Core-Mark Holding Company, Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Welcome to the Core-Mark 2018 First Quarter Investor Conference Call. My name is Jay, and I will 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 that this conference is being recorded. I will now turn the call over to Ms. Milton Draper. Ms. Draper, you may begin.

[Milton Draper:]

Thank you, operator. I would like to welcome everyone to Core-Mark’s first quarter 2018 investor call. Joining me today are Thomas Perkins, our Chief Executive Officer; and Scott McPherson; our President and Chief Operating Officer and designated Chief Executive Officer. We also have Chris Miller, our Chief Financial Officer and Matt Tachouet, our Chief Accounting Officer on the call. Core-Mark’s earnings press release was issued earlier this morning. You can find the copy of it on our website under the Investor Relations tab. Today’s discussion will include both GAAP and non-GAAP financial measures. A reconciliation to GAAP of these non-GAAP financial measures is included in the earnings press release. We will also be discussing forward-looking statements. These forward-looking statements are subject to risk and uncertainties that may have cause actual results to differ materially from management’s current expectations. We refer you to the documents we periodically filed with the SEC, specifically our 10-K and our 10-Qs for discussion of risks that may affect our future results. I’ll now turn the call over to Tom Perkins.

[Thomas Perkins:]

Good morning and thank you for joining us on our 2018 first quarter conference call. I would characterize the quarter's result is solid as we were able to grow our topline sales and our EBITDA and healthy rate despite some significant headwinds. We are encouraged by that accomplishment, but we all know the first quarter only represents a small percentage of our annual EBITDA. The good news for the quarter is the two divisions that struggled in 2017 benefited from significant improvements in their warehouses and delivery expense and are performing well. We are encouraged by these results and are optimistic that these early wins are indicative of how they will perform through the busy season. The most significant headwinds we face in the quarter was the continued weakness in carton sales in a challenging retail environment. The quarter continued to accelerate with steeper than normal decline in carton sales. This headwind was tempered by accelerated growth in vapor and other nicotine products. We do not believe these two trends are entirely unrelated. We are seeing signs and hearing from the manufacturers that carton decline will moderate. While these trends in cartons and nicotine products ever hurt very rapidly. We have been strategic in our approach to pricing and focused on our carton decline initiatives. I have every confidence that Walmart will make the proper adjustments to how it serves its customers given these circumstances. I would like to provide an update on our strategies. Our VCI and fresh incremental sales totaled about $15 million, despite having to replace fresh and VCI volume, resulting from the Kroger transition in a soft retail environment. These two strategic initiatives are a great importance to our C-Store retailers as they enhanced profitability and can offset the profit pressure from continuing cigarette carton declines. Our customers should be focused on taking cost out of the supply chain, while also providing the customers with in-demand fresh and food services items. We are also refining our alternative in nicotine programs so that we are the market leader for our customers and can use that competitive advantage to take additional market share of these two categories. Our Core Solutions Group, whose role grows as data analytics, becomes more critical and virtually all aspects of our business continues to ensure our customers are carrying the right products in their stores. In the first quarter of 2018, we delivered FMI marketing plans to over 1,000 retail partners with a greater than 68% acceptance rate. Our goal is to serve a 4,500 stores in 2018. We continue to see a reduction in churn rates with stores that participated in surveys compared to those that do not. In addition, the incremental non-cigarette sales growth significantly faster for participating stores and for stores that do not participate. This strategy remains essential and are pursued to grow same-store non-cigarette sales in 2018. Our key strategies continued to be our greatest differentiator in markets in which we compete, which was reaffirmed at the recent next date of the industry. Some of our Senior Executive that tendered the next date of the industry submit, I would like to briefly discuss some of the findings this industry group shared with us. Much focus was placed on the decline in store business in 2017. Many COSMA factors were identified, including increase in fuel prices, decline in disposable income of the lower income from consumer, and the impact of e-commerce. Some data point to grow in dollar stores especially from QSRs and certainly the accelerated card declines of the latter half of 2017. Our key takeaway was stores that are focused on providing customers a broad fresh food service offer and are knowledgeable about knitting space will outperform the industry, which makes execution of our core strategies [indiscernible]. I think it is worth noting despite the headwinds in the industry phase in 2017. The year was the third consecutive year of [indiscernible] profits for the industry. Our key strategies are the ideal solutions for the C-Store operators to continue to improve the profitability and relevancy even in a challenging retail environment. I believe that Core-Mark is in excellent competitive position with the right strategies in place to partner with our customers to improve how we are middle market. I would like to take this opportunity to take advice of the investment community as this will be my last investor call. I have enjoyed working with all of you and appreciate all the support you have given me over the last five plus years. I know your interest in our story as well funded and given our very long history of performance and resiliency. I am very optimistic about this Company's future and I have every confidence in Scott’s ability to position this organization for the long-term sustainable success. And with that, I will turn the call over to Scott, our future CEO.

