Core-Mark Holding Company, Inc.
Q3 2007 Earnings Call Transcript

Published: 13 Nov 2007

[Operator:]

Good morning, everyone. Thank you for joining us. We wouldlike to welcome you to Core-Mark Holding Company’s third quarter earningsinvestor conference call. (Operator Instructions) At this time, I would like toturn the call over to Ms. Milton Gray Draper, Director ofInvestor Relations. Please go ahead.

[MiltonGray Draper:]

Thank you, Operator and welcome, everyone. I would now liketo read a statement about the use of forward-looking statements and othernon-GAAP financial measures during this call. Statements made in the course of this call that state thecompany’s or management’s hopes, beliefs, expectations or predictions of thefuture are forward-looking statements. Actual results may differ materiallyfrom those projections. Additional information concerning factors that couldcause actual results to differ materially from those in the forward-lookingstatements is contained in our SEC filings, including our Form 10-K and 10-Qand our press release. We undertake no obligation to update these forward-lookingstatements. We are holding this call to review our third quarter resultsand to answer any questions you might have. If you have additional follow-upquestions after the call, please give me a call at 650-589-9445. Joining me today is the Chief Executive Officer ofCore-Mark, Michael Walsh; and the Chief Financial Officer, Stacy Loretz-Congdon.Also in the room is Chris Miller, our Chief Accounting Officer. Our lineup for the call today is as follows

[J. Michael Walsh:]

