Core-Mark Holding Company, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Welcome to the Core-Mark First Quarter 2021 Investor Call. My name is Karen, and I will be your operator for today’s call. I will now turn the call over to David Lawrence. David, you may begin.

[David Lawrence:]

Thank you, and good morning, everyone. Today’s call will be led by Scott McPherson, our President and Chief Executive Officer; and Chris Miller, our Chief Financial Officer. Before turning the call over to Scott, I will point out the Core-Mark intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act as noted in the earnings release we filed this morning. Please remember that our comments today may include forward-looking statements, which are subject to risk and uncertainties and actual results may differ materially from those indicated or implied by such statements.

[Scott McPherson:]

Thanks, David, and thanks to everyone for joining us today on our first quarter call. We delivered strong results for the quarter in line with our expectations in reflecting the continued hard work and dedication in the Core-Mark family. While the effects of COVID-19 on consumer behavior continue to impact our sales mix and margins. We were pleased to deliver sales growth in both cigarettes and non-cigarettes on a comparable basis for the quarter. Our revenue growth reflects a steady recovery from the peaks of the pandemic with positive same store sales growth in non-cigarettes for the first quarter since COVID-19 struck North America. While sales in February were impacted by extreme winter weather affecting a significant portion of the U.S., Core-Mark showed strong growth on improved sales trends in our food fresh and candy categories. On a sequential quarter basis, we grew our total customer count by 150 stores, reflecting positive momentum in our efforts to grow market share. This growth was supported by the early benefits of our sales force restructure discussed on our call last quarter. From an expense perspective, we continue to benefit from efficiencies in our operational performance metrics including cubes per route in delivery and throughput and warehouse striving year over year, leverage, and expenses as a percent of our remaining gross profit in disciplines. Turning to our strategic initiatives from a growth perspective, I’m pleased with our momentum exiting the first quarter and remain optimistic about the continued mix and margin recovery. From a category management perspective, we continue to execute on the rollout of our national supply chain partnership with Fresh and Ready Foods by leveraging our new chilled redistribution center on the West Coast. We are now providing premium and consistent fresh food to 11 distribution centers and remain on course to offer this product selection to all customers across the lower 48 by the end of the year.

[Chris Miller:]

Thanks, Scott. Good morning, everyone. I’ll start off by covering our first quarter performance, provide an update on liquidity and wrap up with some additional commentary on guidance for 2021. We delivered solid year over year results in the first quarter, despite the pantry-loading related to COVID-19 that benefited the first quarter last year. Net income increased to $8.5 million compared to $4.3 million last year. Diluted earnings per share for the quarter increased to $0.19 from $0.9 per share last year. Excluding LIFO expense, the alluded EPS increased approximately 64% to $0.36 per share versus $0.22 last year. We’re pleased with our operating results for the first quarter and our continued strength in driving operational efficiency and effective cost management. Total sales in the quarter decreased by 0.2% to $3.9 billion. Adjusted for the impact of one less selling day in foreign exchange total sales increased approximately 1% for the quarter. Total cigarettes sales increased 1.2% on a comparable basis led by cigarette price inflation partially offset by a decline in total carton sales. We saw a small decline in cigarette cartons for the first quarter on the same-store sales basis, reflecting growth in January, offset by monthly declines in both February and March. Our results in March reflected the decline in same-store cigarette carton sales of 4.6%. However, it’s against the 5.6% increase in March of 2020, which benefited from COVID pantry loading. Non-cigarette sales increased by 0.2% on a comparable basis, reflecting growth in all commodities, other than food and candy.

[Operator:]

And we do have our first question from Ben Bienvenu from Stephens.

[Ben Bienvenu:]

So I’m glad to hear that non-cig comps have turned positive. I’m curious, what does that look like relative to 2019? You talked about March being kind of a stock-up window. So maybe it’s actually against an abnormally strong base, but I’m just curious how close to normal are we in terms of returning back to that kind of trend line?

[Scott McPherson:]

Yes, that’s a good question, Ben. We spent some time dissecting March of 19, and if you remember, we had kind of a big run-up kind of weeks, two and three, and then a big decline in week four of March in 2019 – or no, in 2020, I’m sorry. And so really 2020 was a pretty good comp month overall. And then if you look back at March, obviously we had increases 2019 over 2020. So I look at it this way, we looked at it versus 2020 and 2020 seemed even though it had some ups and downs, a fairly stable month. And we were up in March in every category. Food was basically flat, but every other category was up. So we saw really good momentum in March. Obviously, February end of quarter wasn’t as strong because of the winter storm and some other impacts there; but there’s some really positive momentum coming out of March.