[Scott McPherson:]

Thank you, Tom. On behalf of your executive team and the 8,500 employees here at Core-Mark, we appreciate your leadership and friendship during your 24-year career. I will begin my remarks by touching on the financial highlights for the quarter. Sales increased approximately 9% to $3.8 billion in the quarter driven by net market share wins including the contributions from our new Iowa division. One of our most noteworthy developments has been the shift in product mix toward the non-cigarette categories. For the quarter, non-cigarette represented 33% of total sales compared to 29% in the same quarter last year. The robust 25% increase in non-cigarette sales was driven by the contributions from our new Iowa division as well as the sales boost from Walmart. In addition, same-store non-cigarette sales continues to grow at a healthy 6% pace with significant growth coming from vapor others tobacco products in our fresh categories. Cigarette sales growth was hampered by the 4.9% decline in overall carton sales with same-store carton declines down 9% or 7.2% if you exclude California for the quarter. January experienced the steepest decline with each month improving slightly. As Tom indicated, the industry is starting to see the positive results of the manufacturer’s efforts to reenergize key brands that have contributed to the accelerated declines. Moving on to operating expenses. In the quarter we were able to increase warehouse throughput and reduce warehouse over time by 26%, which positions us well for the summer season. Transportation continued to be a challenge and was the largest cost overrun we experienced in the quarter driven by rising fuel costs and shortcomings and rather efficiencies. We've dedicated significant resources to position us for the summer, including ramping up driver staffing and focusing upon our [indiscernible] optimization. Cost leverage and transportation will be critical to our success in 2018. Overall, our warehouse and delivery expense increased approximately $18 million primarily attributed to the addition of the Iowa division and limited leverage of our distribution costs. Without taking into account, our significant shift in sales mix, warehouse and delivery expense increased by 21 basis points as a percent of sales for the quarter. And looking at our warehouse and delivery expense as a percent of remaining gross profit, which is a better indication of our cost leverage, we had a 23 basis point improvement from the same quarter in 2017. From a bottom line perspective, our EBITDA for the quarter came in at $24.3 million compared to $19.6 million in the first quarter of 2017, a 24% increase. As we look forward to the balance of the year, I would like to touch on a few areas of critical importance to our success. First, as I alluded to earlier, we have to continue the momentum gained in the warehouse and execute on our plans to improve transportation through the summer season. As you know the vast majority of our earnings are delivered over the next six months and controlling warehouse and delivery expense during this period is critical. Next replacing income from carton decline is top of mind and we are diligently working our plan, which includes focusing on sales growth in key categories such as fresh and food service, capitalizing on evolving nicotine alternatives category and addressing opportunities in our pricing model and filing our ability to continue our market share wins with small chain and independent retailers as key. In the first quarter, we grew by nearly 400 locations. In closing, I would say the first quarter was good from an EBITDA perspective, despite significant headwinds. We continue to focus on gaining market share with smaller retailers and ensuring our key strategies are an integral aspect of how we succeed with both new and existing customers. We are also focused on driving efficiencies in our operations, while the company and the industry are facing some headwinds, we believe we are well positioned to outmaneuver our competition in bringing value to our retail partners and deliver our 2018 guidance. And with that, I will now turn the call over to Chris Miller, our CFO.

[Christopher Miller:]

