Sunoco LP (SUN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Susser Holdings, Susser Petroleum Partners first quarter earnings conference call.

(Operator Instructions)

This conference is being recorded today, Wednesday, May 7, 2014. I would like to turn it 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 first quarter 2014 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.

They are subject to risk and uncertainties that could cause the actual results to differ materially as described more fully in the company's filings with the SEC. During today's calls we will also 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.

With me on the call today are Sam L Susser, Susser Holdings' CEO; Rocky Dewbre, CEO of Susser Petroleum Partners; Sid Keswani our Senior Vice President for retail operation; and Mary Sullivan our CFO, and other members of our leadership team.

As you are probably aware, last week, Susser Holdings agreed to be acquired by Dallas-based Energy Transfer partners in a cash and units transaction valued at about $1.8 billion. We expect to close in the third quarter pending approval by Susser Holdings shareholders and other regulatory clearance. On today's call, we won't be able to comment on additional details of the transaction, the timing of the integration, or the drop downs to SUSP, executive staffing changes and the like.

Beyond that, what was disclosed in the news release, subsequent AK filings, and joint conference call we held on April 28, so please keep that in mind as we enter the Q & A portion in a few minutes. We have rescinded full year 2014 guidance for SUSS as is customary for publicly traded companies that are being acquired.

Given that Energy Transfer has stated that its plans to begin dropping down Susser Holdings and Sunoco operations into SUSP shortly after closing, we have also rescinded our original full year 2014 guidance for SUSP. Because we don't have a clear line of sight as to what SUSP will look like in the latter half of the year. After closing, any future drop downs are subject to market conditions and approval of SUSP conflicts committee.

A reminder that the information reported on this call speaks only to the company's view as of today, May 7, 2014. So time sensitive information may no longer be accurate at the time of any replay. Now I will turn the call over to Sid Keswani, Senior Vice President of operations at Stripes.

Thanks, Chip. Good morning, everyone. Thank you for joining us on this call.

Let me begin with a brief look at our Q1 results for retail operations. We delivered solid performance on the merchandise side of the business during the first quarter despite the fact it was much colder and wetter than normal, including the March spring break period.

Same store sales increased 1.9% over last year or 6.1% on a two-year stack basis. Easter fell in the second quarter this year versus the first quarter last year. So, if you normalize the impact of the calendar change, we estimate it would have increased our same stores sales growth by about 50 basis point. We have already realized the benefit of this in the second quarter.

Merchandise margin was a very solid 33.9% versus 33.1% a year earlier. This is primarily due to the favorable mix changes driven by our solid growth in food service, and some improvement in shortage control. Average fuel gallons sold per store increased 2% versus 4.1% a year ago. This metric includes all stores, and is up 4.2%, excluding the Sac-N-Pac stores which have average fuel volumes that are currently 60% of Stripes levels.

Overall personnel expenses were 21% of merchandise sales, versus 20.6% a year ago. The overall increase in Q1 is due to several factors, including a shift towards more food service, which requires about two to three times the labor as a percent of sales versus traditional convenience store merchandise. Lower than expected top line growth due in large part to the cold, wet weather. Labor inefficiencies related to ramping up new Stripes stores we have opened over the last six months, extra labor and travel costs for our store managers and area managers that mentored the new teams at the Sac N Pac stores that we purchased at the end of January. And higher health care costs. The Affordable Health Care Act is adding about three to four million annually to our health care costs.

These head winds were offset by continuous improvement in the management of labor hours work, versus our staffing model, careful management of our wage rates, and a significant increase the ratio of part-time versus full-time for new hires this year. The team has been focused on labor control and sequentially through the quarter we saw improvement each month.

We opened two new Stripes stores in the first quarter in addition to adding the 47 Sac N Pac stores in January through acquisition. As of today, we have a record 17 new stores under construction so we will be bringing on a lot of stores later this quarter and in the third quarter. So far in the second quarter, we have reopened two acquired stores in central Texas, one in Bryan, Texas and the other in Llano, Texas.

