Core-Mark Holding Company, Inc.
Q1 2015 Earnings Call Transcript

Published: 9 May 2015

[Operator:]

Welcome to the 2015 First Quarter Investor Call. My name is Cynthia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Miss Milton Draper. Miss Draper, you may begin.

[Milton Gray Draper:]

Thank you, Cynthia, and welcome, everyone. I would now like to read the statements about the use of forward-looking statements and non-GAAP financial measures during this call. 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 projects. 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 today 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 6505899445. Joining me today is the Chief Executive Officer of Core-Mark, Thomas Perkins; 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 lineup for the call today is as follows. Tom will briefly address a recent report published on us and then he will move on to discuss the state of our business and our strategy going forward. Stacy will then review the financial results for the fourth quarter - first quarter. We will then open up the call for your questions. Now, I would like to turn the call over to our CEO, tom Perkins.

[Thomas Perkins:]

Good morning everyone and thanks for attending our call. Unfortunately, I feel compelled to spend a minute addressing a few points covered in a recent research report recommending to sell or short sell on our stock prior to discussing the state of our business. I will be brief, first, our story, our management, our strategies, our growth, our performance, and our industry did not change on the day prior to the report being issued and we expect no changes in the future, which leads me to point two. Regarding our valuation, that is your job, our job is to perform. Lastly, I am sure everyone knows that cigarettes have been in a secular to the decline for a few decades and this category has always been highly regulated. While facing these obstacles, we continue to grow our carton sales through market share gains, and we continue to make a higher profit on each carton of cigarettes sold. Manufacturer price increases and our core strategies are the primary drivers to the increased cigarette profits and we expect this to continue. I am as proud and excited about this company as I have ever been and I also have confidence in our investors who take the time to understand the industry and the many opportunities that lie ahead. Since we were not contacted prior to the report being issued or privy to all the information contained in the report, please feel free to contact Milton, Stacy or myself with anything I did not address. Now, back to the important stuff. This is a \very bullish time for the c-store space. The National Association for Convenience Stores recently announced that 2014 recorded the highest in-store sales in the industry's history, growing 4.6% and now representing 30.8% of the total c-store sales. Certainly, we and others believe that the low fuel price is having a positive impact on those sales, but the overall growth trends for the industry continue to be positive. It is clear, convenience store consumers are rewarding the channel with their increased patronage and we expect that to continue. Some quick facts on the scope of the convenience store industry. Convenience stores represent almost 34% of all retail locations in the U.S. with nearly 153,000 stores, which is up 1% versus 2013. Compare that to drug stores with about 42,000 or Dollar Stores with about 27,000 or Starbucks with about 12,000, I think it is important to understand how vital this industry to the U.S. economy and how it affects the consumers' daily lives. The convenience store industry employed 2.4 million people last year, a 10.6% increase. The sales generated by the convenience stores in the U.S. last year were greater than the entire GDP of Switzerland and this industry is growing. Our job is to partner with the customers to help them become more relevant retailers make no mistake, our long-term view of this industry is very bullish. To provide some additional color, I recently attended the NACS CEO Summit, which brings together many CEOs, from large c-store retailers and major suppliers to the industry. During this summit, the retailers and suppliers shared their views for 2015 and future years. The mood of the summit was very optimistic. Many of the retailers were coming off a strong 2014 and were looking forward to continuing that momentum into 2015. Lower fuel costs, are definitely assisting in these results. All of the participants agreed that the c-store industry is constantly reinventing itself and is the reason why the industry is resilient and relative in today’s economy. There were many consistent themes shared by all the participants. The shopping habits of consumers are changing. At the core of these changes is a desire for convenience. This is one of the core strengths of the c-store industry. In addition, the consumer is requiring fresh, healthy and good for you foods. These categories are seeing a rapid growth in the industry and have tremendous growth potential in the future. Food service continues to grow with the industry reporting a 9.7% growth in 2014 and plays an ever increasing role in improving the profits of the c-store. Food service provides the retailer with a way to attract more shoppers to their stores and increase their profits. This is even more important as the industry continues to face headwinds such as the flattening out of fuel consumption and the decline in cigarette carton consumption. Finally, retailers are focused on controlling their in-store costs. The retailers cost are being driven higher due to various rules and regulations that governmental agencies are implementing, so a need to increased efficiencies, and productivity is necessary to offset the cost increases to their business. I came away from this meeting even more confident that our core strategies VCI, fresh, and FMI, are exactly what our customers need to meet the challenges they face to attract and serve the ever-changing needs of their consumers. Moving on, a quick update on our partnership with Rite