Core-Mark Holding Company, Inc.
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Welcome to the Core-Mark 2017 Second Quarter Investor Call. My name is Karen, 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, Karen, 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 second 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 the Chief Executive Officer of Core-Mark, Thomas Perkins; and the Chief Financial Officer, Chris Miller. Also in the room is Matt Tachouet, Chief Accounting Officer, 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 second 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 second quarter 2017 conference call. I’ll provide a summary of the quarter and recent events and then Chris will walk through the quarter in greater detail after that we will take your questions. The company has grown at a rapid pace over the last four years which accelerated sharply in 2016. We’ve experienced significant growing pains from that acceleration in the first half of 2017. That being said, I want you to know that I’ve full confidence in this great company and our ability to absorb this growth and return to our normal levels of profitability. Due to multiple headwinds we’re lowering our guidance for the year. As of today service in our two struggling divisions is vastly improved but absorbing the significant amount of volume due to the new 7-Eleven business has been very costly and it has taken longer than expected. Our revised guidance does not assume any sort of magical fix at these divisions but rather steady improvement in operating costs. That being said I do believe this integration struggle is a 2017 event and we fully expect these divisions to return to the originally expected profits by next year. The first half of 2017 has been the perfect storm in addition to our operational challenges that those two divisions we have been competing in an environment of soft retail sales with the strongest growth coming from our lower margin products such as OTP and of course the large California cigarette excise tax increase has not been helpful. While this is certainly a disappointing quarter, there are positive underlying developments in the business. VCI and fresh posted solid growth despite the impact of the customer transitions. FMI continues to expand at an accelerate rate. Our relationships with Rite Aid and Wal-Mart are going well and we are excited to have the fire bucket acquisition contributing in the second half of the year. Taking all together we will definitely have better days ahead. To get there we must simply return to the basics and execute at a much higher level even in the phase of our current headwinds. I am confident we are taking the right steps to get back on track that is what we plan to do and that is what I expect we will do. On a much brighter note we are exceedingly pleased with our Farner-Bocken acquisition. This business will expand our presence in the Mid West, a region where we do not have extensive coverage before. Our cultures are very similar and we hope to learn from this organization some best practices around selling in operations in food service where they are doing especially outstanding job. Their mix is 58% cigarettes and 42% non-cigarettes which allows them to generate more favorable EBITDA margins than we do as a whole. The purchase price was approximately 174 million and we have incurred around 1.5 million in severe cost to-date. Similar to past transactions we purchased inventory, receivables and fixed assets including their significant fleet of own tractors and trailers. We are very excited by the addition of this team to our company and look forward to both organizations benefiting from this combination. Meanwhile our business continues to grow with our partners at Rite Aid, we continue to expand the locations where we deliver milk and that expansion is expected to continue. We also continue to discuss other categories that we could deliver. We see this as an important partnership performer and are deep into discussions on our renewal of our contract. We look forward to updating you when that process is completed. The Wal-Mart rollout is another good story. We are currently delivering to all 530 stores initial volume was higher than expected particularly in candy and tobacco. This created a little more startup cost than we expected but overall this roll out went very well. We are excited to have this partnership with such a marquee retailers starts so positively. Sales in the second quarter increased 3% for the quarter over last year with non-cigarettes growing 7%. This low growth rate was due to the previously announced customer losses and weak cotton sales offset by our Northern New England division contribution and increases in cigarette prices and excise taxes in certain jurisdictions. Although we seem to be operating in the rather soft retail sales environment that we need to overcome we did see 25% growth in our candy category reflecting the impact of Wal-Mart in addition Fresh grew at a decent rate of about 6% and with our new initiatives I would expect to see that pace accelerate. I am optimistic about the coming quarters. The addition of Farner-Bocken and their 5,000 plus stores along with the full benefit of over 500 Wal-Mart locations will provide us some sales momentum in the second half of the year. Warehouse and deliver expenses were