Core-Mark Holding Company, Inc.
Q1 2008 Earnings Call Transcript
Published:
- Operator:
- We would like to welcome you to Core-Mark Holding Company's first-quarter earnings call. (Operator Instructions). At this time, I would like to turn the call over to Ms. Milton Gray Draper, Director of Investor Relations. Please go ahead.
- Milton Gray Draper:
- Thank you, operator, and welcome, everyone. I would now like to now read a statement about the use of forward-looking statements and non-GAAP financial measures during this call. Statements made in the course of this call that state the company's or management's hopes, beliefs, expectations or predictions of the future are forward-looking statements. Actual results may differ materially from those projections. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our SEC filings including our Form 10-K, our 10-Qs, and our press releases. We undertake no obligation to update these forward-looking statements. We are holding this call to review our first-quarter results and to answer any questions you might have. If you have additional follow-up questions after the call, please call me at 650-589-9445. Joining me today is the Chief Executive Officer of Core-Mark, Michael Walsh; and the Chief Financial Officer, Stacy Loretz-Congdon. Also in the room is Chris Miller, our Chief Accounting Officer, and Greg Antholzner, our Vice President of Finance and Treasurer. Our line-up for the call today is as follows. Mike Walsh will discuss the state of our business and our strategy going forward, followed by Stacy Loretz-Congdon, who will review the financial results for the first quarter. We will then open up the call for your questions. Now, I would like to turn the call over to our CEO, Mike Walsh.
- Mike Walsh:
- Good morning. As many as you are aware, we recently signed a definitive purchase agreement with Auburn Merchandise Distributors, Inc., or AMD, which we believe is an excellent fit for us. They have built a solid profitable business based on great customer service. Combined with our convenience marketing programs and technology, both companies see the opportunities to leverage the synergies. As always, our first priority will be on assuring customer satisfaction. We want those retailers to know that we are truly focused on helping them grow their sales. For you, our investors, I'm sure you will recognize this initiative to be consistent with our stated strategy of taking the Core-Mark business model to where more consumers and customers are located. I am truly very pleased to have the AMD organization join us and help make that stated strategy a reality. We intend to close this deal sometime in June. As our press release explained, we expect this asset deal to cost approximately $28 million. As we did in our Klein acquisition, we plan to use the inventories and accounts receivables from this new division to expand our borrowing base and to increase our tax payables for the states in which AMD does business. We believe the total of these two items will be in the neighborhood of $23 million. We will invest some funds to incorporate our technology, and we will incur startup cost of approximately $1.4 million. The best news is that we expect this division to be adding to the bottomline in 2008, excluding those startup costs. This acquisition constitutes an excellent use of shareholder capital. I would like now to comment on our first quarter results. The first quarter was a pretty good one for us given the current business environment we are all hearing and reading about. Revenues grew 5.4% for the quarter, while adjusted EBIT grew about 30%. If you recall we had a substantial cigarette floor stock gain in the first quarter last year, and we are carving out the Toronto startup cost of $700,000 this quarter for apples-to-apples comparison. The growth in profitability was primarily driven by improvements in the non-cigarette gross margins and by the addition of new customers. Overall, same-store sales were lethargic, but we were able to continue to grow the topline with market share gains and the bottomline with our continued focus on improving gross profits on our non-cigarette products. I would characterize these results as quality earnings and a confirmation that our strategy, that is to uniquely position the Company through infrastructure investments to support VCI and fresh, is effectively serving the needs of our customers as well as our own financial health. For the quarter, our non-cigarette revenues grew about 11%, while the non-cigarette gross profits grew 17% or on a FIFO basis 18%. As a percent to sales, this gross profit line improved by 80 basis points also on a FIFO basis. Now granted, part of this improvement was the result of the increase in candy prices. But as many of you know, our focus on non-cigarette sales has been increasing our non-cigarette gross profit margins quarter-over-quarter for some time. Cigarette revenue, on the other hand, only grew about 3%. And if you exclude the excise taxes, this line item grows 1.6%. This weakness in cigarette sales was driven by a 1.4% decline in carton sales. If you exclude the carton sales of Toronto, the decline is actually 2% for the quarter. Now, this is in line with industry trends that have a reported 3.3% decline for the quarter. The decline in gasoline consumption, driven by higher pump prices and growing state excise taxes, all of that combined to generate a double whammy on cigarette consumption. Cigarettes remaining gross profits were essentially flat on a