Core-Mark Holding Company, Inc.
Q1 2017 Earnings Call Transcript

Published: 14 May 2017

[Operator:]

Welcome to the Core-Mark 2017 First Quarter Investor Call. My name is Nichole, 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. Milton Draper, you may begin.

[Milton Draper:]

Thank you, Nichole, and welcome, everyone. I would now like to read the statements about the use of forward-looking statements and non-GAAP financial measures during this call. Non-GAAP financial measures will be used in this presentation. Reconciliations to the most comparable GAAP measures are included in the most recent earnings press release available on our Investor Relations portion of the Core-Mark website. Statements made in the course of this call that state the company's or management's hopes, beliefs, expectations or predictions of the future are forward-looking statements. Actual results may differ materially from those projections. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our SEC filings, including our Form 10-K, our 10-Qs and our press releases. We undertake no obligation to update these forward-looking statements. We are holding this call to review our first quarter results and to answer any questions you might have. If you have additional follow-up questions after the call, please call me at 650-589-9445. Joining me today is Chief Executive Officer of Core-Mark, Thomas Perkins; and the Chief Financial Officer, Chris Miller. Also in the room is Matt Tachouet, our Corporate Controller; and Theo Castro, our VP of Finance and Treasurer. Our line-up for the call today is as follows. Tom will discuss the state of our business and our strategy going forward, followed by Chris who will review the financial results for the first quarter. We will then open up the call for your questions. Now, I would like to turn the call over to our CEO, Tom Perkins.

[Thomas Perkins:]

