Core-Mark Holding Company, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Welcome to the Core-Mark Second Quarter 2020 Investor Call. My name is John, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note, the conference is being recorded. And I will now turn the call over to David Lawrence.

[David Lawrence:]

Thank you. 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 that 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 risks and uncertainties, and actual results may differ materially from those indicated or implied by such statements. Some of these risks are described in detail in the company's SEC filings, including our annual report on Form 10-K. The company does not undertake any duty to update such forward-looking statements. Additionally, we will refer to certain non-GAAP financial measures during this call. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure and other related information, including a discussion of why we consider these measures useful to investors, in our earnings release and our quarterly report on Form 10-Q. I'll now turn the call over to Scott.

[Scott McPherson:]

Thanks, everyone for joining us today on our second quarter call. Consistent with the first quarter, I want to begin by recognizing our employees, customers and vendors. I'm grateful for their commitment, cooperation and support through what remains a dynamic environment. COVID-19 has certainly challenged our industry with significant swings in volume, margins and product mix. Although we saw consistent volume improvements in many product categories through the quarter, margins remain compressed, affected by lower volume incentives, consumer demand and mix. Despite these continued headwinds, this organization has proven its resilience by leveraging technology to align our variable costs, making meaningful progress on our fixed-cost initiatives, and executing on our productivity metrics. I have a high level of confidence in our ability to successfully navigate the challenges that lie ahead related to the pandemic, while continuing to move the business forward to the benefit of our shareholders. To that end, I'm sure you noticed we restated our full year guidance, which had been previously withdrawn. Obviously, the trends related to COVID-19 remain uncertain. But after experiencing three consecutive months displaying reasonable consistency from a cost, volume and margin perspective, we had a foundation on which to provide some transparency to our outlook on full year results. Chris will provide more details on our assumptions in his prepared remarks. Turning to the quarter, our EBITDA of $52.5 million demonstrated the ability to flex our cost structure despite the volume and margin challenges. From a revenue and margin perspective, it's important to recognize the industry trends related to consumer behavior. Recent industry data shows C-store trips down approximately 10% to 15%, rebounding from peak declines ranging from 25% to 30% early in the quarter. Offsetting the steep trip decline has been an increase in the average size of the purchase basket, which has been up consistently in the 15% to 20% range throughout the quarter, driven primarily by product mix. On the surface, Nielsen and IRI would indicate that C-store volumes are up 2% to 5% for the quarter, but underlying details reveal that sales growth is being driven primarily by alcohol and tobacco, reflecting continued declines in a number of key categories, including prepared foods, snack and alternative nicotine. Looking at our results for the second quarter, total sales declined by 1.7%, reflecting 2% growth in cigarette sales and a 9% decline in non-cigarette sales. These results reflect a recovery compared to April, where cigarettes were down 3% and non-cigarettes down 20%. Remaining gross profit margins presented a significant headwind throughout the quarter, seeing a 58 basis point compression, with approximately half of the decline driven by the mix of cigarettes versus non-cigarettes and half driven by the impact of lower margins within our non-cigarette categories. The decline of non-cigarette margins was caused by mix and margin challenges in the segment. The mix impact resulted from sales weakness in the higher margin categories of food, candy and health and beauty and general, coupled with the strength of lower margin tobacco products. Turning to rate, lower margin percentages in our health, beauty and general category, which contains vapor products, was the majority of the issue. The decline in vapor margin percentage reflects both the impact of lower incentives associated with volume declines as well as a change in vendor sales mix. We expect to see a meaningful rebound in vape margins as sales volumes