Sunoco LP (SUN) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the Susser Holdings, Susser Petroleum Partners second-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, August 7, 2013. I would now like to turn the call 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 released our second-quarter 2013 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners. Our news release were broadcast to our e-mail list. If you would like to be added to one or both of those lists, please send your request 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, and via our telephone replay until August 14. To access the replay on the web, go to our IR pages either at www.susser.com or www.susserpetroleumpartners.com. You will find a replay instructions in this morning's earnings release.

A reminder that today's call will contain forward-looking statements. These statements are based on management's beliefs, expectations, and assumptions and include 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. They are described more fully in the Company's annual reports for 2012 and on file with the SEC. During today's call, we will also 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.

As a reminder, this information report on this call speaks only to Company's view as of today, August 7, 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.

Thanks, Chip, and good morning, everyone.

We were pleased to announce this morning Susser Petroleum Partners' first increase in distribution to our unitholders. The Partnership's Board declared a distribution of $0.4528 per unit, which represents a 3.5% increase over the first-quarter distribution. That is $1.81 on an annualized basis. Distributable cash flow increased by 14% versus the first quarter, to $11.9 million, and the higher distribution represents a 1.2 times coverage. We are very pleased with the performance of the Partnership since last September's IPO. We will, of course, evaluate future increases on a quarter-by-quarter basis, but our goal is to continue to grow our distributable cash flow and be in a position to increase our unit distribution regularly. I will ask Rocky to provide some additional highlights of our Wholesale business in the Partnership in a moment.

Now, looking at our businesses overall in the second quarter, cooler-than-normal temperatures in April and part of May this year impacted same-store sales as compared to a year ago when scorching Texas temperatures drove a near record 8% same-store merchandise sales increase. The year-over-year comparison was also impacted by the Easter weekend falling in the first quarter this year versus the second quarter last year. The calendar difference had a negative impact of 50 to 100 basis points on the second quarter same-store sales. Same-store sales increased 2.2%, but they were up 10.2% on a two-year stack-comparison basis for the quarter.

Overall, total merchandise sales from our 567 Stripes stores increased 8.5% year over year in the second quarter, including the impact of the 28 new retail locations we had added in the past four quarters. Merchandise margin was strong at 34.3%, up 20 basis points from a year ago.

As expected, our fuel margins were softer compared to the same quarter a year ago, which was a record-breaking period for us. We did not enjoy the falling fuel prices this year that we experienced throughout the second quarter of 2012. And this different trend is reflected in lower margins in 2013. The lower Retail fuel margins were partly offset by overall fuel volumes that were 9.7% higher, or 5.5% higher looking at average gallon sold per store, per week. You will note in this morning's release that we have slightly raised both ends of our guidance range for average-per-store gallon growth. Wholesale volume sold to third parties were 1.7% higher than a year ago.

Looking now at new store development. We opened six new large-format Stripes stores in the second quarter and closed one smaller store. Since the end of the second quarter we have opened three more, bringing our new total stores year to date to 13. We currently have 16 additional stores under construction. As you may have noted in this morning's news release, we have adjusted the range of our new store construction guidance and we now expect to open between 28 and 30 stores this year. As a reminder, in 2012, we opened 25 new large-format Stripes stores.

As we have mentioned the last few quarters, it typically takes about six months for new stores to turn cash-flow positive and about three years for them to reach maturity. The negative pressure on earnings last quarter from the unusually large number of stores that opened at the end of 2012 has generally abated, and that group of stores, as expected, contributed positive cash flow in the second quarter. Although we are still quite a way from maturity, this past year's crop of stores continues to steadily improve and it looks like they are on track with our new store performance expectations, which are based on the results we have generated consistently over the past 10-plus years. The number of actual openings this year, although slightly lower than we had hoped for, will still set a new record for organic growth, and we remain aggressive as we explore markets looking for additional sites for future developments.

Now, I would like to turn the call over to Steve DeSutter for a more detailed look at our Stripes store operations. Steve?

Thanks, Sam, and good morning everyone.

As Sam indicated, the unseasonably cool weather in the quarter -- early in the quarter, got us off to a slower-than-normal ramp-up in sales during what is one of the two highest volumes quarters of the year. Our April was weak, with the milder temperatures and the Easter calendar shift; we saw sequentially improved merchandise performance through the quarter. Both merchandise sales and gross profit in the second quarter were led by increases in food service, package beverages, smokeless tobacco, and candy. We were especially pleased with the results from our Laredo Taco Company restaurant concept, outpacing the average merchandise growth, which has a positive impact on gross margin. For those who are interested, comps, excluding cigarettes, were up 2.6% for the quarter and 3.5% year to date.