Good morning and thank you for joining us on our first quarter 2017 conference call. Our top line growth trajectory continued at a healthy pace in the first quarter both in revenues and store counts and we continued to make good progress on our core strategy. However, our profit results did not meet our goals. While some of the factors were outside our control, we need to continue improving our execution especially hitting our productivity targets in two of our divisions that involved with the integration of the 7-Eleven business. I am confident, we will get there and that is why we've reaffirmed our guidance today for 2017. We have a strong organization, the right strategies to improve our profitability and continue our momentum in the marketplace. I will provide a summary of the quarter and recent events and then Chris will walk through the quarter in details and discuss our outlook. After that we will take your questions. I would like to start with a quick update on Rite Aid. We are in deep discussions - deep into discussions on our renewal of our contract. As we discussed on our last quarterly earnings call, we expanded our product categories with Rite Aid and added at their locations in Southern California and Northern California. We will also be starting the planning process to delivering fluid dairy to approximately 700 stores in the South East. We believe we will reach a mutually beneficial agreement in the near future and look forward to updating you at that time. Now turning to the first quarter, we grew sales at a strong pace of over 16% and continue to gain market share with our net store count ending the quarter at approximately 42,000 which is up 8.5% year-over-year. Despite this growth, we along with other food distributors and retailers in our industry faced major headwinds and challenges across our division. These included bad weather in certain regions, higher fuel cost in the quarter, we well as continued overall weakness in consumer market demand. These market dynamics are occurring at the time when we are scaling the company for growth. Operating costs for the quarter were $30 million higher than last year's first quarter including increase in cubic feet handle, higher fuel prices and miles driven, the addition of Pine State and the infrastructure investment to support our larger company. Our first quarter result also reflects the off-boarding of the 1,100 Circle K Stores in the southeastern region that we previously announced. Finally, the integration of 7-Eleven stores continues to experience some challenges from a productivity and execution standpoint particularly in two of our divisions where volumes have doubled. The good news is we are making progress although we know we have more work to do to get the execution and service levels improved and the cost stride. Taking all of this into account, adjusted EBITDA came in at 19.6 million compared to 24.1 million last year, which was one of the most profitable first quarters in the company's history. As we look out over the rest of 2017, we see some real opportunity to better leverage our operating costs and refocus in the higher margin products to reach the financial goals that we have set. We have some puts and takes in terms of off-boarding the Kroger stores, on-boarding the Walmart stores with month and absorbing the impact of the $2 per pack cigarette price hike in California. Overall, we see a significant growth potential and better bottom line performance they had. Bear in the mind that the first quarter is historically a lowest EBITDA quartered year typically under 15% of annual EBITDA. As we move through the year, we are focused on leveraging our warehouse and delivery expenses during number of initiatives. We have planned to eliminate some inefficient staffs that they have mandated for all the vision to ensure our goal to reduce miles we achieved. We also planned to leverage our largely fixed SG&A expenses to a greater degree as volumes increased through the year and production levels and new hires increased. As we improve the execution and new customer wins take hold, we have an excellent growth runway ahead of us. As a result, we are reiterating full year guidance for 2017 and we are fully committed to achieve our targets of 9% to 14% adjusted EBITDA growth on a mid-single-digit sales increase. Moving deeper into the quarter's results, sales of 3.5 billion included fall of double-digit growth in cigarettes, non-cigarettes and then strategically important food and fresh categories. The strong the sales volume has driven primarily by market share wins and additional volume from the Pine State acquisition. Sales for the center stores categories and the higher market islands were softer than expected due to weaker the normal consumer demand. We were able to rebound somewhat from a rough start in the first two of the year and had improved performance in March that we have seen continuing in April. We've remained very encouraged by our performance in our growth categories which include food up 11% and fresh which increased 14% despite a macro-pressure stage. Food and fresh are key elements of our core growth strategies and we believe they will help driven strong earnings growth going forward. The largest challenge to earnings for the quarter, we were helped in delivery expenses which increased 25% during the quarter. The higher expense level represents a significant amount of effort required on the part of our operations team to absorb the large increase in volume and execute with a high number of new employees. We also increased comparable cubic feet of product ship by 2.9%, increased