recover. Longer-term, we continue to expect to see steady growth in the alternative nicotine category. From an operational perspective, we delivered warehouse throughput and transportation cubes per route metrics that exceeded prior year levels in spite of the significant volume metric impact of COVID-19. We accomplished this through quick and decisive headcount actions and the hard work and commitment of our employees. We also took aggressive cost cutting actions throughout the rest of the organization, including sales, merchandising and general expense that helped to better align our cost structure to the volume and margin pressure we faced in the quarter. In SG&A, we reduced expenses by almost $5 million as compared to the prior year period. It's important to note that while we are proud of our efforts to reduce expenses in response to the COVID-19 crisis, one must recognize a significant portion of our cost reductions are variable in nature, including labor, travel and other miscellaneous costs tied to sales volumes. From an asset management standpoint, despite some bad debt expense in the quarter, we generated solid free cash flow, including the benefit of solid inventory management and receivables oversight. We did a nice job of executing on our inventory strategy related to the recent cigarette price increase, generating meaningful income contribution in the quarter. Maybe most importantly, in an environment where liquidity is critical, we preserved the health of the balance sheet, finishing the quarter with financial leverage of approximately 1.5 times. Under the heading of business as usual, we have maintained a sharp focus on strategic execution throughout this pandemic and believe that the actions we are taking now will position us to drive growth in sales and margins as we emerge from the crisis. We have accelerated the transformation plans for our sales force, focused on driving greater efficiency and alignment of incentives, and despite a slowdown in conversations with perspective new customers early in the crisis, we are seeing some recovery in activity as customers are more willing to engage. We've forged ahead with the exciting re-launch of our SmartStock program, which pairs merchandising resources to world-class category management. This program has been a cornerstone of our same-store sales growth for nearly two decades, and this was the perfect time to launch our redesign in an effort to recapture momentum and drive growth in sales and margins across our customer base. Communicating emerging category management trends during the pandemic can be challenging and led us to leverage our new Center of Excellence by launching online virtual experiences featuring educational videos, new programs, store set designs, and optimized product mix using real-time data analytics. We continue to evaluate changing consumer behavior in the current environment and have launched programs to capitalize on the opportunities brought about by the pandemic. Our new personal protective equipment program is a turnkey solution for convenience retailers, containing a wide array of gloves, masks, sanitizers and cleaning supplies to satisfy consumer demand. On the food front, we re-launched our grab, heat and eat program to feature packaged hot food items for consumers on the go. And before year end, we will be launching our private-label program and begin adding items to our product mix sourced through Core-Mark Curated, which is focused on bringing new, innovative products to the convenience retail industry. We continue to drive meaningful progress on our finance transformation as we leverage investments in technology to drive greater efficiency in many of our transactional processes. The COVID-19 crisis has taught us a lot about what we can achieve in terms of operational efficiency as we continue to evaluate and implement changes to help mitigate the impact of margin pressure. And on the acquisition front, we still see significant opportunity ahead and continue to have active dialogues, but recognize that the timing of potential transactions remains uncertain in the current economic environment. In all, the results for the quarter were reflective of a company with a dedicated workforce committed to its strategic priorities of continuing to grow profitably, leading category management and leverage costs. Obviously, during this crisis we have had to pull hard on our cost levers, as much of the volume compression was beyond our control, but we have continued to move our growth initiatives forward, positioning us well as we gravitate toward historical consumer behavioral trends. I will now turn the call over to Chris for additional detail on our financial results for the quarter and color on our most recent trends.