up 12 million or 11% driven by inefficiencies particularly as it relates to two division servicing 7-Elven. Both of these divisions have the largest growth in volume doubling in size. We have struggled to achieve our productivity targets and in order to improve service to our customers in these divisions we have had to invest significantly, both of these divisions are stabilized as of today. The entire company is focused on reducing our warehouse and delivery cost on the warehouse side of the business we have set a goal to improve our warehouse productivity across the company by 5% for the second half of the year. The key metric critical to achieving this goal is improving on pieces pick per hour. On the transportation side we need to make our routes more efficient. Our focus is on increasing queues per route which will drive the reduction in the number of miles we drive. All divisions have implemented full reroutes in order for us to achieve our goal of reducing the number of miles driven by 5% in the back half of the year. In other words we are laser focused on the operational basis and have meaningful targets in place. We have seen leverage in our primarily fixed SG&A expenses but we can do more. In the back half of the year we have a goal to reduce this cost by an additional 7% versus the first half of the year. The organization is executing against these critical initiatives and we expect to see improvement in operating expenses in the second half of the year. Taking all of this into account adjusted EBITDA came in at 30.1 million in compared to 42.5 million last year. Even went back and after reduction in cigarettes gains of 6.1 million on a comparable basis the second quarter results were disappointing. We are determined to turn this trend around and reach our new goals. We would like to provide an update on our core growth strategies in a soft retail environment is even more important for our customers and our company that we accelerate these core strategies. Our VCI and Fresh incremental sales totaled over $22 million despite having to overcome two previously announced customer losses. It is important to us and to our customers that we take cost out of the supply chain by putting more products on our trucks. It is also very important to us and to our customers that we provide what the consumer is demanding. It has become very clear that consumers are favoring products that are both fresh and convenient. The Fresh category was led by diary which grew by 11% and was the largest contributor to the growth of the Fresh categories. The overall growth is 6% in these critical product lines -- in light of the comparison headwinds but ultimately it is not where we want to be. We have realigned incentives and renewed our focus to sell the higher margin products that offer customers fresh and healthy foods. Turning to our core solutions group, we are responsible for FMI series that we conduct. In the first half of 2017 we printed over 1,700 FMI surveys with a greater than 60% acceptance rate. We continue to see these stores growth their non- cigarette at an accelerating rates compared to stores that have not participated and we continue to see significant reduction in churn rates for these independent retailers. We have increased the number of FMI service that we originally plan for 2017 by 50% which should assist us in reaching our financial goals for the year. Our core solution group also plans to release further enhancement to our core logistics later this month which will provide greater visibility to key transportation data. This enhancement along with the warehouse side of the core logistics will help us quicken the pace of identifying opportunities to improve operational efficiencies. For monitoring the number of OT, over time hours worked to the amount of idle time of our tractors, this enhancements or operations will be valuable. Our core solutions group is also helping facilitate some of the company’s key initiatives through reporting mechanism which provide ourselves, organizations pin point intelligence on primary distribution gaps and helps them – helps all the [indiscernible]. These are just some of the examples of how we are constantly evolving to improve even in times of significant challenge. In closing we’ve continued to face headwinds throughout the first half of the year. Our slow reaction to trashing down expenses in the soft retail sales environment has been disappointing. More impactful are the warehouse and delivery cost overruns we have experienced at the two divisions which observed the greatest volume growth. We have clear and detailed plans in place to improve execution and return Core-Mark where we should be performing. I am confident we will get our two key divisions back to profitability in the short run and back to the originally planned target levels in 2018 and beyond. I am also very confident that we will improve our warehouse and delivery productivity in the second half of this year. Now is also the time to refocus on accelerating our core strategies and order to grow our sales and higher margin items and reach our new goals for 2017. In addition as I mentioned I have full confidence in this great company. We will get back, get the company back on track and return to growing our profitability at higher levels in future years. I will now turn the call to Chris Miller our CFO.

