Sunoco LP (SUN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen; thank you for standing by. Welcome to the Susser Holdings Corporation, Susser Petroleum Partners LP third-quarter earnings conference call.

(Operator Instructions)

This conference is being recorded today, November 6, 2013. I would now like to turn the conference over to Chip Bonner, Executive Vice President. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us.

This morning, we released our third-quarter 2013 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners by our news release were broadcast or email lists. If you would like to be added to one or both of those lists, please send your request via the IR pages of our website, and we'll 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 November 13. To access the replay on the web, go to our IR pages either at www.Susser.com or www.SusserPetroleumPartners.com. You will find replay a instruction in this morning's earnings release.

A reminder, 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 are subject to risks and uncertainties that could cause actual results to differ materially, as described more fully in the Company's filings 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 performance. Please refer to our news release for reconciliation of each financial measure. Reminder that information reported on this call speaks only to the Company's view as of today, November 6, 2013. So time-sensitive information may no longer be accurate at the time of any replay.

With me on the call today is Sam L. Susser, Susser Holdings CEO; Steve DeSutter the CEO of our Retail group; Rocky Dewbre, the CEO of our Wholesale group; 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.

Overall during the third quarter, we delivered solid performance across both businesses. Total merchandise sales from our Stripes stores increased 9.8% from a year ago, which reflects a solid 3.4% increase in same-store sales, plus the contribution from the 30 new retail stores we have added in the last 12 months. Merchandise margin was 33.8, basically flat versus a year ago. We experienced a shift to a more favorable product mix, led by food service, which offset margin pressure in other categories, such as beer and cigarettes.

We managed our store labor better in Q3 than earlier in the year, but we continued to see wage pressure, driven by the strong economy in certain local markets, plus increased demand for part-time workers, one of the unintended consequences of the Affordable Care Act. We also continued to see strong growth in retail fuel sales in Q3, strong volumes. Our total volumes increased 9.6% year-over-year, and our average gallon sold per store were 5.6% higher than a year ago on a comparable basis.

On the wholesale fuel side, Susser Petroleum Partners increased the volume sold to third-parties by very strong 9.3% year-over-year. We continued our new store development in the third quarter, opening 10 new big box Stripes stores and closing 1 older, smaller store. Since the end of the quarter we have opened 1 more in west Texas and converted 1 more retail store to a wholesale dealer operation, which brings our current retail store count to 576 and our new build count for the year to 21. We have 10 more under construction, of which 7 to 9 should be open by the end of December. We expect to continue to aggressively open new big boxes throughout 2014.

As you no doubt saw on the Susser Petroleum Partners release this morning, we were pleased to announce the second consecutive increase in the Partnership's quarterly distribution. The Board directed the distribution be increased by 3.5% sequentially, to $0.4687 per common unit. Based on distributable cash flow of $12.7 million for the quarter, this distribution represents a coverage ratio of 1.23 times. Looking at coverage for the last four quarters combined, our coverage ratio was 1.14 times. We clearly have strong momentum.

Rocky will provide additional highlights for the Partnership in a moment. 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.

The third quarter is one of our strongest seasonally, and as Sam commented earlier, we had a very solid quarter. Our sales performance was led primarily by same-store dollar increases in food service, beer, and packaged drinks. We saw a positive performance across most of our categories, with snacks and candy also strong contributors to sales growth. Leading gross profit performance were same-store increases in food service and packaged drinks.

Our Laredo Taco Company restaurant concept continues to outpace average same-store merchandise growth, and is a strong driver of our stable gross margin. Currently, fresh prepared food is available in 64% of our stores. At the end of the third quarter, we operated 371 restaurant locations, including 357 Laredo Taco Company locations. 17 of our stores operate multiple food concepts. Food service accounted for more than 22% of total merchandise sales and 30% of gross profit dollars this quarter.

Cigarette same-store sales were essentially flat for the quarter; price increases were effectively offset by a 1% decline in units sold. While cigarette consumption continues to decline across the country, we believe we gained a market share in this category. Cigarettes were approximately 18% of merchandise sales, and only 6.5% of gross profit dollars for the quarter. For the first time, this quarter's beer sales caught up with cigarette sales as a percent of merchandise sales, and package drinks are not far behind. From a gross profit dollar contribution standpoint, packaged drinks are the number two category, behind food service.

As Sam mentioned, third-quarter average gallons per store grew by a remarkable 5.6%. Retail fuel margin, before credit card fees of $0.183 this quarter, was slightly better than the second quarter, and up about $0.012 a gallon over last year on a comparable basis, adjusting for the MLP impact. On an apples-to-apples basis, we were about $0.01 below the 5-year average for the third quarter, which was $0.195 a gallon, again adjusting for the $0.03 per gallon of margin that is now recorded at the Partnership. We are raising the lower end of our fuel margin guidance for the year to a range of $0.16 to $0.18 per gallon. As a reminder, our 5-year average fuel margin for the fourth quarter is $0.144 and $0.163 for the full year, adjusted for the $0.03 mark up now charged to SUSP.