Good morning, everyone. I hope that all of you got a chanceto see our MAPCO press release. We are very excited to be partnering with MAPCOto serve its 500-plus stores in the Southeast. We believe we won this businessbecause we listened to their needs and objectives and came up with creativeways to satisfy them. This is another example where our business model andmarketing strategies are resonating with convenience retailers. This contract, along with two other accounts that we haveadded to the roster this past month, and our expansion into Toronto,based on our agreement with [Cushtar], should increase revenues byapproximately 8% in 2008, holding everything else constant. We will begin delivering to these aforementioned newcustomers in early 2008. We have not completed our 2008 planning process so I’mnot prepared to give guidance revenue at this point, or revenue on guidance atthis point. However, given these events, I am sure you will agree that the nextyear is looking very strong for Core-Mark. While I am on the topic of guidance, it appears that we willfall short of our original 2007 guidance by about 2.6%. As our press releaseindicated, sales expectations for the year have been reduced, primarily due toweakness in carton sales. I remember being asked why we reiterated the guidancein August. At that time, I said we still had some balls in the air. In fact,there were three opportunities in play that I thought had a reasonable chanceof occurring that would have enabled us not only to meet but exceed theoriginal guidance. I didn’t want to lower expectations and then have to reversemyself. Now, two of these opportunities have basically been deferredby the customers and one we simply didn’t get. The two that have been deferredare still possibilities for 2008. I will be delving into sales trends for thequarter in a moment, but given the new wins previously mentioned, our run-rategoing into 2008 is actually higher than if our original guidance hadmaterialized. Our numbers for the quarter are distorted, given thesubstantial increase to the bad debt reserve we needed to make. One customerconstitutes 92% of this increase. We inherited this particular account from oneof the Fleming divisions. From the beginning, this account had terms whichsubstantially exceeded our average DSO. Over the past few years, our folksworked diligently to lower the terms and until recently, we were making someprogress. We have a personal guarantee by the owner and we arepursuing our claims appropriately. Unfortunately, the circumstances have led usto build our reserve, which impacts this quarter by $5.2 million. While this isas disappointing to us in the third quarter as the one-time gain of $13.3million was satisfying to us in the second quarter, we believe that ourremaining AR quality is very good overall. I am not saying that we will never have a bad debt hit inthe future but I do believe that this is not a material threat to the companytoday. Stacy will have some additional comments regarding this issue in a fewminutes. Now the good news, putting the reserve action aside andadjusting for the other significant one-time events, like the floor stock gainwe enjoyed in September, our adjusted operating income is up a very healthy27.7%. The reason is simple -- our gross profit, adjusting for holding gainsand LIFO, was up 9.7% while expenses were up an adjusted 7.4% after eliminatingthe effects of the bad debt reserve increase and if you’ll recall our one-timeintegration and closure costs of last year. The spread between gross profit and operating expense wasmore in line with what we are capable of doing. How did we move the grossprofit meter up, given the apparent flatness in revenues? Well, two things toconsider here. One, you have to adjust for the loss of the Imperial Tobaccovolume we suffered last year. In doing so, revenues were actually up 4.9%. Ifyou recall, we retained substantially all of the profitability associated withImperial, so that automatically gives us a bump in our margins. Two, our non-cigarette gross profit rose a healthy 14%adjusted for LIFO on a revenue increase of 8.2%. I find this indicative thatour VCI and fresh strategy continues to gain momentum. I know I went by that 4.9% revenue growth a little fast.Does it give me cause for concern? We all know that it is below ourexpectation. Irritation, yes; concern, no. Let’s talk about cigarettes. We did not anticipateconsumption decline in the 3% to 4% range as published by the cigarette manufacturers.Aside from Imperial, our carton movement in the third quarter versus last yearis down 2.8%. Both manufacturer price increase and state excise taxincreases have matched this down trend. Our cigarette revenue dollars areactually up 3.4%, again adjusting for Imperial. This carton decline cost usabout two percentage points in the total -- that is, the combined cigarette andnon-cigarette growth rate. Two divisions in particular had been hit hard by recentstate laws governing where you can smoke and how much you have to charge forselling a carton. These two divisions are Las Vegas and Pennsylvania. Now, just those two divisions constituted 65% of the thirdquarter