Aid. We are making significant progress in our discussions to expand the categories of product that we deliver to their stores. Execution on the current items delivered has improved. We continue to sell chilled, fresh, frozen and bakery items in about 4200 Rite Aid stores. We firmly believe that we should be delivering more of the items that Rite Aid sells in their stores. Our partnership provides Rite Aid with a national distributor that can provide them a consistent production selection which they can leverage to drive food traffic and sales in their stores. Now on to Q1 results. I would leave most of the details in Stacy's capable hands but from my perspective, Core-Mark had a very good first quarter and we are encouraged by the momentum we are seeing in the business. Our sales were up a healthy 8.1% adjusted for foreign currency fluctuations. This was driven by both an increase in same-store sales and market share wins. Comparable same-store sales for non-cigarettes improved 5.5% in the first quarter as it did in the fourth quarter last year. This metric is one of the key statistics we use to measure how well we are serving our customers and indicates to us that our core strategies are resonating. I am reassured by the continued healthy growth of this metric. I was especially pleased to see the 18% growth in fresh products sold. This indicates that consumer tastes are continuing to move toward the fresh and good for you products. Same-store carton sales for the first quarter were up 2% which is the second quarter in a row showing growth in this statistic. We can’t know for certain, but we suspect that this was driven by a combination of lower fuel prices better employment levels and CVS’s exit from the tobacco business. Now, remember, CVS reported their tobacco sales were approximately $2 billion, this was a large share of the $3.7 billion of cigarettes sold in the U.S. drug channel in 2014. This is a fraction of the $52.5 billion of cigarettes sold in the c-store channel. I am encouraged by the continued growth we are seeing in our sales and gross profits, the latter of which grew 10.4% for the quarter. My confidence in the fundamentals of our company and the industry we service continues to strengthen due to the current opportunities we see. We did see operating leverage in the first quarter with both sales and gross profits growing at a faster rate than operating expenses, driving the improvement in our operating income. Warehouse and distribution expenses increased about 6% and decreased 3 basis points a percentage-of-sales basis versus the first quarter of last year. As we head into the summer, our focus is on ensuring we are properly staffed to handle the higher volumes and providing excellent service to our customers during this important season. Our transportation cost continue to improve. Our fuel expenses were 2.6 million less in the first quarter this year compared to the first quarter last year. This improvement was driven by a reduction in the prices we paid for diesel, growing use of the CNG fuel for the trucks we have converted, and the reduction in stem miles from the movement of customers into the Ohio division. Also on the transportation front, we expect that longer term, the driver pool across North America will continue to tighten, but we have seen some relief from the spikes we experienced last year. We believe that the reduction in fuel production in certain regions and the plans we have implemented addressing the hiring, training, and retention of drivers is causing those improvements. The bottom-line is our adjusted EBITDA increased 44% to $22.9 million in the first quarter. I am very pleased by these results and feel we are well-positioned for the rest of 2015. As a result, we have decided to tighten our guidance by increasing the bottom range of our revenues guidance previously $10.7 to $11 billion now $10.8 to $11 billion. We have also lifted our EBITDA guidance from $125 billion to $129 billion to $126.5 billion to $129 billion. Just to reiterate, our guidance does not include any big account wins or acquisitions. We had a good start with the execution of core strategies. We are targeting $100 million in incremental VCI and fresh sales for 2015. And these two programs contributed over $22 million in incremental sales to the quarter. Innovation continues to drive the results in these categories. You may have seen the recent announcement regarding our strategic partnership with Boyd's Coffee Company. Boyd’s is known as the premium coffee company in the c-store space and have been operating under a DSD model. This partnership should broaden and improve the coffee options and programs we bring to our customers and improve the overall quality and the service they offer to their customers. We are again targeting 3000 FMI surveys for the year. These surveys will be a combination of new stores redo, some stores surveyed several years ago, and potential new stores. We have gotten off to a strong start in the first quarter completing approximately 630 surveys. We continue to see our non-cigarette sales to these stores grow two to three times faster than un-surveyed stores and the customers' acceptance rate of a recommendations continues to be above 60%. In summary, business is good and the industry is healthy. I am very pleased with the first quarter results and feel good about where we are positioned as we head into the summer season. We will remain focused on the execution of our core strategies and business operations. We will continue to innovate in how we go to market to assist our retailers, to meet the ever-changing needs and demands of the consumers. We are also focused on investing in our people, technology, systems, and assets in order to support the future long-term growth of the company. It is my responsibility to make sure this organization has the tools and resources it needs to support our continued growth and to ensure we adequately leverage these investments to return value to you, our shareholders. 2015 is looking like we could have a very good year. With that, I will now turn things over to our CFO, Stacy Loretz-Congdon.

