Susser Holdings Corporation Q4 2007 Earnings Call Transcript

Mar.13.08 | About: Susser Holdings (SUSS)

Susser Holdings Corporation (NYSE:SUSS)

Q4 2007 Earnings Call

March 13, 2008 11:00 am ET

Executives

Chip Bonner - EVP and General Counsel

Sam L. Susser - CEO

Mary Sullivan - CFO

Analysts

Bill Reuter - Banc of America Securities

Dean Haskell - Morgan Joseph

Bryan Hunt - Wachovia

Regina Russell - JPMorgan

Anthony Lebiedzinski - Sidoti & Co.

Andrew Berg - Post Advisory Group LLC

Chris Smith - SCM

Operator

Good morning ladies and gentlemen and welcome to the Susser Holdings Corporation fourth quarter Earnings Call. (Operator Instructions). This conference is being recorded Thursday, March 13, 2008. I would now like to turn the call over to Chip Bonner, Executive Vice President and General Counsel. Please go ahead sir.

Chip Bonner

Good morning, everyone. Thanks for joining us. With us today are Sam L. Susser, our Chief Executive Officer; Mary Sullivan, our Chief Financial Officer; Rocky Dewbre, President of our Wholesale Division; Richard Sebastian, Senior Vice President of Operations, and Cathy Hauslein, Corporate Controller.

Before I turn the call over to Sam, I have a few of the usual items to go over. Yesterday afternoon Susser released its earnings and the news release was broadcast through the company's e-mail list. If you would like to be added to our list, please contact our investor relations firm, DRG&E, at 713-529-6600, or send your request via the company's investor relations website and we'll be glad to add you. A replay of today's call will be available both on the web and via telephone replay. To access the replay on the web, please go to the investor relations page of Susser's website, at www.susser.com. A phone replay will be available approximately two hours after the call ends, and will be accessible through March 20th. You'll find a number and the access code in the earnings news release.

Today's call contains various forward-looking statements that include information that is based on management's beliefs and assumptions. This includes Susser's objectives, targets, plans, strategies, costs, and anticipated capital expenditures. These statements involve risks and uncertainties that could cause actual results to differ materially. The risks and uncertainties are detailed in our latest 10-Q filed with the SEC and will be outline in our 2007 10-K, which will be filed tomorrow. Both can be found on our website. Information reported on this call speaks only to the company's view as of today, March 13, 2008, so time-sensitive information may no longer be accurate at the time of any replay.

Management will also be discussing non-GAAP numbers today, specifically adjusted EBITDA, which Susser defines as net income before interest, income taxes, depreciation and amortization, the accumulative effect of accounting changes and discontinued operations, non-cash stock-based compensation expense, and certain other operating expenses reflected in net income that management does not believe are indicative of ongoing core operations, such as the gain or loss on disposal of assets and any impairment charges. Adjusted EBITDAR adds back [rent] expense to adjusted EBITDA. We provided reconciliations of EBITDA, adjusted EBITDA, and adjusted EBITDAR with net income and cash flow from operations at the end of our news release.

Now I would like to turn the call over to Sam L.

Sam L. Susser

Thanks, Chip, and good morning everyone. Thanks for joining us. We had a great fourth quarter and a super 2007, and I look forward to covering the highlights with you as well as giving you a brief look ahead at 2008. We provided a Stripes-only same store merchandise sales figure, and Stripes-only average gasoline gallons per store volume figure. We will also be discussing what our same-store sales would have been if Town & Country was involved in the comp store base and provided pro forma financials in yesterday's news release, showing the results that the combination had taken place on January 1, 2006. We are striving to provide greater comparability of how the combined organization performed year-over-year. Let me first give a quick update on the progress of the integration, which continues on track with our expectations.

Since the transaction closed we've initiated the process of consolidating the information technology platforms, finance accounting, and shared services. We have successfully renegotiated merchandise supply contracts with [McKlein] and several of our other leading suppliers under which we have already begun to realize some cost savings.

As we reported a few weeks ago, we've raised our estimate of expected cost synergies from Town & Country acquisition from about $2 million a year to a run rate of about $5 million. The $5 million includes about $2 million of G&A savings and $3 million of procurement savings. We expect to realize about $1 million of the G&A savings in '08 and the balance in 2009. In procurement, we expect to realize approximately $1 million for 2008 and to achieve the full $3 million in 2009.

