Core-Mark Holding Company, Inc.
Q4 2016 Earnings Call Transcript

Published: 1 Mar 2017

[Operator:]

Welcome to the 2016 Fourth 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 Gray Draper:]

Thank you, Operator, 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 fourth 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, 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 fourth 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, everyone. Thanks for joining today’s call. I think it is fair to characterize 2016 as the year of tremendous growth for Core-Mark. We added over 2,800 stores to our customer base with new business and approximately 4,000 additional stores with the Pine State acquisition. In total, we added 1,000 new employees to support our growth. We also implemented new financial and human resource, information systems during the year which added significant challenges especially during the period of high growth. I’m so proud of this organization for meeting those challenges and for all they have accomplished in 2016, it really has been an extraordinary year. Moving on to the quarter, during the fourth quarter we saw a strong sales growth of 36%, with good performance across all categories including cigarette, non-cigarette and strategically important areas like food and fresh. Higher sales volumes resulted from all of the market share wins for the year including Murphy U.S.A. in 7-Eleven as well as the additional volume from our Pine State acquisition. I would point out that non-cigarette sales while solid were at their low point of the year in the fourth quarter but these categories still performed well for us despite the relatively weaker market demand. Overall, however our sales growth rates are significantly higher than the company’s historical norms. Non-cigarette sales grew about 25% driven by market share wins and same-store sales growth of over 3.3%. This is slightly better than what we saw in the third quarter, the U.S. same-store non-cigarette sales grew 3.7% this quarter, while Canadian same-store sales were down less than 1%. Looking specifically at strategic priorities, we also saw healthy growth in food which grew 20% and fresh which grew over 18%. These categories are part of our core strategies and will continue to drive future earnings growth. It is imperative that the organization remain focused on these products which are indispensible to driving new customers into the stores and providing the consumer what they want. These categories are also offsetting the slowing of the centre store. Our same-store cartons have decline of 2.5% which was lower than the 3.3% decline we saw in the third quarter. The industry decline was about 3.5% for the fourth quarter. Warehouse and delivery expenses increased about 27% including expenses generated by our new acquisition while our sales increased about 36%. We really stretched our operation team in order to execute on the delivery of the tremendous increase in volume, the doubling of our Sacramento division volume from the addition of the 7-Eleven stores in Northern California did cause us to spend more than we anticipated and contributed to our guidance miss. However, the money spent ensured a successful roll out of those stores. As a percentage of sales, these expenses decreased 23 basis points. We did leverage these expenses overall well to increasing our operating activities in the fourth quarter. We increased the cubic feet of products shipped by 15%, increased the deliveries by more than 18% and increased the miles that we drove by 16%, all of these are excluding the Pine State acquisition. We saw more leverage in SG&A expenses which are more fixed in nature. These expenses grew only 4% on a 36% increase in sales. As a percentage of sales, these expenses declined 41 basis points. The bottom line is our EBITDA was up 39% for the quarter and up 13% for the year or 20% excluding last year’s large stamp gain. Although we are able to leverage some expenses, we did miss our profit goals for the year as the constant on-boarding of new business throughout the year led to some operational inefficiencies. So when all is said and done, we did have a record year while strengthening our platform for long term growth or investing in the systems that will create future efficiencies. I am disappointed we lost some money on the table but we accomplished a lot in a remarkable year and we provided excellent service to our new customers. Now to update you on our core strategies, our vendor consolidation and fresh initiatives had an excellent performance for the year. These core strategies continue to differentiate us in the markets in which we compete. For the year, we generated $163 million in incremental BC [ph] on fresh sales. This is by far the highest incremental sales from these two strategies that we have ever produced. As a reminder, our original goal for the year was $100 million of incremental sales for these core strategies. This performance is really outstanding so congratulations to everyone who help make this happen. The penetration of the eight fresh categories that we track and grown over the last year at a healthy pace with milk now at 50% penetration and fresh juices over 56%. This was accomplished despite the enormous distraction and