Sunoco LP (SUN) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Susser Holdings/Susser Petroleum fourth-quarter earnings call.

(Operator Instructions)

This conference is being recorded today, Wednesday, February 26, 2014.

I would now like to turn the conference over to Chip Bonner, Executive Vice President. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. This morning we released our fourth-quarter and full-year 2013 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners.

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 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 also discuss certain non-GAAP financial measures that we believe are helpful for full understanding of our financial performance. Please refer to our news release for reconciliation of each financial measure.

A reminder that the information reported on this call speaks only to the Company's views as of today, February 26, 2014. So, time-sensitive information may no longer be accurate at the time of any replay.

With me on the call today are Sam L. Susser, Susser Holdings CEO; Rocky Dewbre, the CEO of Susser Petroleum Partners; 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. 2013 was a milestone year for us in a number of ways.

It marked our Company's 75th anniversary, and the 25th anniversary of our transition from a family-owned fuel business to a more meaningful entry into the convenience store business, with the acquisition of 26 7-Eleven stores in September 1988. Today we operate 627 retail stores under the Stripes and Sac-N-Pac banners.

I'm also proud to say it marked our 25th consecutive year of positive, same-store merchandise sales growth. My continued thanks to all of our team members who helped make that happen. It's a big achievement, and one that we are all very proud of.

We also celebrated a year of record organic growth in our Stripes chain, with 29 new-build, big-box convenience stores. These stores have an average footprint of 6,800 square feet, and we believe this year's crop of new stores will continue to improve in dry results in the coming years as they reach maturity.

We also are growing the Business through acquisition, with two deals recently completed. First, was the acquisition of Gainesville Fuel in the third quarter, which sells diesel fuel to oil and gas producers in north Texas and southern Oklahoma. The business is a great complement to our existing commercial fuels business serving the Permian Basin region.

Then, on January 29, we acquired 47 Sac-N-Pac stores located in the high-growth corridor between Austin and San Antonio, along with 20 dealer supply agreements, five tracts of land, and the right to acquire two additional tracts, and one stand-alone QSR. This area is a great new market for us, and it will complement our organic store expansion in some high-growth markets nearby in central Texas. Although it will take 6 to 18 months to optimize this portfolio, we expect it to be accretive, both to Susser Holdings and to Susser Petroleum Partners, for calendar 2014.

As you saw in this morning's release, in addition to Sac-N-Pac, we expect to maintain roughly the same level of new-build growth this year as we did in 2013. 13 of these new stores are already under construction. This is a positive development, because for the past two years, most of our new stores opened late in the year. We are very much ahead of the curve for new store construction in 2014, and we are very bullish on the pipeline of new locations we are building for 2015 and 2016.

Looking at the fourth quarter, we continued a solid pace of performance in our retail business. Merchandise margin was a very strong 34.4%, and 33.9% for the full year. Same-store sales growth was 2.4%, or 8.2% on a two-year stacked basis, as we were comping up against a big fourth quarter in 2012. For the full year, our average same-store sales growth came in at a respectable 3%, despite some difficult weather comparisons, especially in Q2 and Q4.

We experienced a second consecutive quarter of exceptional growth in average fuel gallon sold per week per store of 7.8%. This growth demonstrates the underlying strength of the economy and the markets we serve. For the full year, the growth in gallons per store averaged 5.8%. Significantly lower retail fuel margins compared to last year did impact our EBITDA performance in the fourth quarter, but we partly offset that with significant gallon growth, solid merchandise sales, and strong merchandise margin performance.

Our Laredo Taco company restaurants are continuing to outpace average same-store merchandise sales growth and gross margin. Freshly prepared food is now available in 64% of our stores. As of the end of the year, we operated 376 restaurant locations, including 363 Laredo Taco company locations. Following the Sac-N-Pac acquisition, we now have 400 restaurant sites. In the fourth quarter, food service accounted for approximately 24% of merchandise sales, and 33% of our gross profit dollars.

Q4 cigarette same-store sales were up just slightly year over year. Total units sold had been down by about 1% this year, although we believe we are still performing very well relative to the market. Most of the reduction comes from lower carton sales, with increases in by-the-pack sales. Cigarettes were less than 19% of merchandise sales, and less than 8% of gross profit dollars in Q4.

Our wholesale business also continues to gain strong momentum. Q4 total gallons sold to third parties increased year over year by about 18%, which reflects both organic growth, and the benefit of the Gainesville fuel acquisition we completed in early September.