dollar basis and slightly down on a percent to sales basis. The shift in Canadian cigarette sales from premium to discount brand continues to pressure Canadian cigarette gross margins. In addition, lower MI program monies from the largest remaining Canadian manufacturer also impacted margins to a small degree. There is considerable discussion in the industry as to precisely what has been happening to the US consumption of cigarettes, and I think it's fair to say there doesn't seem to be a consensus as to what specifically has taken place. Some indications would suggest that unique situations in specific regions are driving the declines or at least that was the case in 2007. Fundamentally, it seems clear that non-cigarette commodities will have to shoulder more of the channel burden. There is a sufficient broadband of traditional C-store products and a growing introduction of new items now being offered to absorb this shift, which will happen over a period of time. This shift will be a competitive imperative for everyone in the industry as carton sales decline. While we will respond to marketplace competition for sure, we believe an orderly transfer is in our best interest and will pursue that course to the extent we are able. The faster the decline in cigarette consumption, whatever that turns out to be, the faster the shift in margins to other traditional items will occur. This product shift, along with our strategy of nontraditional, VCI, and fresh products provides us with a credible vision of higher gross profit margins. To be sure, this transition will also mean higher operating costs as a percentage to sales, but the effect to our bottom line will be positive. I believe an analysis of Core-Mark over the past couple of years supports this hypothesis. Speaking of operating expenses, let's take a look at the first quarter results. In total, our expenses increased 12% or $8.8 million. Now, here is the breakdown of the causal factors. First of all, we did grow our sales. Variable cost associated with that sales increase contributed about 24% of the expense increased. Startup and operating expenses for the new Toronto distribution center contributed 30% of that cost increase, normal inflation on non-labor items, plus the excess inflation on fuel, another 16%, a noticeable fluctuation in medical claims expense above the increase in headcount, 15%, and expansion costs covering four new facility additions, excluding Toronto, a 4%. So with that list of five items I have enumerated most of the cost increase that we incurred. However, notice that I've not included in this list wage increases, which by themselves would have contributed 25% of the overall operating cost increase. To be sure, we took extraordinary steps to attract and retain drivers and warehouse workers in areas where tight labor forces were in play, in addition to the normal merit increase of traditionally a very modest amount. Nonetheless, we experienced an approximate 3.5% improvement in labor productivity, which served to largely offset this increase. This balance between wage inflation and productivity improvement is more in keeping with what I have witnessed in Core-Mark for most of my 17 years. There remains ample opportunity to offset rising labor costs by leveraging the technology we have in-house today. So what do we expect for the remainder of 2008? Well, we continue to expect reasonable sales growth, notwithstanding carton sales decline. We see an opportunity-rich environment for market share gains. Now, I want you to read that as opportunities, not guarantees. And we will continue to look for infrastructure expansion opportunities, ala AMD, when they make sense. We remained highly focused on VCI growth and other opportunities to expand our non-cig gross margins, and we look to slowly whittle down the costs associated with being public. We believe that our reorganization of our corporate operations group in combination with an improving labor market will benefit our operating efficiency. We will need to further reduce turnover to enjoy the leverage nature of our business model. Data reflected a significant decrease in turnover in both the US and Canada for the first quarter, but it's way too early to declare victory. Let's just say the trending is moving in the right direction. As far as predicting the future, yes, I am concerned about the effects of high gas prices. A softening in the economy should afford an easing in our turnover, a good thing. Declining carton sales is a fact of life, but the marketplace will adjust. You can go on and on, but I remain steadfast in my belief that we have a bright future in store over the long haul. Furthermore, I wouldn't bet against us for a reasonably solid 2008. I would like to close by reminding all of our stakeholders that Core-Mark is celebrating this year our 120th continuous year of operation in serving the packaged consumer goods retail trade. This is a company that survived the 1906 San Francisco earthquake, the Great Depression, and the great Fleming bankruptcy. Maybe we do belong in the non-glitzy traditional market economy, but we will be around when a lot of others have come and gone. I'm very grateful to belong to organization where value still means something and a competitive spirit to be the best still thrives. If heritage counts for anything, our success in the future cannot be denied. As always, thank you for your interest in Core-Mark. And now I'm going to turn it over to Stacy to discuss in greater detail the financial results. Stacy?