Thanks, Scott. I'll start by reviewing our earnings for the first quarter. We reported a net loss for the quarter of $1.3 million or $0.03 per share on a GAAP basis compared to a profit of $2.1 million or $0.05 per share in the 2017 first quarter. The loss was largely due to LIFO expense, which increased $1.7 million over last year. Excluding LIFO, our diluted earnings for the quarter were $0.07 per share compared with $0.11 last year. In addition to LIFO, there are two other items I'd like to point out, which impact the comparability of EPS for the quarter. First interest expense was $1.9 million or $0.03 per share above last year, and second last year's results for the first quarter including an income tax benefit of $1.5 million or $0.03 per share, which did not reoccur this year. Adjusting for these two items and the increase in LIFO expense, EPS would have been $0.10 per share this year, compared with $0.08 for the first quarter last year. Total sales grew 8.6% to $3.8 billion compared with $3.5 billion in last year's first quarter driven primarily by the 25% increase in non-cigarette sales. We made significant progress in increasing sales in a number of our non-cigarette commodities during the quarter. Our fresh category, one of our core growth strategies showed strong growth increasing 13.6% in the quarter. Food sales increased 16.9% in the quarter and OTP sales grew 18.6%. These categories were positively impacted by the addition of the Iowa division and an increase in same-store sales. Candy sales grew 58%, which was mostly attributable to the addition of Walmart. Sales in the cigarette category remain positive with sales growth of 2% to $2.5 billion. The slight increase was led by the addition of our Iowa division and increases in excise taxes in California along with increases in current pricing. The growth in cigarette sales was significantly impacted by a 9% decline in same-store card and sales. The trend of this decline did improve modestly as we moved sequentially through the quarter and April decline was much lower which is encouraging. Gross profit and remaining gross profit benefited from the additional revenue contribution from our Iowa division. In the quarter, gross profit increased 14.8% to $199.8 million compared to $174 million in last year's first quarter. The growth was slightly offset by an increase in LIFO expense. Remaining gross profit, which excludes inventory holding games and LIFO expense increased to $198.6 million or 15.7% for the quarter. The strong increase was also driven by the new business from Walmart as well as higher non-cigarette sales on the same-store basis, partially offset by the loss of Kroger in 2017. Looking at remaining gross profit by category, non-cigarette increased 24% to $150 million, while cigarette remaining gross profit decreased 3.3% or $1.7 million compared to 2017s first quarter, primarily due to the decline in carton sales. Non-cigarette remaining gross profit margin was approximately 76% of our total remaining gross profit, compared with 71% in the first quarter last year. The increase was driven by the addition of the Iowa division given its higher mix of non-cigarettes combined with the overall Company's sales mix shift to non-cigarettes, partially resulting from the sharper decline in carton cartons this year. On the margin side remaining gross profit margin expanded 32 basis points in the quarter due primarily to the sales mix shifts previously mentioned. Cigarette remaining gross profit margin decline 10 basis points due to increases in excise taxes of manufacturer prices. Non-cigarettes remaining gross profit margin decrease 9 basis points. The compressing effects from the addition of the Walmart business and a shift in sales mix to OTP which carries lower margins than our other non-cigarette commodities was offset by the positive margin contribution from the Iowa division, higher sales of alternative nicotine products and the expiration of the Kroger agreement which had lower margins. As Tom and Scott discussed we are focused on improving our margin profile by further penetration of the large independently own convenience retailer population. This is a key sales goal for 2018. Our strategy is to balance our business mix and capture additional share in this large independent market which makes up approximately two-thirds of the convenience stores in the U.S. Now turning to OpEx. Total operating expenses increased approximately $26 million to $198.2 million in the quarter primarily due to the addition of the Iowa division, the increase in non-cigarette sales volume and higher delivery expenses. Operating expenses were 5.2% of net sales in the quarter compared with 4.9% for the first quarter of 2017. As a percentage of remaining gross profit total OpEx improved approximately 30 basis points. SG&A expenses increased $8.1 million or $2.1 million excluding our new division. This represents a 4% growth in these expenses or 7 basis point uptick as a percent of sales. The change in sales mix had an approximate 10 basis point compressing effect on this metric. As a percentage of remaining gross profit SG&A expenses improved approximately 30 basis points. Our income from operations or EBIT was $1.6 million compared with $2.2 million for Q1 last year. Excluding LIFO expense EBIT increased approximately 17% to $7.5 million versus $6.4 million last year. Our free cash flow which we define as net cash from operations, less net CapEx and capitalized software was $93.7 million compared to $143.7 million in the year ago quarter. The decrease in free cash flow compared with last year was due primarily to the timing of manufacture price increases on cigarettes. At the end of March this year our long-term debt was $444 million and included approximately $100 million related to cigarette inventory purchases we made an anticipation of price increases. Manufacturer's announced price increase of $0.90 for carton in mid-March this year. Given the late time in the quarter approximately $2 million of holding gains from the March increase will carryover into the second quarter. We were able to paydown our credit facility during April through approximately $300 million as we sold through most of the extra cigarette inventory we have left over from the March price increase. Keep in mind our debt level tends to expand and contract significantly depending primarily on our working capital requirements. For Q1 this year our debt levels range from $353 million on the low end to $575 million on the high end. Capital spending was approximately $7 million in the quarter and we expect it to be $30 million or less for the full-year. We used approximately $3 million of cash to repurchase shares at an average price of approximately $23 per share during the quarter and we have $35 million remaining under our authorized to repurchase plan. For the quarter we spent $4.6 million on cash dividend payments. As you may have noted in our earnings release we reaffirmed our guidance for the year. Sales are expected to be between $16.6 billion and $16.8 billion representing a 6% to 7% growth rate over 2017. Adjusted EBITDA is expected to increase to between $157 million and $167 million representing growth of approximately 16% to 23%. Diluted earnings per share expected to be between $0.84 and $1.13 and $1.29 excluding LIFO expense. Represent an increase of 13% to 29% over the dollar per share we reported for 2017. We are currently a little ahead of our plan on the generation of free cash flow, but to be conservative I'm still estimating between $50 million and $60 million our free cash flow for the year depending on the level of inventory purchases and capital expenditures. Our guidance assumes cigarette inventory gains of $16 million which assumes two price increases in the U.S. during the year consistent with what we've experienced the prior years. LIFO expenses forecasted to be $18 million for the year and we are assuming an effective tax rate of 25% reflecting the impact of tax reform. Incremental interest is expected to be between $4 million and $5 million over the 2017 levels subject to the magnitude of interest rate increases. In our diluted shares outstanding are expected to be $46.4 million for the year. In summary, we're off to a solid start with the progress and continuing to grow and diversify our non-cigarette revenue base. While executing on a portion of our key cost reduction initiatives. We believe our continued focus on the execution of our core growth strategies and our key cost reduction initiatives will result in additional operating leverage and improve profitability in 2018. I will now turn over the call to the operator for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Chris Mandeville from Jefferies.

[Christopher Mandeville:]

Yes. Hi, good morning. Chris if I could start off just on the EBITDA margins, it showed some nice improvements versus prior trends, but to better understand the OpEx growth absorbed in the quarter, would you be able to break down what was core versus acquisition. I know you had mentioned it was predominantly Iowa, but could you isolate that first on warehousing in SG&A?

[Christopher Miller:]

Yes. Hi Chris. We haven't disclosed that number, but Iowa was a big piece of the increase in warehouse and delivery expenses for the quarter then followed by as we mentioned the delivery costs.

[Christopher Mandeville:]

Okay. And then I realize you had mentioned that cigarette volumes or comps have seen some sequential improvement and continued into the month of April, but I may have missed that or you haven't mentioned it, how does non-cigarette comps trend throughout the quarter and what are you absorbing there quarter to date?

[Christopher Miller:]

Same-store sales, Chris were up over 6% for the quarter, so it was high definitely going January than it went and settled in at 6% because last year in the first quarter we had added a lot of dairy products to our Rite Aid stores which impacted our same-store averages. And I think April has shown on the same trend what we saw in the first quarter which is about 6% improvement, so good solid same-store sales in non-cigarettes.

