Core-Mark Holding Company, Inc.
Q4 2013 Earnings Call Transcript

Published: 3 Mar 2014

[Operator:]

Welcome to the fourth quarter investor call. My name is Adrienne, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. [Operator Instructions] I'll now turn the call over to Ms. Draper. Ms. Draper, you may begin.

[Milton Gray Draper:]

Thank you, operator, and welcome, everyone. I would now like to read the statements about 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 fourth quarter results and to answer any questions you might have. If you have an additional follow-up question after the call, please call me at [phone]. Joining me today is the Chief Executive Officer of Core-Mark, Thomas Perkins; and 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

[Thomas B. Perkins:]

Good morning, everyone. I would like to go over the state of our business and briefly review the results of the fourth quarter and the year and to discuss our core strategies. 2013 was a very good year for Core-Mark. We were focused on our core objectives

[Stacy Loretz-Congdon:]

Thanks, Tom, and good morning, everyone. I'd like to start my comments with a brief discussion of our earnings per share. Diluted EPS for the fourth quarter was $1.29 compared to $0.83 last year. Or for those of you who model EPS, excluding LIFO expense, this translates to $1.28 for the quarter compared to $0.90 last year, a 42% improvement. Normalized for unusual and one-time items, LIFO EPS for the quarter was up 32%, driven primarily by the growth in our non-cigarette sales and related margin improvement. For the year, diluted EPS grew 23% to $3.58 compared to $2.91 for 2012. We had guided to a range of $3.35 to $3.45 and beat that expectation due to our LIFO expense coming in lower than expected. As a reminder, our LIFO expense is tied to the Producer Price Index and reflects inflation, or lack thereof, in the various product categories we carry. Excluding LIFO expense, we earned $4.04 this year compared to $3.55 last year, a 13.8% increase. We are pleased to see this fall in between our guidance of $4 to $4.10. Free cash flow per diluted share was $4.52 compared to $4.27 for 2012. Our year-end inventory buildup was approximately $7 million higher than the end of 2012, which roughly translates to about $0.60 of free cash flow per share. More on free cash flow later. For 2014, we are guiding to an EPS range between $3.50 and $3.65, which includes an estimate of $13 million of LIFO expense, $7 million of cigarette price increase, a 39% tax rate and 11.7 million diluted shares outstanding. These 4 key assumptions compared to 2013's results equate to a reduction of approximately $0.48 per share. On a FIFO basis, we are guiding to an EPS range of $4.15 to $4.30, compressed by $0.26 related to the changes in our CPI, tax rate and outstanding share assumptions. Had we used the same CPI, tax rate and LIFO expense as in 2013, our FIFO EPS guidance for 2014 would have been a range of $4.41 to $4.56 compared to $4.04 this year. This represents an adjusted growth rate of 9% to nearly 13% over 2013 results. However, since several of these key assumptions are so unpredictable, we felt conservative estimates at this time was the most appropriate approach to our guidance. Our expected free cash flow for 2014 should fall within a range of $4.70 to $5.10, assuming we spend $30 million in CapEx and assuming the buildup of inventory levels at year end are similar to this year. I think it is worth mentioning that we generated sufficient excess cash in 2013 to pay out dividends of $7.1 million or $0.61 per share spread over 3 dividend payments, following the accelerated Q1 dividend paid on December 31, 2012. We also repurchased about 7 million of our shares, offsetting all of our 2013 dilutive incentive shares, while continuing to invest in the business. Our financial condition continues to be very healthy. And now, moving onto the fourth quarter results. Sales increased 13.8% in Q4 from $2.2 billion last year to $2.5 billion this year. Cigarette sales increased 11.8%, and our non-cigarette sales increased 18.2%. We had one extra selling day during the fourth quarter compared to the same period last year, representing approximately 2% of our growth. Cigarette sales increased 11.8% for the quarter on a 10% increase in carton sales. This increase was driven primarily by the additional cartons sold by our Carolina division and by market share wins which offset a 4.3% decline in same-store carton sales. More importantly, our non-cigarette categories increased over $123 million or 18.2%, including Carolina's contributions. Excluding Carolina, we still saw 13% growth across multiple non-cigarette categories led by food, which increased 15.3%. Same-store sales grew a healthy 7.3%, and market share wins contributed to the acceleration and the growth rates of our non-cigarette sales. We believe this success is being driven by our core strategies, Fresh, VCI and FMI. Gross profit increased $21.4 million to $143.3 million, an increase of 17.6% for the fourth quarter of 2013. Remaining gross profit increased $19.2 million or 16% to $139.1 million. Gross profit margins for the quarter were up 18 basis points, and remaining gross profit margins, which excludes LIFO and cigarette holding gains, increased 11 basis points. Excluding the compressing effect of Carolina and Turkey Hill, which we started servicing during the second quarter, remaining gross profits were up 23 basis points. Cigarette remaining gross profit increased 5.1% or approximately $1.9 million, benefiting from our new Carolina division and new customers gained during 2013. Non-cigarette remaining gross profit increased 20.8% or $17.2 million for Q4 2013. About 1/3 of this growth came from our Carolina division, with the remainder driven largely by our focus on selling higher-margin products to our existing and new customers. In total, our non-cigarette margins as a percentage of sales increased 27 basis points, all in. Diverting in promotional activity during the fourth quarter assisted in our -- in driving 16 basis point improvements in our candy and snack categories, and our e-cigarette sales growth of 117% bolstered general merchandise margins. Moving on, operating expenses were $119.5 million in the fourth quarter this year compared to $105.6 million for the same period last year, a 13.2% increase, which supported our sales growth, specifically our non-cigarette categories, which increased 18.2%. Almost half of the increase in operating expenses was generated by our new Carolina division. As a percent of sales, operating expenses decreased 2 basis points. Warehouse and delivery expenses increased $12.5 million or approximately 19.4% to $77.2 million during the fourth quarter, including one extra work day. Excluding our newest division, warehouse and delivery expenses increased 16 basis points as a percentage of sales, 4 basis points of which were driven by higher workers' compensation cost. On the surface, it appears we didn't leverage warehouse and delivery. However, as we sell more of the non-cigarette categories, 2 things are happening