year-over-year drop. Frankly, our business model can grow profits evenin the environment of declining carton sales, as evidenced by the third quarterprofit results, the Imperial experience of last year, and the faith that theconvenience retail industry will require the other 35,500 SKUs we offer foryears to come. Now, to touch on adjusted operating expenses, I am going toaddress warehouse delivery and facility numbers at the division level. This iswhere most of our costs occur. Facility expenditures were up 15.7% for the quarter.Approximately 85% of this increase is due to normal rent increases and theinvestments in new space we have made to accommodate growth. For example, our new distribution center in Spokane andbuilding additions in Calgary, Salt Lake City, Portland, and Albuquerque. As weadd sales, we will be leveraging these fixed expenses. Warehouse costs as a percent of sales were flat to last yearin both the U.S. and Canada after adjusting for the loss of Imperial sales.This result suggests a slight improvement in productivity since our mix ofcigarettes and non-cigarettes has improved since last year -- last year being72% cigarettes, this year 69% cigarettes. Delivery costs grew from 1.39% of sales in 2006 to 1.44% in2007, after adjusting for the loss of Imperial sales. As a result, we spentabout $1.8 million more this quarter than last. After adjusting for normal costinflation, five divisions count for approximately 90% of this excess. Thesedivisions experience the highest wage and benefit growth rate in the companyand did so to attract and keep quality drivers in their respective marketareas. Extraordinary increases for these divisions beganmaterializing as early as last summer, and continued throughout parts of thelast four quarters. I believe all distributors have experienced the samechallenges. As time progresses, these economic forces will manifestthemselves in higher prices to the consumer. In Canada, for example, we havehad to implement some price increases. We believe that retailers understand theissue and want us to be healthy to service their needs now and in the future. It is good to see the margin improvement realized in thethird quarter. In part, this is attributable to expanding our VCI consolidationplatform to more and more customers. Year-to-date, we have increased the numberof stores that we were delivering milk to by more than 50%. The latest big newsfor us is the fact that our five California divisions are now coming online andwill be selling and delivering milk by month end for [Cushtar]. It isgratifying to see our largest customer embrace the VCI program. These five bring the potential of effectively doubling ourdairy sales by end of year 2008. Inthe U.S., the commodities that we have targeted for this program have grownmore than 40% for the quarter. I believe this is our best opportunity toincrease shareholder value long-term. In addition, we have a total of three divisions now sellingour fresh offering. As a reminder, the fresh category includes such items assalads, cut fruits, cut veggies, home replacement meals, and other similaritems. This is a new category for the convenience world and it is showing greatpromise. I have just returned from the National Association ofConvenience Stores annual conference and trade show. I can tell you that thebiggest buzz there was the interest in fresh offerings and how to find thelogistical support. In September, the Insight Research/NACS Future ofInternational Convenience Retailing 2007 conference was held in the UnitedKingdom and attendees included NACS vice president of member service, MichaelDavis, who witnessed some of the latest innovations in convenience retailing.Mr. Davis concluded that “The takeaways for our stores in the United States arethat good fresh goods can be sold in a small footprint, especially if the operatordoes his or her homework and partners with the right distributor or wholesaler.We intend for that choice to be Core-Mark.” Lastly, while I cannot comment specifically about anyparticular acquisition initiative, we remain active and focused in pursuingopportunities that make sense. While I don’t have anything to announce at thepresent time, I remain optimistic that deals will be done in the foreseeablefuture, although I am not issuing any guarantees as to who, what, where, orwhen. Many of the family-owned businesses are facing the sameacceleration in the decline of cigarette consumption that I previouslyoutlined. Many understand that they will have to make significant investmentsin the businesses in order to compete or their future will be made up ofdwindling revenues and profitability. We are dedicating more and more resources to pursue theseopportunities, as well as strengthening the organization to enable us to absorbthem when they do occur. I am confident that this organization is fully capableof pursuing this mission. We are very excited about MAPCO joining the Core-Mark familyand we are immersed in making their transition to us smooth and efficient. I thank you as always for your interest in Core-Mark. Now Iam going to turn it over to Stacy Loretz-Congdon to discuss the financialresults.