[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 for the quarter and full year guidance. Diluted EPS for the first quarter was $0.24 compared to $0.10 last year. For those of you that model EPS excluding LIFO expense, this translates to $0.30 for the quarter compared to $0.17 last year, up $0.13 or 76.5%. We tightened our 2015 annual EPS guidance following a solid quarter has strengthened our belief that we will deliver annual results towards the upper-end of our original guidance. For 2015, we are now expecting an EPS range between diluted EPS was $1.83 in 2014 compared to $1.79 for 2013. We had guided to a range of $1.87 and $1.91. Key assumptions remain unchanged and include $16 million for LIFO expense, $8 million for cigarette holding gains, a 38% tax rate, and 23.4 million dilutive shares outstanding. Excluding LIFO expense, we are now expecting an EPS range of $2.29 to $2.33. This compares to $2.26 in 2014 which included approximately $0.36 per share of candy holding gains and net OTP tax items which are not expected to recur at the same levels in 2015. We did received 900,000 in net OTP tax refunds for the first quarter of 2015 and it is possible we may receive additional refunds or assessments later this year. But these events are very difficult to predict. Moving on to our first quarter results. Sales increased 6.6% to $2.5 billion compared to $2.3 billion last year. Excluding the impact of foreign currency, sales increased 8.1%. The weakness in the Canadian dollar reduced Canada’s contribution to sales by about $34 million for the quarter. First quarter is generally our softest quarter and currently represents approximately 23% of the top-end of our sales guidance consistent with the past two years. Cigarette sales increased 6.3% to $1.6 billion compared to $1.5 billion last year, driven by a 4.4% increase in carton sales and a 1.8% increase in the average selling price per carton, which includes foreign exchange effects. It is interesting to note that same-store carton sales actually increased 2% during the first quarter, contributing to our strong 4.4% increase in carton sales. The remaining increase was attributable to the Karrys acquisition as well as other market share gains. Industry carton shipments were down a modest half a point. An increase in the same-store carton sales is fairly unusual for us and the modest decline in the industry is also unusual. Many reports are citing strong consumer spending fueled by lower gas prices. Longer-term, we would expect the industry consumption trends to more historical 3% to 4% declines. However, we have typically those trends. Our food/non-food category sales increased 7.2% in Q1 to $807 million compared to $753 million in the same period last year. This increase was led by food in particular which was up 9.4% compared to prior year. Rite Aid fresh refrigerated and frozen sales contributed meaningfully to our success in this category. Remaining increases in food were led by our snack category, which increased about 14% driven by alternate snacks including meat snacks and our nuts, seeds, and dried fruit categories. The industry overall is showing strength in these categories benefiting from strong unit growth as well as some inflation. All in, our fresh categories which include dairy, bread, fresh products, and meat increased nearly 18% during Q1 benefiting from the Rite Aid contract and the execution of our core strategies. Gross profit increased $12.9 million to $137.3 million, an increase of 10.4% for the first quarter of 2015. We recorded $0.9 million in net OTP tax items of $0.5 million and incremental cigarette holding gains while LIFO expense was $0.4 million less than prior year. Remaining gross profit which excludes the aforementioned items increased $11.1 million or 8.8% to $137.8 million. Remaining gross profit margin increased about 11 basis points for the quarter, or 17 basis points if you adjust for the 6 basis point compressing effect of the cigarette manufacturer price increases. Cigarette remaining gross profit increased 4.3% to $36.4 million, benefiting primarily from the 4.4% increase in carton sales. For the quarter remaining gross profit per carton was essentially flat or slightly up excluding foreign exchange impacts. Non-cigarette remaining gross profit increased $9.6 million or 10.5% to $101.4 million for the first quarter of 2015. Remaining gross profit margins for non-cigarettes increased 37 basis points. Our strategy is focused on improving the non-cigarette margins by 20 basis points per year, excluding any compressing events which we normally call out. Our Q1 results were driven predominantly by shifting sales towards higher margin items. Moving on, operating expenses were $127.4 million in the first quarter of this year compared to $119.8 million for the same period last year, a 6.3% increase supporting a 6.6% increase in sales and a 10.4% increase in gross profit. Operating expense as a