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Executives

Chip Bonner - EVP

Sam Susser - CEO

Steve DeSutter - President, Retail Group

Rocky Dewbre - President, Wholesale Group

Mary Sullivan - CFO

Analysts

Irene Nattel - RBC Capital Markets

Mike Otway - Wolfe Research

Sharon Lu - Wells Fargo Securities

Ben Brownlow - Raymond James

Anthony Lebiedzinski - Sidoti & Company

Ronald Bookbinder - The Benchmark Company

Michael Gaiden - Robert W. Baird

Karen Short - Deutsche Bank

Bonnie Herzog - Wells Fargo Securities

Susser Petroleum Partners LP (SUSP) Q2 2013 Earnings Call August 7, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen and thank you for standing by and welcome to the Susser Holdings’, Susser Petroleum Partners Second Quarter Earnings Conference Call. (Operator Instructions) This conference is being recorded today, August 7, 2013. I would now like to turn the call over to Chip Bonner, Executive Vice President. Please go ahead.

Chip Bonner

Thank you operator, good morning everyone and thank you for joining us. This morning we released our second quarter 2013 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners LP. Our news releases were broadcast to our email list. If you would like to be added to one or both of those lists, please send your request via the IR pages of our websites, and we will be glad to add you. A replay will of this call be available on the web for at least 60 days and via telephone our replay until August 14. To access the replay on the web go to our IR pages either at www.susser.com or www.susserpetroleumpartners.com you’ll find a replay instructions in this morning’s earnings release.

A reminder that the today’s call will contain forward-looking statements, the statements are based on management’s belief, expectation and assumptions, and includes the Company’s objectives targets, plans, strategies, costs, and anticipated capital expenditures. These statements involve risks and uncertainties that could cause actual results to differ materially. They are described more fully in the Company’s annual reports for 2012 and on file with the SEC.

During today’s call, we will discuss certain non-GAAP financial measures that we believe are helpful for a full understanding of our financial condition. Please refer to our news release for reconciliation of each financial measure. As a reminder that the information reported on this call speaks only to the Company’s views as of today, August 7, 2013, so time-sensitive information may no longer be accurate at the time of any replay.

With me on the call today are Sam Susser, Susser Holdings’ CEO; Steve DeSutter, the President of our Retail Group; Rocky Dewbre, the President of our Wholesale group and Mary Sullivan, our CFO and other members of our leadership team.

Now, I’ll turn the call over to Sam.

Sam Susser

Thanks, Chip and good morning to everyone. We were pleased to announce this morning Susser Petroleum Partners first increase in distribution to our unit holders. The partnership’s board declared a distribution of $0.4528 per unit, which represents our 3.5% increase over the first quarter distribution, that’s a $1.81 on an annualized basis. Distributable cash flow increased by 14% versus the first quarter to 11.9 million and the higher distribution represents a 1.2 times coverage.

We are very pleased with the performance of the partnership since last September’s IPO. We will of course evaluate future increases on a quarter-by-quarter basis but our goal is to continue to grow our distributable cash flow and be in a position to increase our unit distribution rate early.

I’ll ask Rocky to provide some additional highlights of our wholesale business in the partnership in a moment.

Now looking in our businesses overall in the second quarter, cooler than normal temperatures in April and part of May this year impacted same store sales as compared to a year ago when scorching Texas’ temperature has drove a near record 8% same store merchandize increase.

The year over year comparison was also impacted by the Easter weekend following the first quarter this year versus the second quarter last year. The calendar difference had a negative impact of 50 to 100 basis points on the second quarter same store sales.

Same store sales increased 2.2% but they were up 10.2% on a two year stack comparison basis for the quarter. Overall, total merchandize sales from our 567 Stripes store increased 8.5% year over year in the second quarter including the impact of the 28 new retail locations we have added in the past four quarters.

Merchandize margin were strong at 34.3% up 20 basis points from a year ago. As expected our fuel margins were softer compared to the same quarter a year ago which was a record breaking period for us. We did not enjoy the following fuel prices this year, that we experienced throughout the second quarter of 2012 and this different trend is reflected in lower margins in 2013. A lower retail fuel margins were partly offset by overall fuel volumes that were 9.7% higher or 5.5% higher looking at average balance sold per store per week.