Last month we completed the initial merchandise resets at all Sac N Pac locations, bringing their product mix closer to the Stripes offering. We expect the merchandise resets and our close working relationship with key suppliers will drive significant growth in our merchandise sales over the next two years.

We currently operate 631 convenience stores and more than 400 have restaurant locations. Food service is and will continue to be, an important focus for our C stores because it typically drives the purchase of other high margin items like drinks and snacks. In the first quarter food service, nonalcoholic packaged drinks, and snacks represented 46% of the merchandise sales and 60% of the merchandise gross profit contribution.

And now I'm going to turn it over to Rocky Dewbre for a more detailed look at our wholesale business. Rocky?

Thanks, Sid. Good morning, everyone.

Our wholesale fuel business continued to perform very well last quarter. As a result we are pleased to announce the fourth consecutive increase in our quarterly distribution at Susser Petroleum Partners, an increase of 3.5% versus the prior quarter to $0.502 per unit or $2.01 on an annualized basis. $0.502 cents is a $0.065 cent and 14.8% increase over the distribution we paid last May. Based upon distributable cash flow of $14 million, this reflects a coverage ratio of approximately 1.27 times for the first quarter and coverage of 1.22 for the trailing four quarters.

Susser Petroleum Partners delivered robust first quarter performance with an 18% year over year growth in fuel gallons sold and a 42% increase in gross profit. The partnership continues to generate solid growth in fuel volumes and rental income through our existing and acquired stocks. Resulting in increased distributable cash flow and distributions.

An important part of the year over year growth was driven by the Gainesville Fuels and 3W Warren Fuels acquisitions we completed over the last nine months. For the Sac N Pac, 3W Warren Fuels acquisition, we increased our third-party volume with the addition of 19 new dealer sites. And our volumes sold to affiliates increased through the addition of 47 Sac N Pac stores that are operated by Stripes.

Volumes sold by the partnership to affiliates, which includes volume sold by the partnership to Susser Holdings for resale at Stripes and Sac N Pac stores and independently operated consignment sites increased 11% year over year to 278 million gallons. This reflects very strong volume at new Stripes stores, healthy growth trends at existing Stripes stores, and at our dealer operated consignment locations.

Volumes sold to third parties, including independent dealers and commercial customers, increased 34% to 156 million gallons. Gross profit on these third-party sales increased 53% to $8.8 million or $0.057 per gallon compared to $0.05 per gallon a year ago. The margin improvement per gallon was driven by higher margin commercial fuel gallons. Primarily from the Gainesville Fuel gallon mix as well as higher margins on other commercial gallons.

We added 27 new contract dealers last quarter, including the 19 acquired locations and we discontinued 2. This brings our independent dealer count to 616 at the end of March, which includes 517 supply sites and 13 consignment sites. In addition to the 86 consignment sites supplied by Susser Holdings.

Average fuel margin for all gallons sold by the partnership on a weighted average basis, increased to $0.04 per gallon compared to $0.036 per gallon a year ago. Again this mainly reflects the strong margins on the Gainesville Fuel volumes we sell to permian basin producers. Partnership gross profit totaled $22 million, up 42% year over year.

Rental income continues to increase as SUSP completes additional purchase and leaseback transactions with SUSS. In the first quarter, rental income contributed $3.9 million to gross profit accounting for almost 18% of the partnership's total gross profit.

We completed drop down transactions for seven Stripes stores during the first quarter, for $27.5 million and two more in the second quarter for $8.5 million. Since the IPO, we have acquired a total of 42 Stripes stores for $169.6 million that will produce annual rental income of approximately $13.6 million for the partnership, plus the $0.03 per gallon margin on fuel volumes.

The relationship with Stripes plus the outstanding work led by our Chief Operating Officer, Gail Workman, has increased our organic growth, improved our customer service, and added scalability to our platform.

The net result is that adjusted EBITDA for the partnership was $15.7 million in Q1, up from $11.2 million a year ago and up more than 11% versus the fourth quarter. Distributable cash flow totaled $14 million representing a 35% increase over the prior year period.

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

Thanks, Rocky. Good morning, everyone.