- Stacy Loretz-Congdon:
- Thanks, Mike, and good morning to everyone. I'd like to take this opportunity to recap some of what Mike covered and to provide a little more detail on the financial results for the first quarter. First, many of you may have seen in our 10-Q that we purchased almost 100,000 of our shares at a cost of about $3 million. This represents 10% of the $30 million share repurchase program approved by our Board of Directors. We believe this is a good use of our excess cash, especially at these price levels, and we plan to continue to purchase opportunistically in conformity with the SEC guidelines. Also, we believe the pending acquisition of AMD is a very good use of our excess debt capacity, considering the potential of future earnings and strategic fit in our long-term vision. As with all investments of this type, we have spent time reviewing their financials and trends, and our shared vision over the next five years meets our investment criteria and RONA hurdles. AMD will give us additional infrastructure and additional capacity to service existing customers and potential future customers in this Northeastern region of the United States. This acquisition makes a lot of sense. And we are very excited that the two organizations will provide AMD's customers with additional tools and product lines that will help them grow their profits. Now, on to the quarter. Sales to our customers increased by 5.4% or $69.3 million. Our cigarette sales grew by 3% and non-cigarette categories grew by 11%. Excise taxes, which are embedded in our revenues, increased by approximately $22 million or 7%. Foreign currency translation accounts for approximately $30 million of the overall sales increase, of which approximately $20 million is related to the cigarette category. Keep in mind that a portion of the foreign exchange impact is embedded in the excise tax increase. It is worth noting that cigarette sales dollars improved by approximately 3% despite a 1.4% decrease in carton volume. This increase was driven primarily by the excise tax inflation just mentioned, which helped offset the effect of the decline in cartons. Granted we are focused on the consumption trends and monitoring our profit per delivery to ensure we protect our profitability, our non-cigarette marketing initiatives resonate even louder in this climate. We did show good progress in our non-cigarette categories, which grew by approximately 11% in the first quarter. Excise tax inflation had a nominal impact overall on this result. Candy sales were favorably impacted by the manufacturer-driven price changes, and snacks, fast foods, and health and beauty care products showed double-digit growth along with bread and dairy. These other categories were favorably impacted by our VCI and fresh initiatives as well as new business. Gross profit for the first quarter of 2008 was $81.2 million compared to $75.5 million for the same period last year. This includes LIFO expense of $1.7 million this quarter versus $1.8 million last year. Although the LIFO impact was about the same in both quarters, 2007 expense was heavily weighted towards the cigarette categories whereas 2008 expense was more evenly split between the categories. We call out the effects of LIFO because they can and often do fluctuate significantly, and because we operate and manage our business on a FIFO basis. Last year's results also included a $3.3 million cigarette inventory holding profit that was generated mostly from the Arizona excise tax increase that went into effect in December of 2006. Manufacturer increases in the first quarter of this year only amounted to $100,000. However, recently announced pricing changes by two of our larger cigarette manufacturers will favorably impact the second quarter compared to the first quarter. After adjusting for these items, remaining gross profit amounted to $82.8 million this quarter versus $74 million last year, an 11.9% increase. Cigarette gross profit margins on a FIFO basis and excluding holding gains decreased by approximately 10 basis points as a percentage of sales. As Mike indicated, this was driven largely by a shift in Canadian cartons to generic brands and a reduction in the Canadian manufacturer program incentives compared to prior year. Non-cigarette gross profits on a FIFO basis were up 18.1% for the quarter. Included in this growth is floor gain income from the recent increase in candy prices that we would not expect to continue at the same pace in the future. However, margin improvement resulting from those increases will benefit us into the future. This category, candy, is primarily sold on a cost plus markup basis. Confectionary price changes are not predictable, and the patterns for these programs and announcements have changed over the past several years. We also showed margin improvement in other non-cigarette categories resulting from the shifting of lost cigarette profits to these categories, continued improvement as a result of our VCI and fresh programs, as well as a better sales mix of the higher margin categories. Moving on to operating expenses, Mike has already spoken about this line item in some detail, so I will be brief. To recap, operating expenses increased 12.3% in the first quarter from $71.7 million last year to $80.5 million this year. Two items, Toronto operating costs and related startup, and an increase in the severity of our health and welfare claims, contributed over 46% of this increase. Excluding just these two items, operating expenses were up $4.7 million or 6.6%, slightly higher than our sales growth. Warehouse and delivery costs increased $5.8 million or 27 basis points as a percentage to sales. Excluding Toronto, health and welfare costs and fuel price inflation that continued to outpace our surcharges by approximately $800,000, warehouse and delivery increased by 11 basis points. This increase was driven primarily by increased rents and wages, as well as an increase in depreciation and truck lease expense to support our VCI initiatives and new business. As Mike mentioned, we did enjoy