[Stacy Loretz-Congdon:]

Thanks, Mike and good morning to everyone. I would now liketo take this opportunity to recap some of what Mike said and to provide alittle more detail on the financial results for the third quarter. Sales to our customers for the third quarter showed a slightdecrease of 0.3%, or approximately $4.5 million compared to the same quarterlast year. There are several factors to consider when reviewing revenue. First,we have a decline of about $72.8 million in revenues in the third quarter, dueto last year’s move by Imperial Tobacco, the largest Canadian cigarettemanufacturer, to deliver their own product directly to the stores. This will bethe last quarter where it will be necessary to track these sales and carve themout in order to compare apples-to-apples. More importantly, these lost sales were offset by realgrowth of approximately $68.3 million, or a 4.9% increase over base sales lastyear. This increase is net of both gains and losses to existing customers, inaddition to sales to new customers. The Pennsylvania division sales are not called outspecifically, since we enjoyed sales for the entire third quarter in bothyears. As Mike indicated, after adjusting for Imperial, cigarettesales dollars are up 3.4%; however, carton volume is down 2.8%. Despite thedecline in carton volumes, cigarette sales dollars were up because of increasesin product price, excise tax, foreign exchange rates, as well as a slight improvementin gross profits per carton. Non-cigarette sales increased 8.2%, assisted slightly byforeign exchange rates and more specifically, improvements in our fast food,general merchandise and snack categories. Included in our total net sales for the quarter isapproximately $14.5 million related to foreign currency exchange gains offsetby a $21.9 million decrease in excise taxes. Approximately $10 million of theforeign exchange gain is in the cigarette category and the excise tax declineis due primarily to the loss of Imperial’s Canadian cigarette sales and adecline in overall volume. Gross profit for the third quarter 2007 was $85.2 millioncompared to $79 million for the same period last year. The remaining grossprofit, which excludes LIFO expense and cigarette inventory holding gains, was$87.5 million this quarter versus $79.8 million last year, a 9.7% improvement.Remaining gross profit as a percent of sales improved over 50 basis points to5.92% from 5.38% last year. Two contributing factors to this improvement werethe absence of Imperial Tobacco product revenue in our sales and an 8.2% growthin non-cigarette revenues which earn higher margins. As Mike mentioned, non-cigarette gross margins improved 60basis points to 13.2% after you add back LIFO expense. It should be noted that we had $4.6 million of LIFO expensefor all categories this quarter versus only $0.8 million for the same quarter ayear ago. This increase was largely driven by an impact of price increases onthe producer price index for the cigarette and tobacco categories. Thesecategories amounted to approximately $3 million of the 4.6, with the remainingfalling into the non-Tobacco categories. We call out the effects of LIFO adjustments because whilethe company has chosen to report on a LIFO basis, primarily for tax purposes weoperate and manage our business on a FIFO basis. During the quarter, we also enjoyed $2.3 million incigarette inventory holding gains related to the price increases announced bycigarette manufacturers in September. Similar holding gains did not occurduring the third quarter of 2006. While holding gains are unpredictable, they are a majorcomponent of our wholesale business model and management will continue to focuson maximizing these opportunities as they present themselves. Our operating expenses increased 13.8% in the third quarterfrom $70.8 million last year to $80.6 million this year. Included in operatingexpenses this quarter is a $5.2 million bad debt charge, which I will discussin more detail in a minute. Last year’s third quarter includes $0.6 million incosts associated with the integration of the Pennsylvania division and theclosure of our Victoria division. If you adjust for both of these amounts, theremaining operating expenses are up only 7.4%, which is less than our growth of9.7% and remaining gross profit. Remember, this 2.3% spread between gross profit gains andoperating expense increases resulted in a healthy 27.7% increase in adjustedincome from operations. The largest contributor to the increase in operatingexpenses is in warehouse and delivery costs, which increased $3.3 million, or7.8% over the same quarter last year. As many of you know, our warehouse anddistribution expenses are largely variable and track with our sales growth,which in total was 4.9% after adjusting for the impact of Imperial lost sales. Remember, cigarette cartons were down but non-cigarettesales grew at 8.2% and certain new non-cigarette categories have higherhandling costs, so this increase is not completely surprising. Warehouse and delivery costs include facility costs. Mikehas already covered the facility rent increases which contributed approximately24% of the 7.8% increase in this line item. Warehouse expenses on their ownonly increased approximately 3.3% over prior year third quarter. This was belowour growth rate of 4.9% for organic sales, and we benefited from productivityimprovements in certain of our divisions. The real culprit continues to bedelivery expenses, primarily in the salaries and benefits line item. Fivedivisions drive this increase due to continued pressure on wages and the demandfor drivers. We are tracking the divisions that have adjusted compensationlevels and pay structure in order to attract and retain quality drivers, toensure that their costs fall back in line once they lap the anniversary date ofthese changes. SG&A expenses as a percent of sales increased 4 basispoints for the quarter after you remove the bad debt expenses and last year’sdivision implementation and closure costs. We also adjust the percentage forthe impact of Imperial sales. Overall, I am pretty pleased that these costs have fallenback into line with our expectation. I would like to spend a little time on the increase in ourbad debt reserve -- specifically, the $5.2 million for two customers who raninto serious financial difficulty during the third quarter. As Mike indicated,one customer represents 92% of this reserve and we anticipate that they willfile for protection under chapter 11 inthe near future. We