we don't expect to be within that range on each quarter. We haven't--we would need wider ranges for sure to--because of the great seasonality in our business. So we still--we continue to feel good about our annual guidance. Our Company typically fine tunes that guidance in--after the second and third quarters of the year. And so, we'll continue to look at it real hard when we get together, next call.

Okay. Understood. Okay, thank you very much.

Thank you.

And our next question comes from the line of Ben Wyatt with Stephens. Please go ahead.

Good morning, guys.

Good morning.

Hey, Rocky, on SUPC side, I wanted to see if maybe you can give a little more color around that $0.05 per gallon third-party margin number. Is it just your adds volume spot pricing? Maybe you could just talk a little bit more about that.

Well, sure, Ben. Within that category, obviously that includes our dealer supply customers, as well as our commercial business. And we've had some--some good success in the commercial segment. A lot of great folks out there working hard, trying to pick up new customers. And we've talked about the oil and gas activities and other customer categories within our Commercial segment. But we've done well in that section--in that segment, and that's a chunk of it. With the volatility in pricing, you know, as the absolute dollar amount of fuel is higher one period versus another, that also can impact our margins some. So it's a several different things, it's not any one thing, but the biggest item is the commercial fuels piece.

Got you. Appreciate it. And then, I guess just one more from me. You alluded to it a little on the G&A side. Is this quarter kind of a good run rate for us to use, going forward?

I'm going look to Mary here--

I'll take that one. This is Mary. You know, I think it's pretty close. We are still ramping up some of the costs we'll have of running the separate public company, but being first quarter, keep in mind there's a little bit of lumpiness. Sometimes you have some annual costs that tend to get paid in the first quarter. So short answer is, I think we're pretty close to being there, Ben.

And I look at it as--you know, when we were trying to model this thing out, we--we did the best we could. Overall, for the quarter, our gross profit was a little better than what we had estimated. And our--the cost side was a little higher. Overall, we came in I think pretty well in line with what we expected. But quarter to quarter, we're still trying to figure out what G&A's going to look like, with this new public company.

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

Thanks. Can you provide an update on the trend in shrink and shortages, and how your efforts in technology are working to improve shrink? Thanks.

Lee, this is Steve. We--and I don't have the number right in front of me, but I would say that we were in line with a year ago, maybe slightly better in the first quarter, on our key controllable's. That is coming from technology. And it's coming from, you know, stabilization and improve--some improvements in turnover and store management, who obviously has to be trained to use the tool. So they're working together, and they're largely on plan. We expect to see that improve as we go through the year. But January, again, is one of those--January, February, March, that first quarter is usually a tough quarter for us, in terms of controllable's. So expect to see that improve, but year-over-year, it looks good.

Looks good. The--we've got some low hanging fruit over the last few years, and big baskets of it. And we're holding on to that, and maybe getting just a little bit more. And we hope to get a little bit more in the next few years, but I don't see opportunities for big leverage in that area. Pretty comfortable that we're going to really be able to improve our lever efficiency and effectiveness over the next couple of years further. Less opportunity probably on the shorter side.

Great. Thank you.

Yes.

Our next question comes from the line of Ronald Bookbinder with Benchmark Company. Please go ahead.

Good morning, and thank you for taking my question.

You bet.

Could you talk about blending your own fuel? How it impacts profitability, and how you see your percentage of blending trending going forward?

Sure. Ron, this is Rocky. So when we have the opportunity to blend our own fuel, you know, with the RINs that come along with that, it obviously provides a margin enhancement opportunity. We have increased somewhat our volume that we're blending, and are looking at opportunities to continue to grow our unbranded segment as we are supplying fuel to third parties, including Stripes. So I think last year was--all in for the year was around 5% of the total volume that was bulk. What we call--bulk is what we call our volume that we blend ourselves. And that number is, you know, it's growing, but it's still small, relative to the overall business.

And over time, what percent do you think that could grow to?

Probably hinges on how supply negotiations go with some of the major refineries as we approach contract terminations. Its potential can be very significant. But it really will just hinge on how those negotiations go.

And it is something obviously that we're very aware of and are evaluating options.

Okay. And just on the weather issue, did you have some territ--some regions or some weeks where weather wasn't an impact? And so, if you could sort of tell us how much of a comp impact do you think weather had on you guys?

We haven't had a week yet with a typical Texas 100 degree weekend. We just haven't had one yet. So directionally, you know, the difference between hot and cold is 5% or 10%. It's going to be hot this summer. That's for sure. (laughter) That's highly likely. Blazingly hot in three or four weeks from now. It's coming.

Thank you. Our next question comes from the line of James Jampel with HITE. Please go ahead.

Thanks for taking the call. That $0.05 a gallon margin on the third party customers. I understand from your other comment that you had some new commercial customers that might have pushed that average up. Do you consider that to be sustainable, going forward?

This is Rocky again. So as I think about that piece, we've been in the commercial fuels business for many, many years. That's the roots of our Company, way back with Sam's grandfather, so we're very familiar with the business. You know, the margins in that business ebb and flow just like the other pieces. The level of profitability we achieved in that segment in Q1 is not abnormally high. It's just relative to what it was last year in that segment. It was higher. So yes, I would say that--let me say it differently. The overall margins we're achieving in that segment are not abnormally high, and therefore, over a longer term, I think it would be sustainable.

With some volatility around them.

Absolutely.

Okay. Great. And given your overall statements on the increasingly competitive landscape you see there--(technical difficulty) All goes to plan?

Yes, we're looking at the second full year of operation of the MLP versus the first. We feel that our business remains on track to achieve that objective.

Okay. Thank you.

Thank you very much.

Thank you, and our next question comes from the line of Suzanne Franks with Vivid. Please go ahead.

Good morning.

Good morning, Suzanne.

I was wondering what your competitive expectations might be for CST brands, which was just spun out of Valero recently.

You know, they're a well-run competitor that we have some overlap in deep South Texas and in Houston. They have run their business well and been innovative. And we see signs of them accelerating new store growth. But they're--in most markets, we don't have much direct overlap. We certainly view them as a healthy, successful competitor, and they'll probably have even more focus in the years ahead. Probably have been very, very busy preparing for the spinoff of this segment.

Right. So you'd say the overlap of your stores is really limited to Houston, deep South Texas, and maybe that overlap is, what, 20% of your stores, or 30% of the store base? What--

Closer to 20%, probably.

20%?Okay.

They have a lot of stores in the metropolitan area-- (technical difficulty) wholesale fuels presence. So there's not a lot of direct overlap with Stripes, but there is with our very valued wholesale customers.

Yes. All right. Thank you.

Thank you very much.

Operator?

Yes?

I think we're at a--at the end of our time.

All right. Let me turn the call back over to Mr. Sam Susser for closing remarks.

Thank you, everybody, for dialing in with us. The Company continues to mature and strengthen, and we appreciate your interest. And we all hope you come down and see us again soon. We really enjoyed hosting those of you that were able to be with us on our Analyst Day, and look forward to doing that again in the not too distant future. Have a great day, everyone. Thank you.

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