[Christopher Mandeville:]

Okay. And then the last one for me and I’ll hop back in the queue. Thinking about route optimization, how do you guys strike a right balance between the demand or the increased demand from the summer driving seasons and pursuing route optimization and where do we really stand in terms of that overall profit? Thanks.

[Thomas Perkins:]

Yes. So Chris we look at cubes for load and that's probably the one metric we focus on the most as far as the strain we put on drivers during the summer. So depending on the truck size, we kind of have a capital of how many cubes we want to put on our route with a single driver. And really through the back half of last year, we felt like we had a lot of opportunity. We weren’t getting to that kind of maximum number. And that's really our focus for going into second quarter is to make sure optimizing those routes, but not putting so many cubes on them that a driver can't – they were putting too much strain on the driver.

[Operator:]

And our next question comes from Ben Bienvenue from Stephens.

[Daniel Imbro:]

Hey, good morning. This is actually Daniel Imbro on for Ben. Thanks for taking our questions.

[Thomas Perkins:]

Hi Daniel.

[Daniel Imbro:]

I wanted to start on cigarette trends, so you’ve seen a number of manufacturers reports some pretty tepid results to start the year, but I think you guys noted in your remarks that you and the manufacturers expect those volume declines to improve through the year? So kind of what's underlying that assumption as you look to the rest of 2018 in the absence of a volume improvement, how can you guys navigate through this kind of environment?

[Thomas Perkins:]

Yes. So just to kind of restate where we were, year-to-date we were at 4.9% decline and we saw same-store declines around 9%, but if you backed out the California impact it was more like 7%. As you look at it where we were out in April, our same-store declines were more like 3%. So we see a pretty positive trend in same-store sales. And also if you look to things that are going on with Marlboro and other promotions, we've seen Marlboro I think at one-time it was down 9% and has improved pretty dramatically from that as well. So I don't know where it's going to end up, but we think that the first quarter especially since we're lapping the California tax was probably overstated from where we look for the balance of the year to be. That being said, your second part of your question is what we are doing to combat that. We have – as I mentioned last year have been focused on a strategy around cigarette carton decline. We know that it's going to continue and if that accelerates, we have to be prepared to manage through that and really it's multi-pronged, but the key things are focused on food service and fresh. Obviously, leveraging our costs and then what we've also kind of gotten back to our roots have really pushing the street and trying to pick up independent and chain retailers which we find to be good partners and more profitable.

[Daniel Imbro:]

Great, yes, thanks for that color. Actually continue on that last point, but the focus on independent kind of excluding California, are there any geographic specific regions that are seeing particular areas of strength or weakness maybe you would focus your growth on? And then kind of related to that, are there any areas within your network that you have excess capacity or you can maybe easiest to grow?

[Thomas Perkins:]

We definitely – I’ll touch the second part first. We definitely have areas of our network with capacity. And you can think about where we lost volume last year with the kind of change out of customers. So most of that's in the eastern half of the U.S. So definitely we're focused on growing capacity in that region, but really – we have room in all of our buildings to grow the independent customer at a pretty good rate. So we don't have any buildings that I would say, aren't now scouring the street trying to pick up business. And then what was the first part of your question again?

[Daniel Imbro:]

If there were any other part of the country kind of excluding California that we're seeing particular areas of strength or weakness?

[Thomas Perkins:]

In the first quarter we saw probably a little more weakness in the eastern half of the U.S. on carton and I think if we look back at what happened in the first quarter around some pretty horrific weather, the divisions that were in those regions affected by that steamed to be affected their carton were affected more so. I think that that definitely had an impact on it. Look outside of that nothing material.

[Daniel Imbro:]

Okay, great. Then last one for me just to clarify or want to make sure, I heard you correctly on the West Coast, it sounds like those are progressing at least in line with your schedule, but maybe this summer months or kind of the key test for the improvements you made in those businesses, that’s what I would think about?

[Thomas Perkins:]

Absolutely, we feel like in those businesses, we've done a really good job of positioning them for the summer or a much better job than we have done historically. But as you know, the summer is the telltale on our business. And so we've got to have a really good summer in those divisions and that will be a big contributor for us.

[Daniel Imbro:]

Okay, great. Thanks so much Tom. Congrats on the retirement and Scott, congratulations on new role.

[Thomas Perkins:]

Thank you.

[Scott McPherson:]

Thanks Dan.

[Operator:]

And our next question comes from Andrew Wolf from Loop Capital.

[Andrew Wolf:]

Thanks. Just to ask about the first quarter since you don't give quarterly annual guidance, was that EBITDA result in the pretty close to what you were budgeting?

[Christopher Miller:]

Yes, I would say that was definitely in line with where we thought we would be.

[Thomas Perkins:]

I think the cartons are what surprises the most, but I think overall – I think it was in line with where we wanted to be in the first quarter.

[Andrew Wolf:]

Okay, so to get to the cartons, I guess you got surprised that went back to down 3%, which is seems to be about normal. Is there something strange enough that is that kind of what you think it could be going forward?

[Thomas Perkins:]

I think there is a little bit of noise there because at the end of Q1 we had a significant buy in of cartons in California. So definitely saw year-over-year big declines in Q1, but I think we're now lapping it and we didn't have very strong cost for April. So I'd say that it's probably not going to be in that three range probably maybe in the four to five range what we expected, but time will tell on that one. But I think it was a little bit of noise just how the California carton purchases as well.