We hope and expect there will be additional synergies, which will be realized over time and we'll certainly be working to achieve that. As noted in our earnings release, Town & Country enjoyed record fuel margins last year and our synergies could be offset by West Texas fuel margins returning to more normalized levels.

Now, turning to the fourth quarter results for Susser Holdings; we had an outstanding quarter on just about every front. The year-over-year comparison on a reported basis was of course influenced by the seven weeks contribution from Town & Country. But, across the board, if you carve Town & Country out, we had tremendous year-over-year growth from the legacy Susser operations. We saw unusually strong growth in both merchandise sales and the fuel volumes for the quarter. Retail fuel margins were nickel a gallon higher than a year ago which helped drive our strong results.

On a true same-store sales basis Stripes-only, merchandise sales were up 11.7% for the quarter. Town & Country will be part of our same-store base until next December, but had they been in the base or same-store, sales would have been up 11.4% for the quarter.

The fourth quarter is generally one of our two weakest quarters because many of our markets are tied to tourism and warm weather activities. And, people just don't buy as much soda or beer or snacks when it's cold outside. Although our winter quarters have historically been seasonably slow, we are not seeing evidence of a consumer slowdown in our numbers. Our top line results are robust and we have a healthy outlook for the coming year.

Our real estate markets are certainly moving in sync with national trends, but they have not been nearly as severely impacted as others parts of the country. We also believe we are growing certain categories of our business at a higher rate than local competitors. We enjoyed improved results from 16 stores that opened during 2006, and nine stores that opened during the first three quarters of 2007. These new stores were much more profitable in the fourth quarter and are starting to fire on all cylinders.

We saw increased sales of cigarettes, partly due to the January 2007 excise tax increase. But, we also had very strong growth from food service, package beverages, beer, and snacks during the quarter. We believe a lot of this is due to the marketing and the store operations programs we began in early 2007, which drove customer traffic, customer account, and transaction size. We increased our net merchandise margin by 45 basis points to 32.7%, in spite of the impact of the cigarette tax. Our cigarette sales by the quarter remained soft, but single pack sales grew in the fourth quarter which enhanced the category's overall performance.

Restaurant service is a key part of the business and remains one of our growth drivers. Currently, 56% of our 500 plus stores have restaurant service; either Laredo Taco Company or Town & Country's country cooking, or national franchises such as Subway.

We intend to increase that penetration rate as we build new stores and remodel existing ones because restaurant service not only provides above-average margins but also drives sales of other items in our stores.

Looking at our retail fuel business, we had a year-over-year volume increase of nearly 47% on a reported basis. Above three-fourths of this increase in volume was attributable to Town & Country, but we also had a very strong 9.1% increase in average gallon sold just from the Stripes stores alone. This increase was influence by the re-branding and technology related disruptions we had in the prior year quarter and the fact that we had a number of new stores that are continuing to ramp up as they mature.

Had Town & Country been included in the base for the whole quarter, our increase in average gallons per store would have been 6.5%. Our retail fuel margin per gallon was $0.141 versus $0.92 a year ago and $0.158 in the third quarter of 2007.

Performance from our whole sale fuel business also was very strong. Wholesale fuel margins were $0.55 a gallon versus $0.45 year ago and $0.63 in the third quarter of this year. Volume was up 5.3% and reported gross profit was up 28%.

The fourth quarter was also a busy one for us with respect to new store growth. We opened nine new large format retail stores that we either built or acquired or substantially remodeled. We also closed four smaller ones, including one Town & Country location. At year end, we had 504 stores in operation and we've opened two brand new ones in the first quarter of this year, one near Houston and other in [Lovett], Texas. We also acquired, and substantially remodeled, the third store in South Texas. We added 13 branded dealers in the fourth quarter in discontinued supply in three which left us at 387 dealers at year end. We added a total of 30 new dealers [in close] for net increase of 20 dealers during all of 2007.

Adjusted EBITDA increased 189% from a year ago. This reflects several things again; very strong performance from merchandise sales and merchandise margins, and great improvement of fuel margins in the Town & Country contribution. If you recall from our discussions last fall, after we made the acquisition, we expected Town & Country to roughly double the company's EBITDA on a go forward basis, and it has certainly made a very meaningful contribution in the last seven weeks of the fourth quarter.