deliveries by almost 7% and increased miles driven by 4.4% in the quarter. SG&A expense grew 12% but as a percentage of sales, declined 6 basis points. We believe the investments we have made are prudent and we'll certainly payoff during the balance of the year in longer term as we absorb these additional cost and volume increases. I would like to provide an update on our core growth strategies. Recently several our senior leaders attended and participated in a NACS State of the Industry Conference. There was good discussion of the event on the current state of our industry and it aligns well with our core strategies. A few important trends I wanted to highlights. First is a demand for fresh. It's becoming clear that consumers are favoring products that have the appearance of being less prepared in our both fresh and convenience. Secondly is understand consumers growing focus on health and wellness. These stores can no longer just replace product offerings. They must stay ahead of the curve and thinking about consumer trends and good for you offerings. Third is continuing innovation that store experience both in store and out. Competition is intensifying and broadening. Other retail formats are immerging as warehouse stores, traditional drug stores - dollar store offer many other products bounding convenient stores. Some retailers like Walmart are even exploring the c-store format themselves. C-stores continue to farewell competitively but as operators, they need to think about their offerings. They must understand that all types of retailers are looking to offer convenience and scale into smaller footprints. Fourth, the growth dominants of e-commerce and the emergence of home delivery both are driving new competition while also creating opportunities for those who figure out how to hornets digital solutions to driven greater convenience for customers. And finally, trends in digital marketing. The industry's traditional promotional awareness for Ramsin campaigns have lost their effectiveness especially with the millennial and future generation who have very distinct and very different purchasing habits as c-store core customers. Helping our customers stay in front of these trends is critical to their success and our ability to anticipate and provide innovative solutions to these evolving trends is key to successful partnerships with our customers. These are the primary drivers to our focus on our core strategies. We continue to make good progress with our strategies and further differentiate ourselves for the market in which we complete and driven incremental financial returns as well. Our vendor consolidation initiative in fresh food strategy both performed well in the quarter and generated 34 million in incremental sales. The fresh category was led by dairy and bread products which grew 21% and 13% over last year's first quarter and were the largest contributor to the growth of the fresh category. We are committed to focusing on these opportunities that offer our customers fresh, health food and meets their chancing demand. We have several new programs and products to advance our strategies that I will touch on. We have been working on a new piece of program to serve our customers of our future crust that made from scratch 100% California buying rice and tomatoes with sauce, 100% mozzarella cheese with no preserves and packing made from recycle materials offer more sustainable footprint. We anticipate the pizza program to be complete by late June and ready for launch in July. We are also in a float stage in looking sandwich programs whereby sandwiches are made fresh in store for customers. This is on trend with what consumers preserve as fresh, meaning they can see the product actually being assembled to order while they are in the retail location. We are exploring earning both national branded and private branded as potential solution. We see this as a late 2017 to 2018 opportunity for Core-Mark. Turning briefly to our core solutions group, this is a critical part of our strategy to help customers gain a competitive advantage and face the industry's challenges. In the first quarter, we conducted over 800 FMI surveys with a greater than 60% acceptance rate. We continue to see these stores grow their non-surveys at a much higher rates compared to stores that have not participate and we continue to see a significant reduction in churn rates for these independent retailers. We are accelerating the number of FMI surveys to be completed this year which will assist us in reaching our financial goal for the year. As the same time, we know the e-store base will assist our customers to grow their profit in a soft retail environment. In closing, I would like to reiterate that we are focused on operational execution and the growth of the higher market products as well as continued market share gains. This means we must accelerate our core strategies in order to deliver the margin enhancement that will drive profitable growth. We have the right approach in place, while we also have more work to do to better leverage our fixed cost and driven the productivity gains that we expect as we increase scale. I am confident we will get there. The investments we have made to expand our business, build our infrastructure and innovate in our operations gives us a tool to achieve our margin goals and deliver strong healthy returns overtime. With Walmart coming on board and on our momentum in the marketplace being strong, our future is bring and we have tremendous opportunity to create shareholder value in the years ahead. I will now turn the call over to Chris Miller our CFO.