We saw an 80 basis point increase in personnel expense in the third quarter, raising to 19.2% of total merchandise sales versus an 18.4% in both the second quarter and the third quarter last year. A portion of this increase is due for the labor inefficiency of our new stores in their first few months of operation, as we previously discussed. We are now effectively deploying new tools for labor management, which has now enabled us to keep our hours spend in line with internal targets.

We were able to hold the line on other operating expenses this quarter, improving the ratio of those expenses to merchandise sales by about 10 basis points compared to a year ago, and by 30 basis points versus the second quarter. The increase in those expenses in dollar terms is primarily related to additional stores this year. Credit card expense, the largest component of other operating expenses, was slightly higher than the second quarter, at $13.5 million for Q3, and about $0.056 per gallon, flat with the third quarter in 2012. Maintenance costs were relatively flat the last year, which means we were able to reduce our maintenance costs per store this quarter.

Our customer base remains value-focused, as middle-income, hardworking folks continue to be impacted by increases and taxes in the uncertainty emanating from Washington, D.C. We believe our high-quality food offering is the significant point of differentiation, especially for consumers feeling the effect of the economic pinch, and it positions us for continued growth as we remain optimistic about the outlook for the coming year.

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

Thanks, Steve. Good morning, everyone.

As you'll recall, we closed the IPO of Susser Petroleum Partners on September 25, 2012, so we have now completed our first full year as a publicly traded MLP. We are very pleased with the progress we have made in growing our business over the last 12 months and growing shareholder value. Looking at the operation results since the IPO, we have grown total gallons sold by the Partnership over 8%, to approximately 400 million gallons in the third quarter.

Looking at our first-year financial performance, in our S-1, our forecast for distributable cash flow for the first four quarters was $44 million. Our actual was about 2% higher than that, at $44.8 million. As a result, we have been able to increase our distribution per unit by about 7% over our minimum quarterly distribution, while maintaining a conservative distribution coverage ratio.

Part of our long-term strategy for growing the wholesale business includes accretive acquisitions. And we are very pleased with our latest acquisition, Gainesville Fuel, which is a wholesale fuel and lubrication distribution business that sells approximately 60 million gallons of diesel annually to oil and gas producers in the North Texas and Southern Oklahoma areas. Due to the smaller average delivery size and the remote locations we deliver to, these are higher-margin gallons than our historical gallons.

The Gainesville assets are a logical combination with the existing commercial fuels business, serving customers in the Permian Basin that we acquired in late 2007, as part of the Town and Country acquisition. Integration of these two businesses is going well, and we are pleased with the initial results and the potential to grow this line of business in the next few years. Next, I would like to do a quick review of some additional highlights of Susser Petroleum Partners results, comparing the actual third-quarter 2013 results against pro forma third-quarter 2012 numbers before I turn the call back to Mary.

Volume sold by the Partnership to Susser holdings for resale at Stripes stores and independently operated consignment sites increased 8.5% year-over-year, to 268.6 million gallons. This growth reflects gallons sold by 30 new Stripes stores that have opened during the last year, as well as volume growth in existing stores and at consignment locations. Volume sold to third-parties, including independent dealers and commercial customers, increased 9.3%, to 131 million gallons. Gross profit on these third-party sales increased 20%, to $6.8 million or $0.052 per gallon, compared to $0.047 per gallon a year ago on a pro forma basis.

The margin improvement per gallon was driven in part by an increase in the higher margin commercial business. We added 9 new contract dealers last quarter and discontinued 5, which brings our independent dealer count to 587 locations at the end of September. Average fuel margin for all gallons sold by the Partnership on a weighted-average basis increased slightly, to $0.037 per gallon, compared to $0.036 per gallon a year ago. Partnership gross profit totaled $18.4 million, up 26% year-over-year.

We have generated some nice sequential improvement in our results compared to the second quarter. Adjusted EBITDA was $13.8 million, up $1 million. Rental income for the third quarter increased to $2.8 million, which is up $500,000 from the second quarter. We completed purchase lease-back transactions for 10 Stripes stores during the third quarter for $39.5 million, and received a full contribution from the 6 stores dropped down during the second quarter. Since the IPO, we have acquired a total of 30 Stripes stores that will produce annual rental income of approximately $9.7 million for the Partnership, plus the $0.03 per gallon margin on fuel volumes.

Our operating and G&A expenses required to support our expanding business are elevated from the expectations we had a year ago, but improvement in our bulk buying operations and accelerated volume growth are more than covering the expense. I'll refer you to this morning's Susser Holdings news release for a look at the performance of the consolidated wholesale segments of Susser Holdings, which includes the results of the Partnership, plus the consignment and fuel transportation businesses that still remain at the parent-company level.

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

Thanks, Rocky. Good morning, everyone.