At the end of January, we announced our third consecutive increase in the quarterly distribution from Susser Petroleum Partners. The distribution was increased 3.5% from the previous quarter to $0.485 per unit, or $1.94 on an annualized basis. Based on distributable cash flow of $12.6 million, this reflects a coverage ratio of approximately 1.2 times. Coverage for the trailing four quarters was 1.18.

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

Thanks, Sam. Good morning, everyone. The fourth quarter represented the conclusion of Susser Petroleum Partners' first full fiscal year as a publicly traded MLP. Since the IPO, we have generated steady growth in fuel volumes and rental income, resulting in increasing distributable cash flow, and three consecutive increases to our quarterly distribution. As Sam mentioned, we have a strong coverage ratio of approximately 1.2 times, and our balance sheet remains healthy, allowing us the flexibility to pursue accretive acquisitions.

We are very pleased with our two most recent acquisitions. Gainesville Fuel contributed to our results for the entire fourth quarter, and is on track to exceed our initial expectations to sell approximately 60 million gallons per year. The combined Sac-N-Pac stores, and the related dealer locations, historically sold approximately 65 million gallons of fuel annually. SUSP will supply fuel to all these locations, which are branded under the Exxon, Shell and Valero flags.

We have not dropped down any of the Sac-N-Pac stores to SUSP yet, pending the retail segment's evaluation over the next 6 to 18 months. Once this is complete, we anticipate SUSP may have the opportunity to purchase a number of these properties, and either lease them back to Stripes, or lease them to independent dealers.

The 2014 guidance we issued in this morning's news release reflects a full year of Gainesville Fuel results, and 11 months worth of estimated contribution from the Sac-N-Pac and dealer gallons. The guidance does not reflect any additional rental income or capital investment for Sac-N-Pac drop downs.

Next, I would like to do a quick review of some highlights of Susser Petroleum Partners' results, comparing the fourth quarter of 2013 results against the fourth quarter of 2012. As this was our fifth quarter since the IPO, I'm pleased to report that this quarter is now an apples-to-apples comparison, so we don't need to discuss pro forma numbers for the prior-year period. However, for the full year, I would suggest you use the 2012 pro forma gallons and gross profit to compare against 2013 full-year results that we provided in this morning's news release.

Volumes sold by the Partnership to Susser Holdings for retail at Stripes stores and independently operated consignment sites increased 10% year over year to 270 million gallons. This growth reflects gallons sold by 29 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 25% to 146 million gallons.

Gross profit on these third-party sales increased 45% to $7.6 million, or $0.052 per gallon, compared to $0.045 per gallon a year ago. The margin improvement per gallon was largely driven by higher-margin commercial fuel gallons, including a significant contribution from Gainesville Fuel, and improved procurement due in part to increased purchasing power and scale.

We added eight new contract dealers last quarter, and discontinued four, which brings our total independent dealer count to 591 locations at the end of December. This includes 492 supply sites, and 99 consignment sites. During January, we added a total of 23 supply sites, including those acquired in the Sac-N-Pac transaction. There were no closures in January, so our dealer total was 614 at the end of the month.

Average fuel margin for all gallons sold by the Partnership, on a weighted average basis, increased to $0.038 per gallon, compared to $0.035 per gallon a year ago. Partnership gross profit totaled $20 million, up 30% year over year. Adjusted EBITDA was $14.1 million, up from $10.8 million in the year-ago period, and up over $300,000 from the third quarter.

Rental income at the Partnership continues to increase, as SUSP completes additional sale lease-back transactions with Suss. In the fourth quarter, total rental income contributed $3.3 million to gross profit, of which $2.4 million was from Stripes. We completed sale lease-back transactions for three Stripes stores during the fourth quarter for $11.9 million, and five more in January for $19.5 million. Since the IPO, we have acquired a total of 38 Stripes stores for $152.7 million, that will produce annual rental income of approximately $12.2 million for the Partnership, plus the $0.03-per-gallon margin on fuel volumes.

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

Thanks, Rocky. Good morning, everyone. To summarize the consolidated financial results of Susser Holdings, this morning we reported fourth-quarter net earnings of $5.9 million or $0.27 per diluted share, versus net earnings of $10.6 million or $0.49 per diluted share in the fourth quarter of 2012.

Adjusted EBITDA totaled $37.3 million, which was down 18% from a year earlier. This primarily reflects the impact of lower retail fuel margins compared to a year ago. Q4 retail fuel margin, before credit card fees, averaged $0.146 this quarter, which was $0.065 a gallon lower than a year ago, but was in line with the prior five-year average of $0.144 pro forma for the MLP impact. Our full-year retail fuel margin of $0.169 was also in line with the five-year average, which is now $0.167 per gallon.