Before I turn it over to Mary, let me walk you through our 2008 guidance in capital spending plans for the year starting with same store merchandise sales growth. For all of 2007, we grew this number 7.7%. Our last year's numbers were strongly impacted by the great performance we had in the fourth quarter as well as the impact of the cigarette tax increase.

For 2008, we're forecasting growth in a more normal range of 4.5% to 6%. We expect the merchandise margin in the same range we've seen in recent years, 32% to 34% against the 2007 actual of 32.5%. Please note that Stripes alone and Town & Country alone merchandise margins were approximately equal for 2007. We anticipate average per store gasoline gallon growth between 2% and 6% for 2008 against the 5.9% growth in 2007.

Retail fuel margins are expected to be in the $0.125 to $0.16 per gallon range against an actual margin of $0.147 a gallon in '07. As always, we cannot accurately predict fuel margins. Town & Country markets have tended to have stronger fuel margins because they operate in less populous markets with less competition than in South Texas. So, we have raised the upper end of the 2008 forecast range by a penny to reflect that.

Had Town & Country been in our store base for all of 2006 and 2007 we would have reported retail fuel margins of $0.146 and $0.166 per gallon before credit card and other fuel related expenses for 2006 and 2007. We are not predicting the same record level margins we saw last year, and we said our 2008 guidance is closer to more historical averages. Our pro forma trailing retail fuel volume is now 650 million gallons. So, every penny is worth $6.5 million in pretax earnings.

Our wholesale fuel margin forecast remains in the same $0.45 to $0.55 per gallon band against a '07 actual margin of $0.53. We opened 18 new Stripes stores last year, and for '08 we expect to build 16 to 22 new stores, about two-thirds in South Texas and one-third in West Texas and New Mexico. We still have quite a bit of integration work to do this year and some re-branding of capital expenditures will start kicking in late in the year. So, we don't plan to be overly aggressive for 2008 and new store building. But, we are already working on the real estate pipeline for 2009.

We are expecting similar activity in new wholesale dealer locations, 25 to 35 for the year. This will be consistent with 2007, when we added 30 new wholesale locations. Depending on how many new stores we build, our gross capital spending should be in the $80 million to $110 million range against actual 2007 spending of about $90 million. We expect that most of our new stores will be financed through sale/lease backs. Net of anticipated lease financing, we would expect capital outlays to be in the $35 million to $45 million range this year versus $43 million of net capital spending in 2007.

With that I'll turn it over to Mary Sullivan.

Mary Sullivan

Thanks, Sam, good morning everyone. For the fourth quarter of 2007 our total reported revenues increased 69% to $822 million, driven by the contribution from Town & Country, significant increase in same store sales, and stronger retail fuel volumes and prices.

Merchandise sales increased 54% to $137 million, driven by 11.7% increase in same store sales for Stripes stores, the seven weeks contribution from Town & Country stores, and the opening of 18 new large format Stripes stores during the last 12 months. These factors, along with the higher merchandise and fuel margins, produced a 62% increase in total company gross profit to $78 million.

Moving to the bottom line, we reported net income of $7.5 million or $0.44 per diluted share compared with a net loss of $10.9 million or $0.72 per share for the fourth quarter of 2006. And, keep in mind the fourth quarter of 2006 included a charge of $0.46 a share related to the redemption of senior notes.

With the Town & Country acquisition, our tax position has changed from a net deferred tax asset to a net deferred tax liability and we now expect to be a cash tax payer. With these changes, our reasons for setting up the tax valuation allowance in December 2006 are no longer applicable and so it was appropriate for us to release the remaining $6.6 million of tax reserve in the fourth quarter.

This tax benefit increased our fourth quarter earnings by $0.39 per diluted share. And, we know that modeling our tax position has been difficult. So this gives [suspect] to more typical tax provision going forward.

Adjusted EBITDA increased 189% to $17 million for the quarter. And, adjusted EBITDAR more than doubled to $24.6 million. For the full year of 2007, which includes seven weeks of Town & Country, our total revenues increased 20% to $2.7 billion. Total merchandise sales increased 22% to $444 million with same-store sales increasing by 7.7%. On a pro forma basis, the combined same-store sales increase with Town & Country would have been 8.6% for the full year.