You will note, in this morning’s release, that we have slightly raised both the ends of our guidance range for average per store gallon growth. Wholesale volumes sold to third parties were 1.7% higher than a year ago.

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

As a reminder, in 2012 we opened 25 new large format Stripes Stores. As we mentioned in the last few quarters, it typically takes about six months for new stores to turn cash flow positive and about three years for them to reach maturity. The negative pressure on earnings last quarter from the unusually large number of stores that opened at the end of 2012 has generally abated and that group of stores as expected contributed positive cash flow in the second quarter.

Although we are still quite away from maturity this past year’s crop of stores continues to steadily improve and it looks like we are on track with our new store performance expectations which are based on the results we’ve generated consistently over the past ten plus years. The number of actual openings this year, although slightly lower than we had hoped for, look still set a new record for organic growth and we remain aggressive as we explore markets looking for additional sites for future developments.

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

Steve DeSutter

Thanks, Sam and good morning everyone. As Sam indicated the unseasonally cold weather early in the quarter got us off to a slower than normal ramp up in sales during what is one of the two highest volume quarters of the year. Our April was weak with the milder temperatures and the Easter calendar shift; we saw a sequentially improved merchandise performance through the quarter. Both merchandise sales and gross profit in the second quarter were led by increases in food service, packaged beverages, smokeless tobacco, and candy.

We were especially pleased with the results from our Laredo Taco company restaurant concept, outpacing the average merchandise growth which has a positive impact on gross margin. For those who are interested comps excluding cigarettes were up 2.6% for the quarter and 3.5% year-to-date. Retail fuel volume growth was very solid at 5.5% as Sam pointed out, when we look at average gallons per store diesel sales showed particularly strong growth which again suggest risk to merchant trade, particularly in the two oil and gas production areas we serve in South and West Texas.

AS Sam mentioned the primary driver for lower fuel margin this quarter was the different pattern of fuel cost movements during the period compared to rapidly declining cost to the second quarter of 2012. Retail fuel margins for credit card expense were $0.182 per gallon which is after deducting the $0.03 margin Stripes began paying the partnership last September; so that would be $0.212 before the partnership payment. That compares to record margins of $0.324 a year ago which we did not deduct the $0.03 fee and $0.246 per gallon on average over the previous five years. However, our year-to-date margin of $0.174 is still $0.017 better than comparable first half average for the past five years. We are maintaining our fuel margin guidance for the year at $0.15 to $0.18 per gallon. We are seeing some more pressure on wages this year than since the recession began in 2008. Also we share with you on our last call that we’re disappointed with our labor control in the quarter. Our team is going to be working hard on this and we’re pleased to deliver some improvement in labor cost performance in the second quarter compared to the first quarter.

Personnel expense as a percentage of total merchandize with 18.4% compared to usually strong 17.7% in the second quarter of last year, but improved by over 200 basis points sequentially from the first quarter. We have just completed the deployment to all stores of the labor scheduling too we have been working on it over the past year.

We expect this tool to give us better real-time visibility into store labor although it will be likely that it will several quarter for us to realize its full potential. We are continuing to invest in technology and training across the organization that to help us make a more profitable company and a great place to work.

Competition for workers remain brisk particularly in the two red-hot oil field markets and we’re very focused on reducing employee turnover as well as making sure we will maximize in revenue per dollar of labor while at the same time delivering an outstanding customer experience. Out training program is helping in this regard.

Now, I am going to turn the call over to Rocky Dewbre for more detail look at hotel business, Rocky?

Rocky Dewbre

Thanks, Steve. Good morning everyone. I would like to begin with a quick review of Susser Petroleum Partners results comparing the actual second quarter 2013 results against pro forma second quarter 2012. Volume sold by the partnership to Susser Holdings for resale at Stripes stores an independently operated consignment size increased 8% year-over-year to 264.1 million gallons.

The growth reflects gallon sold by our new Stripes convenient stores that have opened during the last 12 months as well as volume growth in existing stores independently operated size for resale automobile on a consignment basis. Volume sold independently there is commercial customers increase just slightly from a year ago to 124.9 gallons.