Retail fuel volume growth was very solid at 5.5%, as Sam pointed out, looking -- when we look at average gallons per store. Diesel sales showed particularly strong growth, which again suggest brisk commercial trade, particularly in the two oil and gas production areas we serve in south and west Texas. As Sam mentioned, the primary driver for lower fuel margins this quarter was the different pattern of fuel cost movements during the period compared to rapidly declining costs through the second quarter of 2012.

Retail fuel margins before credit card expense were $0.182 per gallon, which is after deducting the $0.03 margin Stripes began paying the Partnership last September -- so that would be $0.212 before the Partnership payment. That compares to record margins of $0.324 a year ago, which we did not deduct the $0.03 fee, and $0.246 per gallon on average over the previous five years. However, our year-to-date margin of $0.174 is still $0.017 better than comparable first-half average for the past five years. We are maintaining our fuel margin guidance for the year of $0.15 to $0.18 per gallon.

We have seen some pressure on wages -- more pressure on wages this year than since the recession began in 2008. Also, we shared with you on our last call that we were disappointed with our labor control in the first quarter. Our team has been working hard on this and we are pleased to deliver some improvement in labor cost performance in the second quarter compared to the first quarter. Personnel expense as a percentage of total merchandise was 18.4% compared to an unusually strong 17.7% in the second quarter of last year, but improved by over 200 basis points sequentially from the first quarter. We have just completed the deployment to all stores of the labor scheduling tool we have been working on over the past year. We expect this tool to a give us better real-time visibility into store labor, although it will be likely that it will take several quarters for us to realize its full potential.

We are continuing to invest in technology and training across the organization to help us make a more profitable Company and a great place to work. Competition for workers remain brisk, particularly in the two red-hot oil field markets, and we're very focused on reducing employee turnover, as well as making sure we are maximizing revenue per dollar of labor while at the same time delivering an outstanding customer experience. Our training program is helping in this regard.

Now I'm going to turn the call over to Rocky Dewbre for a more detailed look at the Wholesale business. Rocky?

Thanks, Steve. Good morning, everyone. I'd like to begin with a quick review of Susser Petroleum Partners' results, comparing the actual second-quarter 2013 results against pro forma second-quarter 2012 numbers.

Volume sold by the Partnership to Susser Holdings for resale at Stripes stores and independently operated consignment sites increased 8% year over year, to 264.1 million gallons. This growth reflects gallons sold by our new Stripes convenience stores that have opened during the last 12 months, as well as volume growth in existing stores and at independently operated sites where we sell motor fuel on a consignment basis.

Volumes sold to independent leaders and commercial customers increased just slightly from a year ago, to 124.9 million gallons. Gross profit on these third-party gallons was $6.1 million, or $0.049 per gallon, compared to $5.2 million, or $0.042 per gallon, a year ago. The margin improvement per gallon was driven in part by strong performance in our commercial fuels business, which has benefited from our ability to buy fuel in bulk and take advantage of the recent brands dislocation. The Partnership's average fuel margin for all gallons sold was $0.036 per gallon in the second quarter, compared with $0.034 per gallon a year ago on a pro forma basis.

Total gross profit for the Partnership was $17 million, a 20.7% increase compared to a pro-forma gross profit of $14 million in the second quarter of last year. Adjusted EBITDA was $12.8 million and distributable cash flow was $11.9 million. With the increase in the distribution announced this morning, we will pay out $9.9 million of that to unitholders later this month.

Rental income for the quarter was $2.3 million. We purchased six stores from Stripes in the second quarter at a total cost of $21.2 million. We purchased two more Stripes stores since the end of June for $6.7 million. Since our IPO, we have purchased a total of 22 Stripes stores at a total investment of $89.7 million, including a post-completion true-up. These 22 stores will produce annual rental income of approximately $7.2 million for the Partnership, in addition to the $0.03-per-gallon margin on all fuel volumes sold at the sites.

Looking now at the consolidated Wholesale segment of Susser Holdings, which includes all of the operations of the Partnership plus the consignment and fuel transport business that were retained at the parent level, Wholesale adjusted EBITDA was $15.4 million compared to $8.3 million a year earlier. Most of the $7.1-million increase represents the new $0.03-per-gallon markup on gallons sold to the Retail segment that we didn't have prior to the September IPO. The balance reflects the increased gallons sold, partly offset by lower margins on our fuel sales at consignment sites.