To summarize the consolidated financial results of Susser Holdings, this morning we reported a first quarter net loss of $1.8 million or $0.09 per diluted share versus a net loss of about $230 thousand or $0.01 a share for the first quarter of last year.

As Sid mentioned earlier, the warm weather quarters are our strongest, and the cold weather quarters are our weakest year in and year out, both for merchandise sales and for fuel margins. The first quarter was no exception and we were comping up against strong numbers for the last couple of years.

Adjusted EBITDA totaled $29 million which was down 8.8% from a year ago. EBITDA performance was significantly impacted by lower retail fuel margins, which were $0.036 lower than a year ago when we experienced record first quarter retail fuel margins of $0.166 per gallon.

However, our first quarter retail fuel margin was still $0.018 higher than the average margin for the previous five years of $0.112 per gallon. As a reminder, we post our historical quarterly fuel margins on our website. We did mitigate this quarter's retail fuel margin decline with higher inside gross profit and maturation of our new store base.

Fuel margins will always be volatile on a quarterly basis while merchandise gross profit is far more stable. For the LTM period non-fuel gross profit represents 65% of our retail division gross profit.

Looking at some of the key expense lines, most of the increases were related to the growth in our retail and wholesale business over the last four quarters. G&A expense was up $3.4 million year over year, about half of that increase represents higher, non-cash, stock compensation expense that is driven by our strong stock price performance. Other increases generally were related to additional costs of supporting our growth from Gainesville, Sac N Pac, and acceleration of new store growth at Stripes.

For Susser Petroleum Partners specifically, approximately 70% of the additional G&A and operating expense is related to the Gainesville Fuel business we acquired in September. Interest expense dropped by $6.9 million to $3.2 million in Q1 due to the redemption of our senior notes last spring. Our effective tax rate for the first quarter was approximately 30%.

Turning to the balance sheet, our consolidated revolver borrowings increased by $132 million since year end with the majority of that increase funding growth CapEx, including new stores, land bank, and Sac N Pac acquisition. With almost $13 million in outstanding LC's and$ 24 million cash on the balance sheet, our total available liquidity is $384 million. Consolidated CapEx during the first quarter was $139 million which includes approximately $88 million for the Sac N Pac acquisition and $33 million related to new store construction and land purchases.

The partnership capital spending was approximately $31 million which includes $163 thousand in maintenance capital. And the balance for purchase of Stripes stores and other growth investments.

I'd like to turn the call over to Sam for a few closing comments before we open up the line for questions.

Thanks, Mary. And I want to thank each of you for being with us this morning and for being such an important part of our company's growth since we became a publicly traded company seven and a half years ago.

Before we take questions, I want to reiterate this is a very bittersweet moment for the Susser family. We consider ourselves incredibly blessed to be a part of a team that has grown this business from a couple of stores that my grandmother inherited over 76 years ago to a fortune 500 operation. Personally and selfishly, my wife, Katherine and I, really love the way things are today and would have been very, very happy with the status quo.

That said, Energy Transfer presented a compelling proposal for our shareholders at SUSS, our unit holders at SUSP as well as for our leadership team. Pairing Stripes and Laredo Taco Company with Sunoco, one of the great fuel brands in the United States with the capability and resources of the Sunoco and ETP family, tees up our company for a tremendous future.

We've been dedicated to developing a team that is truly a leader amongst our peers, strives to respect each and every individual team member, runs every store on a one at a time basis, and is built on a robust, scalable, low cost technology platform. Combined with Sunoco's brand, logistics, credit card and geographic reach, this company has the potential to be a truly major player, a juggernaut in the years ahead.

Operator, we're now ready for any questions.

Thank you, Sir. We will now begin the question-and-answer Session.

(Operator Instructions)

Our first question comes from the line of Irene Nattel with RBC capital markets. Please go ahead.

Good morning, everyone. And mindful of Chip's comments, I will keep my questions to the quarterly results.

Thank you, Irene.

Thank you for quantifying the impact of the shift in Easter. When you look at the weather impact, is there any way for you to quantify that?

Irene, this is Sam. Good morning.

I would say that based on what we're seeing in a more normal weather pattern, that the weather is worth about 250 basis points, the impact of the weather on the quarter.