have reserved 100% of their outstanding AR balance and wecontinue to service a portion of their stores on a COD wire transfer basis. The other account appears to have more positive alternativeoutcomes available to them and we have taken a partial reserve on theirreceivable balance. We continue to monitor their situation closely. We havepersonal guarantees for both accounts and a [UCC] third position filing for oneaccount. We are hopeful that we will recover some of this amount over time.Rest assured, Core-Mark will take whatever actions are available to us underlaw to recover any loss. Certainly whenever a loss of this size occurs, especially inlight of the current economic factors, like the sub-prime market, fuel prices,et cetera, it causes one to pause and consider whether our current creditpolicies and procedures are adequate. The company undertook such an assessment of our proceduresand we feel confident that we have the right structure in place and take the stepsnecessary to ensure prudent credit decisions are made. Part of our infrastructure includes a robust credit policy,a skilled credit professional at each division, corporate oversight, legalcounsel when necessary, and a monthly credit risk assessment. In addition to our normal procedures, as a result of thisrecent bad debt, we conducted a vigorous review of our customer portfolio,which confirmed the fact that our AR risk is minimized by a diverse customerbase of both small and large customers. We’ve provided additional resources who ranked accounts,reviewed account agings and delved into credit files, and our final assessmentis that we believe we are adequately reserved for the size, structure and riskof our AR portfolio at this time. Moving on, interest expense net of interest income was $0.3million for third quarter ’07 compared to $1.3 million in third quarter of ’06.This decrease was driven primarily by lower average borrowings this quartercompared to last year’s third quarter, and more on debt in a minute. Our provision for income tax for third quarter ’07 was $1.3million versus $2.5 million in third quarter ’06. The effective tax rate forthis quarter was 28.3% compared to 36.2% for the same quarter last year. Thisrate decline was due primarily to a $0.7 million benefit related to theexpiration of the statute of limitations on certain unrecognized tax positions. Diluted EPS was $0.30 per share for the third quarter thisyear versus $0.40 per share for the third quarter last year. Adjusting for theone-time items previously mentioned, the impact of LIFO and using the effectivetax rate, diluted EPS was approximately $0.69 per share for the quartercompared with approximately $0.47 last year, an increase of approximately 45%. Some comments on non-cash charges -- depreciation andamortization excluding amortization of debt issuance costs was $3.5 million forthird quarter ’07 compared to $3.6 million from third quarter ’06. Despite ourinvestment in additional capital, depreciation came in even with prior year,due primarily to certain assets becoming fully depreciated over the past 12months. Also, to a lesser extent, in third quarter ’06, weaccelerated depreciation for certain retired assets, the Victoria divisionclosure, and our move into our new Spokane division. Amortization of stock-based comp increased from $1.2 millionin third quarter ’06 to $1.7 million this quarter, primarily due to the 2007long-term incentive plan, or LTIP, that became effective July 2, 2007. Thisplan overlaps the 2004 LTIP which was put into place during August of 2004 whenthe lion’s share of these grants were made with a three-year vesting schedule. Other notable items in our cash flow includes an increase incash used to buy inventories in order to take advantage of the cigarette priceincreases that occurred during September and other price increases we wereanticipating might occur as congress wrestled with the S-CHIP bill, the statechildren’s health insurance program. We in a sense flushed this inventorybuild-up on the President’s veto and are monitoring the second bill that thesenate and house recently approved. The tax settlement with the State of Washington for $13.3million was recorded during the second quarter and received in July of this year.However, as we indicated on our last call, the after-tax proceeds were used tohelp fund the tax payments of approximately $7.3 million associated with ouramended 2004 and 2005 tax returns filed during the quarter. The remaining taxpayments were related to 2006 final payments and estimated payments versus2007. Cigarette and tobacco tax payable increases have generatedapproximately $42 million in working capital since last year, due largely toour success in reestablishing credit terms in a number of states, mostsignificantly California. Turning to long-term debt, the quarter ended at $53.7million compared to $78 million at 12/31/06, and $32.8 million at June 30th of’07. The increase in long-term debt since the end of June is driven by thecigarette load-ins previously mentioned. Right now, we expected funded debt to be at about the samelevels at year-end as they were at the end of the third quarter, due to ananticipated build-up of LIFO inventory, holiday inventory preloading, andseasonal working capital needs. We will continue to monitor this and make surewe manage inventory levels to maximize tax benefits that rely on year-endlevels. As of September 30th, our availability under the ’05 creditfacility at the end of the quarter was approximately $155 million. We hadapproximately $28 million in letters of credit outstanding and we were incompliance with all of our covenants. As Mike already covered, we have lowered our 2007 revenueexpectation to $5.6 billion from $5.75 billion for the year. As we said in ourearnings release, we do not expect the reduction in our sales targets tosignificantly affect our annual earnings. We believe this because the primarydriver to our revised guidance is the decline in cigarette volume, which haslower margin, and our growth in the non-cigarette categories is bridging thegap. We continue to expect capital expenditures to totalapproximately $24 million for 2007. In closing, I want to echo Mike’s enthusiasm for our newpartnership with MAPCO. I am excited about these opportunities that lie beforeus, and on behalf of all, I want to thank our customers, our vendors, lenders,our employees, and you, our shareholders, for your continued support. Operator, you can now open the line for questions.

