Core-Mark Holding Company, Inc.
Q4 2020 Earnings Call Transcript

Published: 1 Mar 2021

[Operator:]

Welcome to the Core-Mark fourth 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. During the question and answer session, if you do have a question, press star then one on your touchtone phone. Please note the conference is being recorded. I will now turn the call over to David Lawrence.

[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.

[Scott McPherson:]

Thanks everyone for joining us today on our fourth quarter call. The fourth quarter put an exclamation point on a challenging but successful year for Core-Mark. I want to again thank our Core-Mark family and their display of courage and perseverance throughout this pandemic. Not only did our frontline drivers, warehouse staff and sales team members work to provide essential goods and services to our customers and communities, but they showed incredible dedication delivering improved productivity, safety and attendance levels. We also worked closely with our retail partners to minimize disruptions in what remains a very fractured supply chain. These efforts produced strong fourth quarter and full year results for Core-Mark and set the foundation to continue our strong performance in 2021 and beyond, as demonstrated by the outlook we provided today. Reflecting on the fourth quarter, we delivered revenues of $4.3 billion, representing a 2.3% increase over the prior year, driven by the continued strength of cigarette and tobacco sales trends resulting from pandemic-related consumer behavior. From a profit perspective, we delivered EBITDA for the quarter of $55.1 million, a 14.1% improvement over prior year. The outperformance was highlighted by our continued ability to leverage costs across our network with 240 basis points of cost leverage improvement. We also saw continued margin recovery during the quarter with remaining gross profit finishing at 5.21%, a significant improvement over the last two quarters.

[Chris Miller:]

Thanks Scott, and good morning everyone. I’ll start off by covering our fourth quarter performance, share some thoughts on our capital allocation strategy, and wrap up with commentary on our guidance for 2021. Net income for the fourth quarter increased to $19 million compared to $16.2 million in the fourth quarter of 2019. Diluted earnings per share for the quarter increased to $0.42 from $0.35 per share in the prior year quarter. Excluding LIFO expense, diluted EPS increased approximately 27% to $0.57 per share versus $0.45 in the fourth quarter of 2019. In spite of the continued impact of COVID-19 on sales mix and margins, we were pleased to deliver solid earnings growth in the quarter on the benefit of continued strength in operational efficiency and effective cost management.

[Scott McPherson:]

Thanks Chris. To summarize, I want to highlight three main takeaways from our call this morning. First, in 2020 we took decisive action at the outset of the pandemic, reducing costs across the business in order to drive solid performance in a challenging environment. Second, our business is strong. We are generating significant cash flows that we are allocating towards dividend increases and expanded share repurchase to drive value for our shareholders; and third, we are executing clear strategic priorities to drive growth that gives us optimism for 2021 and beyond. With that, I will now turn it back to the operator to begin the Q&A session.

[Operator:]

Our first question is from Ben Bienvenue with Stephens Inc.

[Ben Bienvenue:]

Hey, good morning everybody.

[Scott McPherson:]

Hey Ben.

[Ben Bienvenue:]

I want to ask first on the $375 million shareholder return plan. You mentioned M&A as a subset of that plan, but you also talk about your willingness to go up to a higher leverage load on the balance sheet to support M&A. Could you support meaningful share repurchase and M&A, or would you think about oscillating between the two if an opportunistic M&A deal is presented to you?

[Scott McPherson:]

Yes Ben, absolutely I think we can do both. I think that with the balance in the plan and the way we approached it, if you think about our free cash flows in the $100 million range, and we’re talking about $125,000 a year of repurchase and dividends, clearly we would have the bandwidth to make meaningful acquisitions or multiple acquisitions in that three-year period and still fulfill that share buyback and dividend.

[Ben Bienvenue:]

Okay, great. My second question - Scott, you made mention of technology and robotics investments in the warehouse and distribution capabilities of your business. You also talked about a largely variable cost structure. When you think about the contribution to margin improvement and leverage in 2020 and you think about the contribution going forward, how do you think about those two pieces? Obviously with sales coming back, that variable cost should come back as well, but I would imagine investments you’ve been making in capabilities should yield margin improvement as well going forward.

[Scott McPherson:]

Yes, I think that’s fair, Ben. We definitely have increased over the course of this year our productivity in both warehouse and transportation, which was a big part of us performing this year, is not just eliminating some of the variable labor but also creating a more productive workforce. That definitely will help enhance the margins from a cost standpoint, and then from a revenue standpoint, I think we’ll continue to see improvement in mix this year. We anticipate as the year progresses, we’ll get back to a normal margin run rate by the fourth quarter, so both of those things combined will definitely help. I think that really was the main driver behind what we consider a pretty aggressive guide for 2021.

[Ben Bienvenue:]

Okay, great. Thanks. Congratulations on the results, and best of luck for 2021.

[Scott McPherson:]

Thanks Ben.

[Operator:]

Our next question is from Matt Fishbein from Jefferies.

[Matt Fishbein:]

Hey, good morning. Thanks for the question and congrats on a great quarter.

[Scott McPherson:]

Thanks Matt.

[Matt Fishbein:]

I wanted to touch on, I guess, cost inflation in ’21 as it relates to a couple of the buckets, that that could impact you guys particularly. I just wanted to understand how you’re thinking about labor costs going into the year, what type of an impact maybe minimum wage may have on you as we go into this year and beyond, and then maybe on the food products end, suppliers are talking about raw material cost inflation this year, particularly in the back half. Just remind us how that works through your P&L - I believe that’s a benefit to you, if anything. Then lastly just on the distribution piece and transportation costs, potentially with higher fuel costs now relative to last year, if you could just give any color on how those puts and takes interact with each other, that’d be great.