Total company gross profit increased 18% to $261 million. Net income totaled $16.3 million or $0.97 a share versus a loss of $3.7 million or $0.35 per diluted share for 2006. Again, 2006 included the $7.1 million charge related to the redemption of the senior notes in the fourth quarter.

The impact of releasing the $6.6 million tax allowance in Q4 2007 was a positive $0.39 per share, and keep in mind that we have been required to release a portion of that tax reserve all year to offset our federal tax provision. So, if you look at it on a full year basis we released a totaled of $9.8 million, which increased earnings by $0.58 per share. Adjusted EBITDA increased 29% to $58.3 million and adjusted EBITDAR increased about 24% to $84.1 million.

Looking at some of the key expense items for the fourth quarter; our overall costs were substantially higher in the quarter, in part due to the fact that we had 179 more stores for all or part of the quarter than we did a year ago. The Town & Country acquisition alone increased our retail store count by 50% and we built 18 new Stripes stores in 2007.

In addition, our average store sizes was bigger than it was a year ago, in part due to the fact that we've been shutting down some lower volume stores as we open new large formats stores, and also because the average Town & Country store is larger than the average Stripes stores.

Town & Country stores also have higher restaurant service penetration in its stores. 68% have country cooking or subway concepts versus 50% of Stripes stores with Laredo Taco Company restaurants, and this adds proportionately more labor.

Labor does remain our biggest operating expense. And, for the fourth quarter personnel expense was $25 million, up about 41% versus a year ago. Again, this is due to the store count increase and the growing penetration of restaurant [sales] stores.

Other operating expenses increased 50% to $20 million in the fourth quarter, which primarily reflects the cost of operating more stores. We're experiencing the effects of higher prices at the pump in the form of higher credit card expense. However, we were able to mitigate higher utility costs in our stores last year by locking in favorable energy costs at the end of 2006.

D&A was $8.4 million, which is up 74% from a year ago. A lot of this increase is SOX related and our first year SOX compliance is now complete. Also, as a larger public company, we've added a number of new positions in financial reporting and auditing, we peaked up our IT groups, and we brought a number of Town & Country staff members into the corporate organization.

We also accrued more bonus for the fourth quarter of 2007 versus an act accrual reversal in the fourth quarter of 2006, as we were over accrued during the first three quarters of 2006. Fourth quarter interest expense was $6.9 million, which is down $3.5 million from a year ago.

Now, recalling November of '06, we paid down $50 million of senior notes for which we took a charge of $7.1 million, but lowered our 2007 annual interest expense by $5.3 million. And, this was partly offset in the latest quarter by the fact that we sold $150 million of senior notes, we issued a 105 million of term debt, and we used cash on our balance sheet to finance the Town & Country acquisition.

As part of Town & Country transaction, we executed the sale/leaseback agreement for 13 Town & Country locations and received proceeds of $51 million. In addition, we did a sale/leaseback on seven small older Stripes stores for proceeds of $10 million. For 2008, our rent expense is estimated to be approximately $34 million to $37 million, depending on the timing of additional lease transactions versus the $26 million in 2007.

On a pro forma basis, debt-to-EBITDA to 4.1 times at yearend capitalizing our leases at eight times rent, our pro forma adjusted debt-to-EBITDAR was five times. Depreciation and amortization was $8.5 million for the fourth quarter, up $2.7 million primarily due to the higher store count. We owned 250 of our 504 retail sites and also owned 44 of our wholesale sites.

We recorded the preliminary purchase price allocation for Town & Country owner books, which now reflect net property and equipment of $411 million, total goodwill of $249 million, and total assets of $854 million at yearend. We will finalize our purchase accounting within the 12-month period as required by GAPP. Assuming no material differences to our preliminary allocation, our pro-forma depreciation and amortization for 2007 was approximately $41 million.

With the Town & Country acquisition, we will now be recording and paying federal income tax on a go-forward basis. We will continue to pay the Texas state margin tax of one half of 1% of gross profit, and will also be subject to federal income tax at a rate fairly close to the statutory rate of 35%. Now, including New Mexico and Oklahoma income tax, we expect an effective rate of approximately 36% on top of the Texas margin tax.

I would like to remind you that we provided pro form financial statements in yesterday's news release as if Town & Country had been included in our operations reach at 2006 and 2007. And, I hope that this might be helpful with modeling our new combined company.

I'd now like to turn it back to Sam.