Gross profit on these third-party gallons was 6.1 million or $0.049 cents per gallon, compared to 5.2 million or $0.042 cents per gallon a year ago. The margin improvement per gallon was driven in part a strong performance in our commercial fields business which is benefited the liability to bio-fuel in bulk and take advantage of the recent rents dislocation.

The partnership’s averaged fuel margin for all gallon sold was $0.036 per gallon in the second quarter compared with $0.034 per gallon a year ago on a pro forma basis. Total gross profit for the partnership was 17 million, a 20.7% increase compared to a pro forma gross profit of 14 million in the second quarter of last year.

Adjusted EBITDA was 12.8 million and distributable cash flow of $11.9 million. With the increase in the distribution announced this morning, we will pay out 9.9 million of that to unit holders later this month.

Rental income for the quarter was 2.3 million. We purchased six stores from Stripes in the second quarter at a total cost of 21.2 million. We purchased two more Stripes stores since the end of June for 6.7 million. Since our IPO, we have purchased a total 22 Stripes stores at a total investment of 89.7 million including the post-completion true-up.

These 22 stores will produce annual rental income of approximately 7.2 million with the partnership, in addition to the $0.03 per gallon margin in all fuel volume sold at the sites.

Looking now at the consolidated m, wholesale segment of Susser Holdings, which includes all the operations of the partnership plus the consignment in fuel transport business that were retained at current levels.

Wholesale adjusted EBITDA was 15.4 million compared to 8.3 million a year earlier, most of the 7.1 million increase represents the new $0.03 per gallon markup on gallon sold to the retail segment that we did have prior to the September IPO. The balance reflects the increased gallon sold partly all set by lower margins on our fuel sale at consignment sites.

We added 10 new dealers last quarter and discontinued six which brings our independent leader count to 583 locations at the end of June. Our pipeline of new dealer customers continues to build and we now expect to bring on 28 to 40 new contracted wholesale stats in 2013.

Our commercial fuels business also continues to grow. We added about 16 new commercial customers during the second quarter for a total of approximately 1,800 active commercial accounts that purchased on brand fuel from us.

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

Mary Sullivan

Thanks Rocky. Good morning everyone. A quick reminder that our Susser Holdings results fully consolidate the results from Susser Petroleum Partners with the minority interest share of the Partnership’s net income deducted as non-controlling interest. And looking at the consolidated results of Susser Holdings, this morning we reported adjusted net earnings of 12.5 million or $0.59 per diluted share versus net income of 29.8 million or $1.40 per share in the second quarter last year. The adjusted number for this quarter excludes the impact of after-tax debt refinancing charges of 16.7 million or $0.79 per share.

Adjusted EBITDA was 50.5 million, a decline of 22.3 million from a year, which is mainly due to the lower fuel margins. Total operating expenses for the quarter increased by almost 11% over last year with most of the increase related to the additional store count this year. Store personnel cost remain our largest line item and Steve has already discussed the sequential improvement in personnel expense as a percentage of revenue.

Credit card expense is the largest component of other operating expenses, and was 13.1 million for the quarter or about five and half cent per retail gallon compared to 12.2 million in Q2 last year. We’re extremely pleased with the refinancing that we completed in May including the new $500 million parent credit facility and the redemption of 425 million of 8.5% notes.

Reported interest expense in the second quarter included 26 million of non-recurring pre-tax charges related to the refinancing. Had we completed the refinancing transactions at the beginning of the quarter, pro forma interest expense would have been approximately $3 million for the quarter?

Our income tax accrual in the second quarter was negligible because we had a reported net loss due to the refinancing charge. We continue to expect our 2013 effective tax rate to be between 26% and 28% for the full year. This rate would apply to pre-tax income before deducting minority interest.

As of June 30, we had 220 million drawn on the parent company’s revolving credit facility with unused availability of 278 million. The Partnership had 85 million borrowed on its revolver at quarter end with unused availability of 152 million. Our trailing 12 months net debt to adjusted EBITDA ratio was 1.6 times.

Total consolidated capital spending in Q2 was 54 million, of which about 35 million was for new Stripes stores and land. Of that total capital spending, 30 million was spent at the Partnership level, which primarily reflects the drop down of stores from the parent to the Partnership.