[Andrew Wolf:]

And I got to assume your guidance is somewhere, plus or what you just said, while expecting four to five declines for same carton have same-stores?

[Christopher Miller:]

Yes, we said when we put out our guidance last year that we thought we were going to be in that historical normal range that 3.5% to 4%.

[Andrew Wolf:]

Okay. So as you kept guidance and you know cigarettes came in a little worse than last in the first quarter. Are there things going on in the business levers either Sacramento doing better earlier or things that change or is you’re basically sort of your projections or your internal projections pretty much where they were when you reset them last.

[Thomas Perkins:]

I would say it's a combination I think that - are you still there Andy.

[Andrew Wolf:]

I am, yes, I'm just well.

[Thomas Perkins:]

Okay. I'm sorry. I think we definitely have accelerated carton decline at a pace a little higher than we expected. But what we have been working really diligently on our pricing model and growing food service and fresh which we were successful in the first quarter with. And warehouse expense you mentioned the two divisions they did well but overall in warehouse we did a really good job of getting leverage there. So I think it's a combination of us improving. And the other thing that was kind of a unforeseen benefit was kind of the alternative nicotine category. We saw a significant growth in they've been vapor and e-cigs which helped to come that some of that accelerated cigarette decline.

[Andrew Wolf:]

Okay. And I just wanted to ask on – on the fuel side of things. For the consumer with gasoline prices heading up a little. I mean your same-store sales were pretty good in the front-end. So have you heard anything anecdotally about any traffic changes in the industry or is – or are not?

[Thomas Perkins:]

There's been a lot a lot of conversation about declines in traffic and store counts and are not. If you look at what next just published you know it appears to be 2016 to 2017 was pretty flat and Q1 of this year you know I think the eastern half of the U.S. with weather was affected. But outside of that I would say our store traffic was I would estimate it to be fairly consistent. The one concern that we do obviously when fuel prices going up that that puts pressure on our customer’s disposable income. And then also others lot of conversation in the industry about around the kind of lower income earners that they've got some less disposable income and that's affected some of those store trips. But you know like you said so for same-store sales comps in Q1 were pretty good. So incurs by that.

[Andrew Wolf:]

Just lastly, you might just mention this but if you did are sorry about it. But did the increase in diesel and maybe natural gas prices. Did it impact your that part of your delivery costs? If so can your past it through eventually?

[Thomas Perkins:]

Yes, definitely was part of our delivery cost, the way our fuel surcharges work. We change those either once a month or once a quarter. So usually there is a little bit of a lag in recovery, but we definitely that - that definitely has an impact and a bit of a concern for the year would you see that continue to raise. Actually help us on the C&G side know.

[Andrew Wolf:]

Okay. Thank you.

[Operator:]

Our next question comes from Kelley Bania from BMO Capital.

[Kelley Bania:]

Hi, good morning. Thanks for taking my questions. Was wondering if you could just help me understand of the sales growth this quarter. So the 8.5% how much of that was kind of organic verses what the contribution from the acquisitions in the different customer wins and losses and the puts and takes there?

[Christopher Miller:]

Hi, Kelly. It's Chris. So far the acquisition was a big piece of the growth. And then of course there was Walmart as we mentioned. So and then our growth in non-cigarettes, our same-store sales of course also right contributed for the quarter. So those are the key drivers. And then offsetting that was the Kroger which expired last year. So those are the big pieces of it.

[Thomas Perkins:]

Yes, I think that – Kelley, it’s Tom here. I think that that definitely I had an impact which we expected. But I think what you know services look at WalMart Kroger sort of offset each other and that really the other piece of the growth is really coming from the same-store sales increase.

[Christopher Miller:]

Yes. Maybe just to add to that, so looking at our non-cigarette sales, so if you adjust for the large items I mentioned, they grew about 7%. That’s the organic growth.

[Kelley Bania:]

Sorry, that was the non-cigarette sales?

[Christopher Miller:]

That’s the non-cigarette, yes.

[Kelley Bania:]

Okay. And then I guess just a couple more questions. In terms of the soft environment, I mean this 6% non-cigarette comps seem to still be pretty solid, obviously that cigarettes are more challenging, but I guess can you just provide some more context on the characterization of the soft C-Store environment you mentioned a little bit of the disposable income pressure on that low income consumer? Can you just talk about the drivers of that pressure on the disposable income like what you're really – how you would really characterize what's driving the softness across the industry and where you think it could go from here?

[Thomas Perkins:]

Yes. I mean I’d say there's a few things that I think are driving softness. We talked about fuel costs. I think there is some pressure from other channels and that's been talked about in the trades a little bit. I think there's some pressure from the QSRs that themselves are feeling pressure and have kind of ramped up their promotional activities. We think there's a little impact on cartons from dollar stores because their volume was up slightly, although, there are pretty small share overall, but they do have a lot of retail locations, so I think there's some impact there. And then you probably be to think that e-commerce doesn't have any impact on our channel would probably be naïve. So I think there's some headwinds there. But I think – and then going back to the low income consumer, they kind of pointed to a couple things. One is the Hispanic consumer is one that often visits convenience stores three plus times a week. And that's one of the consumers that tends to be a higher percentage of the low income segment and it just outlines their disposable income over the last three or four years as going down. But they are encouraged by – as you know there's minimum wage increases are going up and I think they are thinking that that is going to be some of that pressure might be lifted. So I think overall, Kelley, I would say that there's definitely some headwinds with fuel costs and cartons and traffic for us. We think we have opportunity and market share gains and drive in food service and fresh, and even the nicotine category which is really – overall the non-combustible category is really growing. A lot of information, but does that answer your question?