We added 10 new dealers last quarter and discontinued 6, which brings our independent dealer count to 583 locations at the end of June. Our pipeline of new dealer customers continues to build, and we now expect to bring on 28 to 40 new contracted Wholesale sites in 2013. Our commercial fuels business also continues to grow. We added about 60 new commercial customers during the second quarter, for a total of approximately 1,800 active commercial accounts that purchase unbranded fuel from us.

Now I will turn the call over to Mary Sullivan for a few comments on the financials. Mary?

Thanks, Rocky. Good morning, everyone. A quick reminder that our Susser Holdings results fully consolidate the results from Susser Petroleum Partners with a minority interest share of the Partnership's net income deducted as non-controlling interest.

So, looking at the consolidated results of Susser Holdings, this morning we reported adjusted net earnings of $12.5 million, or $0.59 per diluted share, versus net income of $29.8 million, or $1.40 per share, in the second quarter last year. The adjusted number for this quarter excludes the impact of after-tax debt refinancing charges of $16.7 million, or $0.79 per share. Adjusted EBITDA was $50.5 million, a decline of $22.3 million from a year ago, which was mainly due to the lower fuel margin.

Total operating expenses for the quarter increased by almost 11% over last year, with most of the increase related to the additional store count this year. Store personnel costs remain our largest line item, and Steve has already discussed the sequential improvement in personnel expense as a percentage of revenue. Credit card expense is the largest component of other operating expenses and was $13.1 million for the quarter, or about $0.055 per retail gallon compared to $12.2 million in Q2 last year.

We are extremely pleased with the refinancing that we completed in May, including the new $500-million parent credit facility and the redemption of $425 million of 8.5% notes. Reported interest expense in the second quarter included $26 million of nonrecurring pre-tax charges related to the refinancing. Had we completed the refinancing transactions at the beginning of the quarter, pro-forma interest expense would have been approximately $3 million for the quarter.

Our income tax accrual in the second quarter was negligible, because we had a reported net loss due to the refinancing charge. We continue to expect our 2013 effective tax rate to be between 26% and 28% for the full year. This rate would apply to pre-tax income before deducting minority interest. As of June 30, we had $220 million drawn on the parent company's revolving credit facility, with unused availability of $278 million. The Partnership had $85 million borrowed on its revolver at quarter end, with unused availability of $152 million. Our trailing 12-month net-debt-to-adjusted-EBITDA ratio was 1.6 times.

Total consolidated capital spending in Q2 was $54 million, of which about $35 million was for new Stripes stores and land. Of that total capital spending, $30 million was spent at the Partnership level, which primarily reflects the dropdown of stores from the parent to the Partnership. We have made several updates to our annual guidance metrics, which you will find in this morning's news release for each company. And now, I will turn it back to Sam.

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

Thank you very much.

(Operator Instructions).

And our first question does come from the line of Bonnie Herzog with Wells Fargo.

Good morning everyone.

Good morning Bonnie.

Sam, you mentioned you expect your grow to accelerate in the next couple of years. You know, given the strength of your balance sheet, I assume this growth could ramp quickly. Could you quantify this for us or, you know, give us an idea of the magnitude we should expect store growth to accelerate? And then in light of this, can you give us a little more color on reduction of your top end of the new store openings this year, maybe what happened there? And then finally talk a little bit more about your appetite for acquisitions. It certainly sounds like it has increased and I assume they are maybe more opportunities in the market right now?

Okay, let me take that on Bonnie. Thank you. We are looking to, every year, hopefully increase the number of new stores that we are building in our markets, working on the assumption that Steve uses the phrase that the world continues to spin. But in, you know a steady-state sort of economy we think we can accelerate our store growth a little bit. We kind of think about trying to build about 5% or 6% net new stores each year and grow our business through same-store growth in addition to that on top of getting 5% or 6% net new stores, net of closures, opened up. And each of the new stores at maturity is producing to 2, 2.5 times the cash flow of our traditional legacy stores. So that kind of store count growth, if we can keep that up as the base gets bigger, could deliver very healthy growth to the business.

With respect to reducing the top end of our guidance for new stores, it is totally a reflection of shaggy dog stories relating to real estate development issues that have occurred on a handful of locations. Those locations are still underway, in development and we will help in the same sites, hopefully early in the first quarter. Just kind of a timing issue for us. We find the development process is certainly challenging, and not getting easier in terms of working with all of the different local municipalities. But we are investing more and more resources in it and more dollars in our land bank and trying to get ourselves positioned to continue to accelerate that growth and have more visibility into the number of sites that we are going to really be able to open. You know when we give that guidance a year out, it is our best guess and we try to refine it as the year goes along.