[Christopher Miller:]

Thank you, Tom, and good morning. We generated solid top line growth in the quarter and total sales increasing 16.4% to $3.5 billion. Our GAAP EPS for the first quarter was $0.05 compared to $0.12 last year. Excluding LIFO expense, EPS was $0.11 for the quarter compared to $0.17 last year. A disappointing bottom line was due primarily the soft comparable store sales in the first two months of the quarter combined with higher warehouse and delivery expenses related primarily to the absorption of the 7-Eleven volume. Although EPS was below our expectations for the quarter, it is important to remember the Q1 is basically our weakest quarter. At this point, we still expect to reach our previously announced sales and EBITDA guidance for the year. I'll touch more in that later. The healthy increase in sales for the quarter was driven mostly by market share gains in the Northern New England division we acquired last year. Excluding the acquisition, our sales increased approximately 9%. Sales of Murphy U.S.A. combined with other market share gains including 7-Eleven accounted for the lion share of the remaining increase in sales for the quarter. We saw a strong growth in most categories and are especially encouraged by continued strength in strategic categories even in the soft economic environment. Starting with cigarettes, sales increased approximately 18% driven by a 10.6% increase in cotton sales. Our same-store cigarette cotton sales were down 3.8%, also reflecting a sequential decline from the fourth quarter of 2016. This was slightly more severe than the decline reported by cigarette manufacturers for the quarter and mainly driven by significant tax increases in certain states. Non-cigarette sales increased 13.5% during the first quarter led by OTP sales which grew over 17%. The increase in OTP was driven by market share gains and Pine State acquisition and the continued shift from cigarettes, the smokeless moist tobacco products which is a continuing industry trend. We saw a healthy growth rates in food, our largest volume commodity which grew almost 11% and fresh which grew 14%. Our same-store non-cigarette sales in both January and February increased less than 1%, but we're much stronger in March with an increase over 5%. Same-store sales for the month of April were consistent with March especially in the U.S. Further strengthening our consumer spending coupled with our strategies could provide a significant tailwind for the remainder of the year. Gross profit increased $22.9 million or approximately 15% in the first quarter this year compared to last year's first quarter. We recorded $6.6 million of cigarette holding gains in the first quarter compared to $1 million in Q1 of 2016. Cigarette manufacturers in the U.S. increased cotton prices much earlier this year than last. As this was unexpected for us, we're not able to build our cigarette inventories ahead of the price increase as much as we normally would. However, we were still able to capture meaningful holding gain. We do still expect the cigarette price increase from U.S. manufacturers in the second half of this year consistent with prior years. In addition to the holding gains, gross profit for the quarter includes LIFO expense of $4.2 million compared to an expense of $3.4 million last year. Remaining gross profit which excludes holding gains and LIFO expense increased $18.1 million or 11.8% for the quarter. Non-cigarette remaining gross profit increased $12.1 million or approximately 11%, which cigarette remaining gross profit increased $6 million and 13.5%. Remaining gross profit margin decreased approximately 20 basis points to 4.9% driven primarily by the addition of Murphy U.S.A. given its substantially higher sales mix of tobacco products that has significantly lower margins. We have now last this business for beginning in the second quarter, our gross profit margin will be more comparable. Cigarette remaining gross profit margins declined 7 basis points due mainly to the additional volume generated by the net new market share wins. Non-cigarette remaining gross profit margins decreased 26 basis points during the quarter. Excluding the impact of a net market share gains and our acquisition, remaining gross profit margins for non-cigarettes were down 10 basis points. Margins were also compressed by approximately 12 basis points due to the higher OTP sales volume. The sales weakness in January and February which affected certain of our higher margin food commodities resulted in a reduction of our overall non-cigarette margins. Because of those we did not see the 20 basis points to 25 basis points increase we normally expect each quarter. However, we are encouraged by higher sales levels in March and April these trends continue we expect to see the impact in our margins. Total operating expenses increased approximately $30 million or 21% for the quarter on sales growth of 16.4%. As a percent of sales, OpEx increased 18 basis points in the first quarter of 2017. Warehouse and delivery expenses increased approximately $23 million or 25% during the first quarter. The increase in these expenses includes $6.6 million of operating expenses from our Northern New England division acquired in June last year. As a percent of sales warehouse and delivery expenses increased 22 basis points due primarily to significant cost overrun at two of the three divisions involved in on-boarding 7-Eleven an increases in fuel and employee healthcare costs. SG&A expenses increased $5.9 million or 12% compared with the first quarter last year including $4.3 million of expenses generated by the Northern New England division. SG&A in the first quarter of 2016 included a gain of $2 million related to the settlement of a legacy lawsuit. As a percent of sales SG&A expenses decreased six basis points or 11 basis points adjusting for the legal settlement last year. You may have noticed we had an income tax benefit of $1.2 million for the first quarter of this year, new accounting guidance went into an effect at the beginning of the year. And general terms the new guidance requires us to recognize the tax benefit or tax expense depending on the difference between our stock price at the time shares best versus the price of the corresponding shares when initially granted. If the prices risen which was the case here we recognized the tax benefit conversely at the price declines we will have the higher tax expense the benefit was $1.5 million in the first quarter of this year. We will likely see the largest impact of this change in the first quarter each year because this is what the majority of our internal stock grants best. We still anticipate our full year tax rate in 2017 to approximately 37.5%. Our free cash flow, which is calculated by taking net cash from operations less net CapEx and capitalized software generated cash of approximately $144 million for the first quarter of 2017 compared to net cash provided of $38 million for the same period in 2016. The primary driver of this improvement was the sell through of our cigarette inventory from the end of 2016 and both the U.S. and Canada. We increased our purchases of inventory at the end of last year in order to maximize incentives. In addition, we saw reduction in non-cigarette inventory driven primarily by the impact of the market share gains and losses and some yearend rise across several non-cigarette categories. Our total long term debt was $233.4 million at the end of the quarter compared to $347.7 million at the end of 2016. The free cash flow we generated in the first quarter was used to pay down our credit facility. Capital spending totaled $14.4 million for the quarter, compared to the $11 million for the same quarter last year. The increase is due primarily to investments in a new consolidation center in the Northeast. We announced our quarter dividend of $0.09 per share to be paid on June, 22 the shareholders are record on May 25. To summarize, a thought sales start to the year combined with higher warehouse and delivery expenses actually disappointing bottom line in the first quarter. As Tom mentioned, the first quarter is the small contributor through our annualized EBITDA goal. We feel comfortable reiterating our full year guidance. As a remainder, we're expecting revenue growth between 5% to 7% for 2017 and adjusted EBITDA improvement between 9% and 14%. The faster growth in adjusted EBITDA compared to revenue is due primarily to a favorable shift in sales mix to non-cigarettes driven primarily by our core strategies and the leveraging of our operating expenses. This financial performance will not easy though we see enough opportunities out there this point this allow us to believe our financial goals are retainable. Some other more significant opportunities are sales momentum including market share wins, execution of our core strategies including VCI, fresh and FMI and most importantly leveraging our OpEx during the soft retail environment. Additionally, if we see further strengthen as consumer spending as we are seeing in the early spring that could provide a strong tailwind for the remainder of the year. At a high level we are confident at the long term cores we launch to drive growth and improving profitability. We believe the execution of our core strategies coupled with our flexible go to market approach uniquely positions us to continue to capture market share and help our customers succeed. And with that operator you may now open the line 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. Your line is open.