percent of sales were essentially flat, absorbing cost associated with our expansion activities including our new Ohio division and the Karry’s acquisition. Operating cost as a percentage of sales for the remaining business decreased 11 basis points. Warehouse and delivery expenses increased $4.2 million or approximately 5.6% to $79.5 million during the first quarter 2015. Almost half of this increase was due to Ohio and Karry’s. The remaining cost increased 2.9% supporting a comparable 6% increase in cubic feet handled 7% increase in miles and almost 10% increase in deliveries. Favorable fuel cost contributed to our leverage compared to last year to the tune of $2.6 million. As a percent to sales, this benefit was partially offset by the shifting sales to food non-food categories increasing warehouse and delivery operating cost by about 4 basis points. SG&A expenses increased $3.4 million or 7.7% during the first quarter excluding expansion cost related to Ohio and Karry’s comparable SG&A increased approximately 5.2% and as a percentage of sales decreased modestly. Bonus and stock comp accruals were $1 million higher than prior year due to better Q1 performance. We mentioned on our last call that our annual guidance includes approximately $6 million to $7 million of investment spend affecting SG&A in 2015. This investment is focused on people, technology and infrastructure and we’ll ramp up as the year progresses with a focus towards the back half of the year. So leveraging this line item may become a little bit more difficult later this year. These investments support longer-term value creation and are necessary to maintain our continued growth. In Q1, we spend less than $1 million with those dollars contributing to a facility consolidation and system improvements that will increase productivity and efficiencies in the future. Moving to cash flows, cash generated from operations before working capital changes was $18.8 million for the quarter compared to $14 million for the first quarter of 2014. Changes in working capital which measures two single points in time resulted in a generation of $63.3 million compared to $63.6 million for the first quarter last year. The largest contributor to working capital in both periods was the cash generated from flushing inventory levels down to more normal levels compared to a year-end position. As we have said in the past, our peak inventory levels are generally at the end of the second quarter before the July 4 holiday and December 31, when we are building inventories to preserve our LIFO position. Free cash flow, which we measure as adjusted EBITDA plus or minus changes in working capital, less CapEx, cash taxes and cash interest, was over $77 million for the quarter compared to almost $66 million for the same period last year. First quarter is always robust due to significant swing in inventory levels from year end, a better gauge is our annual forecast for free cash flow that we still believe will be between $65 and $70 million for 2015. CapEx got off to a slow start that we are still guiding to $35 million for the year. Average debt for the year was $30.4 million compared to $13.6 million in 2014. The purchase of Karry’s in late February a slightly slower flush of inventory levels fro year end drove average debt levels up. We spent $3 million on share repurchases in Q1 and continue to support the stock so far in Q2 subject to 10-b51 limits. We also paid $3 million in cash dividends in Q1 and have announced our second dividend in our press release this morning. As we move towards, the fourth quarter, we anticipate our free cash flow will support another increase in our dividend as has been our historical practice. We did use about $8 million of cash to acquire Karry Brothers in Canada and a large portion of this will be self-funding as we build and stabilize related accounts payable and tobacco taxes payable levels. Our capital allocation decisions support our core strategies and focus on ensuring we have sufficient capital to support our initiatives that will ultimately return value to you our shareholders. Our investments in CapEx and related infrastructure and our acquisition and expansion activities are all focused on long-term value creation. Opportunistic inventory buys may be shorter term but are an integral part of our wholesalers business and help us maximize free cash flow that allows us to fund our dividend and shore repurchase programs. To summarize, we had a very good first quarter and are very optimistic about the year. Nothing has changed in our fundamentals or our strategy. We operate in a robust and growing industry with great momentum to continue our growth trajectory and we believe we are on track to deliver yet another record year. And with that, I’d like to thank all of our employees, our vendors, our customers and you, our shareholders, for your continued support. Operator, you can now open the line for questions.