[Chris Miller:]

Thanks, Scott and good morning, everyone. I'll start off by covering our second quarter performance, provide an update on our balance sheet and cash flow, and then wrap up with our outlook for the remainder of the year. Net income for the second quarter decreased to $16.9 million, compared with $17.7 million last year. Diluted earnings per share for the quarter was $0.38, consistent with last year. Excluding LIFO expense, diluted EPS increased $0.02 to $0.52 for the quarter. In a quarter with an unprecedented impact on sales and margin as a result of COVID-19, we're pleased to deliver growth in FIFO, EPS and only a modest decline in EBITDA, largely driven by our actions to right size the business and reduce operating costs. Total sales in the quarter declined 1.7% to $4.26 billion. Following a 3% decline in cigarette sales in April, we saw a recovery in cigarette sales throughout the second quarter, resulting in overall sales growth of 2% for the quarter. Total carton sales declined less than 1%, which was offset by cigarette price inflation of 2.8%. Carton declines for the quarter significantly outperformed the historical trends. We believe that this shift primarily reflects the change in consumer buying behavior as a result of COVID-19 and is consistent with the trends we have seen from industry metrics such as Nielsen and IRI. Non-cigarette sales decreased 8.9%, reflecting declines across all categories, with the exception of other tobacco products, which grew by approximately 6%. Consistent with the trends in cigarettes, we saw a steady recovery in non-cigarette sales throughout the quarter from peak declines of approximately 20% in April. Despite the steady recovery across most non-cigarette categories, OTP continued to outperform, causing continued imbalance in mix and compression on margins. Total remaining gross profit margin for the quarter declined by 58 basis points. From a total sales mix perspective, our cigarette category finished the quarter 250 basis points higher than prior year, which compressed our overall remaining gross profit margin by 26 basis points. In addition, the impact of cigarette price inflation compressed our total margins by another 6 basis points, and the remainder of the decline was due to sales mix and rates within the non-cigarette category. The growth in OTP in relation to other non-cigarette categories and lower rates in our vapor products drove the majority of the decline in non-cigarette margins. Our margins in vapor last year benefited from incentives tied to volume metric growth targets and more favorable vendor sales mix. We expect to see a meaningful recovery in vapor margins over the longer-term. Near-term, we expect to continue to see margin pressure on a year-over-year basis, reflecting a combination of continued outperformance of cigarettes as compared to non-cigarettes, continued mix challenges within non-cigarettes and lower margins in vapor. Based on our sales results in July, the pace of recovery in both non-cigarette sales dollars and sales mix has moderated and we have not seen a substantial change in our overall sales mix as compared to where we finished the quarter. The recent pause in the pace of recovery that we saw during the second quarter likely reflects the acceleration of COVID cases and the slowing pace of economic reopening at the state and local level. Our cigarette holding gains for the second quarter were $7.7 million, compared with $3.8 million at the same period last year. The increase in holding gains reflects the benefit of a higher price increase in the same period last year and higher inventory levels associated with a strategic build in cigarette inventory. Total operating expenses declined by 10.8% for the quarter, significantly offsetting the impact of the 11.9% decline in our remaining gross profit. The decrease in operating expenses includes a 12.4% reduction in our warehouse and delivery expenses and a 7.4% reduction in SG&A. In warehouse and delivery, our cost savings primarily reflected the benefit of reduced headcount and strong performance in our key operational metrics, including throughput and cubes per route, which benefited from our efforts to reduce the number of deliveries per week. Also, improved safety metrics coupled with reductions in headcount helped to lower our costs associated with workers' compensation for the quarter. In terms of other puts and takes within total operating expenses, we benefited from reduced travel expenses. However, these savings were largely offset by increased costs associated with COVID-19, including personal protective equipment, increased cleaning costs and other expenses, including temp labor associated with sick time and quarantines. As Scott mentioned, a significant portion of our headcount savings are tied to variable labor reductions associated with sales volume. While we've made headcount reductions in SG&A, we expect that we will begin to ramp back up our selling and merchandising headcount beyond 2020 as the economy reopens and we have greater opportunities to grow our market share and drive growth in same-store sales and margins through our merchandising programs. Based on the actions taken to-date, we estimate we have realized approximately $2 million to $4 million in permanent cost reductions that we can sustain in a more normal sales and margin environment. And we remain focused on executing on a number of strategic initiatives focused on further reducing operating expenses over the longer-term, including our finance transformation. We continue to drive solid progress on this front and expect to realize cost savings again this year. And we're well positioned to deliver the planned $4 million in annual operating expense savings on a run rate basis by the end of 2021. Turning to the balance sheet, we ended the quarter with $225 million drawn on our credit facility, $494 million available to borrow and $108 million in cash. For the six months ended June 30th, we generated $219 million in operating cash flow, including $140 million from changes in our working capital. The increase in cash and a portion of the working capital benefit was due to deferred excise taxes in Canada associated with a temporary program that permits us to defer certain tax payments until the third quarter of 2020. The other significant drivers of working capital benefit included a reduction in inventory and a temporary increase in payment terms from two of our tobacco vendors in Canada in response to COVID-19. We expect the temporary terms improvement to return to normal in the third quarter. Excluding the benefit of the deferrals and increased terms, we still drove about $50 million in improved cash flow. We provided in our press release this morning updated guidance for 2020. We currently expect sales to be between $16.5 million and $16.8 million, adjusted EBITDA to be in the range of $173 million to $183 million and diluted EPS to be between $0.90 and $1.06 per share. EPS excluding LIFO expense is expected to be between $1.42 and $1.59. Cigarette inventory holding gains are expected to be between $24 million and $26 million. The guidance does not assume any other significant inventory holding gains such as the $7 million of candy income we earned in 2019. Other key assumptions are LIFO expense of $32 million, a 26% tax rate and 45.3 million fully diluted shares outstanding. The guidance assumes no new acquisitions or large customer wins. And lastly, customer expenditures for 2020 are expected to be approximately $35 million. In summary, while we cannot estimate the duration of the impact of COVID-19, we remain confident in our ability to mitigate a significant portion of these headwinds through our cost reduction initiatives. We continue to maintain a very healthy balance sheet with strong liquidity and low debt, while positioned to emerge from this pandemic to continue to drive shareholder value through our capital allocation priorities that include acquisitions, share buybacks and dividends. Operator, you may now open the line for questions.