Sam L. Susser

Thanks, Marry. Again, we're extremely pleased with both the quarter and yearend, and comfortable with how the integration is going so far. Our past experience with integrating large acquisitions has taught us that the melding of two companies is never easy, but we see more long-term sales upside than we anticipated prior to closing.

Operator, we're ready for any questions, if they are any.

Question-and-Answer Session

Operator

Thank you, Sir. We will now begin the question-and-answer session. (Operator Instructions).

And our first question is from Bill Reuter from Banc of America Securities. Please go ahead.

Bill Reuter - Banc of America Securities

Good morning, guys.

Sam L. Susser

Hi Bill.

Marry Sullivan

Hi Bill.

Bill Reuter - Banc of America Securities

I was wondering if you guys would like to comment on if there is any change in the competition from the big boxes or any other key areas in the quarter.

Sam L. Susser

Not in a meaningful way. There has not been meaningful change there at all.

Bill Reuter - Banc of America Securities

Okay. And with gas and fuel prices continuing to run up, I'm wondering if you guys are seeing any changes in consumer behavior, whether it’s to the less merchandise on per gas, or is that the people not fuelling up their cars fully anything like that?

Sam L. Susser

Bill, we are certainly looking for it with so much in the newspaper about consumer weakness, but we are not seeing signs of that in our numbers. And, we are certainly being vigilant and on the look-out. Our gasoline customers that pay with cash are coming into the store more frequently and buying slightly less fuel with each transaction because they tend to buy $5 or $10 or $20 at a time. But, as evidenced by the numbers that we've been discussing, we have got really good traction in both the merchandise and fuel business.

Bill Reuter - Banc of America Securities

Sounds good. In terms of labor, I mean I know a lot of the increase in personnel expenses was due to the T&C acquisition, but I'm wondering if you guys are seeing any shortages of employees or any upward pressure on wages.

Sam L. Susser

We are experiencing shortages in labor in Western Texas, Midland-Odessa, [Hubs] Roswell, New Mexico in particular. Those economies are very, very strong; Lovett is also a very, very strong combination of very high energy prices and strong commodity prices affecting the farming economy out there. And, we are seeing real pressure on getting great folks, adequate number of great folks to staff our stores and pressure on wages. I would not say there's been a material change in the labor climate in our other markets.

Bill Reuter - Banc of America Securities

Okay. And, then lastly, and then I'll hop out. Can you guys update us or tell us what the value of our own real estate might be?

Sam L. Susser

We've got on the books…

Mary Sullivan

We've got the $400 million of [PP&E] at the end of 2007 that's going to be relatively close to market value. As you recall, we did a partial step up in our assets in December 2005 of 70% of that market value. We recently recorded Town & Country at preliminary fair values. So that's going to be fairly close to that market value.

Bill Reuter - Banc of America Securities

Great; I think it’s enough guys.

Sam L. Susser

Thank you.

Operator

Thank you. Our next question is from Dean Haskell with Morgan Joseph. Please go ahead.

Dean Haskell - Morgan Joseph

Thank you very much. The new construction for 2008 is going to be two-thirds, one-third South and West Texas. How does that stack up in terms of the real estate? Is it acquired, is it still under lease? So, you are still under contract with some of that, all of it, none of it?

Sam L. Susser

Our pipeline for this year is set. We are -- we either own the real estate or we are talking about properties that are under contract. So we are -- we feel very good with our ability to develop those new sites for '08 and we are working on additional sites. It will probably build out in 2009, and some maybe even in 2010. Does that answer it, Dean.

Dean Haskell - Morgan Joseph

Yeah. Do you have a preliminary '09 or '10 unit growth rate?

Sam L. Susser

No, we have not made firm plans there. We would like to kind of offer that guidance when we get later in the year in '08. It's certainly our goal to continue to build out these big boxes. We are very, very pleased with the results that they are producing not only in an individual basis but overall as we build these big box stores with our Laredo Taco concept in the big fuel facilities. I think it really enhances the brand and every new one we own just helps the overall company in many ways and it's very much our goal to continue building these new big boxes at a very healthy clip.

Dean Haskell - Morgan Joseph

That's great. In a static analysis, how many more units can you put into your existing market; an estimate please?