[Operator:]

[Operator Instructions] And our first question comes from Mark Wiltamuth with Jefferies. You may begin.

[Mark Wiltamuth:]

Hi, good afternoon.

[Thomas Perkins:]

Hi, Mark.

[Mark Wiltamuth:]

Tom, I wanted to get a little more insight on what you heard at the CEO Summit there at NACS. Just what are you hearing there on the building momentum in fresh? This is obviously a much higher margin category for you and you had some good growth here. I think you said 18% growth in the quarter. What are you hearing industry-wide and what are you hearing from your independent customers out there?

[Thomas Perkins:]

Well, I think that from an industry perspective, NACS is focused on fresh. They partnered with United Fresh, I believe. And they actually put out a long white paper for the industry to talk about the importance of having fresh fruits, fresh cut vegetables, et cetera in their stores. And really tied it in with the consumer trend. So everyone there are seeing that improvement. And also it’s not just the fresh, but it’s the healthy and good for you foods and I think as the more we do that and the more we continue to push from our company perspective with our core strategies as well as the industry in NACS, it’s starting to resonate with the independents. And I think the – what’s going to end up what’s driving that really is the consumers, they are looking for that product in the stores.

[Mark Wiltamuth:]

Okay, and then, with your independent customers, are you seeing more placements into new venues or is it mostly just more flow-through from your existing customers who have already embraced the fresh?

[Thomas Perkins:]

I think it’s a combination of both. I think, we had a farm to fresh – farm to market fresh fruit program that we rolled out sort of the latter part of last year. I think we’ve placed over 1400 new racks, new placements within our stores. So, I think it’s a combination of both. I think we are getting both new placements with in-stores and we are also getting growth in existing stores.

[Mark Wiltamuth:]

Okay, and in the quarter, did you have a notable contract wins that are worthy of calling out and maybe if Stacy could go over compressing events, as you start up with acquisition digestion, et cetera?

[Thomas Perkins:]

We had, none that we would call out today. We had a couple of good size mid-sized chains that we won. But it’s interesting that we had probably an increase in our store count by about 700 stores from the end of the year to April of this year. So really what we are seeing is we are seeing a really good momentum with independent business that were picking up as well as some medium-sized chains. So, again, I think, our strategies are resonating with both independents and chain customers out there.

[Mark Wiltamuth:]

Okay.

[Stacy Loretz-Congdon:]

As far as, Mark, just on the compressing events, none - nothing notable other than what we talked about in the operating expenses, on the margins, nothing compressing the margins.

[Mark Wiltamuth:]

So, just the Karrys and that was like 7 basis points or something of that magnitude?

[Stacy Loretz-Congdon:]

No, I don't - big enough.

[Thomas Perkins:]

No, yes… and it was only came in – it was only with us for about 5, 5.5, so.

[Stacy Loretz-Congdon:]

Nothing notable there.

[Mark Wiltamuth:]

Okay, all right. Well, thank you very much and congrats on the strong quarter.

[Operator:]

And our next question comes from Andrew Wolf with BB&T Capital Markets. You may begin.

[Andrew Wolf:]

Hi, thank you, and good morning to you out there. Cigarettes, I understand, or I think that there is some of the manufacturers have gotten aggressive due to the potential for consolidation. Is that your understanding as well? Do you think that could also be helping the category as maybe the brands are promoting more and maybe that's taking share from other – other channels or generic type cigarettes?