Looking at consolidated results of Susser Holdings, adjusted net earnings for Q3 were $16.4 million, or $0.76 per diluted share, compared with adjusted earnings of $10.5 million, or $0.49 a share for the third quarter of last year. The adjusted number for this quarter excludes the impact of a $3.5 million non-cash deferred tax charge related to the acquisition of Gainesville Fuel, which was acquired by the parent, and contributed to the Partnership.

The 2012 adjustment was a non-cash deferred tax expense of $3.6 million that was related to Susser Petroleum's IPO. Adjusted EBITDA increased 18.8% from a year ago to $49.4 million, which primarily reflects the benefit of higher merchandise sales and fuel volume sold, as well as the increase in both retail and wholesale fuel margins on a comparable basis.

G&A expense increased by $2.3 million compared to a year ago. $1 million of this was due to an increase in non-cash stock compensation expense. The balance is attributable to the addtional public company expenses for Susser Petroleum and other increases in personnel to support our retail and wholesale growth.

Interest expense was $2.4 million versus $10.7 million a year ago, which is due to the refinancing of our senior notes we completed in May. As of September 29, the parent company had $185 million drawn on its revolving credit facility, with unused availability of $313.6 million. The Partnership had $142.8 million borrowed on its revolver at quarter end, with unused availability of $97.2 million. Additionally, the parent and the Partnership revolvers each have an untapped $100 million accordion feature that we can use for future growth.

Our trailing adjusted EBITDA is $177 million, and our net debt to adjusted EBITDA ratio was just under 1.7 times. We expect our 2013 effective income tax rate for the full year to be between 25% and 27%. This rate would apply to pre-tax income before deducting minority interest. Consolidated capital spending in the latest quarter was $67.6 million, of which $44 million was incurred at the Partnership level. We made several updates to narrow our annual guidance metrics for the full year. Please refer to those in this morning's news releases for each company.

Operator, we are now ready for any questions.

Thank you, ma'am. Ladies and gentlemen, we'll now begin the question and answer session.

(Operator Instructions)

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

Good morning.

Hello. My first question is on your merchandise SSS. It has been outpacing your per store gallon growth. But that doesn't look to be the trend this year. I guess that's been happening over the last several years. So do you have any thoughts on what is driving this and how you can better convert your fuel customer to a stronger merchandise customer?

And then I'm also curious why your lower retail fuel prices didn't necessarily drive the better merchandise comp growth?

Overall, we are obviously very pleased to have delivered healthy growth in both merchandise and fuel on a comparable basis. The fuel volumes over not only this quarter, but over the last couple of years, the growth area has been very, very healthy, and certainly higher than our long-term averages and higher growth levels on a per store basis than I believe are sustainable. I really think that many of our customers that come in with the intent of buying fuel are in a pinch for time, and we provide the most convenience by getting them teed up to get their fuel quickly and reliably at competitive prices and get on their way.

The majority of our merchandise business comes from people that are only buying merchandise and not buying fuel of that particular transaction. Or, expressed another way, you might need fuel once a week, but you might be interested in fresh coffee or a delicious taco three, four, five times a week.

So we don't believe there is -- and we have the experience of having moved from non-pay at the pump to pay at the pump over the years, and we have really studied and watched consumer behavior on this issue, and we don't see there to be a lot of fertile ground on increasing the incidents of fuel customers increasing their in-store transaction. They are some evolving technologies around vending equipment at the pump, especially for soda, but also some other products I have seen displayed, like lottery, and those are ideas that I think we should be open minded to, and should continue to look at. But I don't think there is going to be a lot of movement from out at the pump to inside the store for a customer whose intent is just fuel at that particular purchase.

We are pleased to see our same-store sales trends improving a little bit as the year moves along. We are pretty bullish on the outlook. I wouldn't say bullish -- positive. I think that the outlook's good for next year.

But the consumer is still under some pressure, especially low-, middle-income consumers. And we don't see a tripling of same-store sales growth or anything, but we feel, on balance, like it's pretty healthy and the outlook's good for us for next year.

Okay. Thanks Sam.

And then just in terms of your new stores, you have got quite a few more stores to still open this quarter, as you mentioned, and hit your range. So just want to get a sense of how confident you are that you're going to get these stores open.

And then I'd like to maybe get a sense for your plans for new store rollouts over the next couple of years, would the new store openings be skewed to the first half, or possibly the second half, or more evenly spread?

I'm going to ask Steve to speak to the rate of new growth of the stores and our confidence level on our openings this year. But we think the environment for growing the business is very healthy. If we are able -- if we want to grow organically only, I think with our land bank and the dialogue we have working between landowners and our real estate team, we're positioned to deliver more growth next year than this year.

But the possibility of M&A-driven growth is also present. If we opt to make some M&A growth happen, then that could affect the timing around our new store openings. We may focus our capital and management intensity around M&A opportunities that could affect the timing of new stores. But assuming no M&A happens, Steve, could you speak to the rate of new stores and the confidence level we have around that?