We have provided the details of our historic fuel margins on our website, both as reported and pro forma, for the $0.03 now charged to Stripes by the MLP. You'll note that our 2014 guidance is also in line with this pro forma five-year average margin, at a range of $0.15 to $0.18.

Our average retail selling price of fuel this quarter was $3.19, which was lower than both the prior quarter and fourth-quarter 2012. This reduction helped to lower credit card expense per gallon a little, to about $0.053 per gallon.

Most of the increases in expense lines were related to the growth in our retail and wholesale business over the last four quarters. Personnel expense was 20% of merchandise sales, versus about 19.2% a year ago. Part of this increase is due to a higher proportion of food service, and a portion is due to the labor inefficiency of our new stores in their first few months of operations. We opened 9 new stores during Q4 and 10 in Q3 that are still ramping up.

In addition, labor efficiency was negatively impacted by the colder weather, as our sales were slightly lower than we had anticipated. That said, our operators are managing labor hours more effectively than we did just a few quarters ago.

The increase in G&A expense for both the quarter and full year primarily reflects additional non-cash stock-compensation expense, which was up by $2.4 million for the fourth quarter, and by $3.4 million for the full year. Other increases generally were related to additional costs of supporting our accelerated growth, and operating two public companies.

Interest expense for the quarter was $2.5 million, versus $9.9 million a year ago. This decrease was due to the refinancing of our senior notes we did last Spring. As you'll note in this morning's guidance, we expect consolidated interest expense for 2014 to range between $13 million and $16 million. The slightly higher run rate primarily reflects financing our planned growth through our two revolving credit facilities.

Depreciation and amortization in the fourth quarter was up $3.4 million year over year, to $16.6 million for Q4. Just a reminder that our pace of new store construction and our recent acquisitions will increase our D&A at a faster rate than in prior years. We currently estimate D&A of $70 million to $80 million for 2014, as reflected in our guidance this morning.

Our effective tax rate for 2013 was 26.8%, excluding one-off charges, and before deducting minority interest. We expect our 2014 effective income tax rate to be between 27% and 31%. And you'll note that we have added this line to our guidance table.

Turning to the balance sheet, at year end, the Parent Company had $189.3 million drawn on its revolving credit facility, plus $1.4 million in letters of credit, leaving it with unused availability of $309 million. In December 2013, the Partnership increased its revolving credit facility by $150 million to a total of $400 million, and we still have a $100-million accordion feature to further expand this revolver. At year end, Susser Petroleum had $156.2 million drawn on its revolver, plus $10 million in standby letters of credit, leaving unused availability of $234 million. So, including our cash balances, that gives us total available liquidity of $565 million at year end to fund our growth.

Our trailing 12-month adjusted EBITDA was $169 million, and our 12-month net-debt-to-adjusted-EBITDA ratio remained at less than 2 times on a consolidated basis. Consolidated capital spending in the fourth quarter was $50 million, of which $14 million was incurred at the Partnership level.

For the full year, CapEx was $212 million, including $116 million at Susser Petroleum. Our CapEx guidance for 2014 of $300 million to $350 million includes the $88-million purchase price for the Sac-N-Pac transaction that closed at the end of January. Please see this morning's news release for other guidance metrics for 2014.

Now, operator, we are ready for questions.

Thank you, we will now begin the question and answer session.

(Operator instructions)

Our first question comes from the line of John Lawrence with Stephens.

Thank you, good morning guys.

Hi, John.

Sam, could you walk through a little bit -- I mean congratulations on everything on the retail side. Could you give us a little bit of flavor of the fuel margin and the cadence there, little surprising it was that weak, in our opinion. But just trying to get a sense of how that flowed, the volatility, and was it the last few weeks of the quarter that impacted that? Thanks.

I do believe that margins were markedly tighter toward the end of the quarter, for us. But I think the difference, really over the last year, one of the differences over the last year, has been the lack of volatility. That's really was a sea change in 2013 versus the two prior years. Our average retails have been holding in a pretty tight band, and we just haven't had the benefit of volatility from weather crises or global crises, not that we are pulling for crises around the world, but they do drive volatility and energy, which is always correlated to higher fuel margins, and it's been a period of stability, which has impacted us.

So on that, Sam, and you may have mentioned that a little bit. But I mean the cadence as we went through the quarter -- Mary could you give us a sense of through the quarter, just how meaningful was, say, that last month?