That's a big number, Sam.

It is a very unusual quarter.

Clearly. Clearly.

So taking that into consideration, how would you describe the competitive dynamic in your key markets and was there any real intensification, say, sequentially or quarter over quarter?

I want to reflect on that number. If I'm off on the 250, maybe it's 200. I shouldn't imply so much precision. But weather is worth a couple percent.

And I would not say that there's been any meaningful change in the intensity of the competition from prior quarters. It is competitive. It is intense. We've got great competitors that we respect and there's lots of new growth in Texas, but not at a different pace than three or four months ago.

That's great. Thank you.

Thank you.

Our next question comes from the line of Bonnie Herzog with Wells Fargo.

Good morning.

Hi, Bonnie. Good morning to you.

I just have a question on your package strengths. You called it out as having driven, you know, your strong merchandise margins.

I was hoping you could talk about the trends you're seeing in packaged beverages? And then how that helped drive your strong margin? And then, could you also touch on some of the trends you're seeing in the broad tobacco category especially in E-vapor?

Sure. Thank you.

Bonnie, on the packaged drinks side, the real trend line is growth in single-serve immediate consumption for us, especially in energy drinks, speciality waters is key, which are higher margin items and travel with great frequency inside a Laredo Taco Company basket. So, we have had some help there.

The take-home multi-pack business, so12-packs remain under a lot of competitive pressure. We're holding our own, but it's a competitive landscape for those larger packages which are very price sensitive for most consumers.

In this particular quarter, I would also add that our coffee business was really strong. That's not necessarily a good thing. That's kind of another weather report. But we hope to see a much stronger trend in fountain and frozen beverages hopefully in the coming quarters with an average kind of weather pattern.

With respect to the electronic cigarette business, and the new packages, still some growth but it's off a tiny base; very, very small base. But we would see it as incremental to the category. It's so small, it's really hard to measure.

We are seeing growth in moist or smokeless. Our trends in the traditional cigarette category, it's not a growth business for us, but we are growing our market share because there's a decline in that market that's much greater than what we're experiencing.

So we're paying a lot of attention to the category. It remains an important traffic driver for us. Cigarette gross profit is 7% of the total inside gross profit, so it's at a place where we think it's very manageable for us.

Thank you. I just had a quick follow-up on the energy category.

Because certainly that's been a trend I have been seeing for a while. And I'm hearing from several retailers that they're allocating more space to energy drinks, possibly taking space away from CSP's which has been under pressure. Is that something you've done in your stores as well?

Short answer is yes. It's not an enormous yes, but as we're going through reset, that would be kind of the trend line as we are trying to be sure we stay in stock on what customers want now.

And what's growing and, like you said, driving margins. Thank you so much.

Thank you, Bonnie, very much.

Our next question comes from the line of Dane Leone with Macquarie.

Good morning. Thank you very much and a big congratulations to you, Sam, and the rest of the team.

Thank you.

The one question, keeping in mind that there is (inaudible)it the guidance and everything else, we have a lot of questions just about how you thought about transfers into the MLP asset and the short history that it's existed.

Is there any color you can provide in terms of the thought process of the payment or the payment terms? I guess maybe from Gainesville or any other transactions that you guys were considering, where Susser would drop down assets into the MLP?

Susser, during this next few months, is going to operate on the basis consistent with what we've done in past practice. And we're going to continue to drop down our newly built Stripes stores and just operate on a steady-state basis. So we don't have any significant plans to deviate from what has been our operating plans since going public at Susser Partners.

I guess the question more specifically was, if you look at the Gainesville transaction, right, Susser was issued 2 million in Susser Petroleum common units, for the addition of assets. Is there kind of an ROI target you were using or how is that the right number?

We used I think about $2 million of value of SUSP units which was part of the overall tax structuring of the transaction. It was a structure that was complicated for a small deal but it saved us, a lot of work for the team, but it saved the Company some important taxes. So there was only $2 million worth of SUSP units.

With respect to returns, that was a business that we expected to acquire at a very attractive, kind of mid high single-digit EBITDA multiple, and our team's done an outstanding job there. And we're ahead of our targets a little bit. With a great outlook for the business.