labor productivity improvements that helped defray some of the rising cost. But there is still more work to be done, and the management team is focused on this. SG&A expenses for the first quarter increased by $2.9 million or 9.3% as a percentage of sales. This line item increased 9 basis points over last year's first quarter. The lion's share of this increase is related to the healthcare claims and fixed costs related to Toronto that preceded the rollout of sales during the quarter. We expect that the Toronto costs in total will be leveraged over the remainder of their first year of operation. Excluding these items, SG&A grew at 2.6% and is more in line with merit increases and historical inflation. We continue to focus on bringing down costs wherever we see an opportunity, and I am hopeful we can continue to rationalize our cost of being public and other related expenses. I am sure you all noticed the foreign currency transaction loss we recorded during the quarter. $1 million is hard for even us to come to terms with, but this is purely a function of the revaluation of our investments in Canada, and as our US dollar competes with the Canadian dollar, we will continue to see swings until the currencies stabilize. Our tax provision is essentially nil, and as we explained in our MD&A, we actually enjoyed a nominal benefit that was offset by the interest on our unrecognized tax benefits. We disclosed a basic effective tax rate of 41.5% as compared to 43.9% last year to give you a sense of the real tax impact before you adjust for interest and other items. Diluted earnings per share was a loss of $0.05 for the first quarter versus income of $0.19 per share for the first quarter last year, a $0.24 swing. The largest contributors to the swing in EPS is the difference in cigarette holding gains, which amounted to approximately $0.16, and the foreign exchange loss and startup costs for Toronto, which explains another $0.09. Some of you are interested in our cash flow and some of our non-cash items. Depreciation and amortization, including the amortization of debt issue costs, amounted to $4.5 million for the first quarter '08 compared to $3.6 million for the first quarter '07. Cash flow generated from our core business operations was $8.6 million compared to $8.9 million last year. Working capital generated another $20.5 million of cash during the quarter compared to $60 million last year. The largest portion of this cash comes from the declining cigarette inventory levels that were especially high at the end of 2006 and tax payable balances that increased during the first quarter of 2007, resulting from the reestablishment of credit terms in a number of states. We spent approximately $6 million for fixed assets during the quarter, which is slightly below a third of our expected spending for the year. A portion of this related to our investment in the new Toronto facility and another large portion related to our investment in our tri-temp fleet. As previously mentioned, we did repurchase about 100,000 shares during the first quarter under the share repurchase program with a cash outlay of approximately $2.1 million this quarter with the remaining costs falling into the second quarter. Moving to our balance sheet, there is not a lot to report that is not already captured in the cash flows. Our asset management statistics, days sales outstanding and days cost of sales, both showed improvement from the end of the year. AP days, including bank overdrafts and taxes payable, remained relatively stable. Our long-term debt at the end of the quarter was $9 million compared to $29.7 million at 12/31/07 and $6.1 million as of March 31, 2007. As I have shared with you before, our long-term debt is normally highest at the end of second and fourth quarters due to the holiday and LIFO inventory buildup at the end of each of those periods. Our investment in AMD's assets, expected in June, will also contribute to a higher debt level at the end of second quarter, and it will take us about 60 days to build their payables up as we replenish their inventory turn and establish credit in the states they do business in. We expect, based on current projections, that their payables should cover approximately 30% of our purchase price. In addition, we expect their receivables and inventory to be added to our borrowing base at the time of closing. Based on our advance rates and ineligible criteria, we should be able to cover somewhere in the neighborhood of 60% to 65% of these balances. This leaves approximately $5 million to $7 million uncovered that we will be tapping into our existing availability under our credit facility. Speaking of which, at March 31, 2008, our availability was approximately $196 million. We had approximately $28.7 million in letters of credit outstanding and we were in compliance with all of our covenants. We would like to reiterate our expectation for $6 billion in sales and capital expenditures of $20 million for 2008. As a reminder to those new to our story, the first quarter has generally been our weakest quarter and for the past two years has contributed less than 10% of our annual pre-tax profit. In addition, our plan for 2008 did include some costs related to the phase in of new business and startup costs related to our new facility in Toronto. We continue to believe that we will experience some weakness in the same-store sales due to consumer demand not being as robust as in previous years and a continuation of weakness in our carton sales, as reflected previously in our guidance. In closing, we have a history of making measured but meaningful capital allocation decisions that slowly but consistently add to the bottomline and support our long-term growth strategy. We have been around for 120 years by following the steady eddy philosophy that has served us well in tough times. I see no reason to believe that this philosophy will not continue to serve us, our customers, and you, our shareholders, well into the future. Thank you for your support. And operator, you can now open the line for questions.