[Operator:]

(Operator Instructions) Our first question comes from[Blaine Marter] with [Lobe] Partners.

[Blaine Marter:]

Mike, in your initial statements, you clearly sound a littlebit excited about your prospects for 2008, and so two questions about that;first on the revenue side, you said up 8% excluding -- leaving everything elseconstant. Well, if I don’t leave everything else constant, should I assume thatthe core business ex your recent contract wins has some amount of organicgrowth in them?

[J. Michael Walsh:]

One would certainly think so. Those were two or three veryspecific opportunities that we got, but rest assured, we plan to grow thebusiness outside of those three opportunities.

[Blaine Marter:]

Okay, terrific. And with the top line growth, can youachieve, at least holding the margins flat, such that that will carry intooperating income growth, if not maybe get a little leverage on the operatingside?

[J. Michael Walsh:]

Well, yes we do. We will certainly be planning our year todo just that, as that’s the model. We grow our revenues, we hold our operatingexpenses to something less than our revenue growth and it has wonderful effectson the bottom line. So we are certainly planning to do that.

[Blaine Marter:]

Okay, but between Canada and MAPCO, what is the mix going tobe in terms of cigarette versus food, non-food? Are those revenues going to beas efficient, if you will, on the gross margin side as just your normaleveryday business?

[J. Michael Walsh:]

Fair enough. The Toronto division I think is separate fromwhat I would say about everything else in the business. The Toronto division isa start-up. We have basically one contract, an anchor tenant, if you will, with[Cushtar]. Now, we are going to be spending the first quarter pretty muchdevoted to having a smooth rollout so that all the stores are -- the service isgreat. The degree to which we are successful in Toronto, however,will depend upon our ability to grow independent sales and other chainbusiness. And as those sales come online, our profitability -- that’s when ourprofitability will start to be impacted favorably. The key to Toronto in my mind was not only being able topartner with Elaine Bouchard in this venture but it really positions us totake, to have the platform in Ontario where most of the population is, toservice the other national chains in Canada, like Esso and PetroCan and soforth. That really -- as those contracts come online and if we are successfulin -- and we’ll always have to compete for the business, but we are prettyoptimistic about our ability to compete because at that point, we become moreof a one solution for the big chains in Canada. But Toronto, and I think that question came up a call or twoago, Toronto is not going to add a lot to our profitability in 2008. However,putting that aside, I expect us to continue on the path of growing our marginsand growing our profitability not only with MAPCO and these other two accountsthat I won’t mention, but just the opportunities we have in growing VCI and thefresh. I just got back from a long trip, 8,000 miles last week and Ivisited a number of divisions and I came back really filled up with theenthusiasm and the prospects that I’m seeing from our divisions in the freshcategory. So I think 2008 is going to be a very good year for us.

[Blaine Marter:]

Thank you very much.

[Operator:]

Our next question comes from Richard Whitman from BenchmarkCapital.

[Richard Whitman:]

Regarding the MAPCO business, that’s a division of DELEK, isit not?

[J. Michael Walsh:]

Yes.

[Richard Whitman -Benchmark Capital:]

Is it not true that they are planning to take these 500stores to 750 stores?

[J. Michael Walsh:]

Well, I don’t want to comment on behalf of [Ezra] and whattheir plans but certainly I think if you look at their history, they havedemonstrated an inquisitive attitude and I have no reason to believe that thatwon’t continue. We believe they are in that mode but that’s something Ican’t speak for him about.

[Richard Whitman -Benchmark Capital:]

Okay. I think they may have stated that publicly on theirwebsite, but okay. Second question, regarding the Ameristop bankruptcy and thefact that you have a personal guarantee, do you have any knowledge orinclination that in fact the principal behind it can honor that personalguarantee?

[J. Michael Walsh:]

The answer to that is no, because I think we don’t know nowexactly what his personal debt would be but we are optimistic that there willbe something there. But I don’t think that at this time, we know what thedegree of recovery will be, but I can say we are pursuing it very aggressively.

[Richard Whitman -Benchmark Capital:]

Okay, fair enough. Third question, Mike, I’m going throughthe proxy, you know, if you ex out options, there really is very little insiderownership by management and the board. Is there any plan for management and theboard to buy some stock in the open market?

[J. Michael Walsh:]

That is certainly a topic of conversation. It is sorestrictive in the time that you can buy stock and frankly, all of us are alittle bit paranoid about buying and selling stock in the world we live in. I don’t know if I can speak for the board but I think thatall of us would like to, but there’s these very narrow windows of what you cando and --

[Richard Whitman -Benchmark Capital:]

Well, but Mike, I mean, insider buying goes on all the timeand other executives or directors of companies don’t have a problem with it. Thewindows just revolve around your reporting periods, which means there’s a bigchunk of the year in which you can buy stock.

[J. Michael Walsh:]

Yes, but that’s a -- it depends on what you know and whatyou don’t know, and it’s complicated. All I can tell you -- I really can’t --that’s not a topic I can discuss publicly.

[Richard Whitman -Benchmark Capital:]

All right. We’ll let that go. I’ll let someone else takeover now. Thank you.

[Operator:]

Our next question comes from Jonathan Lichter with Sidoti& Company.