With respect to acquisition related growth, we remain very positive that we are going to be able to identify great assets and great teams that we are going to be able to bring into our network and join the Susser family of companies here over the next year or two. We don't want to ever comment on any particular transactions. But we are seeing some opportunities that we think will make a lot of sense and fit in very nicely with our core business and our team is working aggressively to deliver acquisition related growth with a special focus on the wholesale side and leveraging our MLP structure here and expect to have some attractive things done in the next year or two, for sure.

Okay. That is helpful. Then, maybe just going back to something you said about, you know, the larger-format stores you have been opening. Could you touch on, you know, the growth you are seeing from some of the first larger-format stores you opened, you know, a few years ago? You know, has that growth from these stores continued to accelerate or is it moderating? You know, just maybe walk through a little bit of a life cycle, for us if you could.

Sure. And I'm going to kind of speak to the average of the portfolio. We generally see our new stores in the first three years of their life cycle to outperform on a same-store basis, 1% or 2% or 3% a year in terms of the amount of out-performance of same-store growth. But we also see improved efficiency in labor management and store expenses. So whether it is store supplies, maintenance, shortages, you know, there is a lot a different expense lines and moving levers. And we tend to see stores improve in profitability quite a bit.

So our long-term experience is if you get past the first two or three months of the grand opening process, the first real 12 months, we are generating 10%-ish incremental four-wall cash flow divided by the total investment, assuming no drop downs to the partnership, just gross investment. That is typically moving to the low mid-teens in the second year and approaching 18%, 20% and in some years it's actually exceeded that in the 30% upon maturity. But on the average, we think of it as low double-digit the first year, low mid-second digit -- middle excuse me, low to middle double-digit in year two and approaching 20% in year three. And we expect that kind of performance to continue as we increase the number and size of stores here over the last 18 months.

And those become a greater portion of your base as you mentioned.

Yes. And we've -- you know, it is really helping us on the food side. Every new location offers Laredo Taco. Laredo Taco is very will received in the marketplace. It is increasingly important to our business. It is a driver of our beverage and snack business. And every time we open a new store, it helps us from a brand awareness standpoint too. It seems to have kind of a halo effect on the rest of the business. We are really very pleased to see that the business is taking share in many of the core categories that we operate in. And we think having the biggest, best boxes in our markets is a huge part of that.

Okay. Thank you Sam.

Thank you.

And our next question does come from the line of John Lawrence with Stephens Inc.

Yes. Good morning.

Good morning, John.

Sam would you discuss on the fuel margin just a little bit? I mean obviously the last couple of years you have enjoyed really good margins. Anything happen this Or anything you can point to from a pricing mechanism that made it tougher?

John, I think the overall competitive set, it remains competitive. We are up against some large and very sophisticated big box fuel marketers. As aggressive today as they have always been. Haven't seen a big shift or change in strategy. We did not have any decrease in the cost of fuel to speak of in this quarter, which is unusual. Normally prices move up early in the year as refiners prepare for the summer driving season and as they build inventories. And then during the summer it usually goes the other direction as they start building inventories of heating oil. We just haven't seen that yet so far this year.

So comparing year to year, our real difference is the lack of volatility down in the cost of gasoline. It would be -- I would be remiss if I didn't note that government policy has been very, very well reported. Has created a shortage of these RINs and that has created some distortions in the fuel marketplace that are impacting different retailers in different ways in different markets. And we certainly our part of that. We are a company that -- we've felt some disadvantages in some places and we've felt advantages where we are buying fuel in bulk and doing blending and so forth. So that is one element in the fuel supply chain that has been different in the last 90 days that is impacting the retail marketplace.

And just to take that, a disadvantage position where somebody is, that has the RINs, can you give me an example of that?

In cases where a marketer is not blending product and if their supplier is not passing it along and they are competing heads-up with somebody that has a RINs buying advantage because they are blending or have a different arrangement on the supply side would create that kind of advantage.

Great, thanks. And secondly, Steve, I don't know, is there anything on the merchandise side as you move through the first quarter to second quarter on some of those new boxes, sort of expanding that base business a little bit? I know LTC has started strong in a lot of those. But some of that base business starting to pick up in some of those?