John, there I don't -- I think as Sam mentioned, we saw lower volatility this year. And while there was some difference quarter to quarter, it wasn't as marked as you seem to think it might have been.

I think the last couple of weeks were maybe $0.05 a gallon or so, I'd have to go back and examine data, but December was about $0.05 a gallon lower than where we were in October and November, if that's helpful?

Yes, that is helpful. Secondly Mary, as far as, although you mentioned on the labor hours, et cetera, that I would assume the work force management system and all those were continuing pay dividends and we are starting to see some of that?

Yes, we rolled that out over the summertime, and our store managers are enjoying the new system or learning how to use it, and we feel very good about where that's going to put us this coming year. As I mentioned, we had a lot of new stores come in at the end of the year, and you know, those new stores used a lot of labor hours, and don't quite have the sales to cover that.

So that, along with the just the normal Q4 seasonality, and on top of that, the much colder winter that we saw in Q4, all impacted that number. But we feel good about our labor management going forward.

John, you remember exactly one year ago, and also three quarters ago, I expressed some frustration around the way we were running things operationally, and just not as tight as we should be, and our new labor systems are starting to mature and get traction. We are doing a much better job of managing our hours in matching it to the customer counts.

It's hard to see it in our P&L, because the mix of food service is growing so fast. We have to use directionally twice as much labor per dollar of food service sales -- three times as much labor, for dollar of food service sales, as for a dollar of nonfood service merchandise. And so, with that mix surging, it looks like our labor is not getting better, but inside, under the hood, we are really making some progress. And we feel well positioned for the balance of this year and the years ahead.

Great, thanks. Last question for me, the cadence or opening schedule for 2014, first half versus second half?

John, this is Chip. We will have two stores open in Q1, and we will start up to seven more stores in Q1. So as Sam indicated, we have 13 stores under construction today. We will have a significant amount of stores start in Q2. And -- which means the stores under construction today will be opening in Q2 and in Q3. It is must more front-end loaded this year than it has been in years past.

We also have a more robust land bank than ever. So we feel like we are in a position to spread out our new construction over the next couple of years, where it is more rateable. And it is going to be less growing pains, and more efficient from a cost standpoint for the company, overall, as we look out over the last couple of years.

The last couple of years have been a little bit painful as we have ramped up our growth to the current levels, but now we've got it at a place where we feel that we are going to manage it better and start to leverage cost as a percent of sales more effectively here in the next couple of years.

Thank you, our next question comes from the line of Sharon Lui with Wells Fargo.

Hi, good morning.

Good morning, Sharon.

Just a question on the SUSP guidance, does the volume guidance include the $65 million of motor sales related to 3W?

Yes, it does.

It does? But the opportunity is for SUSP to buy, I guess the assets and earn 8% lease rate on that? Is that how we should think about it?

Yes, Sharon this is Rocky. So the asset -- first of all, all of the gallons to the Sac-N-Pac stores and the dealers are supplied by the MLP. But none of the assets of the 47 stores have been acquired at the MLP level at this point.

They are trying to determine what the long-term plan is, some stores will likely be converted to Stripes, some would likely be converted to the dealer channel. Either way, we anticipate SUSP having the opportunity to acquire some greater portion of those locations, once the determination's been made. But at this point in time, none of the assets are actually owned at the MLP level.

And the -- there are no drop-downs of the Sac-N-Pac assets contemplated in the SUSP guidance. But after we make final determinations of which stores are going to move to the Stripes network. We are in a position to accelerate drop-downs and increase the number of drop-downs to a higher level than what's in the guidance. But we haven't made that determination yet, and so we don't want to guide for it.

Okay, but the drop-downs could be conversions, or just, if you decide to maintain the Sac-N-Pac?

They could be, but it is also possible that we move some sites that are today retail under Sac-N-Pac to our dealer model and dealers opt to acquire some of that real estate. So if we are putting some stores into the dealer channel, some may be -- the real estate might be sold to the third party dealers, or could be sold to the MLP, and leased to the dealer to be operated.

Okay, and in your consolidated growth CapEx guidance, do you assume any spendings for conversions of these Sac-N-Pac?

Yes, we do have some dollars allocated in our guidance to upgrade and convert some of the Sac-N-Pac locations.

We are talking about at the Susser Holdings level that we have that, right?

Yes, that wouldn't be at the partnership level, but it would be at the Susser Holdings level.

Thank you, our next question comes from the line of Kelley Bania with BMO Capital.

Hi, good morning, thanks for taking my questions. Just first wanted to ask --

Hi, Kelly.