[Ben Bienvenu:]

Great. I want to revisit, if I think back to your legacy drivers of growth, vendor consolidation, focus marketing initiative, I’m wondering how disruptive was COVID to that process? Did you guys continue to work through surveys and guide your customers around the assortment and pricing? And coming out of COVID with potentially some consumer behavior changes in terms of traffic patterns and the way they shop the store, have the acceptance rates changed relative to the recommendations that you’re making from FMI? Have your recommendations changed? I just want to get a sense of how do we get back to normal, to kind of getting that compounding growth engine back in place?

[Scott McPherson:]

Yes, that’s a great question, Ben. I would say that, it’d be naive to think that COVID didn’t impact to some extent. I mean it did impact a number of FM’s, not dramatically, but definitely impacted them. And I think in some ways, just that engagement to be able to be out in the store all the time and have that engagement when you’re doing an FMI, and communicating an FMI. So our acceptance rates were also down a little bit last year. I’d say, from a positive note, I think last year really allowed us to retool not only FMI, but our category management tools. We’re now using Blue Yonder. And our ability to provide, in a schematic intel to customers, is multitudes better than it was a year ago. So I think we’ve come a long way there. And then, the other tools that we’ve added to really help them skip payment solutions and PDI, from a loyalty standpoint, I think we’ve added a lot of tools to the toolbox. And then also, I’m really encouraged by the early results of our sales organization, through the first quarter, on how they’re executing. So yes, I think last year was impacted, but I think it also allowed us to really reposition and retool.

[Ben Bienvenu:]

All right, great. And then one quick one for me, and then I’ll hop back in the queue. You talked about fill rates, you talked about building inventory to try and insulate yourself from supply chain challenges. How notable are inbound delivery disruptions? Does it present any risks to sales this year, do you think? And how much of it do you think has to do with COVID absenteeism versus maybe stimulus-driving absenteeism?

[Scott McPherson:]

Yes. So Ben, to give you a little perspective on fill rates. Historically, we run about 1% manufacturer out of stocks. Really, since the height of COVID, and it really hasn’t gotten materially better through today, we run somewhere between five and 10% manufacturer out of stocks, depending on the manufacturer, depending on the region of the country. So it definitely has a material impact on our inbound. And as we talked about in our prepared remarks, we are building inventory, we’re using secondary sourcing where we have to. And in some situations, we’re having customers change items in their schematic to find a good substitute because the supply chain on those items just isn’t good. So that certainly, supply chain, has been a challenge. I think it’s going to be a challenge through much of this year. And then, the second ask of your question on stimulus, what exactly – Can you repeat that again, Ben?

[Ben Bienvenu:]

You talked about COVID disrupting supply chain and presumably creating absenteeism. We’ve seen this in a lot of our other companies, as well, but we’re also hearing companies talk about all of the stimulus in the system contributing to absenteeism, as well.

[Scott McPherson:]

Absolutely, again, in our remarks, we always talk about drivers and warehouse, we have for my whole career.but I think I heard on another investor call a couple of days ago. I heard somebody asked, they said, they’ve listened to four or five investor calls, and they’ve never heard the noise around staffing and workforce availability that they’re hearing right now. And I’d say, that’s true. I think the unemployment situation, that people are able to draw on employment and the rates they’re drawing, combined with stimulus, makes it really, really tough on the warehouse and transportation workforce. So we’re doing more around staffing and hiring than we’ve done in the last three or four years combined. It is definitely a challenge. And I think that definitely has an impact on the supply chain.

[Operator:]

We do have our next question from Kelly Bania from BMO Capital.

[Kelly Bania:]

Just curious, maybe, what’s giving you pause to raise the guidance? I get that the tax stamp gain was partially offset, and maybe more like $5 million instead of $8 million on a net basis.but I think you guys were planning for EBITDA roughly similar to last year levels? And so this quarter does seem to just be starting out stronger than expected. So just curious if there’s one or two things that are standing out to give you pause, or it’s just really too early in the year?