[Christopher Miller:]

Thank you, Tom, and good morning. First I will review our results for the second quarter then provide more detail around our revised guidance. We have modest top-line growth in the quarter with total sales increasing 3.1% to $3.8 billion. Our GAAP EPS for the second quarter was $0.15 compared to $0.35 last year. Excluding LIFO expense EPS was $0.21 for the quarter compared to $0.39 last year. Part of this decrease is due to reduction in cigarette holding gains which were $0.01 per share or $0.09 million this year versus $0.09 per share or $7 million last year. The disappointing bottom line was due primarily to cost overruns and warehouse and delivery expenses particularly in the two divisions as have struggled to observe 7-Eleven volume and a lack of operational leverage given soft sales in other divisions. There were several factors affecting sales for the quarter both positive and negative. On the positive side sales increased from the addition of our Northern New England division acquired last June as well as the new agreements with 7-Eleven and Wal-Mart. In addition increases in non-cigarette same-store sales and cigarette prices and a 20% increase in excise taxes which are included in our total sales contributed to sales growth in the quarter. On a negative side sales reductions related to the expiration of service agreements with Circle K in January of 2017 and cover in April of this year coupled with an overall decrease in cigarette cotton sales dampened our sales growth. Sales for the non-cigarette categories increased 7.4% on a 4.5% increase at same-store sales. We saw growth in most categories especially in candy which grew 25% due primarily to the new Wal-Mart agreement which began in May of 2017. We also saw 5.5% increase in our fresh categories which includes dairy, meat, bread and fresh products. We are encouraged by growth in these critical categories despite soft retail sales environment. As Tom mentioned we are focused on growing these categories in the second half of the year. Sales in the cigarette category grew 1.3% to $2.7 billion on increases in price and excise taxes. Unfortunately we saw a cigarette cottons decline by approximately 8% in the second quarter of this year. This was a blend of a 22% decline in California due primarily to $20 per cotton tax increase and a 6.5% decline for all other divisions. Excluding California the decline was mainly driven by net market share losses and lower cotton sales in certain other jurisdictions that had seen excise tax increases. From the same store perspective cotton sales were down 6.4% or 4.2% excluding California. We believe the retail sale softness impacted cotton sales in the second quarter this year. Gross profit decreased $1.8 million or 1% in the second quarter compared to last year driven primarily by $6.1 million differential and cigarette holding games due to timing. Cigarette manufacturers in U.S. increased cotton prices much earlier this year than last year. The differential in holding gains was partially offset by 1.2 million OTP tax refund. Gross profit was also negatively affected by LIFO expense of $4.6 million compared to an expense to $2.9 million last year. Remaining gross profit which excludes holding gains, OTP tax refunds and LIFO expense increased $4.8 million or 2.6% for the quarter. Looking at remaining gross profit by category non-cigarette remaining gross profit increased $7.1 million or approximately 6%, while cigarette remaining gross profit decreased $2.3 million or approximately 4%. Remaining gross profit margin was flat for the quarter as we have now lapped the addition of the Murphy USA business which had a compressing effect on previous quarters due to the lower margin on the high mix of tobacco products. The increases we saw in cigarette manufacture prices and excise taxes compressed remaining gross profit margin by approximately 30 basis points in the second quarter of this year. Cigarette remaining gross profit margins decreased 12 basis points due mainly to the increase in excise taxes during the quarter. On a per cotton basis cigarette remaining gross profit increased 4.3% driven by higher manufacture discounts earned as a result of price increases. Non-cigarette remaining gross profit margins decreased 21 basis points during the quarter. The decrease was driven in part by the addition of our agreement with 7-Eleven and Wal-Mart. In addition a higher sales mix of OTP which has much lower gross profit margins relative to other food and non food products compressed gross margins by approximately 29 basis points partially offsetting the decreases for the effects of expiration of our agreements with Circle K and Kroger as well as the addition of our Northern New England division. Total operating expenses increased $13.8 million or 8.6% to $174 million for the quarter as a percent of sales OpEx increased 24 basis points. As Tom already mentioned warehouse and delivery expenses increased approximately $12 million or 11% during the quarter. In addition to cost overrun at our two struggling divisions the Northern New