John, the -- so the new boxes, I think was in Sam's comments, turn to positive cash flow in the second quarter. And that's across the board, just strong growth, continued strong growth in food service as Sam has mentioned, and as we've said it led the way this quarter across the company. And the associated sales with it, so snacks and candy were especially strong. It has been a competitive retail market. But those -- the big boxes have set us apart. So we're -- nothing particularly new other than the kind of strength and seasonal growth we expected is exactly what we saw in those new stores.

Great. Thanks. Good luck.

Thank you.

Thanks John.

And our next question does come from the line of Irene Nattel with RBC Capital Markets.

Thanks, and good morning everyone. Just if you could just provide a little bit of color on the competitive environment overall both for inside the store, and I guess you touched a little bit on the fuel side. And we're also hearing a little bit more about stepped-up competition in the QSR space, that as well please.

Irene, we see the reports of very large retailers and some very large CPG companies that are really struggling on delivering same-store growth in the retail side, or unit growth with the manufacturers. And definitely, there are certain retailers both very, very large end of the spectrum and some small or family regional chains that we see working it hard on promotions and being aggressive in certain packages, certain SKUs, doing things to try to reverse that softness in the market. And it is greater today probably then a year ago. We -- I am not particularly concerned by it. I think we have long-term demographics and a real strong, long-term economy, and great people, and the best real estate. And I think it is a winning combination as our competitors kind of ebb and flow on their promotional activity. But there is no doubt there are some guys big and small that are making changes in their offering to respond to softness in their business.

On the QSR side, I think it is moderately -- there is moderately more price aggressiveness, but it is not significant versus a year ago. I think ever since the recession the QSRs have had to resort to more and more dollar pricing and value pricing of their menu. And that may be a little more so today than a year ago but not much more so. They have been down and dirty for quite some time and I think feeling pressure on their margins as a result.

That makes a whole lot of sense. And again, just continuing on, are you seeing -- are you seeing much dollar store impact in your space?

Stripes is doing well. We are taking share and growing share in all of the core categories that we are able to assess and have visibility into. But definitely the dollar stores are one retailer -- one retail channel that has -- doing the same thing. And they are also growing share as they add more and more SKUs and more complexity to their offering. They are having success at growing share. But it doesn't seem to be at the expense of Stripes. It seems to be having more impact on other retailers in the marketplace. But no doubt about it, they are growing share in a number of the important categories.

That's great, thank you.

Yes.

Once again, ladies and gentlemen, so that we do have time for all questions today, please limit yourself to one question and one follow-up and then re-queue for any additional questions. And our next question does come from the line of Scott Mushkin with Wolfe Research.

Hi, good morning everyone this is actually Mike Otway in for Scott. Thanks for taking the question. So Sam, it sounds like you are working hard and having some success on improving the operating costs. Is this something that, you know, that we should expect will continue for the rest of the year? Albeit, you know, personnel, and G&A and some, a lot of those costs with the new stores?

Yes. As the new stores mature, but -- and Mike this is Steve. You know, we are also rolling new stores into the portfolio as well. So there is still the maturing of those new stores in their first couple of quarters as well. Our expectation is to see a slight improvement, sequentially. But we've got to move on a tough labor market, we've got a lot of wage inflation, and that's -- it is making it hard to produce flow-through.

And Steve in --

As I look out over next year I am very confident in our Steve and our team's ability to creatively find ways to reduce core expenses as a percent of merchandise sales. We now have 31 new stores operating today that aren't in our same-store base. That's materially more than it was a year ago at this time. So, we have that kind of expense pressure from that fast ramp-up of these new really big box stores. I don't see 31 becoming much, much higher than that over the next 12 months. I think that is going to take a little pressure off Steve and the team as they are striving to deliver improvement on expenses divided by merchandise sales.

Okay. That is really helpful. Thank you. And then in terms of the delay in the store openings and those getting pushed into the first quarter of '14, you know, what are you guys doing to standardize the process, you know, partly to make the timeline more predictable but also keep the expenses low in case things, you know, slip as you know, you are negotiating real estate and things like that?

Yes, this is Chip. The shaggy dog stories that Sam referred to, a lot of it has to do with the municipalities that we are developing in and that they've seen increased development in the form of new housing, new commercial business, et cetera. They have not increased staff at these municipalities, so plan review is taking increasingly longer and so what used to be a three week process now is eight weeks process. It was that unintended consequence of a rising tide and rising development in our markets. So what we are doing is getting things in the queue much quicker. Many -- our first, say, 16 stores that will be built next year already been submitted for plan review today. So those are the type of things that we are trying to get out in front of and it is just a function of each municipality has different issues that we're dealing with, so.