challenges of servicing so many new customers that affected virtually every division. We must continue to focus on execution of these critical strategies that move our customers into the fresh, food service and good for you products. We have many food service programs that address those needs and we continue to develop new food programs to help our customers adjust to the changing consumer demands and to help them thrive in the competitive environment. We have a few new programs under development so far this year to add to the ones we mentioned on our last call. We have a new fountain program focused on Hispanic products. We will be offer a horchata as well as several fruit-flavored aguas frescas to enhance customer beverage offerings with high-quality authentic tasty products. In addition, we are developing a very high-quality fried chicken and sides program from customers who prepare food on-site that we find exciting. Our core solutions group, who are responsible for the FMI surveys, continue their excellent work. They have conducted over 3,000 surveys for the year with over 60% acceptance rate. We continue to see a meaningful reduction in churn rates and our non-cigarette sales growth rates are significantly higher than stores that have not participated in this program. As to our acquisition strategy, we are having active dialogue with a number of targets, but, of course, we have not included any of this in our guidance as transactions can take uncertain turns at any time. Over the past couple years, we have announced some major customer news both the plus and minus side. I will provide some prospective on these in a moment, but at a high level we are excited about the moment we have in the marketplace and the opportunities we see to add share in 2017. Losing a valued customer is very disappointing, but we are in a competitive business. Most importantly we feel good about our competitive advantages in the marketplace and our ability to win profitable business to drive incremental value for our shareholders. As we announced late last year, we have signed a contract with Walmart where we will be the new supplier to 530 stores in the West. We will be servicing stores in Arizona, California, New Mexico, Nevada and Utah. The categories we will be delivering include certain snacks, OTP, and cigarettes, but more than 65% of what we will be delivering will be candy. Our initial focus will be on executing this roll out in an efficient manner, but we expect that once it has been successfully achieved, there will be additional opportunities to expand the relationship both vertically and geographically. We are very excited about this opportunity to partner with the world's largest retailer. As you probably are aware, we retain and continue to service 1,900 Couche-Tard Circle K Stores. These include the stores in Canada, the Western and Southwestern U. S., plus the stores out of the 3PL in Arizona. When Couche-Tard closes on the acquisition of CST, we will continue to service CST stores and run the 3PL in San Antonio. The transition of the approximately 1,100 Circle K Stores we did not retain was completed in January. In January, we announced the loss of our contract with Kroger Convenience. The transition of these stores is expected to occur early in the second quarter. We’re surprised and disappointed with this loss especially because we are providing value-added products and services that we do not believe can be matched by the new supplier. We operate in a competitive industry, but we must remain discipline in our approach to these bids. As we see no value in adding to the top line, if we do not add to the bottom line and generate the returns we need. We are entering 2017 with only one major contract up for renewal this year and none of the c-store space. We do see opportunities in the marketplace to an attractive new business and that is where we are focused entering 2017. As to what we are expecting in 2017, we are forecasting our revenues will increase by about $1 billion at the high-end with EBITDA growing between 9% to 14%. We will need to leverage our operating expenses although on-boarding and conversion costs will continue throughout the year. Bottom line is we expect another healthy year of profit. In summary, I am very proud of this organization and our accomplishments in 2016. There are not many organizations that could have achieved the success we did. We did have a few bumps in the road, but overall we provided excellent service to our customers. The exceptional pace of growth and expansion of our business has really been impressive this year. The growth will continue into 2017 with significant new business added. We will continue to focus on selling the higher margin strategic products that helps our customers be relevant and more profitable and leveraging our operating expenses as we absorb the large volume of new business. I remain very optimistic that our core strategies and focus on exceptional customer service will continue to drive customer gains. Our power industry remains strong and stable as it has grown year after year. As in the past, we continue to invest in our people, our buildings and our systems to support our business and its future. And with that, I will hand the call off to our CFO, Chris Miller.