- Operator:
- (Operator Instructions). Our first question comes from Jonathan Lichter from Sidoti & Company. Please go ahead.
- Jonathan Lichter:
- Good morning.
- Mike Walsh:
- Good morning.
- Jonathan Lichter:
- The non-cigarette margin, I think Stacy had mentioned it is sustainable. Is there any possibility for some upside there the rest of the year, or is this the peak?
- Mike Walsh:
- No, that's really going to be a function of continuing to drive VCI and the fresh opportunity. And our long-range plans are to grow our margins. That's going to be a function of sort of a product mix shift, if you will.
- Jonathan Lichter:
- Okay. So other than the candy, there wasn't anything else unusual in the quarter?
- Stacy Loretz-Congdon:
- No. The candy price increase did have a positive impact in the quarter and actually gave it a boost for the first quarter. Going into second quarter, a portion of that will be sustained because we do earn profits on a cost plus markup basis, but you may see a little bit of compression there because the floor gain won't be there.
- Mike Walsh:
- But you take out the cigarette price increase our margins on non-cigarettes grew nonetheless.
- Stacy Loretz-Congdon:
- They grew nonetheless. They actually improved quarter-over-quarter.
- Operator:
- Our next question comes from Richard Whitman from Benchmark Capital. Please go ahead.
- Richard Whitman:
- Yeah. I have three of them so I will just spit them out and you answer them in whatever order. Any progress on recovery in the bankruptcy, number one? Number two, could you talk about potential geographic expansion in the East? And three, in terms of new product initiatives that you've spoken of recently, prepared foods, breads, fresh fruits, et cetera?
- Mike Walsh:
- Greg, do you want to talk about the Ameristop?
- Greg Antholzner:
- Certainly. Yeah, at this point we are very much involved in the Creditors Committee. As you know, bankruptcies and the proceedings go rather slowly, so there is not a lot to report. They've sold some properties off. But at this point in time it is still early on. We still expect some recovery, but it's very, very uncertain at this point in time. And that goes for both Ameristop and Big A, our other large bankruptcy.
- Mike Walsh:
- Let me speak to geographic expansion. We believe that there's some opportunity still out there. We are in dialogue with some potential operations. The last year, we were really focusing on more the strategic kinds of things, which really took a lot of focus and time and energy. We're now looking at more I guess you would say tuck-in acquisitions, that sort of thing. And there are some out there. We are pursuing them as we speak, and I expect that we will be doing some in the foreseeable future. So, absolutely. Now as far as new products, like in the fresh area, we've developed a modular store set for all these new products, kind of spearheaded by Rob Hoefs, our new Director of Fresh. We have been out presenting that to the marketplace through trade shows and other and we have enjoyed some pretty good traction there. I don't have the numbers right off the top of my head, but I think we are picking up 100 stores a month or something like that with these new store sets. Our movement of milk continues to grow, I'm going to say 100 stores a month or something recently. That sort of just steady eddy grinding, no big chain accounts that we've picked up in the first quarter to pick up milk and that sort of thing. So it's not sort of a project; it is just a long-term keep marketing, keep selling, keep introducing these. I would say we have only scratched the surface with fresh, and we're doing pretty good with that. And I have been talking to CEOs of large retailers, and I am more and more convinced that that's where the industry is going and I'm more and more convinced that Core-Mark is well positioned to take advantage of it. And we are growing the business, certainly double-digits in those categories. So I think those are the -- if that answers your questions.
- Operator:
- Our next question comes from Kian Ghazi from Hawkshaw. Please go ahead.
- Kian Ghazi:
- A few questions. One on the inventory gains on the candy. Can you guys help us a little bit more on trying to quantify that? As you've noted on your cigarette inventory gains, they can be volatile and meaningfully impact results on a quarter-to-quarter basis. It would be helpful if you would also break out for us how much that candy gained helps the gross margins and the non-cigarette revenues.