We have made several updates to our annual guidance metrics, which you will find in this morning’s news release for each company.

And now, I’ll turn it back to Sam.

Sam Susser

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

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, at this time, we will begin the questions-and-answer session. (Operator Instructions) And our first question does come from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities

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

Sam Susser

Let me take that on Bonnie, thank you. We are looking to every year hopefully increase the number of new stores that we are building in our markets working on the assumption Steve uses the phrase that the world continues to spin but in a steady state sort of economy we think we can accelerate our store growth a little bit we kind of think about trying to build about 5% or 6% net new stores each year and grow our business through same store growth in addition to that on top of getting 5% or 6% net new stores net of closures opened up.

In each of the new stores at maturity is producing 2, 2.5 times the cash flow of our traditional legacy store so that kind of store count growth if we can keep that up as the base gets bigger could deliver very healthy growth to the business. With respect to reducing the top end of our guidance for new stores it is totally reflection of shaggy dog stories relating to real estate development issues that have occurred on a handful of locations, those locations are still underway in development and we will help in the same style hopefully early in the first quarter just kind of a timing issue for us. We find the development process is certainly challenging and not getting easier in terms of working with all the different local municipalities but we are investing more and more resources in it, in more dollars in our land bank and trying to get ourselves positioned to continue to accelerate that growth and have more visibility into the number of sites that we are going to really be able to open.

When we gave that guidance a year out well it’s our best guess and we try to refine it as the year goes along. With respect to acquisition related growth, we remain very positive that we are going to be able to identify great assets and great teams that we are going to be able to bring into our network and join the Susser family of companies here over the next year or two. We don’t want to ever comment on any particular transactions but we are seeing some opportunities that we think would make a lot of sense and fit in very nicely with our core business and our teams working aggressively to deliver acquisition related growth with a special focus on the wholesale side and leveraging our MLP structure here and expect to have some attractive things done in the next year or two for sure.

Bonnie Herzog - Wells Fargo Securities

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

Sam Susser

Sure and I am going to kind of speak to the average of the portfolio. We generally see our new stores in the first three years of their lifecycle to outperform on a same store basis 1% or 2% or 3% a year in terms of the amount of outperformance of same store growth but we also see improved efficiency in labor management and store expense so whether it’s store supplies, maintenance, shortages there is a lot of different expense lines and moving levers and we tend to see stores improve in profitability quite a bit so our long term experience is to get past the first two or three months of the grand opening process the first real 12 months we are generating 10%ish incremental four walled cash flow provided by the total investment assuming no drop downs and the partnership is gross investment. That is typically moving to below mid teens in the second year and approaching 18%, 20% and in some years it's actually exceeded that in the third year on maturity. But on average we think of it as low double digit the first year, low mid second digit, middle, low to middle double digit in year two and approaching 20% in year three. And we expect that kind of performance to continue as we increase the number and size of stores here over the last 18 months.

Bonnie Herzog - Wells Fargo Securities

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

Sam Susser

Yes, and it's really helping us on the food side, every new location offers Laredo Taco. Laredo Taco is very well received in the market place, it's increasingly important to our business that's it's waiver of our beverage and snack business and every time we open a new store it helps us from a brand awareness standpoint too. It seems to have kind a halo effect on the rest of the business. We're really very pleased to see that the business is taking share in many of the core categories that we operate in and we think having the biggest best boxes in our market is a huge part of that.

Operator

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

John Lawrence - Stephens Inc

Sam would you discuss your fuel margin just a little bit, I mean obviously last couple of years you have enjoyed really margins. Anything happened, I mean with the tighter volatility and everything in these margins with this summer, with the less volatility. Did you see some of the lower price guys do anything different with value pricing or anything you can point to from a pricing mechanism that made it tougher?

Sam Susser

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

We just haven't seen that yet so far this year. So comparing year-to-year our real difference the lack of volatility down than the cost of gasoline. It would be, I'd be relaxed if I didn't note that government policy has been very, very well reported as created a shortage of these RIMs, and that has created some distortions in the fuel marketplace that are impacting different retailers and different ways in different markets, and we certainly are part of that. We're a company that we feel disadvantages at some places and we felt advantages where we are buying fuel in bulk and doing blending and so forth.