[Chris Miller:]

Thanks, Tom, and good morning, everyone. I'd first like to review our results for the fourth quarter and then provide a few details around our guidance for 2017. GAAP EPS for the fourth quarter increased to $0.41, compared to $0.38 last year. Excluding LIFO expense EPS was $0.45 for the quarter compared to $0.28 last year reflecting a 61% increase. Excluding incremental cigarette holding gains of $0.03 per share and other one-time items, which were provided in the supplemental table to our press release, EPS for the fourth quarter increased approximately 39%. As Tom highlighted, we had a very strong quarter and sales growth across the board despite some weakness in retail demand. Total sales increased 36.3% during the fourth quarter of 2016 or approximately 27% adjusted for the Pine State acquisition, which we now refer to as our Northern New England division. Sales to Murphy U.S.A. combined with other market share gains including 7-Eleven accounted for the lion's share of the remaining increase in sales for the quarter. Cigarette sales increased approximately 41% driven by a 35.6% percent increase in carton value. Our same-store cigarette carton sales were down 2.5% reflecting a sequential improvement from what we reported for the third quarter. The decline was 1% below the decline reported by cigarette manufacturers for the fourth quarter. Non-cigarette sales increased 25.2% during the fourth quarter led by OTP sales, which grew nearly 39%. In addition, we saw healthy growth rates in our food commodities, which combined grew over 20%. The increase in OTP was again driven by the addition of Murphy U.S.A., other market share wins and the continued shift to smokeless moist tobacco products. Our fresh categories continue to generate solid growth while home meal replacement items saw the largest increase among the other food categories. Gross profit increased $28.9 million or 17% in the fourth quarter of this year compared to last year's fourth quarter. The gains we made in strategic area with higher margins such as food and fresh were outpaced by stronger sales growth in cigarettes and OTP. We are pleased with the increase in our non-tobacco underlining margins driven primarily by the success of fresh and our other marketing programs. Driving a little deeper into gross profit, our results for the quarter included LIFO expense of $3.2 million, compared to LIFO income of $7.3 million last year. The LIFO income in 2015 was driven by significant deflation in two of the three PPI indexes we use to measure LIFO at the end of every year. In addition, during the fourth quarter, we recorded $6.9 million of cigarette holding gains compared to $4.7 million in Q4 of 2015. Although, we discuss cigarette holding gains each quarter given their magnitude, they represent incremental gross profit that we work hard to maximize. The increases in 2016 was driven by the significant growth in cartons sales primarily due to the addition of Murphy. Also gross profit for the fourth quarter of 2015 included a cigarette stamp holding gain of $0.7 million. Remaining gross profit, which excludes holding gains and the impact to LIFO, increased $37.9 million or 24.1% for the quarter. Remaining gross profit margin decreased about 50 basis points to 5.1% driven primarily by the addition of Murphy U.S.A. given its substantially higher sales mix of tobacco products that have significantly lower margins. Cigarette remaining gross profit increased $13 million or 28.8%, while cigarette remaining gross profit margins decreased 21 basis points due mainly to the addition of Murphy U.S.A. volume. Non-cigarette remaining gross profit increased $24.9 million or 22.2% compared to the fourth quarter last year. Remaining gross profit margins for non-cigarettes decreased 30 basis points during the quarter. Excluding the impacts of our largest new customers and our acquisition, remaining gross profit margins for non-cigarettes were up over 15 basis points. Margins were also compressed by approximately 17 basis points due to the increase in OTP sales after excluding the new business. We are pleased with the increases in our non-tobacco margins during 2016, which were driven primarily by the success of fresh and our other marketing programs. Total operating expenses increased $27.1 million or 19.2% for the quarter on sales growth of 36.3%. As a percent of sales, operating expenses improved over 60 basis points in the fourth quarter, about half of the improvement was due to the overall shift in sales mix to cigarettes which have higher price points than non-cigarette categories. The remaining improvement of 30 basis points was due to overall leverage of our expenses. We did incur approximately $3 million of identifiable cost relating to the on boarding of 7-Eleven compared to $1.4 million of startup cost in Q4 of 2015. Warehouse and delivery expenses increased $24.5 million or 26.7% during the fourth quarter. The increase in these expenses includes $6.7 million of operating expenses from Northern New England and start up cost of $2.7 million related to the on boarding of 7-Eleven. In addition, warehouse and distribution expenses in certain of our divisions were higher due to short term inefficiencies driven