- Stacy Loretz-Congdon:
- I will take that. Kian, we normally don't break that out or call it out specifically. It's partially due to the fact that the floor gain displaces some of our normal merchandise income and it's hard to segregate the two from one another. There is overlap, so to break out an exact number would be a guesstimate. And so we traditionally do not call that out.
- Mike Walsh:
- The other thing is you get price increases from manufacturers every week, every month, and I think we are a little reticent to get into the game. Cigarettes are clearly different. Cigarettes are very substantial, and you need to know about that. I understand, I sympathize with you, but we don't want to get into this quagmire because there is no end to it. There is always a price increase. We've always sort of viewed that as part of the normal course of business. It's nice. You get it from time to time, but you get it on other products as well. I would say, yeah, candy is a little bigger, a little richer, a little nicer when you get it. But it's really kind of part of the continuum of the normal course of business.
- Kian Ghazi:
- You mentioned that the non-cigarette gross margins were up quarter-over-quarter. Were they up year-over-year including this gain as well?
- Stacy Loretz-Congdon:
- I'm sorry. We were comparing to first quarter of last year versus first quarter of this year when we made that statement.
- Mike Walsh:
- I think over the last two or three years, our margins have steadily been growing quarter-over-quarter and year-over-year. And I believe that that will continue to happen as we see a larger acceptance by the industry of fresh and the VCI concepts.
- Kian Ghazi:
- Got you. Secondly, on your auditor fees, they are still very high. A few years ago they were $5 million, this past year they were $4 million. When I look at your peers in the distribution business, if I look at companies your size they are much less, let's call it $700,000 to $2 million tops. $4 million seems way out of whack for the business that you run, the size company that you are. Where do you think you can get those auditor fees over time and how are you actually pursuing an effort to get them down?
- Mike Walsh:
- I'm going to comment at 10,000 feet and then I'm going to turn it over to Stacy who will give a cogent, I'm sure, technical explanation of that. I would have to say that I'm very frustrated over the cost of being public in general and audit cost. However, I think when you compare us with other companies, when we emerged from bankruptcy, because we were privately held, I didn't know a whole lot and the management team at that time did not know a whole lot about being public. We were slapped with a number of material weaknesses. There was a change of auditors and we were trying to get help as best we could. I think the risk from the auditors point of view, who, by the way, are very good, very professional, I think they would say, well, as we took you on, we viewed Core-Mark as a higher risk because of the number of material weaknesses or material deficiencies that we had. Now, the fact that we've gotten rid of these, I think that we should look to more market rates, in line with the risks that we now have or don't have. But it is, nonetheless, amazing to me the costs that we bear on that. And I think that with the forces working with the SEC and all this going on, just the way our system is set up of auditing and oversight and so forth, there is not a whole lot the management team can do to that, except to continue to press and negotiate and point out that we are not a company at risk. We're a straightforward company. I mean, we have 25 distribution centers, but it is the same business. Its one business replicated 25 times. So I'm with you 100%, but part of this is driven by just what is coming out of Washington. I would hope that you investors would have a little more influence on that than the people that are targeted to receive this onerous oversight. But Stacy, so what is the real answer?
- Stacy Loretz-Congdon:
- No, I mean you touched on a lot of it. A lot of it has to do with that we were perceived in 2007 still as a high-risk account because of the remaining material weakness. A couple other things to note is our materiality threshold is extremely small because of what we do in our industry. And as a wholesaler we have a small bottomline, which we are measured against, and that causes their magnifying glass to be that much larger.
- Mike Walsh:
- You understand what she was saying? I think the materiality was like, if you have a thing that is 5% of your pre-tax net in one quarter, well, ExxonMobil, for example, would be held to the same standard that Core-Mark is. And so, we're trying to point out that, look, 5% of our pretax net in a quarter is slightly smaller than 5% of Exxon Mobil's pre-tax net. So it sounds like Core-Mark is being held to 100 times more difficult standard on materiality. But that's the rules of the game that we have to live by, and there is no sense to it.
- Stacy Loretz-Congdon:
- And I think also there's other things that we are putting in place in order to elevate the view. We're focusing on our entity level controls, putting more analytics in place, so that we can try to get the auditors out of the transaction details. Because as you know, we have millions of transactions, and when they get down to that minutia it takes more time, it is more labor-intensive. So we are elevating that and restructuring some of our internal controls in order to provide them with a better approach. We are working with Deloitte very closely to identify efficiencies in order to reduce their hours. So, it's definitely something that Chris Miller and I are extremely focused on and that Mike is reminding us of on every chance he gets. So it is something we are anticipating we will bring down in 2008 and we're just working very hard at it. Does that answer your question, hopefully?