Okay. Again, congratulations on everything. I think that does about it.

Thank you, Dane.

Our next line comes from the line of John Lawrence with Stephens.

Good morning, everyone.

Hi, John. Good morning.

Sam, would you start off with just a little bit on the expense side? And I guess from a broad standpoint, the experience with the Sac N Pac stores from acquisition date and integration date. Are you seeing anything different in those markets than you expected or marketplace competitive pressure, anything? Just dive into that a little bit, if you will.

John, our fuel volumes there are off to a really strong start.

We have made such wholesale change in the merchandise lineup over the last five or six weeks. We have had challenges getting to in stock with our suppliers and staying in stock as we've completed those resets. So it has been a little bit of a bumpy road through the merchandise resets of the Sac N Pac stores.

We pretty much had them all done by the end of April, and last week's data was very, very positive on the merchandise side, now that we've got the products in stock that our customers are looking for. And the feel of the merchandise set is much closer to Stripes.

We'll continue to tweak planograms in the vault. The vault sets between now and May 30, Sid?

Yes.

We'll have all the vaults done by May 30.

So we're feeling very good about the outlook there and, no, there hasn't been a meaningful change in the competitive environment or in the labor market. It's a challenging market but our team has a lot of new tools and is managing labor much better today than we were just six months ago.

Great. Thanks. Let me offer congratulations, and to all the team and all the help you've given me since the start. Thanks.

Thank you, John. We appreciate it so much.

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

Hi. Good morning.

Just following up, I guess, on John's question about Sac N Pac. Since I guess the deal has closed for about a month now, is there, I guess, an update on how you plan to optimize the portfolio, meaning potentially how many stores could be converted to Stripes and potentially drop down to SUSP?

Sharon, this is Rocky.

Sam mentioned we spent the last couple months resetting the merchandise in all of the Sac N Pac stores. We're going to run those stores for a while to determine exactly what the volumes get to, and after that time make a decision as to whether we would continue to operate them long term under the Stripes brand or do something else.

So based on that, really no change to our original plan. We will evaluate them after running them for a while and at that time make a decision as to how many we might drop. There's 47 total sites. Some of them are smaller footprint stores that may not make sense for the Stripes brand, but there's many in the package that are much larger that we think will be great.

As far as giving you a precise number, we don't have a laser dot on that at this point.

Okay. That's helpful.

And then I guess just following up on the improvement in the fuel margins for third party. Do you expect that to continue to trend higher, given, I guess, higher commercial margins?

You know, we had a fabulous quarter last quarter. As we mentioned in our comments earlier, the Gainesville volume has grown over even what we expected. And just higher margin than our average commercial gallons. So that's been very positive and will hopefully continue.

Separate from that, our other commercial business, we had a great quarter as well. Is that sustainable? I would -- I hope so but I would be less confident in that. This was a great quarter.

Up, as you can recall from each quarter, the last two or three have grown and I don't know that we can sustain that growth, but we've--

The outlook is great for the Permian Basin, which drives a lot of that activity, as you know, Sharon. But we've come to believe that trees don't grow to the sky, even in the great state of Texas. (Laughter)

So we try to be realistic, too. There's a good positive trend. Our customers are growing. They need our services. And we feel good about it but we wouldn't extrapolate it out forever.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Scott Mushkin with Wolfe Research.

Thanks. I really just don't have a question.

I just really wanted to say thank you. You guys are some of the finest people I know, and do an incredible job running that business. Personally I'm going to miss being on these conference calls and hope to see everybody resurface and make people a lot more money.

Sam, you are a great businessman. Thank you.

Scott, you're kind to say it. Thanks for your kind words. We're going to keep swinging and hopefully keep driving growth here with our new partners.

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

Good morning. Thanks for taking the question.

On the new builds, could you give some color around what the Company's capacity is for annual new builds? And just comment on how permits and community approvals would limit that acceleration?

Ben, we are continuing to plan for 28 to 35 or so new stores a year. I think with the land bank that we have and the properties under advanced negotiations, I think we -- despite the permitting challenges, we could move towards the high end of that and keep bumping it up over the next couple of years from a permitting standpoint.