England division contributed $4.7 million of incremental operating expenses. As a percent of sales, warehouse and delivery expenses increased approximately 20 basis points due primarily to the cost overruns of two divisions and a lack of operating leverage given the soft sales in other divisions. SG&A expenses increased $1.2 million or approximately 2% to $54.2 million compared with the second quarter last year including $3.4 million of incremental expenses generated by the Northern New England division. As a percent of sales SG&A expenses were essentially flat including the new division’s sales and expenses. Our free cash flow which is calculated by taking net cash flow from operations less net CapEx and capitalized software, generated cash of approximately $74 million for the first half of 2017 compared to a net cash usage of 81 million for the same period in 2016. The primary driver of this improvement was the sale through of cigarette inventory from the end of 2016 in both the U.S. and Canada. We increased our purchases of inventory at the end of the last year in order to maximize incentives. Free cash flow last year was impacted by increases in working capital to support business growth. We expect free cash flow for 2017 to be between $40 million and $60 million subject to yearend LIFO and other inventory buys. Our total long term debt declined to $231.5 million at the end of the quarter compared to $347.7 million at the end of 2016. The free cash flow generated so far this year was used to pay down our credit facility. The debt balance at the end of July was $487 million which reflects additional borrowings to fund our asset purchase of Farner-Bocken and incremental working capital. Capital spending totaled $30.8 million for the first half of 2017 compared to $22.8 million for the same period last year, the increase is due primarily to investments in a new consolidation center in the North East and investments needed to service the new Wal-Mart business including leasehold improvements and additional tractors and trailers. We announced our quarterly dividend of $0.09 per share to be paid on September 15 to shareholders of record on August 29. Now turning to our guidance. At high level our new guidance includes a contribution from the Farner-Bocken acquisition and assumes an additional cigarette holding gain. From the top-line perspective we now expect total sales to be between $15.6 billion and $15.8 billion which represents 7% to 9% year-over-year growth rate. Our EBITDA expectation for the year is now between $152 million and $159 million. This translates to GAAP EPS of $0.96 to a $1.03 or EPS excluding LIFO expense of $1.20 to $1.27 per share. We continue to expect approximately $80 million of LIFO expense and 46.5 million diluted shares. We also estimate our tax rate will be approximately 37.5%. In addition to the assumptions I have mentioned, I would also like to cover some additional expectations in our guidance. First, we expect continued soft convenience sales overall. However, we believe there is opportunity to grow our higher margin categories which we have assumed in our revised guidance. Second OpEx reductions, expense reductions are two struggling divisions. Our low end guidance assumes a slight improvement on OpEx levels for the two divisions and at the high end better improvement but not dramatic reductions in OpEx. And third OpEx improvement related to our initiatives to reduce costs from our first half of the year run rates. This includes warehouse productivity improvement between $1 million and $3 million. Transportation mileage reductions also between $1 million to $3 million. SG&A expense reductions between $2 million and $4 million. And savings of approximately $3 million by delaying certain corporate projects. Lastly, our guidance does not include the expected non-cash pension expenses related to the planned termination of our pension plan. As a reminder in September of 2016 our Board of Directors approved the termination of our qualified to fine benefit pension plan. We do expect to settle and terminate the plan in Q4 and incur non-cash charges in the range of $17 million to $19 million which represents unamortized actuarial losses that have accumulated over the life of the plan. Terminating the pension plan will lower future expenses and eliminate risk of rising premiums. We will provide an update on the planned termination later this year. To summarize the first half of 2017 can be characterized as a very challenging operational environment. We are very focused on accelerating and executing on our core strategies. We believe this combined with the OpEx initiatives we have put in place will enable us to have a strong second half and generate the results we are expecting. We are very confident about the long term course we are on to drive growth and improve 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 overtime and to help our customer 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 Instruction] And we have our first question from Ben Bienvenue from Stephens, Inc. go ahead sir your line is open.