Okay. That is helpful, I appreciate it. I will jump back in the queue. Thanks.

And our next question does come from the line of Sharon Luke with Wells Fargo.

Hello good morning.

Morning Sharon.

I noticed at the partnership level, the third party fuel margin per gallon, increased about $0.049 from $0.042 last year. Just wondering if that rate is sustainable? And also looking at the wholesale third party fuel margin at the holdings level, it was actually down year over year. Can you maybe also explain what accounts for the difference in the move of the margin at the holdings level?

Sure, Sharon. This is Rocky. So the third party margin at the SUSP, you know, the increase there, we mentioned our commercial business has done very both this quarter and last quarter. We have had some benefit from RINs, you know that commercial businesses unbranded. And some of that we blend and are able to get the benefit of the RINs. So those are two things that we have found very helpful. As far as the sustainability of that going forward, you know, if you can tell me what RINs will do, I could probably give you a better answer but that is a part of it.

And that we are taking -- we have been able to take advantage in this segment of our business of the higher value of RINs. Pretty optimistic that's a continuing trend, but we don't have clear visibility into it.

Right. The volumes that we are able to blend are increasing. But the price at which we are able to sell the RINs, you know, we don't know what that's going to be going forward. So, you know, kind of the give-and-take there.

As for the wholesale margin -- the wholesale segment margin, if you remember, inside that business is our consignment sites. So you know at the wholesale segment level, we have all the partnership, plus the consignment and the transportation business we did not contribute. And we saw some margin decline in Q2 this year versus same time last year.

So the consignment business has seen the same sort of margin compression that the retail Stripes stores have and that margin is captured at the Susser Holdings, not at the partnership in terms of financial reporting.

Correct.

Okay. And I guess in terms of the benefit from the RINs given that the EPA made some announcement and RIN pricing has declined a bit in reaction. Would you be able to isolate what was the benefit from the RINs on the margins during the second quarter?

Sharon, we don't want to give a whole lot of details on that. We can obviously tell you we have increased the amount of -- the quantity of fuel that we blended Q2 versus Q1. And we're look -- continue to look for opportunities to do that, but we don't want to share any more details than that.

For competitive reasons.

Okay, understandable. Thank you.

Thank you.

And our next question does come from the line of Ben Brownlow with Raymond James.

Hi, good morning. Mary, could you talk about the G&A decline year over year and just how we should think about that going forward?

Sure. Hi Dan. G&A for the quarter, we did have some lower bonus accruals, which to match up the performance that we saw in Q2 against our internal targets. That's going to be the biggest delta sequentially from Q1. I think if -- as you look at the run rate, obviously we were a little bit lower this quarter than we were in Q1. The run rate is probably somewhere in-between but again, it's going to depend on our performance as we go forward into Q3 and Q4 and what we record there for the related bonus expense.

There are a lot of people in this room, Ben, that would sure like to see that G&A line a bit higher. (Laughter)

Understood. And on the guidance that you gave for the fuel comps of 2% to 5%, I guess that, the lower end of that and even the upper end implies a modest deceleration on a two year basis for the second half. Can you just give a little color around that volume guidance and what you are seeing or your demand outlook in relation to the recent rise in oil prices?

Ben, the -- observation I have is that we're just going up against continually bigger and bigger comps, bigger and bigger numbers. The outlook feels healthy. Overall, I think the economy in our part of the world is improving, although there are certain markets that we are in that are definitely very soft and there are others that are on fire and it's a mixed bag. But in total I think the economy is improving and I think the demand for fuel is improving. We have seen some recent reports from Texas Comptroller's office, I believe, on amount of gallon sold across the state. It is healthy, both gasoline and diesel. So we're -- feel good about demand and the outlook, but we recognize we are just going up against some huge comps.

Great. Thank you, guys.

Yes.

And our next question does come from the line of the Lee Giordano with Imperial Capital.

Thanks. Good morning everyone. Just following up on the last question. Sam are you still seeing increases in drilling activity helping to drive the business in your markets? And I guess how is the difference in performance in south Texas versus west Texas at this point? Thanks.