[Chris Mandeville:]

Hey, good morning.

[Thomas Perkins:]

Morning.

[Chris Mandeville:]

Tom, could we start I guess we were pretty severely under appreciating the amount of the leverage on the quarter. Can you walk us through that a little bit more, I'm just trying to understand and parsed out if there was really largely isolated the 7-Eleven facilities as well as some incremental expenses for fine state or maybe if there were some additional elements in there whether it would be are you realizing some of the Wal-Mart on-boarding expenses or any type of potential deleveraging that your team down in the Southeast?

[Thomas Perkins:]

Yeah, no gain if you think our guidance was created, we took into account definitely the startup for Wal-Mart they off-boarding from - off-boarding of the Circle K business, but really our two main components of our business in the first quarter was one with soft same store sales, so for existing customers we benefited from market winds that carried over into the quarter, but definitely had soft sales and then we definitely had severe cost overruns in two of our divisions that we're servicing the 7-Eleven stores. At the same time though as our sales softened our divisions needed to react much quicker to that softening and we have the thing call the iron bar we're basically if our sales and profits declines, gross margin declines, we have to reduce our OpEx in line with that ball up, and so we didn't react as quick enough, so right now we're really geared towards improving that execution. And so really those were the three components, yes do we have off-boarding cost with Circle K, yes we did and that impacted the higher fuel cost helping, but really the two divisions operating costs were much higher than we anticipated and that's our number one goal to get those back inline.

[Chris Mandeville:]

Okay, that's very helpful. And then I guess just thinking about the near term it's great to hear that you realized some sales momentum in margin, but you did outlined a few puts and takes in the coming quarter with the cigarette tax increase in an on-boarding Wal-Mart and then off-boarding of Kroger, I guess I'm just trying to grab with how we should be looking at the margin profile in the coming quarter given some of the elevated OpEx as well as maybe just the sales mix for the sales one hand lost.

[Thomas Perkins:]

Yeah, definitely the first five months of the year have a lot of ups and downs, right, because you talked about Circle K off-boarding, we talked about difficult with 7-Eleven absorption and we had the $2 per pack increase in California Kroger coming off, and Wal-Mart coming on. So all mix together, once we get it all rolled out we should see our margins get back to that basic of growing our non-cigarettes 20 basis points to 25 basis points once all that activity has fleshed out June will be the first three months went all that activity has done and so I anticipate that to happen, I think again our focus is we have to be very focused on our two divisions with 7-Eleven and that's critical that we get them right as quickly as possible. And so that's a really a high priority for us and we need to do that and so I think that the other divisions will get their expenses were we want them, but the two 7-Eleven divisions were probably our most present issue right now.