Sure. So, Bonnie, we have 10 under construction right now. We are well beyond the permitting processes or the things that could -- the unknowns that could slow them down. Weather is always a factor at this time of year in some of our markets. So seven to nine of those, weather depending, certainly puts us inside of our range. We are pretty comfortable; we'll make it.

The rate of openings for next year spread throughout the year?

Yes, the rate of openings next year will be probably pretty similar to this year, a little lighter in the first half of the year, depending on how many of these roll over into the first quarter. And then more even as we move through the year, beginning second, third, and fourth quarter.

Okay. Thank you.

Thank you, Bonnie.

Our next question is from the line of Scott Mushkin with Wolfe Research. Please go ahead.

Hello. Thanks for taking my question.

So Sam, you piqued my interest with your comment two seconds ago. It wasn't really one of my questions, but -- you talked about M&A growth and that maybe you would tack potentially more in that direction. And I'm curious because, spending a lot of time in your stores as of late, it seems that the box, the 6800 square foot box, is so differentiated, being probably almost 70% food service, and it is incredibly hard to copy.

So I'm just trying to overlay that observation being down there, with the idea of M&A, and what you could do to bring in Laredo Taco, you know, the big food service offering. Are those opportunities, or are we kind of backing off a little bit of that box as you see your growth potential going forward?

Not backing off that box at all, that is the core driver of growth for Stripes, short-term, medium term, long-term. We are very encouraged by the results from our Gainesville acquisition. Rocky and other team members have an active dialogue, working with other owners of attractive packages of businesses, and a lot of that dialogue is really wholesale-centered, but could come with a chunk of assets that we think are good fits for the Stripes or Stripes Laredo Taco company offering. But that definitely is the small minority of the number of sites that are out there.

So we are continuing to see M&A opportunity dialogue. We are talking with folks. We are very interested in pursuing that dialogue, and, depending on what does not happen, it could affect the timing of our stores. What I was trying to do, Scott, was not have our investors and financial community just locked in on -- it is going to be an exact number of stores.

This year, each quarter, or every year, we are going to have some flexibility, be opportunistic, but we are as passionate and committed as ever to the unique store that we are building and its potential. And we have more dialogue on new property to develop that box than we have ever had, a bigger land bank than we have ever had, and that remains a huge focus for us.

So if I have misled you on that, I apologize.

No, I appreciate the clarification. One follow-up. If you were to go the M&A route, obviously you have talked about through the fuel business, but maybe a chunk going over to retail, would you desire or have terms of that deal that you would want Laredo Taco and any boxes coming over to retail?

Whenever we -- our strong preference is to continue to develop Laredo Taco and the big box convenience that we are able to offer under the Stripes brand. It is not our primary desire to add a bunch of small boxes to the retail network. That is inconsistent with the way we are building the business.

Perfect clarification. Thanks, Sam.

So then I want to move on to CapEx. There weren't many changes in what you guys put out for guidance, but there was a pretty decent bump up in the CapEx, if I'm going to remember the exact numbers, I don't know. But it did bump up to 200 to 235 from 195 to 210. I was wondering if we could get some more insight on what is causing that big bump up, and is that something we should expect going forward, a little bit more spending on the CapEx side?

Part of it includes dollars invested on the Gainesville acquisition. And we are continuing to invest heavily in the land bank and preparing for the next couple of years of new store development.

So this type of bump up we shouldn't expect going forward? Is this more kind of paying it forward?

Well, the Gainesville acquisition is part of that bump up.

Okay.

And so, hopefully, we'll continue to find additional acquisition opportunities. And so, we hope to be able to deploy capital and transactions like that next year and in future years. Okay?

Yes.

And yes.

So then, I'm sorry, I just have one more for Mary. The fourth quarter is going to be interesting, Mary, because of the kind of openings and high gas profitability as we look through last year. You guide are tight in your guidance, but I was wondering, maybe you could take 30 seconds to give us some feel about how you are thinking about the fourth quarter, and how we should be thinking about it, given the puts and takes, gas profits being really high last year. We did have a lot of openings, and I think you have a number of stores coming into the comp base in the fourth quarter. So I was wondering if you could help us think about it in a little more detail. And then thank you.

Hi, Scott.

So we updated our guidance, which is full-year guidance. While we don't specifically give quarterly guidance, you can probably interpolate a little bit from the a full year from what the ranges are to what we are thinking about. In terms of new store openings, it is going to be somewhat similar to last year with the number of openings that we have had. I don't know if there is another specific question. (Multiple speakers.)

The word for me is traction. I think that we are incrementally gaining a little more traction with each quarter in terms of our effectiveness at running our existing stores, and our effectiveness at ramping up with these new big boxes, and being a little more efficient today in the big surge we have experienced over the last year and new store opening costs. With the benefit of experience and more numbers, we are running a little bit tighter ship. And we feel good about that, Scott.