[Kelley Bania:]

Yes. That's very helpful. Just also on the same note, are you seeing any different trends as you look across your chain customers versus your independent customers and their abilities to kind of weather this soft environment?

[Thomas Perkins:]

I wouldn't say there's any big differences, the one thing I would say is I think that the larger national chains I have recognized a couple things. One is they have to do a better job of attracting customers with fresh and food service offers. And the independents tend to lag behind slightly and that's really our job. Our job is to educate those independents to make sure they understand that really driving food services is a key, that's the number one item that customers enter a convenience store for as a food service or fresh item. The other thing I would say is that the whole industry, the biggest opportunity we have is over 50% of our customers sit on the lot. They never leave the pop and come into store. And that's I think the real opportunity for our channel and it's the one thing that the chains do better than the independents, and they're starting to leverage digital technology and other avenues to get those people inside, and that's a big opportunity across the channel.

[Kelley Bania:]

Okay. That's helpful. And then also just on the cigarette trends, you made a reference to addressing opportunities on your pricing model. And I guess I just wanted to further clarify what that meant. You mentioned the two price increases, the typical kind of price increases on the manufacturer level, but is there an opportunity for you to take an additional price increase on your cigarette business?

[Thomas Perkins:]

I don't know if it's on the cigarette business, Kelley, and we would definitely talk to you more about that. But as I look up at the Board of people participating on the call, we have competitors on there. So it's probably not some that we'll get into in detail, but I would just say that the whole industry I think has an opportunity on how we price our customers. And so it’s definitely something that we look at our regular basis and I think it's an opportunity?

[Kelley Bania:]

Okay, thank you.

[Operator:]

And our next question comes from Ryan Domyancic from William Blair.

[Ryan Domyancic:]

Hi, good morning, and thanks for taking my questions. So first on non-cigarette comp a 6%, I think the comps get increasingly tougher throughout the year, some of like April’s off to a good start, which is good to hear, but for fiscal 2018 guidance, does that anticipate that 6% same-store sales figure continuing to the next three quarters in this tougher environment or do you think that there are market share gain you can make in the next three quarters to kind of make that guidance work?

[Christopher Miller:]

Hey, Ryan, normally when we look at sales growth, we normally include as we look forward excluding like large customer ads or large acquisitions we look for like a 6% organic growth that's if cartons are there. But normally is that it's usually 2% same-store sales growth, 2% inflation and 2% just regular independent group. So that's what than our guidance I think the 6% is better than we expected. And so we'll see if that continues, but as Scott said our whole sales organization that's the focus on our sales organization is to make sure that customers have the right alternative nicotine products, then they have the right food service and fresh offerings in the stores and that's how we can impact.

[Ryan Domyancic:]

Okay, that's helpful and then just a second one was, on the call you mentioned the higher sales of vapor tobacco products, but they come in at a lower gross margin. Can give us a sense of what the dollar margin differences between traditional cigarette in a vapor product? And then as you've seen higher sales of those products, do you yet have a sense from your customers of what the frequency difference looks like between a typical vapor customer and a typical cigarette customer?

[Thomas Perkins:]

Yes, so Ryan just to clarify the vapor products I think you might be getting a little confused when we say the vapor products have a lower margin. They have a lower margin than other products in our non-cigarette categories, but definitely a higher margin in cigarettes. So just to clarify that that point.

[Christopher Miller:]

I think the consumption – and I think Scott – I think everyone we've talked to is that they don't know yet.

[Scott McPherson:]

Right.

[Christopher Miller:]

They don't know how – some one buy the vapor pen versus a pack of cigarettes and that’s what they’re still trying to get their own arms around, what is that frequency of use.

[Scott McPherson:]

Yes, Ryan every one of vapor devices and e-cigs devices as different drop ratios and so they're consumed at different rates and so that's definitely something that we are in [indiscernible] and others are trying to kind of get their arms around is what is that that kind of consumption ratio look like. Yes and all smokers’ starts using vapor device or somebody new comes in the channel use vapor device. So it’s definitely an outstanding question that we're looking at.

[Ryan Domyancic:]

All right, thank you for the help.

[Operator:]

And our next question comes from John Lawrence from Coker Palmer.

[John Lawrence:]

Good morning guys. Yes, first of all Tom thanks for your help and congratulations.

[Thomas Perkins:]

Well, thank you John. It’s been a pleasure and appreciate all your support over the years?

[John Lawrence:]

Thanks. Talking about just the segment that on the cigarettes a little bit, can we just segment the business a little bit to that low wind might that Hispanic customer et cetera, I would assume that the declines in some of those stores would be low to middle double-digits instead of 78, is it fair? You're talking about declines in specific stores? Yes, and specific stores with cotton and the carton decline just looking at those segments that you mentioned like Hispanic or low income areas.

[Thomas Perkins:]

Ye, John, I have never - I haven't seen anything specific in our channel to see were declines accelerated. Like I said on the call where we saw accelerated as a company was really obviously the eastern half which bounce back really good after March. But we saw a kind of accelerated decline in that market, but I didn't see anything that would you know when I think about states that have you know a heavy Hispanic population. I didn't see direct correlation between that and carton decline. It was pretty consistent across the country with maybe a little heavier influence in the east.

