Marathon Petroleum Converts One-Third of Hess Assets

FINDLAY, Ohio — Seven months after adding the Hess retail network to its portfolio, Marathon Petroleum Corp. (MPC) subsidiary Speedway LLC has converted about one-third of the stores to its own banner.

"Speedway continues to make excellent progress transitioning its new retail locations to the Speedway brand. As of today, we have converted more than 400 stores, including 260 completed during the first quarter," Gary Heminger, president and CEO of MPC, said during the company's first-quarter 2015 earnings call Thursday morning.

The comprehensive transition for each Hess store not only includes the changing of signs and canopies, but also a complete changeover of the back-office, point-of-sale and inventory control systems, as well as integration of the Speedy Rewards loyalty program, Heminger explained.

"With the majority of the Florida stores now converted, crews have been focused on conversions in the Northeast for the past month. This rapid pace of store conversions contributes to our confidence that we will achieve the synergies and market enhancements that we expect as we integrate this business," he said.

According to Heminger, first and foremost is getting "Speedway East" fully transitioned and converted over to the type of operations that Speedway President Tony Kenney runs. 

"We are pleased with the progress we are making on the conversions to the Speedway brand. Along with that includes the implementation of our merchandise programs inside the stores, which is a real source of synergies down the road," Kenney said during Thursday's earnings call.

Speedway is going through the best practices of both companies. That is, in and of itself, a good source of the synergies the retailer is experiencing — primarily on the expense side of the business right now. 

"As we continue to go forward, we're going to start to realize some marketing efficiencies as well," Kenney said. "On a full-year basis in 2015, we're right on plan with where we expect to be on the synergy capture in 2015." 

Speedway is also banking on its Speedy Rewards loyalty program to draw customers into the newly converted convenience stores.

"The benefit we have with the conversion is our loyalty program. These markets, Florida in particular and as we move into the Northeast, they really haven't had a strong presence of a retail loyalty program, said Kenney. "We are getting a lot of good interest of customers signing up for our loyalty program, which is probably the best benchmark we have right now in terms of how we are attracting new customers."

There are a lot of dynamics in play. For example, retail prices (as gasoline prices come down) may be driving traffic as well, according to Kenney.

"We're very careful on how we are analyzing that. The deal is only seven months old and the conversions in Florida are three to five months old, so we have limited data at this point. But we are getting some very good feedback from our customers in terms of the loyalty and the offers that we have once we convert to the Speedway brand," he explained. 

Looking at the numbers, MPC reported first-quarter results of $891 million in earnings. "The outstanding results demonstrate our ability to take full advantage of favorable market conditions," Heminger said. 

Speedway's earnings — independent of contributions from newly acquired retail operations — also resulted in a record first quarter for the division.

"Our financial performance for the first quarter was quite strong. MPC reported earnings of $891 million ... compared to $199 million on the first quarter of 2014," said Tim Griffith, senior vice president and chief financial officer of MPC. The primary drivers of this performance were a $954-million increase in refining and marketing, and a $110-million increase in Speedway income, partially offset by higher income taxes associated with these higher earnings.

Speedway's newly acquired locations are performing better than expected, contributing income of approximately $36 million to the first-quarter results. For the legacy Speedway sites, the light product gross margin was about $70 million higher in the first quarter of 2015 compared to the same quarter last year, Griffith said. 

Overall, Speedway's gasoline and distillate gross margin increased by more than 8 cents, to 19.7 cents per gallon in the first quarter. Merchandise gross margin was $22 million higher in the first quarter than the same period in 2014 for the legacy locations.

On a same-store basis, which excludes the newly acquired assets, gasoline sales volume decreased 1.2 percent compared to the same period last year. Merchandise sales during the quarter, excluding cigarettes, increased 6.2 percent on a same-store, year-over-year basis, Griffith reported.

"For the second quarter of 2015, we project that Speedway's light product sales volume will be approximately 1.5 billion gallons," he added. 

Findlay-based MPC is the nation's fourth-largest refiner. Marathon brand gasoline is sold through approximately 5,500 independently owned retail outlets across 19 states. In addition, Enon, Ohio-based Speedway owns and operates the nation's second-largest convenience store chain with approximately 2,750 convenience stores in 22 states.