There is no change in the outlook. Certainly to the downside, there is no change to the downside around how we feel about the quarter. Gas margins remain wildly unpredictable, and we are not in the business of giving quarterly fuel guidance, but our overall sense for the business, we feel good about where we are going.

That is perfect. Thank you for all the color. Appreciate it.

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

Thanks, Sam, just if I could ask you to expand a little bit on your last comments, because we have seen -- we are now four quarters into the higher run rate of store build. Do you feel that you are now optimizing the process, and from here on forward, we should see fewer of those bumps in the road?

I don't feel that we're optimizing. And I do think you'll see fewer bumps in the road. A lot of growing pains over this big ramp-up period for us. And we were moving into -- we were basically two brand-new markets for us.

We have now entered those markets, and as we are developing them further, there are efficiencies that we have in those markets that we didn't have 12 months ago, and 6 months ago. And so, it is not a huge sea change. But traction and efficiency here comes -- steadily picking up little bits at a time. And I think we are on that highway of picking up those little bits.

That's great. Thank you.

And one of the things we have been talking about for the last several quarters is really stepped-up, competitive environment. Texas economy certainly is doing extremely well, but as you have noted, it is attracting incremental competition. So just wondering if you could talk a little bit about what's going on, if that was a factor from the beer category in Q3, and what you are really thinking as we move into next year.

Taking the last part first, yes. Very competitive market conditions affected beer in the marketplace. We remain committed to holding on to our customers and doing whatever it takes to hold on to that core customer. And we are doing so.

And our team has done a great job of optimizing our margin, but holding on or building that market share in the category, despite tough conditions. And that -- the improved execution on food provides a higher margin contribution that's offset the pressures we are having to absorb on beer, a little bit, and soda and cigarettes.

We don't see that pressure letting up next year, but I don't see it getting materially worse, either. It is just, you know, healthy environment down here, attracting a lot of new competitors. But I think that is going to be a trend that we've got to accept and learn to compete and live with, without -- we've done that for a long time. It is not intimidating to us, but it is a competitive environment.

There are big retailers building new distribution centers in this part of the world, which says volumes about their long-term plans for the market. And we have got to deliver on fast, fun, and friendly and delicious with Laredo Taco to stay ahead of the game. Competition will make us all better.

If I just might add one sort of follow-up question on that, Sam? When it comes to things like beer or soda, are you able to deliver value? And compete bundling with some food item, so you can mix back on the margin on a transaction by transaction basis?

We -- some of these packages that we have to aggressively go after, I wouldn't say there is a bundling opportunity, like this particular package goes with a hot dog or something. But part of why we are so committed to holding on to our units and driving share is that a particular package might be very low margin, but that customer will, for a portion of his or her purchases, pick up something else with it. And we don't went to miss that transaction.

So some of these things that the really big boxes are going after don't lend themselves to buy-item combo promotions, but they are still very important to us because of the overall basket impact. We do really like combo promotional activity and with beverages and food service and certain other items. We work that very hard and are doing it more effectively today than a couple of years ago. But some of these big take-home beer/soda packages, I don't think are natural combo items.

One would hope not. Thanks. Sam.

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

Good morning.

Sam, you have been sort of touching on this a little bit throughout the call. But on the gross margin, I wanted to dive deeper a little bit into that. For the fourth quarter, the guidance that was given for the annual implies a pretty broad range on the fourth-quarter gross margin -- merchandise margin. And with coffee costs coming down, increasing food service, I'm just wondering what, you know, what sort of other components there would lead to a margin decline aside from -- is it mostly competition? Or are there other cost pressures you are seeing?

Ben, we try -- we think of our guidance as annual guidance, and we feel that our merchandise margin remains very strong, healthy, and stable, as we have said in past quarters. So always a little bit difficult time managing the guidance conversation for us when we get to this fourth quarter. Because we start with annual guidance, and it kind of narrows in.

But Kevin and our team feel that we are in a solid, appropriate, healthy spot with respect to our long history of stable merchandise margins. And there will be a little bit of volatility from quarter to quarter, but we think when we are in real good, solid shape as we finish the year out and move to next year.

That is fair.

Can you just remind us how you are thinking about that margin opportunity longer-term and some of the key opportunities?

Yes. Our focus remains on driving same-store sales growth. And we think that, for our company, with our very, very, very, very long-term orientation, we want to be famous for driving volume and taking share. And we see the environment having a lot of retail convergence, a lot of people that from our bigger boxes, the dollar format, and so forth, they are all coming after that core convenience customer. And I think we are going to have to learn to compete against those formats that work with lower margins.

Fortunately, I think we are going to continue to drive media consumption, beverages, and food service that will help offset those pressures. So what I'm hopeful for is many years of continued healthy same-store sales growth and flat margins.

I recognize that our cigarette margin, it is down so low, there is not much more to give on that category. And you know, it is still going to feel pressure for the next year or two, but it is just not much of the base any more. We have other competitive pressures outside of cigarettes that I think will mitigate the tail winds we have in our media consumption beverage and food side.