primarily by the ramp up of new employees to support significant increases in sales volume. As a percent of sales, warehouse and delivery expenses decreased 23 basis points due primarily to the shift in sales mix. SG&A expenses increased $1.9 million or 3.9% compared with the fourth quarter last year including $4.9 million of expenses generated by our new Northern New England division. As a percent of sales, SG&A expenses decreased approximately 40 basis points of which 10 basis points was due to the shift in mix to cigarettes from the new business. Leverage of our SG&A expenses drove the remaining 30 basis points of improvement as a percent of sales. Our effective tax rate was 37% for the fourth quarter of 2016 which was down slightly from the fourth quarter of 2015. For the full year, our effective tax rate was 36.6% which came in lower than we expected due primarily to adjustments of prior year estimated expenses. Our free cash flow, which is calculated by taking net cash flow from operations less net CapEx and capitalized software was a net usage of approximately $160 million for 2016 compared to net cash provided of $38.2 million for the same period of 2015. Net working capital used in operations was $226.1 million compared to the use of cash of $36.8 million for the same period last year. This increase in usage was driven primarily by additional inventory and receivables to support our two large new customer wins, incremental inventory purchases to maximize rebates for manufacturers and increases in capital expenditures. CapEx totaled $54.3 million for the year, slightly above our plan of $50 million due to the timing of certain projects. This compares to $30.3 million of CapEx we spent in 2015. The increase is due primarily to the opening of our new building outside of Las Vegas and additional logistics equipment to support our growth. Our long term debt was $347.7 million at the end of the year compared to $60.4 million at the end of 2015. The increase was driven primarily by the investments in working capital to support our growth which I mentioned earlier and the approximate $88 million we spent to acquire the assets of Pine State. During the year, we returned $24.4 million of cash to shareholders in the form of cash dividends and stock repurchases. Cash dividends were $15.5 million and we spent $8.9 million for stock repurchases. In addition, our announced our quarterly dividend of $0.09 per share to be paid on March 28 to shareholders of record on March 13. To summarize, we have a strong quarter growing our top line by approximately 36% and our adjusted EBITDA by 39%. 2016 was a record year with sales growing in excess of 30% to $14.5 billion which drove record adjusted EBITDA of over $152 million. This was accomplished despite considerable investment in our business. We feel very optimistic about where the company is positioned, they might continue to see leverage of operating cost as an opportunity. This was a transformative year for the company and we anticipate 2017 will be an exciting one as well. I would now like to review our guidance for 2017 which we provided in our earnings release. At a high level, the guidance reflects the net market share gains made last year which combined with new market share opportunities this year position us for an increase of revenues between 5% to 7%, and adjusted EBITDA improvement between 9% and 14%. The leverage we expect in adjusted EBITDA is due primarily to a favorable shift in sales mix to non-cigarettes driven primarily by our core strategies and leverage of our operating expenses. I’d also like to cover some underlying assumptions in our forecast. First, our guidance reflects on own contracts, contract gains and losses in a more normal level of organic growth. We expect free cash flow to range from $30 million to $50 million for 2017. We’ve assumed in 11% decline in cigarette cartons sold in California due to the increase in exercise taxes approved last year which takes effect on April 01. However, given the significant increase in tax per carton, we estimate that our revenues will increase by approximately $150 million net of the reduction in volume. Also, we estimate a reduction in pretax income of approximately $1.8 million for the year resulting from the tax increase. We will work hard to offset this through other market share gains or other opportunities. We expect $15 million in cigarette holding gains in 2017 which assumes two price increases during the year consistent with the last several years. We have not included any other significant holding games in our guidance. Lastly, we have not included in our guidance any impact from acquisitions or pension settlement expenses. As I mentioned on our third quarter call, we are working on the termination of our defined pension plan which we expect to complete later this year. We will update you on timing and impact as these events unfold. Overall, our guidance reflects our continued bullish view of the business for 2017 as well as for the company long term. We believe our core strategies coupled with our flexible go-to-market approach uniquely position us to continue to capture market share and to 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 please.