[Scott McPherson:]

First off Kelly, I’d say it gives us a lot of confidence. That was definitely a shot in the arm. And we have a lot of confidence in the year. That said, we definitely have inflation built into our plan. I wouldn’t say that we specifically had a Colorado tax increase built in, but probably more so than that is, it is the first quarter. It’s our smallest profit quarter of the year. It’s not been our historical patterns to make changes in guidance after Q1. So we will definitely look at that again in Q2 and decide what we want to do then.

[Kelly Bania:]

Okay. And in terms of fill rates, any color on specific categories that you see that more – And how that’s impacting your sales? Just, any update on that point?

[Scott McPherson:]

I’d say, if there’s one category that probably stands out it’s cigars. Cigar fill rates were a challenge pre-COVID and have been a disproportionate challenge after COVID. Outside of that, it’s surprising, Kelly. It’s across a number of different categories, and it’s not just smaller manufacturers. It’s some of our key major manufacturers. So we have a dozen manufacturers that make up a big portion of that delta. And obviously, those are the ones that we’re really focused with and working on day-to-day.but it’s not any specific category other than cigars.

[Kelly Bania:]

Okay. That’s helpful. And I guess, just on the topic of inflation, can you just help us understand, just with another quarter under the belt, what you are hearing from manufacturers and how that compares to what you think is in your plan? Are there more price increases in the second half? And could that be a tailwind above and beyond what you expected? Or are you expecting that to – How are you expecting that to impact you?

[Scott McPherson:]

Yes, I think we expected maybe a little higher inflation this year, than historical.but I wouldn’t say that we planned anything greatly disproportionate. I would say that, obviously, everybody’s hearing a lot of noise about inflation. I would say through the first quarter, we really, other than cigarette price increase, didn’t see really any material signs of product inflation other than that. So I do anticipate there will be some. So I expect maybe pick up a little tailwind as we move through the year, but we haven’t seen a whole lot yet. You still there, Kelly?

[Kelly Bania:]

Yes.

[Operator:]

And we do have our next question from Matt Fishbein from Jefferies.

[Matt Fishbein:]

Wanted to just follow up on Ben’s question around the labor availability environment. We have been hearing on many calls the similar feeling, the tightness there, is potentially bigger problem going forward than it has been in recent past.but would point out that probably looks different from industry to industry, and the drivers behind it may be a bit different from industry to industry. So I know you pointed to stimulus, is certainly a driver. Wanted to know from Core-Mark’s perspective, what are the other big drivers of the availability shortage, as it relates to the company, specifically? And is it a push from industry competitors, too? Is it more driven by large companies from outside the industry, maybe stepping in and competing for that same skillset? Or, is it just more of the macro aging labor force dynamic, maybe impacting the situation more recently because of the pandemic shock to the system, so to speak? Those are a couple of my ideas, but interested in hearing your perspective.

[Scott McPherson:]

Yes. I think you’ve touched on a few really good key points, Matt. The one thing that I pay attention to is warehouse availability across the country. And there’s a couple of indexes that show warehouse spaces available. And I can tell you right now that warehouse occupancy is at its highest rates in a couple of decades, which means – and I think a lot of that math comes from the fractures in the supply chain, and people are trying to buy a space to store products and move product around. And when that happens, that increases demand for warehouse workforce. And I’d say that driver demand is tough too, but I’d say right now warehouse might be slightly edging driver availability. And I think a lot of that is just because there’s so much demand and so much occupancy in the warehouse space. So certainly that is – Other players that are in the space –. I mean obviously Amazon, I think has leased up half the warehouse space in the country over the last 12 months. So we definitely have other competitors out there for workforce. And the other thing I’d say is it’s a little more regional for us. We probably have five divisions that make up 80% of our challenges. And so there’s certain markets where we are certainly exerting more resources to try and recruit people.

[Matt Fishbein:]

And just to follow up on that, it looks you’re in the process of relocating one of your distribution facilities and just looking at kind of the CapEx allocation there, it sounds it’s a move to a pre-existing building. So you touched on the warehousing environment a bit. Do you, as a company see any opportunities in the future to optimize or expand your logistics footprint? Or is this more of a headwind for others that are looking to step on the gas to expand going forward? Just kind of asking this, is that going to impact you doesn’t feel like your rates are necessarily variable when you’re renegotiating leasing?