[Thomas Perkins:]

I don’t know. I think there definitely is some – I read an article a couple days ago and it was regarding RJ Rentals who were being more aggressive with a couple of their brands, because part of the – sort of the how they approach the FTC was the brands that they are shifting over to Imperial Tobacco have to be a certain market share. So it sounded like they were being a little bit more aggressive on the pricing and promoting of those brands. I think it was Winston and maybe Salem. But, I have – we have not seen any changes really in their promotions, today and that’s not to say that once if the FTC approves the merger that may not – that may change, but at least today, I don’t see anything really different about the environment today. I just think it’s really driven by lower fuel prices. I think there are definitely unemployed is getting better and definitely there is impact from CVS. I think, we’ve seen in the past is that when one channel exits the tobacco business, the convenience stores tend to get a big share of that those purchases.

[Andrew Wolf:]

Switching to the natural and better for you, food category. Could you just tell us a little about your internal, what you've - over the years and even recently in terms of buying and merchandising, I mean, when I think of a big retailer, they now - like a really good retailer, food retailer would have a separate department or at least certainly buyers just for natural foods. Have you reached to that? What point have you got to in the merchandising evolution in that regard?

[Thomas Perkins:]

I don’t think we are at that point yet about having a separate buyer for organic products and I don’t know if retailers are – but what we are doing is we are partnering with some experts in the field. For instance, we talked about, I think neither the last quarter or the third quarter of our partnership, U&FI with really partnering with them to identify the upselling SKUs, especially from a fresh and probiotic drink perspective as well as other good-for-you snacks for the convenience store. So, we are using some companies that are really good in what they do. But we have, I mean over the course of the time, what we’ve done is we have changed really how we go to market and I think the majority of our suppliers and vendors are also bringing to us more fresh and good for you products to sell into the convenience store channel. And so that’s, so I think the combination of the suppliers as well as ourselves, getting more of that product in the hands of our retailers.

[Andrew Wolf:]

Okay, well that was interesting. And also on the Boyd Coffee deal, the strategic partnership, is that a regional or is that going to be over the entire business. And then, I just wanted to ask you, I am sort of like thinking in my mind is, to bearing that to milk or some other type of vendor consolidation, is there – do you – does the cost go down, kind of substantially because Boyd no longer have to bear the cost of transportation?

[Thomas Perkins:]

Yes, it’s a national program for us and really the first focus on that is to - we have Arcadia Bay Coffee programs, our own private-label branded coffee program and we have about 2500 stores that are selling that Arcadia Bay program and so now that could be powered by the Boyd's Coffee. But, it's a national program. The thing we are seeing today is we are seeing DSD companies are wanting to get out of the business, but the other thing too is they don’t have the market penetration that wholesalers have. We saw that with Hostess. Hostess, for many years was a DSD supplier, but they only reached about 70,000 convenience stores versus 150,000 convenience stores and now their sales have never been greater, because of their partnership with suppliers. And I think with Boyd’s what it does for Boyd’s it opens up a much broader audience for their coffee products. And so, that's why we are excited by that because it’s a premium greater tasting products and they are really experts in that. And so they can focus on what they are expert at which is picking and grinding and making coffee. And we can focus for them on delivering their products to our customers.

[Andrew Wolf:]

And just a quick follow-up on that, and then I'll cede. Do you get access to any of the Boyd customers, I am thinking like, nice hotel chains and so on, which might have gift shops or…

[Thomas Perkins:]

Yes, as we progress through the partnership with them, there will be opportunities for us to expand our customer count, coffee customer count through this partnership.

[Andrew Wolf:]

Thanks, and congratulations on a good start to the year.

[Thomas Perkins:]

Great. Thanks.

[Stacy Loretz-Congdon:]

Thank you.

[Operator:]

And our next question comes from Ben Brownlow with Raymond James. You may begin.

[Ben Brownlow:]

Hi. Congrats on a great quarter.

[Thomas Perkins:]

Thanks, Ben.

[Stacy Loretz-Congdon:]

Thanks, Ben.

[Ben Brownlow:]

You had mentioned and you've covered this pretty thoroughly, but I'm just wondering on the cigarette cartons and that growth, you mentioned CVS and lower fuel prices, et cetera., but, I was wondering if - it's possible, is there any carryover benefits from the non-cigarette initiatives, like FMI that are maybe help driving traffic to some of the stores that you are distributing to and helping lift the cigarettes?