[Jonathan Lichter -Sidoti & Company:]

Was there any impact from the California fires?

[J. Michael Walsh:]

No, not really. First of all, our first concern was ouremployees and our customers. None of our employees were materially affected bythat and the customer base seems to be holding pretty strong, so our businessout of Corona has not -- we’ve not seen much of a change because of the fires.

[Jonathan Lichter -Sidoti & Company:]

Okay, for 2008, are you assuming that the SCHIP legislationgets passed one way or the other?

[J. Michael Walsh:]

I can only tell you what we read and the discussions we havewith the cigarette manufacturers and so forth. I mean, Bush is obviously veryadamantly opposed to it and I guess it’s -- I think the call is 50-50 as whatthe industry thinks and what you hear about congress, and a few swing votes andit could go -- I think congress is trying to work hard to come up with acompromise that Bush will accept, but so far they have not been able to. I think it is going to be very, very close -- too close tocall.

[Jonathan Lichter -Sidoti & Company:]

But in your assumptions for next year, are you assuming thatit does get passed or do you think it will be defeated?

[J. Michael Walsh:]

Well, in our business plan, we have assumed that it will notpass.

[Jonathan Lichter -Sidoti & Company:]

That it will not pass. Okay, and lastly, what percentage ofyour distribution centers currently can handle fresh food?

[J. Michael Walsh:]

We have -- we’re in part of a construction program and Ithink I reported to you that we’ll be 80% through with our getting all thedivisions with the necessary facilities to handle it, and we’re right onschedule with that. Eighty-percent of our divisions will have that capabilityby 12/31 of ’07. And the other -- the remaining divisions are coming on, Ithink we get three more in the first quarter. One division is predicated on alease expiration and looking at a new location and so forth. That last one maycome a little later but we are going to be essentially completed by mid-’08.

[Jonathan Lichter -Sidoti & Company:]

Thank you.

[Operator:]

Our next question comes from Kevin Starke from Weeden & Company.Please state your question.

[Kevin Starke:]

Mike, about Ameristop, since there’s not a lot of publiclyavailable information about them, I’m left to ask you. It appears that they area 140-store chain that’s entirely franchised. Is that correct?

[J. Michael Walsh:]

No, about half the stores are franchised.

[Kevin Starke:]

Okay, so the debtor in your case would be the parent and itscompany-owned stores, not the franchisee?

[J. Michael Walsh:]

Yeah, the way it worked, the franchisees paid Ameristop andAmeristop paid us.

[Kevin Starke:]

Okay, so effectively sales to the entire Ameristop chainflowed through the parent one way or another?

[J. Michael Walsh:]

Right.

[Kevin Starke:]

As did the receivables?

[J. Michael Walsh:]

Right.

[Kevin Starke:]

Okay. That’s enough of that question then. You just cameback from NACS you said. Did you get any sense from your discussions thereabout what the organic growth rate is currently in the convenience storeindustry and how it might look in ’08?

[J. Michael Walsh:]

First of all, the only factual information I have --anything I tell you would be anecdotal -- the only factual information I haveis the state of the industry report, and they are always a year late. You getthe 2006 numbers, which says in-store sales were up 8%. I didn’t sense anything just -- I didn’t ask that specificquestion of the folks that I bumped into, but I didn’t get a -- I thinkeverybody at NACS is groaning about gas margins and about the price of gas, butI didn’t get a lot of sense about in-store sales declining or anything likethat.

[Kevin Starke:]

The convenience industry has sort of a pock marked historywhen it comes or recessions. They did very badly, if I recall correctly, in the’92 recession but did reasonably well in the 2001 recession. How do you feelthey might do if we were to enter a recession in ’08? How do you think thatwould bear on Core-Mark's revenue?

[J. Michael Walsh:]

Interesting question. It’s the question -- I was on ageneral panel with a few other CEOs, a discussion panel in the general assemblyon Thursday morning and that very question was asked of all of us, and all ofus responded by the industry -- if you are going to be in an industry, I wouldrather be in the convenience industry during a recession than most otherindustries, mainly because people, they’ll stop buying refrigerators and carsbut the bananas, the smokes, the Snicker bars, the fresh product, things likethat -- people are going to be slow to curtail those purchases. I think the consensus of the panel was that the industry isrecession resistant but not recession proof, that it will affect us butprobably not as much as it would affect other people. Now, my own personal experience with Core-Mark is that Ithink even during the periods of recession, I think we did very well, mainlybecause our opportunity is we have such a small market share that we can offsetthat by continuing to grow market share. So I don’t -- I’m not really concerned and would not usethat as much of an excuse if we get into a recession.