[Operator:]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question is from Ben Bienvenu from Stephens.

[Ben Bienvenu:]

Hi, thanks. Good morning, everybody.

[Scott McPherson:]

Good morning, Ben.

[Chris Miller:]

Good morning.

[Ben Bienvenu:]

So I want to first ask, focus on working capital in the balance sheet. Chris, you provided a lot of good helpful color there. I thought it was notable, the debt paydown in the working capital improvement. I know some of it is transitory, but could you help us think about where you expect you know the debt load to be exiting the year? I know there's seasonality in 3Q typically, but kind of give us a sense of what you think it will look like coming out of 2020 from a debt leverage perspective?

[Chris Miller:]

Sure, Ben. So I think for 2020, I mean, from our free cash flow standpoint, we're going to generate meaningful free cash flow this year, I'd say comparable to last year. So I think we're going to end the year you know from a leverage standpoint, probably 1 to 1.5 times.

[Ben Bienvenu:]

That's great, okay. And then, Scott, you talked about you know navigating through COVID, it taught you a lot about the business. You've learned about how efficient you can be. Recognizing there is a lot of your cost structure that's variable, when you think about coming out of COVID and demand returning back to normal, how can you help us think about you know potentially improved operating leverage in the business and how you think about maybe better flow through going forward? Any context or color you can give would be helpful.

[Scott McPherson:]

Sure, Ben. I think you know I'd start with saying that Chris called out in his script, that you know we think we've captured $2 million to $4 million of kind of go-forward - we'll call that fixed expense that we've stripped out of the business, and that's primarily still in the SG&A side of the business. As you know in the warehouse and delivery side, you know a lot of that is variable expense, and we did as we called out, we actually were able to achieve throughput and cubes per load at rates higher than what we were last year over the course of the quarter. So you know I think that's where I would say we learned how we can be more efficient. You know, we picked up some efficiency in what I would call our variable labor, which I think is sustainable. You know I would say and I called out in my comments, and one thing I'd caution you know everybody on around expenses is, clearly in Q2 there were some expenses that you know to maintain and grow the business, we're going to have to spend. I mean, we didn't travel in Q2. And so there are some expenses that will return that we didn't see in Q2, so just you know be mindful of that.

[Ben Bienvenu:]

Makes sense. Okay, last one for me. Can you talk about just the health of your customer base? How would you characterize the health of the industry? And if you can delineate between large and small operators and or geographic trends that'd be helpful as well.