[Thomas Perkins:]

Yes, Ben, that’s a very good point because, one of the things that I believe is happening is, because of the core strategies and how we are assisting our retailers be to become more relevant, we are increasing their food traffic which would increase – you would assume that not only it’s increasing the non-cigarette categories but also the cigarette categories. So, I think your – I think that’s a very valid point you just mentioned. So I think that is helping our growth in our current existing customers.

[Ben Brownlow:]

Great, and just one last one for me, on the demand trends between sort of the channels, the same-store sales growth between channels, you made some encouraging comments on the increased traction you have with Rite Aid, but, I am just wondering what you are seeing more broadly between channels. I think, non-traditional c-store channels are maybe about a quarter your door count. So, just some color there?

[Thomas Perkins:]

I think, that was interesting, we did spend a little of time from – at the NACS CEO Summit talking about the channel impact on the convenience stores. I think what it does, it – there are, the Dollar Stores, definitely when they went into the tobacco and cigarette business are driving some food traffic, but their volume is pretty small, but it’s a lot of stores, drug stores, with the fresh and ready to eat products that they have in a lot of the drug stores are also competing against the c-store. But what it does and a lot of them – lot of the retailers agreed, it just makes us better retailers, because what it means is we have to improve our offering. And at the end of the day, we still have, we are still the most convenient store to buy products at and so, even when it compares to the drug store or a Dollar Store and so I think that’s really where the emphasis is, we need to continue to improve the product selection, but let’s really leverage our convenience to the consumers.

[Ben Brownlow:]

Great, thanks, Tom.

[Operator:]

And our next question comes from John Lawrence with Stephens. You may begin.

[John Lawrence:]

Good morning.

[Thomas Perkins:]

Good morning, John.

[John Lawrence:]

Yes, Tom, would you sort of breakdown a little bit – congratulations on that fresh increase. Can you give us a little sense now, and I guess Ohio has been open for the better part of six months, and not only getting Rite Aid and starting there, but, what have you seen in that territory? You talked about it being a top-10 state and pardon upon, but I assume there was some low-hanging fruit there?

[Thomas Perkins:]

So, Ohio, so, when you open up a new business, definitely what you want to do is make sure your operations are humming. Right, so we’ve been focused on that. We’ve been focused definitely on absorbing the Rite Aid business as well as the accounts we had transferred over from the Pennsylvania and Kentucky divisions. And we picked up a 44 store chain in Ohio, early on we picked up another small pocket chain and really our focus now is to go out and blitz the area and say we are here and really leverage that. The one thing that, one of the – one of the reasons that sort helped us or convinced us to open the Ohio division was to help us decrease our stem miles and decrease our fuel cost and I think for the first quarter, we are really seeing a reduction in the stem miles and actually it’s helping drive some of that fuel savings we are seeing for the company. So there was a lot of opportunity for helping the profitability of the company and definitely that’s coming to fruition.

[John Lawrence:]

Is there any sense or any chance, Stacy would give us sort of that increase of business from those stores that were reassigned or reallocated or the routes re-design - reassigned?

[Stacy Loretz-Congdon:]

No, sorry, John. We don't talk about any particular division.

[John Lawrence:]

But obviously, that’s a big part of this growth.

[Thomas Perkins:]

Yes, and I think, did we mentioned how much what the annual savings were supposed to be?

[Stacy Loretz-Congdon:]

For the stem miles?

[Thomas Perkins:]

Yes, I think, we mentioned about $2 million, John and I would say that it looks very positive that we could attain those savings.

[Stacy Loretz-Congdon:]

I am sorry, I thought he was asking about sales.

[John Lawrence:]

You got to try it, right? So, Tom, could you just take one deeper dive - a little deeper dive into just clarifying on the Rite Aid. So, would it be fair to say, progress is being made of where you have been, execution is better. You had talked about on the last call just getting their store managers a little bit more - I would assume, intelligent in the process. That's happening and there is enough - is it fair to say there is enough results being seen to start the next round of discussions?