[Kevin Starke:]

The ’91 recession, the problem with the convenience storeindustry was generally that it was overbuilt and over-levered and that gascompanies had come up and entered into too much head-to-head competition withthe incumbents, like Southland’s. Do you get any sense of whether we’reoverbuilt and over-levered today?

[J. Michael Walsh:]

No, I do not have that same sense. I remember quite well thecredit crunch that went on in -- actually, there was a bit of a credit crunchin 2000. The industry, there was a credit tightening but -- and I’m sure -- andit did affect some people, there’s no question about it. But people that arestrong and they have good marketing programs and the -- they are going to besuccessful and I think Core-Mark is going to be successful if that same thingoccurs. However, I did not get a sense from people at NACS about asimilar kind of issue regarding credit or -- like I said, everybody is harpingabout gas prices. That is by far, and credit card fees -- those are the two bigtopics.

[Kevin Starke:]

Thank you.

[Operator:]

Our next question comes from Blaine Marter from LobePartners.

[Blaine Marter:]

Mike, you’re on the Board of the company?

[J. Michael Walsh:]

Yes.

[Blaine Marter:]

And you guys have executed the business fairly well sinceyou came public again, except for the unfortunate Imperial Tobacco loss. Yourstock is about where it was -- I mean, really there’s been no upwardappreciation, yet you guys continue to do a good job. You picked up Kline,which seems like a favorable acquisition for the company. You are growingorganically. What in your mind do you think it will take for the marketto recognize your efforts, number one? And number two, is the board prepared todo something to make the market recognize, be it maybe sell the company? Andnumber three, are you doing anything to get more research coverage on yourcompany?

[J. Michael Walsh:]

I agree with your observations. I think if you track whatwe’ve done over the last three years that the price doesn’t exactly reflectthat. There’s not a lot I can do about it. I think the market obviously -- Ithink a lot of companies have been hurt in the last month, given the overalldecline in the market. The market is bouncing around quite a bit. We have bouncedaround. I mean, we went way up in the first six months, then way down, and thenup pretty good and then just recently kind of back down again. And through thatwhole period of time, I think our performance has been pretty steady eddy, so Ithink it has more to do with our investor base looking at various investmentopportunities and moving in and out, and I think that is not reflective of whatthe company is doing. So the only thing I can do is to continue on this course. Ido believe at some point in time that as we make acquisitions, continue to makeacquisitions, continue with our VCI, and continue to grow our margins, I thinkit’s going to attract investors that see this and value this and will actaccordingly. Now, as far as looking at our strategic options, which we’vetalked about many times, I will just say to you that the board is activelylooking at all of our strategic options. They are not passive about this. Theyare looking and I don’t know what’s going to happen with the capital structureor the ownership structure of the company going forward, but if opportunitiescome along I think the board is going to look at that, as they have and willcontinue to do so. But obviously that’s not something I can talk to in detail,but rest assured we understand -- I think we see the same thing you guys seeand if the right opportunity comes along, the board is going to act in the bestinterest of all of you guys. That I am absolutely confident in. And as far as the -- what was the last part of his question?

[Blaine Marter:]

Are you trying to get more research analyst coverage foryour company?

[J. Michael Walsh:]

Yes. Milton, do you want to opine on that?

[MiltonGray Draper:]

We continue to try to get additional coverage that’sappropriate to our story and until I get the commitment from the various peoplethat we are in discussions with, I think it is probably not appropriate for meto benchmark that. But yes, we understand that that will help. In addition, we’ve done a lot of marketing this past yearwhich I think has helped, and we’ll do additional -- more marketing next year.So we think the combination of those two will get our story out and hopefullythis market will respond accordingly.

[Blaine Marter:]

Fair enough. Thanks a lot.

[Operator:]

At this time, I am showing no further questions.

[MiltonGray Draper:]

Okay, well, thank you for your interest and if you have anyfollow-up questions, don’t hesitate to give us a call.

[Operator:]

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