[Chris Mandeville:]

Yeah, hey guys. Good morning. It’s Chris Mandeville from Jefferies.

[Thomas Perkins:]

Good morning, Chris.

[Chris Mandeville:]

Good morning, Tom. Tom or Chris for that matter, just given all the puts and takes in some of the major chain business, is it possible to provide any additional color in terms of what we should be thinking about for the remaining gross margin coming 2017?

[Thomas Perkins:]

Go-ahead.

[Chris Mandeville:]

So with the Circle K stores and Kroger wells that will actually help somewhat in the non-cigarette margins. So I think we do – putting the large customers aside, we do expect to see the 20 basis point to 25 basis point improvement. It’s a little bit higher in 2016 but for 2017, I think 20 basis points to 25 basis points is reasonable to expect.

[Chris Miller:]

Yeah, I think the other thing too Chris, we’ll start lapping the Murphy business in February, so then you’ll see a more normalization from a comparable perspective to 2016. So you’ll have a more – it will be more comparable than we had when we were comparing 2015 to 2016 this year.

[Chris Mandeville:]

Okay, that’s helpful. And then on the sales front, it was nice to see that you guys had some sequential improvement on the one year stack for your comps but did it moderate a little bit on the two year. Can you just talk a little bit about what you’re seeing from your – or hearing from your c-store customers and then possibly provide a little bit of color on what you’ve seen in January as we’ve heard pretty much the broader retail landscape has been fairly weak that month?

[Thomas Perkins:]

Yeah, I think that – what I read from our customers or from other retailers in the c-store space is that definitely sales slowed down on – in the merchandise categories. CSC came out with their and they also reflected that. So, as goes our customer, we follow suit. But I think the thing that assist us and continue to see the same-store sales growth is our focus on our core strategies with vendor consolidation and fresh, again, it’s trying to take more of that product. I think – I don’t allow anyone and myself to use weather as a cause of sales declines, but definitely I think in many parts of the country, there has been some abnormal weather happenings from a freak snowstorm up in Portland, of course the torrential rains we've had in California, but at the end of the day, I think that we are focused on achieving our sales growth and really growing ourselves at a faster phase than the c-store industry does on a normal basis. So, that’s really what our focus is and it comes down to executing on our core strategies.

[Chris Mandeville:]

Okay. And then, Tom, in your intro you mentioned that there was one large contract that was up for renewal this year, obviously, everyone knows that’s Rite Aid. Just trying to understand as we approach the pending merger deadline between themselves and Walgreens, does that prohibit you in any manner as it relates to how you go through the process and what means for your ability to expand with Rite Aid if the merger is not approved by them?

[Thomas Perkins:]

At this point, no. Our focus is to get a renewal of the contract for the same terms, three-year terms that we have today. Because I think at the end of the day is that they are not going to be converted over to Walgreens immediately, so I think we have an opportunity to hold on to the business for – we are going for a three-year renewal with them. Secondly, we are in the process of expanding categories. In fact, we’ve added dairy for their Southern California and Northern California stores this month. So we are now delivering their fluid dairy product to their stores with their deliveries. So we continue to have those discussions on expansion. So next 30 days will be interesting with the Rite Aid folks, but I still feel optimistic that we are going to get a renewal and we will be – they will continue to be our customer. And then when the transaction happens, we will have, hopefully, some opportunity to have further discussions with Walgreens.

[Chris Mandeville:]

Okay. That’s all good to hear. And then, I guess, the last one for me is, for Chris, you mentioned the tobacco holding gain expectation, but no other gains. So that obviously implies that the current guidance does not consider any type of candy gain and is there anything to read into that necessarily?

[Chris Miller:]

Well, no, first it does not – yeah, there is no candy holding gain and candy has kind of been on a three-year cycle, so this would be the third-year if in fact that happens and the trend holds. So now, no, I wouldn’t read into it though, I wouldn’t – we are not implying that there will be one, although there could be.

[Chris Mandeville:]

Okay. And I apologize, just one quick more – one more quick one, excuse me. LIFO, I may have missed it, but did you give a number on 2017 expectations yet?

[Chris Miller:]

It’s $18 million.

[Chris Mandeville:]

Okay. Thanks so much.

[Operator:]

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

[Ben Bienvenue:]

Yeah, thanks, good morning.

[Thomas Perkins:]

Hi, Ben.

[Ben Bienvenue:]

So, just to clarify, in your guidance for 2017, given the expiration for the pending renewal of the contract at Rite Aid, is it assumed in your guidance that the Rite Aid business persists or that it terminates in April?

[Thomas Perkins:]

It persists.

[Ben Bienvenue:]

Okay.

[Thomas Perkins:]

Yeah, that’s – we normally don’t include something in the guidance that we haven’t lost, so we are optimistic and our focus is to renew it.

[Ben Bienvenue:]

Okay, great. And then I’m curious, your thoughts on the implications of CPG companies exiting the DSD business, I know we heard in early February that Kellogg's intents to fully exit their DSD network by the end of 2017. You guys have talked about that for some time given the cost favorability and higher penetration rate when product can get on your trucks. Just your thoughts conceptionally three would be appreciated?