[John Lawrence:]

Okay. So I guess dynamic come trying to get a sense for – is that customers that’s doing fresh, she's not doing food and his business is where you off. There is that how does that hurt your marketing program as far as getting him. Does that give him more of an [indiscernible] desire to reach and look for this these programs that you have what does that cycle look like I guess in good times and bad.

[Christopher Miller:]

Yes, the one thing I would say that in the state of the industry information. The one thing that they pointed to was this lower income consumer tends to be a fairly frequent shopper and what they've seen is they're making a few less visits but they're basket is a little bit larger which is interesting. But you know they also pointed to the fact that we are starting to earned, and gain a pretty significant share of the millennial customer which are definitely focused on things you'd think they'd be focused on fresh healthy, good environment, free Wi-FI so we're definitely seeing kind of a shift in I think the customer in our channel and I think for us the good thing is all of that shift points to a better fraction food service offer whether it be the low income consumer or the millennial is you know that the driver that we really have to focus on.

[John Lawrence:]

And last question for me any new products except that’s your thinking about bringing out to help sort of stem the tide a little bit. To sort of help the non-cigarette business.

[Christopher Miller:]

I would say thing’s one the nicotine category you know for a long time was really just cigarettes. And the emergence of all of the alternative nicotine options out there it's one thing that we've had to kind of retool our sales organization and the company around to make sure that our stores recurring in the right products because it's an ever evolving kind of channel the other thing it is.

[Thomas Perkins:]

The other thing this – I thing the expectations of our consumer around fresh and food service are going to continue to increase. And that means a fresher sandwich a fresher food offer. and so that's you know we're looking for every one of our divisions to do a great job of sourcing fresh and good for your products and continue to grow that the whole market for us.

[John Lawrence:]

Great. Thank you. Answer and questions and good luck.

[Thomas Perkins:]

Thanks John.

[Christopher Miller:]

Thank you.

[Operator:]

[Operator Instructions] and our next question comes from Chris McGinnis from Sidoti & Company.

[Christopher McGinnis:]

Good morning. Thanks for taking my questions. And Tom just want to say tanks as well and we should best in retirement Scott good luck in new role.

[Thomas Perkins:]

Thanks Chris. Appreciate that.

[Christopher Miller:]

Thanks Chris.

[Christopher McGinnis:]

Can you maybe just start with I know you already touched on I think the health of the Independents but do you maybe just talk about how. You know I know in the past their reluctance to invest in their own stores. Can you maybe talk about how that's changed over the years with FMI and you know how you can help them maybe you know maybe you can support you know the higher growth with maybe some new offerings. And I'm just wondering how you can better you know target that part of the market.

[Thomas Perkins:]

You make a really good point Chris and that is that it is really difficult oftentimes for us to get our independent consumers to make capital investments. So what we've through FMI and through our vendor partnerships. We worked really hard to put together programs that are essentially self funded. Either through they're getting free goods from - directly from a manufacturer or they're getting a subsidy on purchasing equipment whether it be our coffee program or our gravity need program almost all of our programs are now structured in a way where the retailer can get into it, essentially with no capital investment they just have to commit to buy and stock the products. And that's really something that was a derivative of FMI and realizing that we had to do something to kind of prompt them to make those investments. And then on a bigger picture, I'd say we're still working all the time to make sure that our stores understand that they have to be clean and safe and have an appearance that would attract people to come in and buy fresh food.

[Christopher McGinnis:]

Thanks for that. And can you maybe just talk a little bit about what you see in the wage and labor inflation and how – I guess how much could that hurt over the year or as you choose just that labor force?

[Thomas Perkins:]

Yes. So we do on a consistent basis wage surveys and obviously there are a couple states with escalated minimum wage this year which was all kind of built into our plan and our guidance. We've always been in the warehouse and transportation a fair bit above minimum wage just for us to be competitive and get the kind of employees that we want. I'm not saying that it doesn't have an impact, it definitely does. But we stay pretty close to that and we have markets where we have wage increases, we focus on productivity and try and absorb those increases.

[Christopher Miller:]

And Chris one of the things that the retailer environment that we talked about in detail was about the wage increase that they're seeing because again, probably for most of the store they weren’t add minimum wage, so they're feeling a big pressure on their labor. So that sort of plays into our hand as how we can help them be more efficient in their stores and take labor costs out of their stores and so that sort of a duel play from our sales force out there, not only fresh and FMI, but also vendor consolidation, our merchandising services et cetera that can help them also and lay some of their wage pressures that they're seeing.

[Christopher McGinnis:]

Sure. It sounds good. And you may have touched on this and I apologize if this is already been asked or you explained it. Can you just talk about the route and efficiencies in the quarter and how you better prepare I guess going for the remainder of the year?

[Thomas Perkins:]

Yes. I'd say when I look at transportation costs for the quarter which I wasn't overly pleased with, but I'd say there is a few things that contributed that one. We talked about fuel. The other one is the market is starting to get as you – anything you read about driver shortage. We’ve done pretty well over the last couple of years, but we're starting to feel a little bit of pressure in certain markets on drivers. So one of the things that we focused on in Q1 was kind of ramping up staffing, so we probably are a little heavy in labor in some ways. And then just thinking about the route efficiency, this is the time of year where come April, May, June our cubes will increase 20% on a truck and so we have to kind of restructure our routes and that's a real opportunity if we do a good job of rerouting which we've done this year kind of on a much more global scale. We've had corporate guys involved in routing across the company to try and capitalize on that efficiency. So it's really – this is to make it or break it over the next five months, if we are routed efficiently and maximizing the cubes on the truck, we’ll do really well.