Sam L. Susser

Since these -- the markets are growing at a very strong healthy clip and we ought to be able to keep building 25 or so a year and enjoying the same kind of returns we have today, and maybe more. Though we're going to focus this year on the successful integration of Town & Country, we want to do the re-branding to Stripes beginning at the fourth quarter of this year and completed hopefully next year. But longer term we hope to ramp that store growth up.

Dean Haskell - Morgan Joseph

Okay. And one last question, what are you doing to attract labor if it’s tough in Midland-Odessa and Eastern New Mexico: you're raising wage rates or you touting your benefits et cetera?

Sam L. Susser

We are evaluating wage rates not only by community but even by parts of talent within the community. We have, I believe, six seasoned operators from all sections of the company from South Texas to Oklahoma that are camped out in West Texas providing -- recruiting assistance, interviewing assistance. We had a team of store managers from other markets in helping shore up the stores that are under staffing pressure. We're doing a whole lot of specific tactical things to try to get this staffing in better condition.

Dean Haskell - Morgan Joseph

Okay. Great: Good luck in '08.

Sam L. Susser

Thanks a lot we could use it.

Operator

Thank you. Our next question is from Bryan Hunt with Wachovia. Please go ahead.

Bryan Hunt - Wachovia

Yes. Thank you. Just to confirm something you said earlier Mary. If we look at the sale/leasebacks you did on the 20 or so properties in Q4 or roughly $60 million, at $3 million per, why is the valuation some much lower on the other total 50 on locations, if you want to call them $400 million for 250?

Mary Sullivan

Most of the sale/leasebacks we did this last year on newer stores as opposed to the older stores that make up are part of that 250 owned sites.

Bryan Hunt - Wachovia

Okay. Thank you.

Sam L. Susser

Also, part of that $60 million was 12 or 13 of the big strong Town & Country unit that we put into the lease financing.

Bryan Hunt - Wachovia

All right. Thanks very much. If we look at your sale/leaseback cap rates in the current environment or even in Q4, what are we looking at from a lease rate perspective relative to a year ago?

Sam L. Susser

The real estate market is still open and we are finding a lot of appetite for our leases, but the initial rate has gone up a little bit over the last, I would say since last June, we've seen pressure for initial yield up a little bit in the institutional market. Maybe backed up about 50 basis points, Brian.

Bryan Hunt - Wachovia

That puts you in the 8.5% to 9% type of range?

Sam L. Susser

8.5 give or take. That's subject to negotiations; what kind of bonds you're willing to offer, that kind of thing. And in the 1031 market, we're still experiencing better lower initial rates in that. But, in institutional market, we've seen it back up a little bit.

Bryan Hunt - Wachovia

It's fantastic. It's cheaper than your bonds. Did you all swap any of the floating rate bank facilities into fix rates and if you didn't, did facilities have any LIBOR floor on them?

Sam L. Susser

We did not swap and we don't have any LIBOR floors in the financing.

Bryan Hunt - Wachovia

Congratulations. All right. That's the extent of my question, and thank you very much. And thanks for providing all the pro forma information. You all should be commended on your transparency.

Sam L. Susser

Well, thanks a lot, Brain. We appreciate it.

Operator

Thank you. Our next question is from Steve Chick with JPMorgan. Please go ahead.

Regina Russell - JPMorgan

Hi. It's [Regina Russell] here for Steve Chick. I just had a couple of quick questions. You initially mentioned in your earlier remarks that there is no evidence of consumer slowdown in your markets right now. And, then I am just wondering what's the idea behind your more normalize guidance in 2008 really on the merchandize same-store sales and the fuel margins?

Sam L. Susser

We are giving guidance for '08 that's consistent with the five-year average that we've had in same-store sales growth and we are comfortable that we'll be able to maintain that, even if there is high gasoline price. Last year's number was the best same-store sales growth we've seen in the last five years, but it was partially influenced by the cigarette tax increase. And, if you strip that out, that part out would be within this guidance that we're offering for 2008. On the fuel margin side, we've taken the same approach, we've tried to offer guidance with a band that is around the longer term average for the Company, inclusive of Town & Country's contribution.

Regina Russell - JPMorgan

Okay. And then to touch back on the real estate once again, looking forward do we anticipate that the real estate market is going to provide you any challenges going forward with these sale/leaseback? Are you comfortable with where things are right now?