Good morning. Just first wanted to ask if you could try to quantify -- if you have any estimate, whatsoever, on the impact of weather for the fourth quarter on your, both your comps and your personnel expenses?

Generally, when, if you look at what we think of as good weather/ bad weather kind of quarter, it is a couple hundred basis points, when you have meaningful difference in weather patterns. And a couple hundred basis points is enough to really alter that percent to sales of labor force. I don't have a good way of quantifying exactly what that would be for you, but I would guess 10 or 20 basis points as a percent of labor when you have a 5% comp quarter versus a 3% comp quarter.

This past year, we had two tough weather quarters, Q2 and Q4, it is widely reported, no news in that. The two years prior to that as you recall, Kelly, were years of exceptional heat and exceptional drought in the Southwest, and we are you know, have comped up against that now. So overall, the weather comps are much easier for us here in 2014. And I approach this year with more confidence than I had last year about our ability to punch out another year of same store merchandise comps.

Feel very good about a confidence level to turn a 25 year record into 26 this year. We feel very well positioned, the economy is strong, weather comps aren't as difficult. Clearly, January was a weather challenge across the country. But our economy, and our store performance, and our trends of market share, the programs that we are implementing, all gaining traction. We feel very good about the outlook, and definitely feel better about the outlook than I did 12 months ago.

That's very helpful. Then just another question on Sac-N-Pac, I realize you guys are evaluating them over the next 6 to 12 months, and how they are going to be integrated as either Stripes or Stripes with Laredo Taco or wholesale? But I'm just curious what would be a reasonable assumption for us to assume in our models in how those 47 sites will in integrated at this point?

Kelly, I am just not prepared to discuss that on the call today. We are -- these stores were, including some high volume, new, really great facilities, and some older, smaller facilities, with a wonderful team of folks that were part of the family, we're thrilled with the very high retention we have had through the transition, much higher than we expected. We are really pleased about the potential to grow merchandise sales here in the next 6 to 9 months in these stores, bringing our purchasing power and some of our merchandising in value to Sac-N-Pac customers that they haven't been able to offer in years past.

We went into it not sure how many of the stores would be able to do enough volume to operate under the Stripes model, but as we are getting into it, and seeing the opportunities and seeing some of the initial response to a few key promotions, that view has changed, and we might end up with keeping a whole lot more of the stores in the Stripes system. But we just need to take time to run the play, and then evaluate the data. We want to be fact-based.

I mean, when you look at the base of stores, how many potentially have the, the in-store square footage for you to potentially fit the Laredo Taco concept in there?

I would say no more than a third would naturally fit Laredo Taco company. But of the remaining 2/3, we might be surprised with our ability to help the Sac-N-Pac team really grow sales volumes, and be in a position to hopefully convert many of them to the Stripes brand.

Thank you, our next question comes from the line of Irene Nattel with RBC Capital Markets.

Thanks, and good morning everyone.

Good morning, Irene.

Just looking at the guidance, on gas volumes for 2014, given everything that's going on, they seemed a little bit lighter than what I would have thought. Is any of that the result of what you are seeing in Q1, weather impact? Or is it a result of a shift in the competitive dynamic? If you could talk us through that, it would be very helpful.

Thanks for raising the question, Irene. One issue is that the Sac-N-Pac stores, the 47 Sac-N-Pac's come in at a lower volume per store than the rest of the chain. And that tones down the, the guidance that we need to put in here in this average per store calculation. There isn't any change, certainly for the negative or outlook for the negative economy. Everything is, remains intact, and we expect to see a number of big, industrial plants in our region break ground over the next year.

So we feel good about the economy. It remains, you know, intensely competitive, as it always has been. We are aware that we have delivered several years of exceptional comps on fuel volume, and as you have heard me say, Irene, trees don't grow to the sky, even in Texas. So we are trying to be conservative in our outlook and in our guidance. The one kind of, hard data point, I think is the Sac-N-Pac volumes per store are meaningfully below Stripes volumes. So that affects the guidance.

Okay, then, so we should not then necessarily assume there is any shift whatsoever in underlying trends at your core Stripes stores, excluding Sac-N-Pac?

Not that we are seeing, Irene.

That is great. And then just on the subject of --

Even in these difficult weather conditions, obviously, we'd be doing even better if things were hot and dry, which hadn't been the case. But the underlying strength of the business is very healthy, and we're looking forward to producing another year of strong comps. Hopefully better than the last year.