[Scott McPherson:]

Sure. You know maybe I'll start with geographic. I mean, I would say we've seen a stronger return in you know the middle parts of the country. Probably where we've seen the most compression remaining is in California, which we definitely have our presence in California. And largely that's due to the restrictive nature of you know their reactions to COVID, so that's been slower to come back. You know from a customer segmentation standpoint, I'd say our convenience store customer health has remained - you know has recovered and is fairly strong, other than you know clearly, we've got some mix impacts. We still have our non-convenient segment as the one that's most pressured. And obviously, that's casinos, schools, airport locations, and that represents a little over 50% of our non-cigarette deficit to prior year. So although it's not a huge part of our total revenues, it's a meaningful part of our non-cigarette revenues and a meaningful contributor to margin as well. So that you know that definitely has still had an impact. We are starting to see recovery there, but you know it's definitely more gradual.

[Ben Bienvenu:]

Yeah, okay.

[Scott McPherson:]

I don't know if I catch all your questions.

[Ben Bienvenu:]

That's perfect, that's perfect. Really nice job managing through this, and good luck on the rest of the year.

[Scott McPherson:]

Thanks, Ben.

[Chris Miller:]

Thank you.

[Operator:]

Our next question is from Chris Mandeville from [Tempris] [sic - Jefferies].

[Chris Mandeville:]

Good morning, guys. Yeah. I'm not sure what firm he just referred to, but it's Jefferies. So Scott, I'm actually without power here in Connecticut, and so I apologize if my math is off a little bit, but in looking at your updated guidance, I think it suggest that sales growth turns negative and EBITDA growth actually moves further negative in the back half of this year. So maybe you just referenced some of the reason why, but can you flesh that out a little bit more? Is it just a function of having to spend as you see some gradual recovery in volumes or are you really trying to position yourselves for greater share gains going into 2021? Just some color there would be helpful.

[Scott McPherson:]

Yeah absolutely, Chris. You know I'd say the first thing is you know from a revenue standpoint, I mean, obviously the revenue has been driven by cigarettes and you know even Altria called out on their most recent call that they don't expect to be flat moving forward. They expect to see some carton decline through the balance of the year. So you know that definitely has a material influence on top line. From an EBITDA standpoint, I want to make sure that you capture the fact that last year, we had a $7 million price increase, so you know we don't anticipate - and that was candy. You know definitely don't anticipate that going forward. So as we looked at the back half of the year from a guidance standpoint, you know I'd say at the bottom half of guidance, you know we anticipated a very modest improvement in revenues, margins you know and obviously you know expenses did align with that. And at the top half of our guidance, obviously we're seeing some recovery in margins, some recovery in revenues, definitely recovery in mix and non-cigarettes primarily.

[Chris Mandeville:]

Okay, I appreciate that. And then I guess I noticed that your customer count declined by about 2,000 stores quarter-over-quarter. Maybe you can help us understand where these losses are coming from and why? And then as we think about some of those major accounts like 7-Eleven, Walmart and Murphy, that are coming up for renewal shortly. Do you have any update on them or any comments regarding your confidence in being able to retain them?

[Scott McPherson:]

Sure. So let's start with customer count. So the lion's share of that is businesses that were deemed non-essential that still were not open, so that was the bulk of it. We did have a small you know decline in our convenience store count, and I would say you know kind of - I know Ben asked this and I didn't quite address it is, I would say at the very lowest tier of convenience you know we had some decline in store count, and I would say that's a really low volume stores where COVID you know definitely had probably a disproportionate impact. I'd say overall the health of our convenience stores, you know chains, independents overall has been pretty strong. I mean, you know we've seen - obviously, they have mix and margin challenges as well, but you know I think that fuel margins and you know some of those things have helped prop them up, and obviously the stimulus has helped spending. And so, yeah, I think the health of our customer base is strong. I think the recovery of the non-convenience store portion has obviously been a little slower. From a contract standpoint, I mean, obviously we don't speak to specific contracts, but we had 4 of our top 10 that we you know that had due in this year. 3 of those we've already re-signed and feel really good about our positioning for the other ones. So I think we're in a -

[Chris Mandeville:]

Okay that's -

[Scott McPherson:]

Really good spot.

[Chris Mandeville:]

Great. And then the final one for me before I hop back in the queue here. I think Chris had referenced that as we look at quarter-to-date trends in the non-cigarettes category, you saw some stalling out in terms of improvements in sales and mix for that matter. Maybe you could put a finer point just on what you're seeing in food service and how to think about that going forward, and what you might be doing in terms of programs to help facilitate better growth with your customers? Thanks.