[Scott McPherson:]

Yes, absolutely. We’ll start off with product inflation. I think we--you know, definitely with the challenges we’ve seen in the supply chain and the challenges that’s caused manufacturers this year, I would not at all be surprised to see some product inflation over the back half of this year, and I think that’s consistent with a lot of what we’ve heard and seen. We haven’t seen a lot of inflation to date outside of cigarettes, but that would not all surprise me. From a benefit perspective, we definitely are on a cost-plus mark-up scenario for most of our customers and we also get holding gains, inventory holding gains when we see price increases, so it is definitely a benefit to us when we see some inflation. From a fuel standpoint, I would anticipate some fuel increases. The one thing that we have built into our pricing algorithms with customers is as fuel rises, we get fuel surcharges; as fuel declines, obviously those surcharges decline, so there is a sliding scale there, so it mitigates any material impact on fuel increases. The last one on labor, we definitely have seen some inflation in labor rates over the last couple of years. We’ve modeled out the impact--even if we were to see a federal minimum wage of $15, we’ve modeled that out, and it definitely has an impact but I think we have a plan to navigate that if it comes to pass. We definitely anticipate some wage inflation this year and have built that into our guidance.

[Matt Fishbein:]

Great, thanks. Just a follow-up on the distribution end, if you can give any color on the shape of your drops to customers, whether it be the truck utilization and delivery frequency, maybe relevant to normalized or 2019 levels, that’d be helpful, and I guess how you’re thinking about maybe that normalization as vaccines and consumer behavior kind of normalizes as well.

[Scott McPherson:]

Yes, so one of the things that we’ve benefited from this year is we worked really hard on our efficiency and routing, so our average drop size and truck utilization was up this year, even in an environment where sales were down, especially non-cigarette sales. I think we expect that that will continue into next year. I think that we’ve done a great job with fleet utilization and efficiency. I think from how does vaccines affect that going forward, I think the biggest challenge that we think we’ll face around driver and transportation next year is just availability. That’s been a challenge historically, and I think with the challenges in supply chain issues over the course of this year, we think warehouse and driver workforce availability is going to be a challenge, and we’re working hard to position ourselves for what we anticipate to be a strong summer in this business.

[Matt Fishbein:]

Got it. Thank you very much. I’ll pass it on. Congrats again.

[Scott McPherson:]

Thanks Matt.

[Operator:]

Once again if you do have a question, press star then one on your touchtone phone. Our next question is from Kelley Bania from BMO Capital.

[Kelley Bania:]

Hi, good morning. Thanks for taking our questions.

[Scott McPherson:]

Hi Kelley.

[Kelley Bania:]

Hi. Just wanted to ask about your outlook for 2021, a little bit more detail between the two--your two categories, between cigarettes and non-cigarettes. I think Chris maybe mentioned flat to declining cartons. Would it be fair to say a little bit better than the historical trends in terms of carton declines there, maybe just talk about that, and also just what you’re seeing in the non-cigarette or food categories and what kind of visibility you have there, given some of the initiatives that you’re seeing at many of your large customers.

[Scott McPherson:]

Yes, so Chris did call out, Kelley, in his remarks that we anticipate cigarettes to remain generally the same trends over the first quarter of this year and into the second, and we expect combustibles to probably head into a decline mode as we get into the back half of the year, more consistent with historical combustible norms. That’s the way we’ve modeled cigarettes, obviously offset by inflation. From a non-cigarette standpoint, we have seen steady recovery both in our convenience and non-convenience channels over the last two and a half quarters, and we think that first quarter of this year will be fairly consistent with the fourth quarter of last year, and then we look to see steady improvement in non-cigs. I think I mentioned on an earlier question, I think we’ll see--we look for mix and margin to be back to kind of a normal environment by the back half of the year. We show in our non-cigs in our model growing somewhere in the 5% to 8% range, and cigarette cartons being down slightly.

[Kelley Bania:]

Got it, that’s helpful. I was wondering if you could talk a little bit more about your private label initiative.

[Scott McPherson:]

Yes, so we just kicked both of those off for the fourth quarter. We have a private label initiative where we’ve kicked off some candy and snack lines, and then we also have what we call Core-Mark Curated, and that is where we really went to the market and are looking for manufacturers of unique products and brands, and that’s one of the things we see with today’s consumer, is a real demand for craft and unique and close to home, so both of those initiatives kicked off. We’ll kick off with--in Core-Mark Curated, we selected five brand partners that will kick off in the first half of this year, and we’ll start distributing their brands across all of our distribution centers. From a private label standpoint, again we will--we’ve already rolled some of those products into our centers, but will roll a number of products that are consistent across our network into our distribution centers over the first and second quarters this year. I think from a revenue and profit impact, yet to be seen, but definitely we make a higher margin on all those goods, as do our customers, so I think we’ll see really strong traction as that moves throughout the year.

[Kelley Bania:]

Thank you.

[Scott McPherson:]

Thank you Kelley.

[Operator:]

We have no further questions at this time. I’ll turn it back over to David for closing remarks.

[David Lawrence:]

Thanks everyone for joining us this morning. We appreciate your interest in Core-Mark. If you have any follow-up questions, feel free to reach out to me, David Lawrence. My contact information is available under the Investor Relations section of our website. Thanks for joining us.

[Operator:]

Thank you. Ladies and gentlemen, that concludes today’s call. Thank you for participating and you may now disconnect.