[Operator:]

[Operator Instructions] And we have John Lawrence of Stephens on line with a question.

[John R. Lawrence:]

Tom, would you start off just a little bit and talk a little bit about, I guess, a couple of things. When you look at the growth of all the new business and the new industry rollout, can you talk a little bit about that, and maybe the costs associated with that? Anything else you can put around that and how -- what's the scope of the extension of that sort of test or whatever?

[Thomas B. Perkins:]

Yes. So we've been in operation for approximately 3 months with the test of stores on the alternative retailer, and we are in conversations today to expand that. And based on where we are in the discussions, I can't go into any more details, but the cost has been minimal for that, to begin with. So -- but I anticipate as we continue that rollout, that will be -- that will grow. I think as for the other business, I think the business we've added, I think, again, it shows that our strategies and how we go to market and what we provide to our customers is resonating. And I think it just goes to show with not only large chains like at Turkey Hill or Esso, but also with our small-pocket chains at the -- in our different regions of the country that are looking for what we bring to the table and offer them to help them grow their businesses profitably.

[John R. Lawrence:]

Right. And secondly, the new tools with the new sort of the team laid out, I assume, is there anything measured strategically different or are we just sort of putting, we gather, and naming that? What's really different on how they're going to go to market everyday?

[Thomas B. Perkins:]

We definitely, when we started the FMI process, our strategy about 3.5 years ago, it was really focused on data, coupled with demographics, to help build a marketing and category management plan for individual retailers. But I think what we've noticed, and I think you see it in the press all the time, is the power of data, right? And so, what this group has done has been able to harness all this data we collect, which probably is the most extensive in North America for convenience stores, and then be able to provide that in an easy-to-use format for our salespeople to go into a customer and help them say, "Here's where your sales are, here's where your competitors are and here's what we need to do to help you get up to those levels." Second thing, the CRM is really going to help us, one, with market intelligence; and then two, to really provide a concerted and directed effort on gaining market share and independence throughout our territories. And so, I think both of those are just expansions of the group. And really, it goes back, again, to this data and the power of data and using that to grow our sales profitably.

[John R. Lawrence:]

And the last question. Stacy, does the guidance at all reflect any type of challenges weather-wise, getting to certain places in January and February?

[Stacy Loretz-Congdon:]

Not specifically, John. I would just say that first quarter, we know, is generally softer, so our plans would reflect some of that softness in the first quarter as we go out. But we didn't adjust it for the weather that we've been seeing in the news.

[Operator:]

[Operator Instructions] And we have no questions at this time.

[Milton Gray Draper:]

That's it? All right. Well, thank you for your participation in our conference call and for your interest in Core-Mark. We are pleased with the results for the year and believe that 2014 will be another terrific year for the company, as we leverage our competitive advantages and continue to grow sales in higher-margin categories. If you have any additional questions, please feel free to call me at [phone].

[Operator:]

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