So that's one element in the fuel supply chain that has been different in the last 90 days, that is impacting the retail market place.

John Lawrence - Stephens Inc

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

Sam Susser

In cases where a marketer is not blending product, and if their supplier is not patching there long and they're competing heads up with somebody that has a RINs bind advantage because they are blending or have a different arrangement on the supply side would create that kind of advantage.

John Lawrence

And secondly Steve is there anything on the merchandise side as you move through the first quarter to second quarter on some of those new boxes, sort of expanding that base business a little bit? I know LTC has started strong in a lot of those. But some of that base business starting to pick up in some of those?

Sam Susser

The new boxes I think in the Sam’s comment turned to positive cash flow in the second quarter and as across the board just continued strong growth in food service as Sam has mentioned and as we said it let the way this quarter across the company and the associated sales with it so snacks and candy were especially strong, it has been a competitive retail market, the big boxes the sales apart so nothing particularly new other than the kind of strength and seasonal growth we expected is exactly what we saw in those new stores.

Operator

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

Irene Nattel - RBC Capital Markets

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

Sam Susser

We see the reports of very large retailers and some very large CPG companies that are really struggling on delivery same store growth in the retail side or unit growth of the manufacturers and definitely there are certain retailers both, very, very large end of the spectrum and some smaller family regional change that we see working it hard on promotions have aggressive in certain packages, certain SKUs doing things to try reverse that softness in market and greater today probably than a year ago.

I am not particularly concerned by it, term demographics and a real strong, long-term economy, and great people, and the best real estate. And I think it is a winning combination as our competitors’ kind of ebb and flow on their promotional activity. But there is no doubt that there is some guys big and small that are making changes in their offering to respond to toughness in their business.

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

Irene Nattel - RBC Capital Markets

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

Sam Susser

Stripes is doing well. We are taking share and growing share in all the core categories that we are able to assess and have visibility into but definitely the dollar stores are one retail channel that is doing the same thing and they are also growing share as they add more and more SKUs and more complexity to their offering.

They are having success at growing share but it doesn’t seem to be at the expense of the Strips seems to be having more impact on other retailers in the marketplace but no doubt about it. They are growing share in a number of important categories.

Operator

(Operators instructions) And our next question does come from line of Scott Mushkin with Wolfe Research.

Mike Otway - Wolfe Research

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

Steve DeSutter

Yes, the new stores mature, that, and Mike, this is Steve. We’re also rolling new stores into the portfolio as well so there’s still maturing of those new stores in the first couple of quarters as well. Our expectation is to see a slight improvement, sequentially. But we've to move on a tough labor market, we have got a lot of wage inflation and that’s making it hard to produce flow.

Sam Susser

Look out over the next year. I am very confident in Steve and our team’s ability to creatively find ways to reduce core expenses as a percentage of merchandise sales. And we now have 31 new stores operating today that aren’t in our same store base. That’s materially more than it was a year ago at this time.

So we have that kind of expense pressure from that past ramp up of these new really big box stores. But I don’t see the 31 becoming much, much higher than that over the next 12 months. So I think that’s going to take a little pressure off. Steve and the team is there striving to deliver improvement on expenditures divided by merchandise sales.

Mike Otway - Wolfe Research

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

Chip Bonner

This is Chip. The shaggy dog stories that Sam referred to, a lot of it has to do with the municipalities that they’re developing and in that they have seen increased development in the form of new housing, new commercial business etcetera. They’ve not increased staff at these municipalities, so plan review is taking increasingly longer and so what used to be three week process, now is eight weeks process and so it was an unattended consequence of a rising tide and rising development in our markets.

So what we’re doing is getting things in the queue much quicker. Many of our first, say 16 stores that will be built next year are already been submitted for plan review today. So those are the type of things that we are trying to get out in front of, and it’s just a function of each municipality has different issues that we’re dealing with.