We're certainly getting better at the people development side, but we're having to add over a thousand net new jobs to support our current level of growth. And that's very challenging.

We feel that the people development side, in getting the food service culture, and the customer service culture right at that pace of growth is also a bit of a challenge. And I think we, in terms of organic growth, we would need to be thinking about stepping that up incrementally as opposed to a giant step change.

Of course all of this is contingent on the continued recovery strength of the economy and population growth in the markets that we serve. It's very strong right now, and we're feeling better about the outlook as more and more of these industrial plants are breaking ground and getting permitted. The outlook is very bright over the next three, or four, five years. I think we can keep creeping up new store growth.

Thank you. I'm add my congratulations on the deal.

Ben, thanks a lot. It's been quite a journey.

Thank you.

(Operator Instructions)

Our next question comes from the line of Ronald Bookbinder with The Benchmark Company.

Good morning. I'll throw my congratulations in there also.

I was wondering, have the cigarette margins stabilized?

Yes. They have really. We've seen, gosh, a decline for about ten years, just a little bit each year.

For us they've gotten so low, they seem to have stabilized. I don't see a return to yesteryear. I think it's going to probably be pretty flattish going forward. But we're not feeling the same downward pressure. That's part of the merchandise margin strength that we were blessed to report here in Q1.

And you all talked about the fuel volumes at Sac N Pac being 60% of the Stripes. But how is their operating margin compared to a Stripes?

Their contribution is lower because their merchandise and fuel volumes per store basis are much lower than average Stripes store. But we're very bullish on our ability to grow that and bring it closer to the Stripes norm over time for the stores that we operate.

We also picked up some sites for a land bank that are very good and we look forward to building new sites in that central Texas region, very fast growing San Marcus area. Those stores ought to be real winners for us and we'll be able to expand our food service offering in a portion of these stores which is going to help bump margins. But it's a multi-year project us for, not unlike Town & Country.

Would the merchandise resets, while it's only been a very short period, is Sac N Pac seeing a really nice comp kick and could you talk about that?

The data that we have is so short. I mean, we only have really a week's worth of data since the stores were reset, but the trend was up 8 or 10 points pre versus post in the first week. So we feel real good about that. But more work to be done and so very early. I wouldn't want to extrapolate anything from a week's worth of data.

And lastly, on that $0.057 wholesale fuel margin, while it's being driven by the Permian Basin producers, is there higher costs involved? You know, SG&A involved in delivering it to the Permian basin?

Hello, Ronald, this is Rocky. Absolutely there is. I think Mary may have called that out. In our operating and G&A expenses at the partnership, you saw a bump. A lot of that is driven by the operating cost for that business.

I think about 70% of the increase in operating expenses were specifically tied to the Gainesville business. Higher margin but higher cost as well. With that said, overall we've been pleased with the cash flow.

Okay, great. Thank you and congratulations once again.

Ronald, thank you very much.

Mr. Susser, we have no additional questions. Please continue with any closing remarks.

Thank you very much.

I'm very grateful for the opportunity to continue to serve our unit holders and our team members as Chairman of the Board of SUSP as we move forward post-closing. I also look forward to supporting Bob Owens, and hopefully helping drive growth as this new chapter in our company's history develops.

It's been a pleasure to get to know so many of you. I count a number of you as true friends. For a few of you have been with Susser Holdings since our IPO in October of 2006, you've seen an increase in value of nearly five fold.

We are very proud of our record, creating strong value for our shareholders, our unit holders, and our bond holders over the years. I usually end these calls with an invitation to come to Texas, tour our stores and taste our hot fresh delicious tacos. Our doors are always open and Stripes Laredo Taco Company is ready to serve you, today and in the future.

Operator, thank you very much. This concludes our call.

Ladies and gentlemen, this concludes the Susser Holdings, Susser Petroleum Partners first quarter earnings conference call. If you would like to listen to a replay of today's conference call, please refer to the press release. [ACT] would like to thank you for your participation. You may now disconnect.