- Operator:
- The next question is from [Matt Vedricks] from Bond Street Capital. Please go ahead.
- Matt Vedricks:
- Good quarter, guys. I've got a quick question about your non-tobacco sales, though. Could you actually breakout what percent of the increase in non-tobacco sales was due to price increases versus organic growth?
- Mike Walsh:
- That was sort of the same question I think the other gentlemen asked. We will continue to break out the impacts of cigarette price increases. But on the non-cigarette stuff, we get price increases on all commodities throughout the year. Candy is a little more impactful. But we tried to say, look, that is part of the normal course of business. We're trying not to get too deep into the minutia because the next thing we will be breaking out price increases on batteries and things like that. It's a path you go down that gets too sticky.
- Matt Vedricks:
- Can you give us a directional guidance, perhaps maybe say if it's half, or more than half, less than half?
- Stacy Loretz-Congdon:
- Matt, I would just add that in the non-cigarette categories we don't really track it that way in our system. For cigarettes, it's very easy to track because we do monitor carton volume. But for the eaches and boxes and the cases of all the other categories, as far as segregating the sales dollars into what was inflationary versus what wasn't, it's not the way that our system currently works.
- Mike Walsh:
- And the other thing, you know, you do get a little bit of a load in, but you're carrying inventory longer and you're sacrificing future what we call merchandising income.
- Stacy Loretz-Congdon:
- Correct.
- Mike Walsh:
- So if you give it a number you would sort of have to say, well, but then I am not going to get X amount the next month. It just gets complicated.
- Matt Vedricks:
- Okay. Fair point. Thank you.
- Operator:
- We have a follow-up question from Richard Whitman from Benchmark Capital.
- Richard Whitman:
- No, I don't have any follow-up questions.
- Operator:
- Sorry. Thank you. Our next question comes from Jonathan Lichter from Sidoti & Company.
- Jonathan Lichter:
- When do you expect the Toronto division to kind of be able to leverage its fixed assets there? When do you expect additional customers?
- Mike Walsh:
- In the next year there will be bids that we will be competing for on large accounts that we currently service in Western Washington, I mean Western Canada, beg your pardon. So, our whole strategy was that we believed that we were the distributor of choice in Western Canada, and that if we established a presence in Central Canada where more people are, as long as we're still providing the service they are looking for at a competitive price, that there would be some rationale for them to choose us. You know, one distributor handling more of their business. And we still view that that way, and we're optimistic that we will do well in competing for that business. Those are bids, they roll every three or four years, and some of those are coming up in the next 12 months.
- Jonathan Lichter:
- Okay. Thank you.
- Operator:
- Follow-up question from Kian Ghazi from Hawkshaw, please go ahead.
- Kian Ghazi:
- Thanks. I had gotten cut off earlier. Just in response to your feedback on the auditor fees, and I don't need more explanations, but I just wanted to give you guys some feedback in that I am looking at other distributors with similar business models as yours. I would imagine they face similar thresholds for materiality and also have many DCs like yours and many operating units. I just think that when I look at all of them, there is no one paying anywhere near the fees that you guys pay. So I don't think it's the structure of your business. I imagine it is your auditors taking advantage of the material weaknesses that you had. And I would encourage you guys, as you have been a public company for some time now, and have gotten your material weaknesses under control, and have built up your finance department, that you push back very hard on them, because I don't see any other firm paying anywhere near what you are paying given your size and given the business that you guys operate.
- Mike Walsh:
- We hear you loud and clear. This benchmarking, that's something we have talked about that I think we're going to come to our auditors with saying, look, here is what other companies are paying. We agree with you. We do feel that we are out of sync. The only thing we can say is that I think that this kind of a hangover from when we first became public we got slapped with what was it, Chris, 11 material weaknesses, and that's been sort of a hangover. But we hear you loud and clear. I absolutely agree with your observation, and trust me, we will be having conversations with our good partners who audit us to try to get us back into more of a market rate.
- Kian Ghazi:
- To be clear, if you guys come out and say we're changing auditors because we are being charged too much, no one is going to penalize you for that. I mean a lot of times there is some fear around changing auditors; but given the egregious fees that you guys are paying, I don't think any investors would be concerned if there were a change at this point. On a separate issue, I did want to bring up some of the kind of investor relation practices of the company, just some feedback, mainly just in a public forum maybe for the Board to hear as well, there's a few things that I have a little bit of issue with and I just wanted to air them here.