Thanks Sam, and just, you know, you did call out the easier comps in Q2 and Q4 of 2014, and I know that Q1 of 2013 wasn't particularly good, but it wasn't as bad a Q1 as you are having this year, was it? So could you just talk a little bit about what's been going on in your markets please?

We have had three very tough weather weeks so far this year. Out of whatever it's been, eight weeks of the year, three of them have been very tough. But overall, looking through the average and everything, we feel like the customer is still spending money in our stores. We are still continuing to see the same trends and big categories, strength in food service, and salty snacks, and beverages. That's driving traffic for us.

We do have a calendar shift this year, in that Easter comes in the second quarter instead of the first. So that is going to make the Q1 comparison a little tougher. Obviously Q2 should be a very, very easy comparison for us because the weather was horrific last year, and Easter comes later in the year. Overall, we see more tourist traffic when Easter comes in April, than when it comes in March, in the middle of Spring Break, so to be able to spread it out, results are doing more business in years past. So we really like the way that lays out, although, we expect a much stronger comp in Q2 than Q1.

Thank you, our next question comes from the line of Ethan Bellamy with Baird.

Good morning guys, congratulations on a solid quarter. One item on the MLP, the maintenance CapEx guidance was a little higher than what we were looking for. Is that due to acquisitions, the year-over-year change? Can you give us a hand in terms of modeling that off of percent of EBITDA or PP&E, and what that ratio might look like over the long-term?

Yes Ethan, this is Rocky. If you recall, we acquired the Gainesville Fuel book of business in Q3 of this past year. Inside that business, they have a number of trucks that obviously are used in the delivery of fuel, and as we replaced those, that's maintenance capital. So that is a big chunk of it. I think our overall guidance was still at a couple of million dollars. But that's the biggest component of it.

Okay.

As far as -- (multiple speakers)

Sorry, go ahead.

I think our guidance was $2 million to $4 million, I believe for maintenance.

Is that a good number going forward? If we break that out per site, for example?

I wouldn't break it down on a per site basis, I mean because --

Probably pretty level from there without meaningful growth by acquisition. This is, $2 million to $4 million range is likely to be -- without a meaningful change by acquisition, this could be the guidance you would see the year after, and the year after as well.

Next question comes from the line of Scott Mushkin with Wolf Research.

Hey guys, thanks for taking my questions. Just wanted to look at the margins in the merchandise business a little bit and your guidance. Seems like you know, maybe the leverage point Sam, if we are going look at the guidance is that maybe sales can do a little bit better from what you are talking about? Maybe there are too many levers to pull on the gross margin or on the store expense side, or am I misreading that? Maybe take a shot at that one?

We feel pretty good about our ability to achieve these guidance targets. I mean, we have always tried to be conservative and realistic, and our experience as a public company -- we have been doing it seven years. I think we have only grown more conservative as we have put together our annual guidance that we share with you in February. But we feel good about merchandise margin.

The tough side, you have big box competitors that are suffering, and producing negative comps, we're not producing negative comps. But we are prepared to be as competitive as we need to be, to hold on and grow our market share. And we have a, do what it takes attitude there. But with the positive trends in our food and higher margin beverage categories, I think it is definitely possible that we could get to the high-end of this margin guidance, or maybe a little bit beyond, because of positive shifts in mix, It's in the realm of possible.

How is the environment in consumables generally -- not in the restaurant side of your business, but on the other side? I know you have talked, oh I guess through the back half of last year that things were pretty darn tough. Is it still remaining that way? Or are things easing up a little bit?

Scott, this is Kevin. It remains pretty much the same. It's very competitive, and everybody is continuing to go after a piece of the pie. But we are very confident that with our programs and our initiatives, our food program, that we'll continue to look at taking more share, and building around that business.

We have a few large supplier partners that are really working very closely with us. And we've got some programs and buy-store merchandising initiatives that I think are going to really help us this year. I don't think that some of the aggressive reaching for price is working so well for some of our big box competitors. They are still doing, it but I'm not sure it is working quite as well as they intended. And we are continuing to hold on and grow our business, relative to the total spend in some of these big categories.

We see what's going on, and we have definitely been holding our share, because, I guess, of our great real estate and great people, and the improvements we are making in service. We have a lot of little things that we are working on relentlessly here, and it is working. We are getting a bigger and bigger share of these big consumer spend categories in our markets.

Thank you, our next question comes from the line of Dane Leone with Macquarie

Hi, good morning, thank you to taking the questions. If you bake everything together what you've given in terms of building out a QSR with some of the operational tools. Could you maybe help us frame the big picture here of, you know in 2014, is it still going to look more like 2013 from an operational leverage point of view? Or do you expect expenses as a percentage of your in-store revenues to have bottomed out and actually seen some leverage this year, maybe ramping up into 2015?