That is helpful. Just one last one for me, on the Gainesville acquisition, obviously that is still being folded in. But you had previously mentioned some opportunity to capture incremental volume with the accounts that you had prior to the acquisition. Are there any early indications that you have that you can share, with expanding with those existing relationships?

Yes. This is Rocky speaking.

We are very excited about the Gainesville acquisition. We had some common customers in our existing commercial business that Gainesville had as well, but at a different geographic region. But there were also customers that the Gainesville group had that we did not have, and vice versa some we had, they didn't have.

So we are clearly looking at opportunities to expand business with those customer sets that were not the same. Very excited that the volumes we are getting from the acquisition is in line with our expectations, and we are looking forward to the year ahead to see you know what synergy we can identify.

Great, thank you.

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

Good morning, everybody.

Morning, John.

Sam, would you -- going back to the cost pressures and your comments of entering the new markets, can you give us a sense of separating a little bit about the differences of some of those stores? And the performance of, say, a Houston versus some of the new stores in the valley and existing markets? And just give us a sense of a little bit about when you talk about those cost pressures to build out the market now, you are more efficient in some of those markets, would that mean that just as you are leveraging some of those startup expenses as a market as a whole? Or just give us a sense of that, of separating those two markets?

Sure.

When we are building out in an existing core market where we have operated for many years, our team can train that big crew in stores right down the street, and they've got our culture, and we can develop speed. And as customers, the staff probably is very in touch with the rhythm and pace of the Stripes experience.

Stripes is bringing something different to these new markets, and there is a learning curve. And there is a cost curve for us there. We remain very pleased with the initial volumes of these new stores in the new markets. And they are starting off with a bang. But it is costing us more in labor and other operating expenses to get it done. But we are seeing, every quarter, little bits of improvement as those stores mature, in line with what our history has been.

We also have, as part of the labor bump over the last year, we have experienced wage pressure. Steve said -- and our team -- are doing a really good job with our new technology tools in managing the number of hours that we have spent in the stores. And a lot of progress here in the last 60 days or so, versus 6 months ago, in that regard. The new tools are starting to work for us.

But we have -- and it is the first time in five or six years, but we have felt some real, meaningful wage pressure in many of the communities that we operate in over the last year. And that is reflected as part of the increase in labor costs. It is about two things. Higher wages and inefficiency in the 30 or so new stores that we have in operation right now. It's not spending more hours in the same stores. We are managing the hours very well.

So, overall, just to take it one step further, the next round of new stores in 2014, for those new markets, will get a little leverage because of that -- not as many bumps in the road.

I think -- yes.

So put another way, it has taken us about six months or so to get to cash flow break even with a brand new box, if we look at the last year. Maybe we can look forward to that happening a month or two earlier. But it is not going to change the world for us.

We are making investments here for the next 20 and 30 years. And we are investing in great corners and great areas. And with experience, we are on the margin, opening up a little bit more efficiently. But this remains very, very long term investment.

It doesn't change, obviously, how you think about allocating to old markets versus new markets, as far as new construction?

No, we don't have an allocation issue. We are going to develop every new site that we can get our hands on, that meets our criteria and is reasonably priced. But that is a tough hill to climb; every site is a fight. Lots of development work. They are not easy.

Great.

We are not constrained between how many we can do, one versus the other. It is how many we can get to, period.

Great, thanks.

And last question. Mary, did you give a sense of diesel gallons and maybe just a quick commentary on fuel margin throughout the quarter? Obviously the last two or three weeks helped you. But just can you give us a sense of how much that volatility at the end of the quarter helped?

John, diesel's been running about 21% of our gallons for the last couple of quarters, and that's what we saw this quarter, as well. Certainly when the cost of fuel declines, that tends to help margins.

Great, thanks for your help.

Our next question is from the line of Kelly Bania with BMO Capital. Please go ahead.

Hi, good morning. Thanks for taking my question. Good morning.

I was hoping you could talk a little bit more about operating expenses and how those came out for the quarter relative for your expectations? And if you could tie in any color on whether or not we should continue to expect personnel expenses as a percent of merchandise sales to leverage by the fourth quarter?

Kelley, this is Steve.

First of all, several bright spots on expenses, as we mentioned. For instance, maintenance expense as percent of sales declined; other operating expenses were really in line.

On the personnel side, we were progressively better as we moved through the quarter. And we expect to be similarly solid as we move into the fourth quarter.

I don't expect flow through necessarily in the fourth quarter to be positive or an improvement against the prior year. But I expect you to see it to be in line or probably kind of flattish in the fourth quarter.

Great. That is helpful.

And then, how do same-store operating expenses look on an overall basis if you exclude the noise from going into new markets and opening new stores?