[Unidentified Analyst:]

Yes. Thanks this is Dan on for Ben. Thanks for taking the questions.

[Thomas Perkins:]

Hi Daniel.

[Unidentified Analyst:]

Hey. So Tom, I guess starting on California you touched on it and obviously put pressure into trends in the quarter. What do you see relative to your expectations and then can you remind us typically how long demand takes to rebound after the initial follow-up? After –

[Thomas Perkins:]

Yes. So the estimates for the cotton decline and this came from the manufacture so we sort of followed with their guidance, it was about 18% to 20% to begin with right and then you would normally see that to come back probably over the six to nine months back to 10% to 12% decline but never of course, never gets back to what it was. I think what we saw since the increase went in, we saw greater than 22% decline in those cottons, which was higher than we expected and it really hasn't started to reduce in a significant manner so definitely that is driving the reduction in our sales and also profits in particular in our California stores.

[Unidentified Analyst:]

Okay. Great and then I guess maybe touching on Farner-Bocken how long you anticipate that is fully on boarded and integrated into your operations and then maybe because of the different merchandise mix how should we think about the cigarette, non-cigarette mix going forward? Is that going to be a meaningful driver or change from your historic –

[Thomas Perkins:]

Yes, good question. I think right now Farner-Bockenis a very well run organization and operation. They do a tremendous amount of volume. They have very good warehouse systems. So I think our integration and conversion of the systems will probably be out 18 months if not longer only because we have great confidence in their systems and how they go to market. What we do know is that we do have opportunities through behind the scenes to sort of if we start to move customers among divisions or something we can do that through the computer versus having to actually do at broad scale conversion of their system. I think secondly is, they are from 5842 permit – 42% mix is probably will be the highest from a non-cigarette perspective of any divisions we have today we may have one that's probably the same level. So I think there is opportunity with them one in our FMI surveys and two in looking at vendor consolidation but they do a very good job on non-cigarette in particular in food services. So we don't anticipate, we hopeful will see improvement in the non-cigs from those two programs but I think that we are going to expect them to continue to those non-cigarette categories like they have been doing,

[Unidentified Analyst:]

Okay, great. Well that's it from me, good luck.

[Thomas Perkins:]

Thank you.

[Operator:]

And we have our next question from Chris Mandeville from Jefferies.

[Chris Mandeville:]

Hey guys.

[Thomas Perkins:]

Hey Chris.

[Chris Mandeville:]

Tom, so I guess I am still trying to understand what may have changed post Q1 and then the non-cigarette comp itself really holds in there quite well. But I am just trying to understand really where the sales fall off came and if in fact there was, it sounded like it was broad base not really just isolated to California if there is more of a traffic issue for the channel as a whole and if that happens to be the case then I guess I am kind of curious how you think about that opportunity to really grow the non-cigarette side if we're not necessarily seeing folks broadly go into the convenience store these days.

[Thomas Perkins:]

Yes. I think the surprising thing from the first quarter was the follow-up in the cigarette cartons. Definitely we were impacted by the California excise taxes. That definitely drove. And we also had excise tax increases in Pennsylvania. So, if we exclude the Pennsylvania, you exclude the California, our same-store current sales would have been down by 3.5 which is what we have been running a little bit higher fall up in normal, but it would be normal but again those had significant impact on our sales. The second thing is in different discussions I've had with different people, there definitely is a follow-up in store visits. And there I still haven’t got I think we all read articles in the Wall Street Journal and different trade publications but there still hasn’t been one silver bullet, this is the reason why traffic is down now. What I do know and talking to people is that dollar stores, Walmart stores are seeing an increase in store traffic, on store visits. So, maybe some of the volume is going that way. The last thing I think when we talk about growth in noncigarettes is again the opportunity for convenience stores is to attract more people into their stores from the gas pumps. And again, today less than 40% of the people filling up go into the stores. And so by with our core strategies, making sure we have the right product, we have the right mixture of freshen and fresh and natural products and there to get more people into those stores. And so, I still think there is opportunity that grow inside store sales with our current customers with the acceleration of our core strategies with them.

[Unidentified Analyst:]

That's helpful. And maybe following up on that in the context of this weaker sales backdrop. What are you hearing actually from the retailers themselves in terms of just the level of competition and then actually even at the wholesale level for that matter?