[Christopher McGinnis:]

And I guess just to follow-up on that. Just the reiteration of guidance this morning and how successful do you need to be in the next coming months in terms of how much is into that guidance? Is it 100% that you operated efficiently, can you just maybe give us a little bit of how much accretion is on the guidance this morning?

[Thomas Perkins:]

I would tell you this, like we said, I think first quarter for us is really about positioning for the summer. I think we did a pretty good job in the first quarter of positioning us for the summer both in warehouse and transportation from a staffing standpoint. We had a couple divisions get really sideways last year and our focus this year is not to let that happens. If that doesn't happen, I think assuming we don't see any crazy changes in the headwinds we've already talked about. I feel pretty good about our guidance. But it's the six months of summer that really drives our business and we operate, we call it reasonably efficiently, and we expect carton decline to kind of get back to a normal historical level and so with that I would feel pretty comfortable.

[Christopher McGinnis:]

Okay, thank you very much. I appreciate and good luck in Q2.

[Thomas Perkins:]

Thanks.

[Operator:]

Our next question comes from Ben Brownlow from Raymond James.

[Benjamin Brownlow:]

Hey, thanks for taking the question. On the SG&A just two – I think I heard this correctly. I just want to make sure excluding the acquisition growth, was SG&A up $2 million year-over-year and how should we think about the run rate on a quarterly basis going forward?

[Thomas Perkins:]

Yes. So Ben, yes, you're right it was up $2.2 million excluding the acquisition, so which is a 4% growth. I think that's probably a decent run rate going forward excluding the acquisition of 3%, 4% perhaps about that level.

[Benjamin Brownlow:]

Okay, great. And just to make sure I heard that the late first quarter buy in that was around 150 basis point lift to same-store sales in April on a carton basis. Is that correct?

[Milton Draper:]

Can you repeat that Ben?

[Benjamin Brownlow:]

Can you go back over the late quarter buy in and sort of what the impact April same-store cartons was?

[Thomas Perkins:]

Ben, I don’t think there was any impact from the price increase, what there was – was an impact because last year when California raised their excise taxes, they had a huge buy in March, right, which really distorted cause the steeper decline in the same-store in California, but then you had this really the deepest trough was in April because everyone had bought in and so basically some of that only 3% decline was caused by that really it's that month-over-month buying patterns in California, which really drove. But it had nothing to do with the price increase that the manufacturers made.

[Benjamin Brownlow:]

Okay, understand. So that was a purchasing timing. Okay, great. That help clarify that. Thank you.

[Operator:]

And our last question comes from Chris Mandeville from Jefferies.

[Christopher Mandeville:]

Hey, thanks for the follow-ups. Scott, are there any new state excise tax or minimum age increases that we need to be mindful of when you're contemplating your go forward assumptions.

[Scott McPherson:]

There's always a number of them on that shows just looking at I think there was like 10 or 15, which is not abnormal but the only one that has basically passed and that is overly material was Oklahoma, which one apply $10 of carton. But outside of that, I would say it's just the normal noise.

[Thomas Perkins:]

That’s effective in July 1.

[Scott McPherson:]

Yes, that one is effective in July.

[Christopher Mandeville:]

Okay, that's helpful. And then how you're going after new business whether it be chain or otherwise? Are there any recent examples where you went up against some major competition regional or national for that matter or you notice maybe a deviation for better or worse on how they were pricing of new contracts?

[Scott McPherson:]

Yes, we haven't as we've kind of alluded to in the last couple calls, there is none any big national hits out there right now. On the street whether we're competing for a one-store, 10 store or 40 store chain. I would characterize that the market as rational, and kind of what we would see historically.

[Christopher Mandeville:]

Okay. And then just the last one for me, thinking longer-term. Chris had mentioned that you guys are running ahead of schedule on your free cash flow guidance here. So how do we think about your need and or maybe your willingness to increase CapEx spend as a percentage of sales. I know you have a pretty significant labor force relative some of your competition. So I’m just because I'm trying to understand how you can position yourself to become more efficient over time through the use of greater IT and or automation? I guess maybe theoretically that would allow you to pass some of the savings on to your independent customer, which in turn would improve their competitive position?

[Thomas Perkins:]

I mean Chris I think that's a completely fair question and something that we're looking at right now and then warehouse in transportation we have a new driver handheld out there with our transportation group, which we think will make us more efficient I know Chris and his finance group is looking at ways to leverage SAP which I think we have some opportunities there. And as well as just looking at some other kind of fixed cost structure things, across the network. We've got one situation. We've got two divisions that are consolidating a sales organization and taken some costs out. So those are definitely things that we are looking at and kind of as we look down the road or definitely turn the streamline our cost structure.

[Christopher Mandeville:]

All right. Thanks again. Look forward to seeing you guys next month. Thanks Chris. End of Q&A

[Operator:]

And we have no further questions at this time.

[Milton Draper:]

Thank you for your participation in our conference call and for your interest in Core-Mark. We appreciate your continued support. If you have additional questions, please feel free to give me a call at 650-589-9445. Thank you. Thanks everybody.

[Operator:]

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