- Mike Walsh:
- Sure.
- Kian Ghazi:
- First, I'm indifferent to whether or not you guys provide guidance, so none of this is around your guidance policy, but a few things. I do think if you're not going to provide quarterly or annual guidance, which again indifferent to, I do think it's important that the company have longer-term goals that they espouse to the market and are held accountable to over a multi-year time frame. Short-term investors are not going to like that. But long-term investors, those who hopefully are your larger investors, want to see that you guys have benchmarks that you are aiming for and we can gauge your success or failure against those over time. I don't see any reason not to do that. I don't think that hurts your Company in any way, and it certainly provides, I think, appropriate goals to be measured against over time. Second, if you guys are going to provide annual revenue guidance, it seems to me a much more valuable benchmark would be revenues net of excise taxes. You have no control over those excise taxes and they should not be factored into whether or not you guys are "meeting or beating your target." So I would encourage the benchmark that you use to be net revenues. I would also encourage the company to use that in their compensation plans as well, because again that is something you don't have control over. The VP of Western distribution operation should not necessarily be penalized or aided by the fact that excise taxes were high or low in a particular year. The other thing I would like to raise is that I know of no other company out there that has this two-day gap between when you have your conference call and when you report your numbers. I don't know what the reason is, but whatever the reason is, I can't imagine it is a particularly good one. In those two days in between, you have the potential for the disclosure on a selective basis to certain investors and not to all investors to certain information, and you eliminate that risk if you have your conference call within, let's call it 12 hours of when you report your results and all the information is disseminated at the same time.
- Mike Walsh:
- Okay, good observation. By the way, I just will comment on our MBOs. We do adjust; we don't let anybody in management get some kind of windfall because there was a huge unplanned excise tax increase in one of the states. We do do that.
- Kian Ghazi:
- Great.
- Mike Walsh:
- But I hear you. Good comments. We will follow up.
- Kian Ghazi:
- Thank you.
- Operator:
- Our next question comes [Tom Samik from Hydrotech]. Please go ahead.
- Tom Samik:
- Recently the company stopped delivery of milk to 600 Max stores in Ontario only after two months of operation. And I was wondering what does that mean for the future of the VCI strategy that you spoke about in the last conference?
- Mike Walsh:
- It will not have any bearing on the VCI strategy. That was a unique situation that was created by a miscommunication of specifications. Let's just put it this way. The timing of doing the milk was not appropriate for us at the prices they believed were that we did. And it got to a point where we just simply couldn't do it for the price. It was just a misunderstanding. So the dairy is now doing the milk. But that has nothing to do with the long-term view of the economics of vendor consolidation. That's sort of a unique situation.
- Tom Samik:
- I have a follow-up. If things were to deteriorate further for you in Canada, would you consider exiting the Canadian market?
- Mike Walsh:
- That is a hypothetical question. We are not dogmatically tied to anything, anytime, anywhere. We're going to do what we think is in the best interest of the business. But I'm certainly not at that point with Canada. Canada has over the years proven to be a profitable contributor to the overall company. We still believe that the potential is there for us to return to that profitability. You would have to say there's been some rather unusual events that have gone on in the Canadian marketplace in that industry that has caused ripples in the pond for all of us. But we think it would be premature to start considering just doing something that dramatic. I mean we're in business to make money and to get a return on our investment. Other than that, there are no rules other than doing it legally, ethically, and morally.
- Tom Samik:
- Thank you.
- Operator:
- (Operator Instructions). And at this moment we don't show further questions in queue.
- Milton Gray Draper:
- Well, I'd just like to thank everyone for joining call. If you have follow-up questions, please give me a call. Thanks.
- Operator:
- Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
Other Core-Mark Holding Company, Inc. earnings call transcripts:
- Q1 (2021) CORE earnings call transcript
- Q4 (2020) CORE earnings call transcript
- Q2 (2020) CORE earnings call transcript
- Q1 (2020) CORE earnings call transcript
- Q4 (2019) CORE earnings call transcript
- Q3 (2019) CORE earnings call transcript
- Q2 (2019) CORE earnings call transcript
- Q1 (2019) CORE earnings call transcript
- Q4 (2018) CORE earnings call transcript
- Q3 (2018) CORE earnings call transcript