[Thomas Perkins:]

I think that our focus has always been, it’s more efficient for the convenience store business to put more product on our trucks and increase their frequency of deliveries. I think that – a perfect example of the winning formula would be hosted. Because when they went from a DSD network to a wholesale distribution network, they increased their distribution points by, I would say, north of 50% because they were not delivering to every convenience store. So with that being said, I think it’s the right thing to do for manufactures in particular is to get out of the DSD business. We’ve seen that with diary companies. We’ve seen it with sandwich companies. We’ve seen it with bakery companies. And Kellogg is just the next one to see that the inefficiencies and really – so you want to get back and focus on what you are good at which is manufacturing. So there is still a lot of opportunity out there. I mean we still have Little Debbie to Lance and Snyder's that still delivers to stores. So I think there is a lot more opportunity, but I think it sort of tells the story of that manufacture to be in a DSD network is not the most efficient way to get their product to the 152,000 convenience stores in the U.S.

[Ben Bienvenue:]

Sure, thanks for that. Lastly, I’m curious you commented a little bit about the 7-Eleven right at roll out, I assume that’s fully rolled out now and maybe if you could just talk about how that went relative to your expectations?

[Thomas Perkins:]

It was – as always with every roll out of a major customer, we have bumps in the road, in particular, we saw in Sacramento because if you think about it, we more than doubled the cubes and the wholesale units that they handled. The number of deliveries that they were making, we doubled our employees in that division. And so through all that, what you do to ensure the service is there, you add assistances from other divisions or from temporary sources, et cetera, just to make sure that they were servicing the stores. And I think that after a few glitches in the first maybe 30 days, we got our service levels in line and satisfactory to 7-Eleven and appreciated by the franchisees. We are now in the process of really trying to work on the getting the productivity levels for all those new employees to the standards we expect, in particular both in the warehouse and in delivery. So that’s really where we are. We talk about sort of a 9-month timeline when you add a new account, large account in getting that into a normal state of business and so we are in that process right now in Sacramento, but the other two divisions, I feel real strongly in Salt Lake and Las Vegas. They had a third of the stores and they handle their roll out very well because of the magnitude of the increase wasn’t as great.

[Ben Bienvenue:]

Great. Thanks for taking my questions.

[Thomas Perkins:]

Thanks, Ben.

[Operator:]

Our next question comes from Ben Brownlow from Raymond James. Your line is open.

[Ben Brownlow:]

Hi, good morning, guys.

[Thomas Perkins:]

Good morning, Ben.

[Ben Brownlow:]

Just to clarify, on the integration expenses, I think, I heard you say it was up to $3 million, $2.7 million was in warehouse and the remaining was in SG&A, is that right?

[Chris Miller:]

That’s right.

[Ben Brownlow:]

Okay. And are there any integration expenses assumed for 2017 that’s embedded into the EBITDA guidance?

[Thomas Perkins:]

Yes, we will have conversion cost when we convert the northern New England division onto our ERP platform and processes and then in addition we will have the on-boarding cost associated with the Walmart stores.

[Ben Brownlow:]

Can you quantify roughly what that will be?

[Thomas Perkins:]

Yeah, I think that it’s about $2.5 million to $3 million for both of those.

[Ben Brownlow:]

Okay. That’s helpful. And just on the California cigarette tax increase in April, is there an opportunity to capture a tax stamp inventory gain there, can you just talk about the dynamics behind that?

[Thomas Perkins:]

No, California does not like to free up money. Unfortunately, not. There is basically a tax required to be paid by both wholesalers and retailers and so basically there is no opportunity like we had in Nevada last year, and so it’s unfortunate. And the other thing about California is, in most states the tax stamp allowance – so they give us an allowance on the tax stamps to really to stamp the product, while they limited their stamp tax allowance, so it doesn’t cover the full increase in the tax stamp, where as other states we saw tax stamp allowance that actually help to offset the volume reduction. So California is really a fun place to do business.

[Ben Brownlow:]

I thought that would be the answer. That’s all I had. Thanks.

[Thomas Perkins:]

Thanks, Ben.

[Operator:]

[Operator Instructions] Our next question comes from Chris McGinnis from Sidoti & Company. Your line is open Chris.

[Chris McGinnis:]

Good morning. Thanks for taking my questions.

[Thomas Perkins:]

Hi, Chris.

[Chris McGinnis:]

I guess just to start-off, can you maybe just comment a little bit about the independent store base and may be how they are performing currently and where they are maybe to your expectations?