[Chris Mandeville:]

Okay, and last one from me. Just on the competitive front have you seen new change in the environment your primary competitor noted an increased competitive business environment no way to filing and if even margins were down pretty meaningfully. So I'm just going to curious if your thoughts there and then kind of just selling into that as it relates to new business potential specifically and must say if a dollar store channel, do you see any upcoming opportunity in the coming 18 months.

[Thomas Perkins:]

Yeah, definitely there are opportunities, definitely there is not as robust of RFP environment 2018 will be a little bit stronger and we're seeing in 2017, but right now we're pretty well set almost set from our own customers, so we really haven't had to go into any competitive bidding environment with any of our customers and I think time will tell us that we get into some RFPs for non- Core-Mark customers will see how that is. But again our focus is financial discipline and we have to make sure that the decisions we make from a pricing perspective or in the best interest of the company and our shareholders and so that will always be sort of a discipline we have to hold as we look at potential opportunities.

[Chris Mandeville:]

All right Tom, thanks again and best of luck in Q2.

[Thomas Perkins:]

Thanks.

[Operator:]

And our next question comes from Ben Bienvenue from Stephens, Inc. Your line is open.

[Ben Bienvenue:]

Yeah, thanks and good afternoon.

[Thomas Perkins:]

Hi Ben.

[Ben Bienvenue:]

So sticking with operating expenses, Tom you've called out the two divisions 7-Eleven and the on-boarding layer, are those same divisions going to be hand lowing some of the incremental sales volume from Wal-Mart and how do you think about the potential pressure there as you want to service that new contract at high service level, but also manage operating expenses on division there already getting all that pressure?

[Thomas Perkins:]

I think one of them will be, but in a very narrow way, so what we've done because of the large number of items that are specific to Wal-Mart, we set up satellite warehouses to handle probably 70% or 80% of the volume, so that those are standalone operations, so the nice thing is those are really going to be operated by themselves that should not have material impact on any of our divisions that have that satellite warehouses closed by. So I think we've sheltered that and we definitely are very mindful in those two divisions that our focus is on their core business with 7-Eleven, but with the other group to be able to handle the rollout of the Wal-Mart stores.

[Ben Bienvenue:]

That's great. You mentioned rerouting initiatives, I know that you had already started towards recent rerouting in the Southeast Tampa division earlier this year, what is the timing of cadence of rerouting across your broader network have you started it and when would you expect it to be finish and implement?

[Thomas Perkins:]

Yeah, really our focus is to get it done in the next two months, it is interesting, Ben as we have been so focused on expansion and growth, right, and now as we've sort of seen a softening of our customer sales, same store sales, we now have to get back to the basics, so now we need to right leverage our operating costs and really implement the iron bar and we've been little slow on that and so now we've set up the process and so everyone has opportunity, right to reroute even though divisions in the Southeast that already did reroute, now that was based on expected sales performance from our customers, but now that's not where it should be then we still have to go back and tighten those routes. And so there is a lot of opportunity in that and so over the next two months really is our focus to get those implemented and start seeing the savings from reducing the miles we're driving.

[Ben Bienvenue:]

Okay, great. And then Chris looking at the balance sheet, we saw some pretty material sequential deleveraging and another seasonality associated with that as you generate free cash coming in the once, what is the right level of leverage for us to think about as you move through the year should we expect safe on the balance sheet to be a little bit lower level and then following typical seasonality trends helps us things to that?

[Christopher Miller:]

Yeah, so Ben, I would say that given where we ended the quarter, and first of all we will end the year with that and I think it depends on if no other I guess transaction or new customers added I think you could expect to see our debt level to come down a little bit by year end, but maybe close to the $100 million, $150 million area.