Kelly, they are certainly better on the same-store basis. We operated very carefully. Our new labor tool allowed us to literally use fewer hours to operate the third quarter this year versus the same-store base for the third quarter a year ago. And that was, that's quite encouraging.

The insight that we get by seeing forward schedules out to two weeks now and the way in which we can manage that data and adjust labor schedules in stores is far superior than anything we have ever had. That certainly has benefited us, and we expect to see some gains continuing in the fourth quarter on the same-store basis that way.

Great, that is helpful.

Then if I could just ask another one on the wholesale gas margins. They seem to be as strong as they have been in at least the last several years. So something you could talk about, just color on what drove that and whether or not that's sustainable. I notice you did raise your guidance range for the year on that metric. But I think it also implies a little bit of a sequential deceleration from the strong margin this quarter. And I don't know, I was assuming that the Gainesville acquisition wouldn't have had much of an impact, but you talked about the higher-margin aspect of that business. And so how can we expect that to impact wholesale margins going forward?

Yes, Kelly, this is Rocky.

So at the MLP level, our margin was up a little over the previous quarter. And remember the guidance that we give is an annual guidance metric. So the Gainesville gallons did help with that. They are higher-margin gallons than our average gallons, so to speak. But our overall commercial business, excluding Gainesville, experienced some good growth and some healthy margin, as well. So that -- and we have a few consignment locations inside the partnership that also helped with our margins a little bit. So several things all came together this quarter. We still feel very good about the annual guidance number we have given you, and that's my thoughts on it.

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

Hi, good morning, everyone.

Just wondering what are the debt and liabilities assumed by SUSP related to the Gainesville acquisition?

It was a stock purchase.

This is Rocky.

It was a stock purchase at the parent company, at SUSS, and then it was a contribution down to the MLP. So the net contribution is roughly about $2 million in value, and units were issued to SUSS as a result. But as far as the average --

Average (Multiple speakers) down were supply contracts, trucks, some working capital with some accounts receivables, payables, so on.

So on.

Okay.

Did you guys disclose how much the acquisition was for SUSP? How much they paid in total?

We did not.

For SUSP, it was a net contribution, and the $2 million in shares issued to SUSS was for that net contribution. There was some debt that was dropped down from SUSS that financed that acquisition.

The terms of the transaction were confidential in the agreement, and no, we have not, nor will we be disclosing the precise purchase price.

Okay.

Maybe if you could just talk about the target return for this investment versus comparing it with a straight drop-down.

This is Rocky.

So, you know, we are blessed to have a strong pipeline of growth from our parent with the Stripes stores that are being built. We've got the rent -- the 8% rent we make on that, plus the $0.03 a gallon margin, so clearly any acquisition we are doing, we want to, hopefully, achieve a yield better than that. But as far as a target number, we hadn't put one out, but obviously we want it to be accretive for our shareholders.

So we're, as you know, producing returns of 9%, 10%, 11% on average for the new store drop-downs, and we are seeking acquisition growth at a better return than that wherever we can. We think Gainesville will definitely fall into that.

Okay. And you are still comfortable --

We did provide the guidance, Sharon, of course, on what we see as immediate, the small amount of accretion for Susser Partners as a result of the transaction. And hopefully we can grow those sales and leverage the fixed cost and build more accretion in the outer years. But in that first year, I think we provided guidance of $0.05 to $0.10 per unit.

Okay, great. That is very helpful. Thank you.

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

Good morning. A couple of questions. I think, Steve, you had mentioned that your Q3 labor management was sequentially better than the second quarter. I know you have put in new labor management tools. If we were to use a baseball analogy, what inning would we be in, in terms of the expected contribution from these improved labor management tools?

Hi, Anthony, thanks. That is a great question, a way to put it. We are in the second or the third inning.

Okay.

And we still think there is a lot of opportunity. The opportunity comes in two ways, certainly it comes in managing hours used carefully, so it is as sales move up and down, based upon weather or other unforecasted trends, that we keep an eye looking forward a couple of weeks. That is one benefit.

The other benefit is managing at the customer demand. That ultimately is a big benefit to us. Making sure we have team members in stores serving during peak periods at the right time of the week. That is an upside for us on the sales side. There is not a cost-side benefit.

And on both of those, there is several innings to go.

All right, that is helpful.

And, Sam, you had mentioned that you are open to M&A opportunities. Are you still looking to potentially be still in the same markets, Texas, New Mexico, Oklahoma? Or would you be open to going outside of that three-state area?

We are open to going outside the three-state area.

Obviously, feel very grateful to be positioned, with the strong demographic trends that we have here in Texas. So we are open, but our first and primary focus is developing further our position in this region. We are still very fragmented market, and we have lots of opportunity here at home. But we are open to looking at other areas.

Thank you. Our next question is from the line of Michael Gaiden of Robert W. Baird. Please go ahead.

Good morning. Thanks for taking my call.

I also wanted to ask about M&A. And specifically I wanted to enquire about the healthy margin environment and the Texas economy tailwinds impacting your ability to do wholesale M&A. Does it help? Does it hurt? Is there no effect?