[Thomas Perkins:]

I think definitely from we have heard from, I talked with wholesaler, we have heard from other wholesalers that definitely it's everyone is feeling the pain of the weak sales environment. Now, and I think from a backdrop is last first half of last year was very strong for the industry. And so, again the comps were a little higher but definitely people are feeling the pain. And again when people feel the pain on shop sales, some people tend to get crazy on prices, mostly independent wholesalers but we haven’t seen too much of that. We from a competitive, it's been pretty calm right now. From a retailer perspective, it is interesting because there are some retailers that are really doing really well. And then maybe they go to market strategy and maybe that they're opening stores but then there's other ones that just are seeing softness. And even though Casey's isn’t a customer large, you can look at the Casey results and you can see that there is they had soft sales and you have Murphy which is customer, they had growth in their non-cigarette but not to the level they anticipated. So, it's pretty widespread and so it's just a matter of that we just we as a company, 1} we have to get our expenses in line with the soft sales environment and so that's really our focus for the back half of the year is we have to really leverage our operating cost to get more efficient so we can grow profits in this soft retail environment.

[Unidentified Analyst:]

And is there any ability on the quarter to somehow maybe quantify and impact the earnings from those two large two customer losses or there may be a productivity matric that you could share with us to kind of illustrate changing efficiencies?

[Thomas Perkins:]

Yes. What I can do and again I think that, there's two divisions. One division has in stabilize and improve performance drastically about two months, two, 2.5 months ago. So, but there now is really trying to get the new employees productive, getting the right mix of employees, et cetera. Second one, really fell off the rails in going into summer and we spent a lot of money to get people in from outside other divisions to really write the ship. And the good news is the service out of that division has is excellent, actually right now for the last six weeks and we also change leadership. But from a cost perspective, we plan, so we knew the volume we plan expenses to handle that volume and right now we're about 30% above that plan cost which translates close to $8 million to $9 million above what we thought we are going to spend. And that's a big number and that's why I think one is we're focused right now on providing customers in those divisions the best service we can. Because that's critically important to us right now. But we're also focused on improving the efficiencies in those divisions. So, first priority, service, second priority is to improve the efficiencies. But again, that's why I point you the fact that this is a 2017 event. We have the right people in place, we're doing all the right things, it's just a slow go and I'm looking forward to better things from those divisions in 2018.

[Unidentified Analyst:]

Great. And just one last one for me and I'll hop back in the queue here. It was nice to see that the Canadian profitability continue to improve. But what happened on the sales side with that being down 7%?

[Thomas Perkins:]

There was, there has been a lot of acquisitions up in Canada. So, I'll say a couple of things. One FO was purchased by Circle K who start in the East and by 7/11 in the West, so we lost the FO business which is below our threshold to report that. But the second thing is we're still seeing softness in particular in the Alberta market place that still hasn’t recovered. And the last thing there is, they have had significant price increases on cigarettes from federal excise as well as just as manufacture price increase. So, that definitely their same-store carton sales are much lower. The decline is much greater than it is in the States. So, those three sort of our drive in front of that sales decline.

[Unidentified Analyst:]

Alright, thanks again and best of luck in the back half.

[Thomas Perkins:]

Thanks.

[Operator:]

And we have our next question from Andrew Wolf from Loop Cap.

[Andrew Wolf:]

Hi.

[Thomas Perkins:]

Hi, Andrew.

[Andrew Wolf:]

Yes. Good morning to you guys. So, the EBITDA if you take out sort of look at what found our bulk and might be contributing and you just kind of round it. It looks like it's roughly about a $20 million reduction. I think you just spoke $8 million to $9 million of already being above cost in the first half. But could you give us a sense how that does break out internally versus your expectations, first half, second half, is that like 10 and 10 or is it different. And I assume you expect it to improve third quarter to fourth quarter. But just a sense of how that miss your internal expectations kind of played out first half and how you think it'll play on second half?