[Ben Bienvenue:]

Okay, great. Thanks for that. And if I could just squeezing one quick - one more question. Tom, the cigarette impact quarter to date from California what is that - is that tracking in line with your expectations for that cigarette tax increase in the resulting [indiscernible]?

[Thomas Perkins:]

It's a little bit higher, so what we did see as we saw sort of a buildup purchases by our customers in the last two weeks of March and then we definitely saw a severe fall off in the first three or four weeks of April. So right now it's tracking a little bit worse, the manufactures made about an 18% to 20% decline immediately and then get back to some normal cadence 12% or 13% decline once all that check, but we're little bit north of that 20% right now and so really it take a little bit of time to shake out and that was the massive increase, but we still anticipate that getting back to that normalize and you maybe a 12% or 13% decline once all the noise and people sticker shock with the smokers in California.

[Ben Bienvenue:]

Great. Thanks for taking my questions and best of luck.

[Thomas Perkins:]

Thanks.

[Operator:]

[Operator Instructions] Our next question comes from Ben Brownlow from Raymond James. Your line is open sir.

[Ben Brownlow:]

Hi, good morning guys.

[Thomas Perkins:]

Good morning.

[Ben Brownlow:]

On the 7-Eleven contract and the leverage there I think in the past you've said it nine month time line to getting kind of OpEx efficiency where you want? Can you update us some timeline there and with the same store sales I mean a little bit softer that same store sales back dropping a little bit softer than expected. Is the challenge more aligning with the weaker slightly with your same store sales and maybe you could get a better leverage because of improved same store sales going forward or do you still have a lot of challenges with employee turnover in those two divisions?

[Thomas Perkins:]

So we have - so the nine months trends we'll go first to that, so really we fully rolled out in November for all the stores, so our focus is to get the execution and the improvement in our service levels where we need to be and from a cost perspective by the end of the second quarter. So that sort of a nine months trend there and definitely we see - you see a higher level of turnover in those divisions, because of the large number of new employees, so it sort of breadth upon themselves as you have new employees, the best productivity, people work long hours and maybe see if they are right for the job. So as you stabilize which we're seeing stabilization in several of the sort of the departments within our operations, you'll start to see better productivity and less turnover and so that's really that nine months trend. But the second thing I think and so you put those two sides, which definitely had a significant impact on our expenses. But in the other divisions as we again focus on off-boarding Circle K, but we didn't react right as the sales softened, one month okay, January is down, okay what's going to come back and then the second month that didn't come back in February then that's when we need to be rerouting, right, focus on efficiency, savings, et cetera and so we were very slow on the uptake on that. And I think again like I say we sort of got with all the expansion in growth is we've got to sort of get back in the mode of running our business as we normally run it which is rushing on expenses and growing our profitable category. So significant cost, but not enough leverage in our other divisions and which would have definitely helped the quarter if we would have done a better job on that.

[Ben Brownlow:]

Okay, that's helpful. And do you expect some additional more incremental extents or wage pressures with the accelerating on FMI surveys or are you constrained at all by labor on that?

[Thomas Perkins:]

Not really, here's our focus, right, where our focus is to do more with less, but that is to just be more efficient, because we definitely have inefficiencies within our selling organizations that we can take some of the dollars that we're spending and really focus really on our FMI strategy, because what we know today is FMI is our really the strategy is our way that we open up the doors to vendor consolidation of rights with our customers and our customers that have been at my survey and much more profitable and successful and we are much more profitable. So definitely we want to accelerate the pay to annually we've been doing about 3000 but our intent is to do more than that, in fact, I think we're shooting for 4500 new surveys - 4500 surveys this year versus 3000. And so I think that really our goal and it's really just about reassigning resources to that key strategy.

[Ben Brownlow:]

Okay, great. Thank you.

[Thomas Perkins:]

Thanks.

[Operator:]

We have no further questions at this time, I'd like to turn the call back over to Ms. Milton Draper. Please go ahead.

[Milton Draper:]

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

[Operator:]

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