[Scott McPherson:]

Yes, I would say a couple of things. I mean obviously from a growth and expansion standpoint we’re focused on acquisition and we think that’s the most efficient and profitable way for us to grow. We moved the building last year in Oregon. We have another one that we’re evaluating for this year, and that’s part of our capital plan. Both of those were moves to locations that were more favorable from an employee standpoint, and were buildings that were simply didn’t matter what technology we put in them they were just buildings that you weren’t going to optimize. But I would still say that our focus on expansion and growth is really going to be through acquisition.

[Matt Fishbein:]

Cool. That’s helpful. And one last one. As it relates to our march out of the pandemic, wanted to check in on how drop rates and drop size look sequentially since the beginning of the year. And I think one of the airlines just pointed out that business travel looks to be back 50% relative to the normal levels, and maybe a bit better in certain markets. How is that a travel related component of your business trending?

[Scott McPherson:]

Obviously for us drop sizes are really driven by our non-cigarette sales. So for the quarter, our drop sizes were down for March when we start to lap and have non-cigarette same store sales growth, you’re going to see our drop sizes start to increase. Because that’s really what drives our drop size. Your comment on the airlines, absolutely! We have seen a market and very quick spike in volume in airlines. And I’d say overall our non convenience segment, although it’s been slower to recover, as I look back at that month to month, quarter to quarter, it gets better every month and every quarter. But I would say over the last three or four months, airlines have jumped disproportionally for sure.

[Operator:]

We do have the next question from John Lawrence from Benchmark.

[John Lawrence:]

Just a couple of questions. Let me ask you about these operators out there. You’ve mentioned some of the new initiatives, the PDI, and – Give us a sense post COVID. What kind of attention can you get to these guys? I mean, obviously they came through COVID all the challenges through that. And now you got a sales guy going in there and trying to help them. Give us a sense of the response before and after. Do they need help? And some examples maybe of this technology of how that’s helping.

[Scott McPherson:]

Yes John. Let me break it into two buckets. I think there’s two buckets where we can really help them. One of them is product selection and the changes we’ve seen as we’ve kind of advanced through COVID the other one’s technology. From a product selection standpoint, I mentioned earlier Blue Yonder and our – we have four dedicated folks that all they do is develop schematics and build out schematics at Blue Yonder. And we work with all of our vendors on a regular basis to optimize those schematics. And I’d say there were significant changes this year. We saw a lot of changes in product mix this year. And so we’re working really hard and we have a lot of folks visiting our center of excellence now that we’ve opened that back up. We had five people in this month, five different groups, but really working to optimize their product mix in store. The other thing that I think COVID did from a retail standpoint is I think the price of admission now is you’ve got to be on a path where you can make the customer experience in a convenience store, more frictionless. And whether that means they’re able to check out on their phone, whether that means that they have an automated checkout, whether that means that they have a loyalty play, whether they can order from the Pump, you have to start adding technology elements. And our partnership with Skip and PDI essentially can do that. All of those things I just talked about for an independent retailer, but also for a small to medium size chain. And we mentioned, we signed up our first PDI customers 200 store chain. So I think getting them into the technology space so they can service their customers more efficiently is going to be critical for the future of ourselves and our convenience.

[John Lawrence:]

Great. That’s real helpful. Secondly, can you talk a little bit about, obviously these chains and some of these independents – Through COVID, now you’re facing supply chain issues, you’re facing labor issues. As you talk to some of these guys and continue discussions with M&A, do you see a little – I’d say light at the end of the tunnel that they may be a little bit more ready to make a move then than before all of this?

[Scott McPherson:]

Yes, I mean, I’ve sit on prior calls, John. I think most of the wholesale environment for convenience fared reasonably well through COVID. I know there were a number of them that took loans to be able to pay their folks and get through the most challenging times. But the one thing I would say, and I’ve seen it in my conversations is, events like this, make people kind of evaluate their business prospects. And I think when you have multi-generational wholesaler and that’s what most of them are out there. I mean this is an event that makes you think how long do we want to do this? And so there are a number of those conversations that I’ve had. And I think this is an event that will probably be a catalyst that accelerate some of those conversations over the coming months and year.

[Operator:]

And we have no further questions at this time. I’m going to turn it over to David for final remarks.

[David Lawrence:]

Thank you all for joining us this morning. We appreciate your interest in Core-Mark. If you have any follow-up questions, please feel free to reach out to me through our IR contact on our website. Thank you.

[Operator:]

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.