I didn't catch the last part of your question, Michael, I'm sorry? Could you repeat that?

Yes. I wanted to ask -- does the current strong margin environment and the tail winds from the Texas economy help or hurt or efforts to do wholesale-related M&A?

(Multiple Speakers)

I think it probably is hurtful. I think that there is more opportunity when companies are really struggling and in a pinch would be my -- I still think there are opportunities out there, and we are having dialogue and pursuing what we believe are real quality operations. But we are blessed to have a strong balance sheet.

So we probably have relatively more opportunities when times are really tough.

Understood and thank you.

Can I ask more specifically about the Gainesville fuels acquisition? Earlier, we talked about some revenue, synergy, opportunities. Rocky or Sam, could you frame it all -- the type of operating gains that you expect to see from that purchase, if any?

Sure.

So that would come in the form of logistic -- as we bring that platform into our company, we have a system, they had a system. As we bring them together, we'll find ways to be hopefully more efficient, hopefully buy a little bit better.

There's some assets that they have that were not fully utilized, that we have customers that we believe can use those assets this next year quickly. So we hope to be able to optimize trucks, tanks, and some of the fixed assets that we have picked up in the acquisition, and, as Rocky said, optimizing back office costs and procurement. And we -- hopefully, being a little bit bigger supplier to these core customers, will be easier for them to deal with, and they will hopefully find some advantage in this consolidation between our two businesses.

Thank you. Our next question is from the line of Karen Short with Deutsche Bank. Please go ahead.

Hi, thanks for taking my question.

Sure. Good morning, Karen.

Good morning.

Just a quick clarification. I know in the last couple of calls, you, Sam, have definitely had a cautious tone on the competitive environment increasing, and it sounds like that you don't really that tone this quarter. You are obviously optimistic about your business, but I feel like your tone is much less cautious this quarter. Is that fair? Or --

You know, I think two or three quarters ago, we wanted to call out -- I wasn't sure that the financial community was feeling what we were seeing in terms of an accelerated number of new units getting plopped down across our markets. And there is a little bit, we thought, of a misalignment of what the competitive set was, and we tried to clarify that. And I think we did so.

And that trend is, I think, well understood now. It's been well documented by a number of participants, both retailers and in the financial community, and the trend is unchanged from where it was six months ago. It's the same competitive trend. Texas is doing very well in attracting lots of new employees, lots of new companies, and lots of new competition. And we expect that to be the case for the foreseeable future.

What I felt six months ago was the financial community was hearing the lots of new customers and employers, and wasn't aware that there were lots of new competition. And we are simply trying to paint a picture of what we were experiencing and seeing, and it is a pretty steady state. It is a high-class problem to have a strong economy that's attracting new competition. And we are up for the challenge.

Got it. That is helpful. And then, just turning to the labor situation in terms of part-time workers being in greater demand and things like that -- can you maybe give some color on what your turnover, your employee turnover might be now versus, say, a year ago? And then any color on how Obamacare might impact you? One of your peers did give a dollar amount in terms of what to expect.

Both great questions.

We are working very hard on our turnover, and we have not realized improvement year-to-year. That remains one of the biggest challenges and opportunities for us. We have not realized improvement over the last 12 months. So it is pretty stable.

The impact of Obamacare, or Affordable Care Act, is -- truly we can't quantify it until we see how our employees react in the sign-up period. So the benefits being offered are changing substantially. We think that it is going to result in a low seven-figure additional cost to our company. But until we get through the open enrollment period -- and we won't know how many folks are going to continue to participate in our family care and dependent coverage, and how many are going to drop coverage altogether, and if any folks decide to opt in that didn't in the past.

We net net, unfortunately, an unintended consequence of the Affordable Care Act at our company we see lots of people that are enjoying the benefits from healthcare, family care today, are not going to choose to take that benefit going forward, because it is going to cost them more, just as it would cost our company more to continue to provide it. We'll probably have pretty -- we expect stability in the number of employees that utilize our health insurance and probably a decrease in the number of families. And the net effect of all that will still be a seven-figure, low seven-figure increase in operating expenses, because of the increased cost of providing these new defined benefits to us. But until we get through the enrollment period, we can't quantify with precision what it is going to be.

Thank you. That does conclude the question and answer session for today. I'd now like to turn the call back over to Mr. Susser for closing remarks.

Right. On behalf our team, our leadership here in the room, we'd like to close by saying thank you. Thank you to our 10,000 team members that are working very hard to try to be fast, fun, friendly, and delicious. We appreciate your time today, the many questions we've tried to address, and thanks for your interest in our company. Have a great day, everybody.

Ladies and gentlemen, that does conclude the Susser Holdings Corporation, Susser Petroleum Partners LP third-quarter earnings conference call. A replay of today's call will be in available in this morning's news release. Thank you for your participation, you may now disconnect.