Mike Otway - Wolfe Research

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

Operator

Our next question does come from the line of Sharon Lu with Wells Fargo Securities

Sharon Lu - Wells Fargo Securities

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

Rocky Dewbre

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

Sam Susser

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

Rocky Dewbre

The volumes that we are able to blend are increasing but the price that we were able to sell the RINs, you know, we don’t what that’s going to be going forward, so that kind of give and take there. As for the wholesale segment margin, if you remember inside that business is our consignment site, so you know at the wholesale segment level we have all the partnership plus the consignment in the transportation business we did not contribute and we saw some margin decline in Q2 this year versus same time last year.

Sam Susser

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

Sharon Lu - Wells Fargo

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

Sam Susser

Sharon, we don’t want to give a whole lot of details on that. We can obviously tell you that we’ve increased the amount of the quantity of fuel that we blended Q2 versus Q1 and we’ll continue to look for opportunities to do that. We don’t want to share anymore details than that.

Rocky Dewbre

For competitive reasons.

Sharon Lu - Wells Fargo

Okay, understandable. Thank you.

Operator

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

Ben Brownlow - Raymond James

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

Mary Sullivan

Sure, hi Ben. G&A for the quarter, we did have some lower bonus accruals which to match up the performance that we saw in Q2 against our internal target that’s going to be the biggest delta sequentially from Q1.

I think as you look at the run rate obviously we were little bit lower this quarter than we were in Q1. The run rate probably somewhere in between but again it’s going to depend on our performance as we go forward into Q3 and Q4 and what we record there for the related bonus expense.

Sam Susser

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

Ben Brownlow - Raymond James

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

Sam Susser

The observation I have is that we’re just going up against continually bigger and bigger comps, bigger and bigger numbers. Our outlook feels healthy. Overall, I think the economy our part of the world improving although there are certain markets that we are in that are definitely very soft and there are other that are on fire, it’s a mix fact but in total I think economy is improving and I think demand for fuels improving. We have seen some recent reports from the Texas Controller's office, I believe, on amount of gallon sold across the State it’s healthy both gasoline and diesel, so we feel good about demand in the outlook that we recognized. We are just going up against for huge comps.

Operator

And you next question does comes line of Lee Giordano with Imperial Capital.

Lee Giordano - Imperial Capital

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

Sam Susser

Lee, thank you. The number rigs in Texas is up slightly from the latest look I saw this week. It’s up in the Permian; it’s up in the Eagle Ford, which are all kind of the core markets for us where we have the most exposure, thank goodness. We see the number of gas wells being drilled in the variety of other plays continues to fall. But currently the number of oil rigs is growing faster than the number of gas rigs that’s following. And so there is a slight increase.

I think that the number of the productivity of the wells that’s being drilled is much greater today than it was a year ago and they are drilling them faster and I think that we don’t expect to see big giant lifts and number of people employed in the oil pads over the next year or two but they’re going to be producing more and more oil because they are just getting more productive, more efficient, smarter at allocating those resources but he outlook is real good for strong healthy economic activity in those markets.

But I think I don’t see another stair step wake up in terms of the number of people that are going to be working on the oil patch but the amount of oil they’re going to be producing were very, very bullish on and I think that’s going to lead to more investment around pipelines, petrochemical and manufacturing here in the Gulf Coast it’s going to support our business over the next three, four, five years.

Lee Giordano - Imperial Capita

Thank you.

Operator

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

Anthony Lebiedzinski - Sidoti & Company

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

Sam Susser

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

Anthony Lebiedzinski - Sidoti & Company

Okay, that’s good to hear. And also can you comment on your diesel comps, what you saw in the quarter? Thanks.

Sam Susser

Diesel continues to grow faster than gasoline a little bit. Steve is here, he have the number handy. Diesel represents 22% of our mix versus 21% as of year ago. The growth and diesel volume was around 8% versus about 4% and gasoline on average per store week but a little bit of add as we have more stores offering diesel today.

And so please take that with a little bit of grand of salt but general the demand for diesel is better than gasoline and I think that reflect strength in the commercial side of the economy.

Anthony Lebiedzinski - Sidoti & Company

Okay, thank you.

Operator

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

Ronald Bookbinder - The Benchmark Company

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

Sam Susser

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

Ronald Bookbinder - The Benchmark Company

And following up on the last caller on diesel you said you are at 22% at the mix for stores, what percent of the stores could have diesel and could?