[Scott McPherson:]

Yes, you bet, Chris. So for sure we've seen you know our category that's down the most is our food service category that lies within the overall food category in our reporting. The food category, you know when we go back to April and late March, was down well into the mid-30s, you know down now more in the 20s and high-teens. But still most of that decline is driven by you know fast food, what I would call restaurant-quality food and fresh food. And that definitely has recovered, but the recovery has been slower, and it has stalled a little bit, and I think it's consistent with what you see in the restaurant industry. And I think you've even seen - I saw your you know most recent IRI stuff that came out, that as the country has seen a little pullback because of the results of COVID, we've seen some flattening of our trends, so you know I think obviously there's some alignment there. So you know I think we will see fast food continue to recover. And from a program standpoint, I mentioned on my call we're doing a number of things around food and fresh and snack. We just relaunched our grab, heat and eat program just in the last week, which is really a program driven at packaged foods. It has the option to be self-served or register-served, so served by the employee. And that's really a program that I think will gain traction, because I think still today, people are a little hesitant to go to the buffet, go to the you know the roller grill or the open pastry counter. And I think you know that confidence will return, but I do think you we're doing some things right now to capitalize on the current consumer behavior.

[Chris Mandeville:]

Okay, great. Thanks guys and best of luck in the back half.

[Scott McPherson:]

Thanks, Chris.

[Chris Miller:]

Thank you.

[Operator:]

Our next question is from Kelly Bania from BMO.

[Kelly Bania:]

Hi, good morning. Thanks for taken our questions. I wanted to go back, Scott, to the really strong performance in the warehouse throughput, which I think you said exceeded prior year levels. I'm just hoping you can elaborate on how you did that? I would have thought lower drop size per customer would be a headwind, and just really strong performance there that sounds like some of that is sustainable. So maybe just help us understand you know how you're achieving that strong performance?

[Scott McPherson:]

Yeah, that's a good question, Kelly and I would actually say - I would point to transportation and delivery before I pointed to warehouse. We had great customer partnerships, and they really helped us as the volume declined. We were able to cut some of our delivery frequency, which you know allowed us to maintain drop size, which also helps the warehouse because they're not picking you know a lot of small orders. They're picking a fewer number of larger orders. So you know I think some of that is definitely sustainable in a number of customers until the volume returns have allowed us to reduce delivery frequency, and that's been very helpful. The other thing I'd say is, you know we were very strategic in how we reduced our workforce, and you know I think the way we approached it was really on reducing it by getting rid of lower performers in the organization. So I think clearly that helped us from a productivity standpoint as well. And you know obviously, maintaining that means you know as we bring back workforce, we're bringing back quality people, but you know those I would say are the drivers behind it.

[Kelly Bania:]

Okay, that's helpful. And you also mentioned you expect a meaningful rebound in vape margins as sales recover. Can you just help us understand what in terms of timing and magnitude is expected there, you know especially within the back half, but maybe even beyond over the next you know a year to two years in terms of the vape category?

[Scott McPherson:]

Yeah, Kelly it's a really - it's a tough question. One of the things we've seen in vape you know I think I said on the last call I expected vape to be flat to up slightly through the balance of the year. Well, obviously I was contemplating you know a quicker recovery from COVID, like I think we all were. But I think what we've seen is a real shift in consumer behavior I think as people are at home more, not in public places as much. They're clearly consuming more combustibles, and you know we've seen combustibles basically be flat for the first time in probably decades. So that has had a disproportionate impact on vape. I think in the long run, I truly believe in the long run that alternative nicotine is a growth category, whether that'd be vape or other forms of nicotine, and clearly Altria and others are spending, you know their investment funding is all around the alternative nicotine space. So in the long run, that is better margins for us, alternative nicotine and combustibles, and I think in the long run that helps our margin profile. To try and be a little more definitive in the shorter run for you, Kelly, I mean, clearly, we had a couple elements that affected you know our margins overall around vape. I mean, one of them was a lot of our programs, vape and other things, not just vape are volume-driven. We have volume incentives and clearly in a declining environment, that disproportionately affects margins. And then the other thing that we had happen in our vape margins is kind of a change in manufacture mix, as we saw JUUL see more headwind pressure in the first and second quarter. They were a little more lucrative from a margin standpoint. So how does that all improve? I think you know revenues and growth and getting you know vape back on track from a sales standpoint helps margins a lot, because I think the mix will normalize. We'll have the ability to make some incentive funding again. And so you know it's hard to say. It depends on how quickly that recovers. I would say we're still going to see significant pressure in Q3 and probably Q4. And as we see consumer behavior normalize, I think, into next year, we'll start to see the margins recover. I know that was a long answer, but that's obviously something we're very focused on.