If I could strip out the Sac-N-Pac, out of the portfolio, which you can't do. But if you stripped it out, we would expect to see expenses as a percent of sales improving in 2014, versus 2013, across a number of lines. We have more control, more visibility, more process. We feel confident in our ability to grow sales this year. That feels pretty good. I think, given the size and lower volume of the Sac-N-Pac portfolio as it works its way into the system, it is going to cause some noise inside the numbers.

But we feel very bullish about being able to grow Sac-N-Pac merchandise volumes at a level that is, kind of the 10% level, for the next couple two or three years. Which has been our experience with Town and Country and stores we have acquired from Circle K and 7-Eleven and others over the years. We have seen the same repetitive opportunities with the Sac-N-Pac group. So it may be a little noise in the expense relationships this year because of it, but we are really pleased we made that acquisition.

Okay great, and then, I'm not sure anyone asked it, but could you, did you give any color regarding core-to-date retail fuel margins?

We have a practice of not commenting on margins in the quarter, Dane. It's so -- it can be so volatile, we could, we feel that we could very mislead the market one way or the other. Because the last week or two can completely change the results for the quarter. So we have had a firm practice, since going public, of not commenting on fuel margins in the quarter. Other than to say when it is rising, that usually hurts us, and when it is falling that usually helps us. But we don't comment beyond that.

Thank you, our next question comes from the line of Ben Brownlow with Raymond James.

Good morning, just a follow-up on the last question. I know you don't want to comment too much on the inter-quarter fuel margins. But is it fair to say that March, the month of March last year was extremely difficult? And that quarter-to-date you have had a little bit more favorable cost environment? But ultimately, I'm just trying to get it you know, how you are thinking about margins and the pricing strategy as you go forward over the next few weeks?

Ben, we don't think about margins on a weekly or monthly or quarterly basis. We have a very long-term approach about holding and growing our volume, and share. And there hasn't been any change in our fuel pricing approach or philosophy, and don't anticipate any.

Okay, and just one more for me. On the wholesale side of the fuel margins to the third party, which I guess were up a little bit to $0.052 per gallon, is there any way to quantify the benefit that you had you from the Gainesville acquisition on that fuel margin?

This is Rocky, so we commented when we acquired that business that we anticipated about 60 million gallons a year. And our expectation is coming to fruition, we are right on track and feel good about that. So --

Rocky's sandbagging you, we were ahead of historical run-rates since we closed the deal. The margins in Gainesville are two to three times the fuel margins of the rest of the portfolio, so that definitely helps.

That was margins, I was talking about gallons. (laughter)

We have been very pleased with Gainesville.

Next question from the line of Anthony Lebiedzinski with Sidoti & Company.

Good morning, the merchandise margin was better than what we had expected, now I know from time to time there are some timing shifts with vendor rebates. Did you see that in this quarter, and how should we think about that in 2014?

A big shift last year from one quarter to the next with some vendor rebate issues, and I don't think that's -- Kevin, would you please comment? Do you see any big shifts on the horizon?

I don't see any big shifts on the horizon. But traditionally, we do pick up some annual growth rebates at the end of the year that we book when they are received.

So because we hit growth targets there at the end of the year, we had earned some additional incentives from certain suppliers and we were able to release that into the fourth quarter.

Got you, and I may have missed this, but did you give the same store sales number for merchandise excluding cigarettes?

We can give that to you.

For the quarter was 2.9% excluding cigarettes, and 3.6% for the full year.

Got it, okay, and Sam you mentioned before that as you opened new stores there are some initial labor inefficiencies. On average, how long did it take for these new stores to become labor efficient? I guess in your opinion.

Anthony, this is Chip, on new stores, our program is, is we have two weeks of training before the store is open. So you have that labor that runs through all of these stores. And then it takes us about six months to ramp sales up, and get our labor basically righted. We are trying, we are working hard to make that shorter than six months.

But these stores, a lot of these stores are in areas, growth areas, where business is coming. And so these sales will ramp up, you know, we expect these sales to ramp up year-over-year. So it is constantly tweaking our labor metrics to make sure we have the right labor in there. But all new stores have training on the front end, which causes additional labor to hit our line.