[Thomas Perkins:]

Yes. I think if, Andrew it's a good question. The cost overruns and the slow on reaction to the sales softness, probably the first half contributed larger to our overall miss, then the back half of the year will be. Okay. Third quarter will be less robust with fourth quarter really being more robust because basically will be getting full impact of all of our initiatives. And so, that's pretty much what I can tell you from that perspective.

[Andrew Wolf:]

Got it. Okay, that's exactly what I was looking for. And so, you've kind of given us a pretty decent view until the 7/11 issue. And sounds like that's still the majority of not just the first half but also the back half just sort of the workout of that. So, I check that I understand it right. And that could you just give us a little more sense what are the other issues, sounds like obviously cigarettes are a lot more in California, so that's real money. Is there anything else going on either in mix or just a lack of inflation to make money on the buy. One other thing that occurred to me is maybe some of these centers were at last some of the business in Kroger and Circle K, maybe their capacity utilization changed and they have to adjust to it. So, just a sense of allocating it to everything other than.

[Thomas Perkins:]

Sure, yes. And I think that's the way I look at the businesses. We have these two divisions that are sort of in a there is a boundary around those. And we know we're spending a lot but we're going to fix them and we'll get those back to profitability. We definitely know the impact of the California tax increase greater than we had or longer -- the decline is been longer or greater and longer than we had anticipated this time. But definitely I'll get back to some normal range. Then this, I think the one thing that we've seen is this overall just soft retail sales and what does that do. It means that we drive into our stores with our trucks with less queues which means less profit. And so, from a relationship perspective, your profits are going down but your cost to deliver are the same. So, that's a bad formula and so that's why we're really focused on that reroutes to reduce the number of miles we're driving. Secondly is because we've had so much growth over last year, we've added a lot of new employee store organization. And so, the throughput which I'm used to from a productivity perspective, it's not where it should be and that's why we really put initiative and to increase that. Because again it's pretty interesting. We pick about on an annual basis we select about 750 million pieces. And if was to improve just one piece across the system on an annual basis, that's like a $1 million saving. So, it's pretty dramatic as to what kind of cost reduction we can do by focusing on that matric. The last pieces and talking about those divisions that did lose the business, now we were able to remove the variable cost that we're associated with those large accounts and the divisions did a great job of that. Now, their job is to grow the sales back and to offset the fixed cost. I knew for instance in Tampa that I was going to investment spend because they'd had the biggest loss of volume. That I was going to have fixed cost, I was going to cover with volume but it's going to take longer to get leverage out of there. So, but because of the environment soft and we're not picking up account as at a fast enough pace, that sort of drive in some of those sales short falls in those divisions.

[Andrew Wolf:]

Thank you, again. And just quite last on Rite Aid, you mentioned talking. Does that include that roughly 2200 stores that they're agreed to sell to Walgreens or does not?

[Thomas Perkins:]

Yes. Let me see if I can phrase that, I'm not --. I believe that the transition when that purchase takes places which transition of those stores of Walgreens will probably not take place immediately. So, the likelihood that we continue to service those stores for a while is probably high.

[Andrew Wolf:]

Okay, great. Thank you.

[Thomas Perkins:]

Uh-huh.

[Operator:]

Thank you. And our next question comes from Chris McGinnis from Sidoti & Company.

[Chris McGinnis:]

Good morning. Thanks for taking my question.

[Thomas Perkins:]

Good morning.

[Chris McGinnis:]

Maybe just on the sales side. If you could just walk through your portfolio, maybe there's a lot of moving pieces with the contracts from last year and maybe just on a same store basis outside of cigarettes, how that looked across the portfolio. And then secondly I guess within that, our regionals performing better and maybe the independence in near portfolio, I know you mentioned a couple of competitor.

[Thomas Perkins:]

Yes. It's interesting because we definitely dive into the number especially when all the time but in particular when we see a reduction of that. Right now our overall for the second quarter, our non-cigarette sales were up almost a --.

[Christopher Miller:]

4.5.