[Kelly Bania:]

No, that's very helpful. And you mentioned, I think, the lower incentives, which I think were specific to this category. Can you talk about what drives the return of incentives, like what level of volume or growth would get back to kind of more normalized incentives?

[Scott McPherson:]

Yeah, Kelly we have incentives, quarterly incentives, with a lot of our manufactures, not just in the vape space. So clearly you know that has an impact on our margins. But you know I would say that you know meaningful year-over-year growth for any of our manufacturers qualifies us for some level of incentives, and usually there's you know a sliding scale on some of those as well.

[Kelly Bania:]

Okay, that's helpful. And then had one last one on your guidance. Correct me if I'm wrong, but I think you mentioned you're not assuming you know substantial change in your mix from where you ended the quarter, so can you just remind us you know a little bit more on how you ended the quarter in terms of mix?

[Scott McPherson:]

Yeah. So you know, I mean for the quarter you know margin standpoint, we were down 58 basis points. We anticipate that that may improve slightly over the balance of the year to get to the bottom end of guidance. To get to the higher end, obviously, we'd see more improvement in that. From a mix standpoint, we were down. I mean, cigarettes were up 250 basis points. Obviously, we're assuming that that's not going to maintain at that rate. And obviously, as I answered Chris' question earlier, we anticipate some carton decline in the back half of the year, which will help to normalize mix you know by itself.

[Kelly Bania:]

Okay, thank you.

[Scott McPherson:]

Thanks, Kelly.

[Operator:]

[Operator Instructions] Our next question is from Bobby Griffin from Raymond James.

[Alessandra Jimenez:]

Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our question.

[Scott McPherson:]

You bet, thank you.

[Alessandra Jimenez:]

First, I had - yeah, of course. First, I had a follow-up on the product category progression. Have you seen a difference in product category recovery from regions of the country that have recovered more quickly? Like are you seeing a benefit from food and candy sales or just overall sales growth in each category?

[Scott McPherson:]

I would say we haven't seen a disproportionate category-by-category recovery by parts of the country. I'd say clearly as I called out, the West Coast and California has been more pressured, but I'd say it's recovered consistently with the rest of the country. I haven't seen a disproportionate impact on food or e-cigarettes or anything else.

[Alessandra Jimenez:]

Okay, that's helpful. And then do you believe the COVID-19 pandemic will create any interesting M&A opportunities that you can take advantage of as we exit the crisis?

[Scott McPherson:]

The short answer would be yes. You know I think the longer answer is, I think most wholesalers like us right now are focused on their business and not looking to be out in the market selling. But I think you know the other piece of that is for us to really do a good job of evaluating a business and making an acquisition, we have to understand kind of what a steady state looks like, and I think we're still obviously, amidst COVID, still sorting that out. But I definitely think it would bring opportunity for acquisition in the long run.

[Alessandra Jimenez:]

Okay, that's helpful. And best of luck on the second half.

[Scott McPherson:]

Thank you very much.

[Operator:]

And we have no further questions at this time. I'll turn the call back over to David for closing remarks.

[David Lawrence:]

Thank you all for joining us this morning. We appreciate your interest. If you have any questions, feel free to reach out to me. My contact information is available on the Investor Relations section of our website. Thanks so much.

[Operator:]

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating and you may now disconnect.