[Thomas Perkins:]

Yes to all of that. But it really is, because I think, I had an opportunity and couple of us did to attend a charity event that Rite Aid puts together and their CEO and COO and Senior VPs were there. And I was very encouraged because, all of them saw the strategic partnership and where they want to take our strategic partnership in the future. And so I think that, one is they are starting, they are seeing the results of the store and really it’s interesting is, it’s all about driving sales for them, right, in their stores and having a national supplier, really assists them in that process. And so that really is they now, how can we leverage it more and so, I am very, very encouraged by the conversations we are having and that I think that, in the not too distant future, we will announcing more categories being added to our deliveries to Rite Aid.

[John Lawrence:]

And certainly they are seeing and that's what you are saying.

[Thomas Perkins:]

Right.

[John Lawrence:]

They are seeing the benefits of additional food traffic.

[Thomas Perkins:]

Correct. Correct.

[John Lawrence:]

And then, last question for me, the Boyd's Coffee and you talk about DSDs, are there other pockets of the business around the stores that are facing the same dilemma that, over time you could go after?

[Thomas Perkins:]

Yes, so we talked about a couple things, one was Hostess which was a big one that we always want it should be in there. Bon Appetit was another one. That was a really high quality pastry line that has really sort of got out of the DSD business. Boyd’s is another one. Dean Foods is another, is the dairy provider that really is – doesn’t want to be in the DSD business especially to the convenience store channel and so we are seeing more and more opportunities come out from Dean Foods. So, it is interesting, I think that the model, our vendor consolidation strategy is resonating with our customers definitely but really with our – with a lot of suppliers in DSD. And so, I am really encouraged by that because I think it’s the right thing to do and it really helps our industry to make us more efficient and less costly. So, I am excited by that.

[John Lawrence:]

Great, thanks. Congrats.

[Thomas Perkins:]

Thanks, John.

[Operator:]

And our next question comes from Chris McGinnis with Sidoti & Company. You may begin.

[Chris McGinnis:]

Good morning, well, I guess afternoon, morning to you. Just two quick questions one, just on Tom, your reference to 700 new stores, can you maybe just talk about how that maybe compared to prior year, but then also maybe how the new CRM maybe helped with that?

[Thomas Perkins:]

Yes, that’s a good point. I think, what I think it’s we are seeing a lot – a greater momentum in number of stores we are picking up, I think, so it is at a faster pace. And I truly believe the CRM is really assisting us because it’s helped us identify the accounts out there we don’t have and what the potential accounts and they really has helped our sales force have a directed focus on attacking and picking up new accounts. So I think that – I think it’s definitely it is assisting us in seeing the pick up and the momentum of picking up new independent accounts.

[Chris McGinnis:]

Great. Is that throughout the organization already and?

[Thomas Perkins:]

Yes.

[Chris McGinnis:]

How – All right, it is throughout the…

[Thomas Perkins:]

Yes, throughout every division including Canada it’s on it and are leveraging and using it on a daily basis.

[Chris McGinnis:]

Great. And then just second, Stacy, probably more for you, obviously. But, just on the gross margin improvement on the non-cigarette, was that aided by the tax benefit?

[Stacy Loretz-Congdon:]

No, that's excluding its remaining gross profit improvement and what I can - some color around that is we had some strong promotions at the back-end of fourth quarter where we loaded in, but we sold through product in the first quarter.

[Chris McGinnis:]

All right.

[Stacy Loretz-Congdon:]

We recognize gross profit based on sales. So that definitely contributed just some healthier promotions as well as the higher margin categories.

[Chris McGinnis:]

All right. And I guess, just – I know there is a lot of seasonality in the model, but, is that a good number to use that improvement throughout the rest of the year?

[Stacy Loretz-Congdon:]

Well, I think I stated that our target is 20 basis points per year.

[Chris McGinnis:]

Great, all right. Thank you very much.

[Thomas Perkins:]

Thanks Chris.

[Operator:]

[Operator Instructions] And we are standing by for audio questions.

[Milton Gray Draper:]

Okay, thank you for your participation in our conference call and for your interest in Core-Mark. We are very pleased with the first quarter results and believe the momentum we have in our business is very encouraging. We believe 2015 will be another record year for Core-Mark. If you have any additional questions, please feel free to call me Milton Draper at 650-589-9445. Thanks operator.

[Operator:]

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