[Thomas Perkins:]

4.5%. And it's really interesting because what we do is we look at it by category. So, we definitely saw large increases in tobacco products. We saw large increases in dairy and cigars. And really, those are being driven the OTP stuff is being driven by excise tax increases, California, Pennsylvania, et cetera. So, as you automatically the inflation of that gives you the same store sales. And then because of the rolling our dairy to Rite Aid, we've actually got a really good bump in same-store volume for the Rite Aid stores. And so, but when you look at other categories for instance snacks which has really been a booming category for the industry. That is pretty much flat. And so, it's really all over the board. When you look at it from a regional from a chain perspective to an independence, there we've seen a slightly better same store sales in our independence than most of the chain but pretty much on par. They're pretty much growing at the same rate.

[Chris McGinnis:]

Okay. And then secondly, I know there is a lot of kind of initiatives just outside of the two warehouses. Can you just talk about how I guess you focus on the initiatives you announced on the OpEx improvements in some SG&A savings and then integrate the acquisition along with improving the operations? Can you just give just a take into how you're focused on that over the next six months? Thank you.

[Thomas Perkins:]

Right, yes. Sure. From an acquisition with Farner-Bocken, the nice thing about Farner-Bocken is it is a well-run organization, well-run company. So, we really don’t have to do a lot right now. They are operating as they have, they are focused on their drive in their volume, their profits et cetera. And so, their division at Core-Mark but and they're doing a very good job. So, right now we don’t have to focus a lot of energy and effort on them except to just get to know their company, get to know their people, get to know their fleet, et cetera. But pretty much there they are a standalone division at Core-Mark and they're running very well. On the flip side what we've done is because we're decentralized, it's a matter of gathering our division presidents who run the divisions and along with our corporate logistics team and saying here are the new initiatives that we're putting in place. And then we provide guidance, we provide training, we provide step-by-step instructions on how you can increase your warehouse productivity. Here's the rewrap process you need to take through, go through to reroute your trucks. And then, on a weekly basis, we have a score card that we actually track the initiatives. So, for instance I know that through last week I think our miles we're starting to see about a 4.2% declined in miles from what we were doing from our baseline which was through April I believe. So, we are laser focused on those initiatives on a weekly basis. It goes from the divisions, the SVPs, with their own regions and their division presidents and then myself and my senior management team and we're focused on that every week on seeing improvements, asking best practices who is doing -- what's working, what's not working and really focused on those outliners. So, we definitely are laser focused on those initiatives.

[Chris McGinnis:]

Thank you, for taking my questions and good luck with the back half.

[Thomas Perkins:]

Uh-huh, thanks Chris.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Ben Brownlow from Raymond James.

[Ben Brownlow:]

Hi, good afternoon guys.

[Thomas Perkins:]

Good afternoon.

[Ben Brownlow:]

Just to clarify on the SG&A goal. I think you said a 7% cut second half versus the first half. Does that include the $2 million to $4 million in G&A that you outlined later and the $3 million in savings from the delaying corporate projects?

[Thomas Perkins:]

So, what I did, I sort of averaged the 2% to 5% on general cost and 7% and 10% on selling cost. The 2% to 4% is represent that 7% reduction. The 3% is something else.

[Christopher Miller:]

It's incremental, yes.

[Thomas Perkins:]

It's incremental.

[Ben Brownlow:]

Okay, so the $3 million and the delay in corporate projects. What projects are specifically being pushed out?

[Thomas Perkins:]

One of the ones that we did is as we were going to convert Pine State, our Pine State acquisition another New England division to our systems in the back half of the year. But what happened in that area was a whole seller went out of business. And so, neither New England was able to pick up about a $120 million of business quickly in the May/June time frame. And so, we felt it was prudent to not have those new customers get onto one system and then convert to our systems and have those customers and convert to another system. And so, we decided to postpone that till next year. And the other one was --.

[Ben Brownlow:]

That's all I have, thanks.

[Thomas Perkins:]

Okay.

[Operator:]

And we have no further questions at this time.

[Milton Draper:]

Alright. Thank you for your interest in Core-Mark. If you have any additional follow-up questions, you can call us at 650-589-9445. Thanks.

[Operator:]

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