Sam L. Susser

We consider ourselves blessed. There is still a lot of appetite for income producing real estate. And, we are comfortable and confident that we will be able to use lease financing for our new store program and for future acquisition opportunities, if they were to arise. We've got great dialogue with market and great relationships that are very important to us.

Regina Russell - JPMorgan

Okay. And then one final question. I believe you mentioned before that personnel seem to be the most difficult part of the integration process, and I was just wondering if you can give us an update on where personnel changes stand right now.

Sam L. Susser

I don't think it will be appropriate to try to do a person-by-person callout, but we are anticipating about 13 people relocating from West Texas to either Corpus Christi or Huston this summer. We have quite a few personnel changes going on as you would expect with an integration of this nature. We have communicated to the individuals who will not have long-term corporate positions with us after the consolidations occurred and that information has been made known to each of the individuals and we put appropriate arrangement in place to help them manage through their transitions personally and professionally.

We're very, very pleased with the store managers from Town & Country. They're really energized and excited. And we had a great sales meeting where we had all store managers pooled together and our supervisors and many members that remained with team with our supplier base in San Antonio. It's a great experience and a great way to kick-off this year and we are also very excited about a lot of the key leaders out of Town & Country that are coming to join our management team and are going to be part of our long-term future. But, that said, this is going to result in a number of job losses and there is a painful element in that and that process is underway.

Regina Russell - JPMorgan

All right. Thanks guys.

Operator

Thank you. Our next question is from Anthony Lebiedzinski from Sidoti & Co. Please go ahead.

Anthony Lebiedzinski - Sidoti & Co.

Good morning. I realize that you don't provide quarterly guidance but you are two weeks away from finishing up the first quarter. I was just wondering if you could just comment on, what you are seeing as far as first quarter sales in margins trends?

Sam L .Susser

Anthony, we've really been pretty strict with ourselves about not providing any sort of quarterly guidance. I would comment, again, that we are feeling -- when we are looking for signs of slowdown in the consumer and we are not finding it in our markets. And certainly we know it's there; California, Florida, certain parts of the Midwest, but our markets remain real strong and we are bullish about our top line trends.

Anthony Lebiedzinski - Sidoti & Co.

Okay. That's helpful. And, earlier in your remarks you had said that -- you hope that you can find further synergies from the Town & Country deal. I was wondering if you could perhaps shed some light as to where there are other synergies that you are looking for.

Sam L. Susser

We are working with our suppliers right now. We are really concentrating on the merchandise side of the business and we think that we may be able to find more ways to improve our cost or supply chain, but also reach some magic price points that allows us to bring some promotional activity to West Texas and Eastern New Mexico that hasn't being there for the last few years. It will hopefully help us to really grow the sales base in the coming years.

So, we are hopeful that we will end up with meaningful synergy above and beyond the $5 million guidance, but we're not prepared to off raise additional numbers at this point.

Anthony Lebiedzinski - Sidoti & Co.

Okay. And then also I think Mary had mentioned that at the -- you benefited from a favorable utility cost so you think you had locked in some favorable rates. For how long is the contract that you have with the utilities?

Mary Sullivan

The purchases that we made at the end of '06 took us through fiscal '07. We did have some additional contracts locked in at the end of '07 for about the first half of '08.

Anthony Lebiedzinski - Sidoti & Co.

Okay. And also just a couple of housekeeping questions, as far as the penetration between Laredo Taco at Stripes locations and Country Cookin' at the Town & Country stores. What's the percent breakdown between those two?

Mary Sullivan

That about 50% penetration of Laredo Taco Company and Stripes and 58% of the Country Cookin' and their other restaurants in the Town & Country stores.

Anthony Lebiedzinski - Sidoti & Co.

And also of the average square footage of the Town & Country store, how does that compare to the average square footage of the Stripes store?

Sam L. Susser

On average Town & Country stores are about 10% larger in square footage. But, both companies have been focusing on building big boxes at around 5,000 square feet. It's kind of a standard prototype for new store growth; lots of similarities between the kinds of new stores that both companies have been building the past five or six years.

Anthony Lebiedzinski - Sidoti & Co.

Okay. So the main reason that the Town & Country stores now are 10% larger than the Stripes stores is because your older stores are sort of laying that down?