So Lee, thank you. The number of rigs in Texas is up slightly from the latest look I saw this week. It is up in the Permian. It is up in the Eagle Ford, which are our kind of -- the core markets for us and where we have the most exposure, thank goodness. We see the number of gas wells being drilled in a variety of other place continues to fall. But currently, the number of oil rigs is growing faster than the number of gas rigs is falling. And so there is a slight increase. I think that, well, the number of -- the productivity of the wells that is being drilled is much greater today than it was a year ago. And they are drilling them faster and I think that we don't expect to see big giant lifts in number of people employed in the oil patch over the next year or two. But they're are going to be producing more and more oil, because they are just getting more productive, more efficient, smarter at allocating those resources.

The outlook is real good for strong, healthy economic activity in those markets. I think -- I don't see another stair-step leg up in terms of the number of people that are going to be working in the oil patch. But the amount of oil they're going to be producing we're very, very bullish on and I think that's going to lead to more investment around pipelines petrochemical, and manufacturing. Here in the Gulf Coast it's going to support our business over the next three, four, five years.

Thank you.

Yes.

And our next question does come from the line of Anthony Lebiedzinski with Sidoti & Company.

Good morning. The more modest expectation for your merchandise same-store sales is that strictly a function of the second quarter coming in lower than you expected? Or are you seeing anything in the third quarter to make you cause to temper your outlook for merchandise comps?

Solely a function of where we came out in second quarter. We want to be realistic and have our guidance, reflect our best thinking today. But we feel better -- I feel better on the call today than I did three months ago in terms of what we were seeing and feeling. Now, we knew and we talked about on the call three months ago that there was weather and calendar shifts that were impacting the business, but we didn't know if we kind of be in a more normal trading pattern until we got back to more normal weather pattern. As May got here and things started to heat up it got to more normal place, and we feel that is where we are. We think that our outlook is consistent with our long-term performance and we feel good about that.

Okay. That is good to hear. And also could you comment on the -- your diesel comps? What you saw in the quarter? Thanks.

Diesel continues to grow faster than gasoline a little bit. Steve if you have the number handy, diesel represents 22% of our mix versus 21% as of a year ago. The growth in diesel volume was around 8% versus about 4% in gasoline on an average per store week. But a little bit of that is we have more stores offering diesel today. And so please take that with a little bit of grain of salt. But, general, the demand for diesel is better than gasoline. And I think that reflects strength in the commercial side of the economy.

Okay. Thank you.

Yes.

And our next question does come from the line of Ronald Bookbinder with The Benchmark Company.

Hi Good morning.

Good morning, Ron.

On the profit per gallon, you guys have some of the best fuel pricing systems in the industry. With the fuel volumes above expectations to the point that you raise guidance, why not capture some of the extra -- why not capture some extra margin versus the greater volume?

Ron our strategy is to compete ferociously for every gallon we can get. And the margins can rise or fall, and we are going to stay focused on our gallons. We are just not a company that is biased, like some, to be optimizing for margin all of the time. That is not what we believe is going to create long-term value for our shareholders, including us.

Okay. And following up on the last caller, on diesel, you said you are at 22% of the mix of stores. What percent of the stores could have diesel? And could --?

So today, we have 428 locations that sell diesel. The diesel that they sell -- that is out of 570 stores operating today -- I'm sorry, it's 431 today of the 570, offer diesel. And diesel represents 22% of the total fuel that we sell today.

And what would you think the comp at -- per pump was for diesel to break out, you know, the growth of going to more stores?

I can't quite do the math in my head, but maybe on an average per store week basis, if you strip out the impact of the additional comps it's perhaps 7% for the quarter.

Okay. Great. Thank you very much and good luck going forward.

Thank you very much.

Our next question comes from the line of Michael Gaden with Robert W. Baird.

Good morning. Thanks for taking my question. Can I ask as a follow-up to some of the RINs discussion, we talked about some of the short-term tactical gains from higher third party margins et cetera. Are there any strategic gain that you can leverage in the RINs marketplace now through your blending capabilities? Can you use that to help do more M&A or grow your third party business at all?

We hope so. As we, you know, every month we are getting smarter and we are continuously growing our bulk buying positions and our skills and our organizational capability. And we are actively looking for opportunities to further leverage our scale and our small but growing amount of expertise in this area.

Right, as I mentioned -- this is Rocky. As we mentioned earlier our volume that we do blend has increased sequentially Q1 versus Q2. And we are continuing to turn over lots of rocks to try to find opportunities, and confident we will find some.

Thanks Rocky. And could I lastly ask, you've mentioned accelerating merchandise sales month over month during the quarter. Was the same true on your motor fuels business as well?