[Thomas Perkins:]

I think that part of the same-store sales growth is coming from our independent stores. And so it really shows that our core strategies and our initiatives are working and really that’s being driven by our field sales force and their territory managers. So definitely they are embracing our core strategies and really trying to add the right products to their stores. I think there still is competition again from the large chain stores and we’ve seen examples where QT opens up next door to three or two independents and they take a lot of business away. We have other smaller regional chains that do the same thing. And Maverik opens a new store and they bring pressure on the independents. And I think – but at the end of the day, what that does, it actually propels the independent stores to embrace our strategy to even more because that’s who they are competing with. But they are still strong, the independents continues to grow and we continue to focus because we believe that’s really the strength of the industry is the number of independent stores that are out there.

[Chris McGinnis:]

Okay. So I guess just with that answer, when you think about the mix of your business of independents versus national chains, is that still that target roughly in the range of 50%/50%, you still believe in…?

[Thomas Perkins:]

Yeah, it went much higher today because of the number of stores we’ve added in particular in 2016 and of course when we do an acquisition like Pine State, we had a lot more independent accounts, but we were probably higher than that level today and higher than I would like to be, but again it’s all about opportunities that present themselves. And so we are going to continue to grow the independent account and chains as they become available to us, we are going to go after that business also.

[Chris McGinnis:]

Sure. And then just two other quick questions. Maybe can you just comment on your organic growth in the non-cigarette category and what that was for either 2016 or for Q4?

[Thomas Perkins:]

Organic growth [indiscernible].

[Chris Miller:]

Yeah, I think, it’s – traditionally it’s been about 6%.

[Thomas Perkins:]

Total sales.

[Chris Miller:]

Total sales, right.

[Thomas Perkins:]

The bigger chunk coming from about a 10% growth coming from organic and then the remainder is really what’s being driven by the change. So I think really in the fourth quarter we did see a downturn again that we talked about, a little bit slowdown really in the center store categories, right, so we saw our slowest growth in the fourth quarter in those categories, but on average we are growing probably – the organic is about 8% to 10%, I think.

[Chris Miller:]

Yeah, this is the – in the fourth quarter, it was about 13% for the same-store sales of the total increase in the non-cigarette sales.

[Thomas Perkins:]

Excluding all the large accounts.

[Chris Miller:]

Correct.

[Chris McGinnis:]

Okay, great. And then just lastly, any deflationary – are you seeing any deflation on any parts of the business?

[Thomas Perkins:]

No, diary again – fluid diary tends to be the one that – we saw that definitely last year and it starting to come up a little bit this year in eggs, right, those were the two categories that impact us. But we haven’t seen any price decreases from any of our like meat Beef Jerky vendors and like that, so they are sort of probably holding onto the margins.

[Chris McGinnis:]

Great. Thank you very much for the time today.

[Thomas Perkins:]

Thanks.

[Operator:]

We have no further questions at this time – I’m sorry, we have a question from Chris Mandeville from Jefferies. Your line is open Chris.

[Chris Mandeville:]

Hi, thanks for the follow-up. Almost got the name right there.

[Thomas Perkins:]

We knew who you were.

[Chris Mandeville:]

Yeah, exactly. Chris, you guys are running a little low on the share repurchase, any consideration in adding to that or what’s your thought process on capital allocation? And then I guess in addition to that, Tom, what’s your appetite for M&A right now with leverage sitting where it is and considering the on-boarding and integration that remain for the coming quarters?

[Chris Miller:]

Well, first on the share repurchase, so as you know, we – our first priority is to invest back in the business and so we are spending, I think, about $50 million in 2017 for CapEx, but we definitely intent to go forward with the share repurchase program and probably at a similar level to – probably close to $10 million for 2017.

[Thomas Perkins:]

And then in regards to the acquisitions, we are – we’ve talked about this in the past that we – we always have ongoing discussions with various distribution companies and it’s a long dance a lot of times. And so who knows when they may happen. The nice thing about acquisitions and I will use Pine State as an example is, Pine State was a well run organization, we didn’t really have to do anything, we just basic consolidated their financials and started to integrate our sales forces up there, but we have the ability to convert an acquisition under our systems when we feel it’s necessary. And so if an acquisition becomes available and it’s the right thing in return – get some return that we are looking for that, we definitely will. We will make an acquisition. So really we control the onboard – the conversion cost from an acquisition perspective.

[Chris Mandeville:]

All right. I will leave it there. Thank again and best of luck in 2017.

[Thomas Perkins:]

Thanks.

[Chris Miller:]

Thank you.

[Milton Gray 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 any additional questions, please give me a call at 650-589-9445. Thank you, operator.

[Operator:]

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