Sam L. Susser

That's correct. If you may recall we had acquired a number of stores over the year, from [7/11] and (inaudible) and others and those legacy stores are in the 2,400, 3,000 square foot range whereas the new stores that we’re building tend to be about 5,000 feet.

Anthony Lebiedzinski - Sidoti & Co.

Okay, that's helpful. Thank you.

Sam L. Susser

Sure.

Operator

Thank you. (Operator Instructions). Our next question is from Andrew Berg with Post Advisory Group LLC. Please go ahead.

Andrew Berg - Post Advisory Group LLC

Hi guys; quick house keeping question, what was the number on the revolver at the end of the quarter?

Mary Sullivan

At the end of the year we had $34.6 million borrowed against the revolver. We had letters of credit of $28.4 million and those come out of our $90 million of dollar revolver and so the balance was available.

Andrew Berg - Post Advisory Group LLC

And just one -- okay great I wasn't sure where the LCs were, thank you.

Operator

Thank you, our next question is from Chris Smith with SCM at (inaudible), please go ahead.

Chris Smith - SCM

Thanks. A follow up question on the revolver balance; is that what you expect to be the peak draw for the year?

Sam L. Susser

Our biggest seasonal use does -- is in the winner months first quarter as we are building inventories for spring break and we pay property taxes and insurance and different things in the year of first quarter time period, but the timing of our leases and our new store program will also effect our usage of revolver.

So, we're very, very comfortable with the liquidity of the Company. We have more than adequate availability on the revolver and we're in a good place. I can't tell you if it might pop-up a little bit more; the other times of the year just depend on the timing of lease financing. We typically bundle up a handful of stores of our new stores and then execute a lease transaction, which is just more efficient for us than one at a time. And, that will effect how we use revolver during the year.

Operator

Thank you, Sir. And at this time, I would turn the call -- actually we do have one additional question and that question is from Andrew Berg with Post Advisory Group LLC. Please go ahead with your follow-up question.

Andrew Berg - Post Advisory Group LLC

Hi. Sam, you guys bundle those up, how quickly should we expect to see another sale/leaseback transaction announced and is that something we might see in the next couple of three months or are we thinking later end of the year?

Sam L. Susser

We would probably have additional lease financing done during the second quarter...

Andrew Berg - Post Advisory Group LLC

Okay.

Sam L. Susser

But I wouldn't expect it at the front end of the second quarter.

Andrew Berg - Post Advisory Group LLC

Okay. Sometime in the second quarter.

Sam L. Susser

Yeah, probably so. And...

Andrew Berg - Post Advisory Group LLC

Can you quantify a ballpark size?

Sam L. Susser

No. It's not...

Andrew Berg - Post Advisory Group LLC

And it begins -- can you actually give me that?

Sam L. Susser

Yeah. Right.

Andrew Berg - Post Advisory Group LLC

Okay.

Sam L. Susser

We did one small transaction in January and we will probably end up with another one before the second quarter ends.

Andrew Berg - Post Advisory Group LLC

Okay. Great. We'll look forward to that. Thank you.

Sam L. Susser

Thank you

Operator

Thank you. Our next question is a follow-up question from Chris Smith. Please go ahead.

Chris Smith - SCM

Thanks. I know you guys will be quick with those questions, I guess. Can you just remind us what your free cash flow priorities are?

Sam L. Susser

First is safety in our stores. Second is stay in business capital for existing stores, we want to be sure that we are keeping the quality of our store base up, keep our technology current, and keeping the customer experience right in our existing stores. Our third priority is new stores and acquisitions in our existing market that help solidify our market share and brand position. And then fourth, lastly, would be acquisitions outside of our core markets in adjacent territories.

Operator

Thank you. Now, at this time, I'd like to turn the call back over to management for any closing remarks.

Sam L. Susser

We appreciate your time. I know we've provided a lot of details today and as long as our business is growing it'd be [clip] and transforming. We're going to continue to provide that detail because we want you to have good insight into what's going on with the business. We're very excited about where we stand and what the future may bring and hope you guys will come down and see us and eat some tacos. Thanks for your time.

Operator

Thank you, sir. Ladies and gentlemen this concludes the Susser Holdings Corporation fourth quarter earnings conference call. This conference will be able for replay after 1 pm Eastern today. You may access the replay system at anytime by dialing 303-590-3000 and entering the access code of 11109685 followed by the pound sign. Thank you for participation. You may now disconnect.

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