Yes, but not quite as dramatic.

Great. Thanks a lot. That it for me.

Thank you.

And our next question does come from the line of Karen Short with Deutsche Bank.

Hello there, thanks for taking my question.

Hello Karen, good morning.

Hello, just going back to the merchandise comp can you maybe give a little more color on the composition of the comp, traffic versus ticket? I know Steve, you've given some color on the transaction size growth in the first quarter.

Sure. We have seen, this year, a pretty flat customer count with the growth in merchandise sales definitely being driven by transaction size. And we think it is about half increase in number of items in the market basket and about half in price. I am hopeful -- can't predict, but I am hopeful, that we will see some growth in customer count over the balance of this year. But I can't -- so far, year to date it's definitely been flat. And we really like the pattern we have been on the last five years or so where our sales growth has been a balance of customer count growth and transaction size growth. We haven't said the growth in customer count we expect for ourselves here in the first two quarters, yet.

Okay. And within the price, is that inflation or --?

I would say inflation. It is a mix.

Okay.

You know, there is some areas where we can't take price at all and we have some compression and we're trying to offset it in some other areas.

(Indiscernible)

Okay and that's helpful. And then within tobacco, or I guess cigarettes, can you maybe give a little color, it looks like your comp, I mean, it was still slightly positive, but can you give maybe give some color on units versus price within tobacco?

Our units are down very slightly so far this year. That is counter to our long-term trend we have been growing units at Stripes for several years. Our business -- our share of the category, though, is growing. Even though we are not able to deliver unit growth here in the most recent quarter. Year to date, we are down about 1% to 1.5% in units but we are growing -- continuing to grow share within the space.

Okay. And is -- in terms of the units being down, so that is just usage? Not so much dollar store impact or anything like that?

We could tell you pretty for sure it is usage. We are doing just fine on share in the category.

Okay. And then any update on a loyalty program? I know that has been mentioned before and you said that you are hopeful customer count would grow, but that would obviously help.

We don't have any announcements to make on loyalty at this time. We continue to look at some different things, Steve and his team are exploring, but we have no announcements or further commentary at this time, Karen. Thank you.

Okay, great. Thanks.

Sure.

And our next question is a follow-up question from line of Bonnie Herzog with Wells Fargo.

Hi, I just have a follow-up question on your tobacco category. I'd be curious to hear if you're shifting more of your tobacco sets towards smokeless, you know, to capture the full field growth in margins. So that, kind of that category versus cigarettes. And then, you know, how did you handle the $0.06 per pack price increase on cigs that occurred during the quarter? Were you able to pass this -- that increase on to consumers in most of your stores? And then, curious to hear where you are at with e-cigarettes. You know, are you carrying them right now and are they in all of your stores?

Kevin why don't you address smokeless and the follow-up.

Hi, Bonnie this is Kevin.

Hi.

We have -- we are definitely gradually moving and shifting more of our merchandising to smokeless, non-smokeless tobacco items. In our new stores, especially, we have gone with a larger footprint of the product and less -- and kind of closing the space down on our cigarette business. We currently are offering a couple of brands of e-cigarettes. And we are seeing growth there. And we expect to see it as a future going, we're kind of anticipating the rollout of Altria in R. J. Reynolds and how the merchandising will go from there.

Okay.

With respect to the routine price increases, we are seeing continued compression in the cigarette category and every price increase, including the last one, is hurting us as retailers. We are going to be aggressive with the category. We are going to buy like heck to retain every single cigarette customer we can. And we are pretty pleased that cigarette represents only about 7% of our merchandise gross profit. We think that is a real competitive advantage and reflective of the big investments we have been making in large boxes and food and in beverage. We are well-positioned to withstand the pain that these big cigarette companies continue to inflict on the retail partners very regularly.

Absolutely. Okay. Thank you.

At this time I would like to turn the conference back over to Sam Susser for any closing comments.

Thank you, Operator. I would like to extend my thanks to our team members here at Stripes and at Susser Petroleum for the strides we are making in customer service and continuing to be one of the share takers in a highly competitive market. I also want to thank you, our investors and our analysts who take the time to learn about our business model, the competitive spirit of our leadership team, and learn more about the tremendous long-term growth potential that exists in our markets. Have a great day everybody, and thank you for dialing in with us.

Thank you very much. Ladies and gentlemen that will conclude the conference for today. If you would like to listen to the replay please see this morning's press release for the information. Again we do thank you for your participation, you may disconnect your lines at this time.