Also Anthony, in 2012 and 2013, we entered a couple new geographic markets, the greater Houston area, and Temple, Killeen, Waco. The staffing efficiencies in these new markets were much higher, and as we get more stores, more share, more density, we think we are going to be increasingly efficient. And about half a little bit more than half of our new store growth, new build boxes, are in these newer markets. But we think we are going to be more efficient with them in 2014, than we were last year.

Thank you, our next question comes from the line of Ronald Bookbinder with The Benchmark Company.

Good morning, with Sac-N-Pac doing lower volumes than the rest of the chain, should we be thinking about some de-leverage of the personnel costs when looking at 2014 as you work through this acquisition?

I think it is going to show probably higher labor to sales in 2014 because of bringing that portfolio on, into the 2014 mix. But in 2015, labor as a percent of sales, will show positive leverage, as compared to 2014. Because we are building sales, and we'll be able to increase labor efficiency in that portfolio of stores over the next 12 to 18 months.

Okay, and last year, your initial average per store gallon growth was up 1% to 4%, and you ended up achieving 5.8%, congratulations.

Thank you.

And so, would you be conservatively looking at the Stripes space in that same range, such that Sac-N-Pac is having a negative 100 basis point impact on that initial guidance?

Hi Ron, this is Mary. I think that would be a pretty close assumption. We, as Sam mentioned, we did take the Sac-N-Pac gallons into account in the guidance, which does include all of our stores. Whereas, if you recall on our merchandise same-store guidance that is only the stores that have been on our system for 12 months. So, I think you are correct in that assumption, that exclude being Sac-N-Pac our guidance would have been similar to what we would have guided in prior years at this point in time.

Okay, and just lastly, why wouldn't you drop all the Sac-N-Pac stores down to SUSP, whether they are leased to dealers or leased to Stripes?

Well the supply will all be -- is already being provided by SUSP, from the first day. But the real estate today is on at the SUSS level. And if we want to maintain the flexibility to sell some real estate to some dealers in select cases, if that is the determination that the Company makes. So we don't want to do drop-downs until after those decisions have been made.

The other thing is, if we spend dollars to convert the stores to Stripes, that CapEx would then be spent by SUSS, which would be included in the price that we drop it down. Versus dropping it down, and then keeping that CapEx on SUSS books. So we want to do the conversion first, before we drop it down.

Okay, great, thank you very much, and good luck for 2014.

Thank you very much, we appreciate it.

Thank you, our next question comes from the line of Karen Short with Deutsche Bank.

Morning, Karen.

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Questions on the cadence for the merchandise comps during the quarter. Was it relatively steady growth throughout the quarter? I know you guys mentioned there were some weather impacts. Any color you guys can give on week to week volatility, maybe what has been impacting that, and if you have seen any significant change across your various markets?

Looking at Q4, October was a strong month and the weather got us in November, and especially in December. We also were going up against increasingly difficult months in the prior year. So the comps got harder as the quarter went along, and the weather got worse. But we -- you know, weather obviously is going to vary from month to month to month. It is not something we spent a lot of time worrying with.

We feel very good about our ability to grow our comps at a healthy level this year, even though there is not much inflation out there in the economy, we still feel very good about our ability to grow our comps. Which is going to, I think, with our improved controls and systems, that are starting to mature and get traction. I think we are going to be better at expense control as well this year.

Okay, thanks for that color. You mentioned the inflation's been pretty modest. What's really embedded in your comp forecast for this year in terms of inflation?

We are seeing inflation of no more than 1%, maybe 0.5% in terms what have we are really experiencing in the business. It's very modest.

Okay, great. Just a last question on the employee cost trends, healthcare trends, any color you guys can give on, how you are thinking about potential headwinds looking out this year, any impact from Obamacare?

We estimate that our healthcare costs in 2014 are going to be $3.3 million to $4 million higher than the prior year. And with most of that, as a result of the Affordable Care Act changes. A small part of that because we have just a larger Company, and we are adding so many new employees as we grow stores at this big clip. We are adding employees, excluding the impact of Sac-N-Pac, just to organic growth, we are growing about 1,000 employees a year.

Thank you, I would turn the call back over to Mr. Susser for any closing remarks. Please go ahead, sir.

We thank everybody for your time and your interest, and I hope you'll come down and see the new stores that we're building, and some of the tweaks we are making in merchandising, and visit us at Suss Petroleum Partners as well in Houston. We have a brand new store near the big Houston Intercontinental Airport, we'd love to show you around when you guys are coming through the region. Thanks for your time, everybody

Thank you ladies and gentlemen, this concludes our conference for today. Replay information is available in this morning's press release. Thank you for your participation, you may now disconnect.