Sam Susser

So today we have 428 locations that sell diesel and the diesel that they sell that’s out of 570 stores operating today sorry 431 today of the 570 offer diesel. And diesel represents 22% of the total fuel that we sell today.

Ronald Bookbinder - The Benchmark Company

And what would you think the comp at pump was for diesel to breakout the growth of building to more stores or could you have been more?

Sam Susser

I can’t quite do the math in my head but maybe on an average per store basis if you strip out the impact of the additional pumps it’

Ronald Bookbinder - The Benchmark Company

Thanks and good luck going forward.

Operator

And our next question does come from the line of Michael Gaiden from Robert W. Baird.

Michael Gaiden - Robert W. Baird

Thanks for taking my question can I ask as a follow up to some of the RIM discussion you are talking about the short term technical gains from higher third party margins et cetera. Are there any strategic gains that you can leverage in our RIM’s marketplace now to your running capabilities can you use that to help do more M&A or grow in the third party business at all?

Sam Susser

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

Rocky Dewbre

As I mentioned this is Rocky as we have mentioned earlier our volume that we do plan has increased sequentially Q1 versus Q2 and we are continuing to turnover lots of rocks to try to find opportunities and we are confident we will find some.

Michael Gaiden - Robert W. Baird

Thanks Rocky and can I lastly as Steve mentioned accelerating merchandised sales month over month through the quarter was the same through on your local fuels business as well?

Rocky Dewbre

Yes but not quite as dramatic.

Michael Gaiden - Robert W. Baird

That is it for me.

Operator

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

Karen Short - Deutsche Bank

Just going back to the merchandised comp can you maybe give a little more color on the composition of the comp traffic versus ticket I know Steve gave in some color on the transaction size growth in the first quarter?

Sam Susser

Sure we have seen this year a pretty flat customer account with the growth in merchandised sales definitely being drive by transaction size and we think it’s about half increase in a number of items in the market basket and about half in price.

I am hopeful can’t predict but I am hopeful that we will see some growth in customer account over the balance of this year but so far year to date it’s definitely been flat and we really like the pattern we have been on the last five years or so where our sales growth has been a balance of customer account growth and transaction size growth and we have not seen the growth in customer account we expect for ourselves here in the first two quarters yet.

Karen Short - Deutsche Bank

And within the price is that inflation or?

Sam Susser

I would say inflation it’s a mix. There have been areas where we can’t take price at all and we have some compression and we are trying to offset it in some other areas.

Karen Short - Deutsche Bank

That is helpful, and then within tobacco or I guess cigarettes can you maybe give a little color it looks like your comp I mean it’s still slightly positive but can you maybe give some color on units versus price within tobacco?

Sam Susser

Our units are down very slightly so far this year that’s counter to our long term trend. We have been growing units at stride for several years. Business or share of the category thought is growing. Even though we're not able to deliver unit growth here in the most recent quarter, year to date we’re down about 1% to 1.5% in units but we're continuing to grow share within the space.

Karen Short - Deutsche Bank

In terms of the units being down, so that's just I mean usage not so much dollar store impact or anything like that?

Sam Susser

We can tell you pretty for sure, it is usage. We're doing just fine on share in the category

Karen Short - Deutsche Bank

And then any update on loyalty program? I know that's been mentioned before and you said that your hopeful customer account would grow but that would obviously help.

Sam Susser

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

Operator

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

Bonnie Herzog - Wells Fargo Securities

I just have a follow on question on your tobacco category. I'd be curious to hear if you are shifting more of your tobacco sets towards smokeless to capture the growth end margin, that occurred in that category versus cigarettes. And then how did you handle the $0.06 per pack price increase on cigs that occurred during the quarter. Were you able to pass that increase on to consumers in most of your stores?

And then can you speak here when you are out with e-cigarettes? Are you carrying them right are they in all of your stores?

Sam Susser

Kevin why don't you address that and the follow up?

Kevin Mahaney

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

Sam Susser

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

Operator

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

Sam Susser

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

Operator

Ladies and gentleman that will conclude the conference for today. If you’d like to listen to a replay, please see this morning's press release for the information. Again we do thank you for your participation. You may now disconnect your lines at this time.

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