Core-Mark Holding Company, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Welcome to the 2015 Third Quarter Investor Call. My name is John, 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 call is being recorded. I will now turn the call over to Ms. Milton Draper.

[Milton Draper:]

Thank you, John, 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 to review our third quarter results and to answer any questions you might have. If you have additional follow-up questions after the call, please call me at 650-589-9445. Joining me today is the Chief Executive Officer of Core-Mark, Thomas Perkins; and the Chief Financial Officer, Stacy Loretz-Congdon. Also in the room is Chris Miller, our Chief Accounting Officer. Our lineup for the call today is as follows. Tom will discuss the state of our business and our strategy going forward, followed by Stacy who will review the financial results for the third quarter. We will then open up the call for your questions. Now, I would like to turn the call over to our CEO, Tom Perkins.

[Thomas Perkins:]

Good morning, everyone. Thanks for joining us on our call. I would like to start with our recent announcement of service the Murphy USA store which is expected to generate approximately $1.7 billion in annualized revenue. Our two organizations have a very good cultural fit and I believe both companies will benefit from this partnership. We will begin servicing these stores in the first quarter of 2016. We expect to invest about 5 million in additional CapEx in association with this contract with most of the spending going towards additional fleet. Inventory will be added to support the new business resulting in an increase in total working capital in the 7 to 9 day rang with each day equals approximately $5 million. In additional we expect to have onetime cost of about 1.5 million to onboard this customer, a portion of which will be spent in the fourth quarter. This customer is heavily weighted in tobacco products which turn very quickly and with the minimal investment in CapEx we should be able to leverage the fixed costs of the 10 division servicing these stores. On the flipside overall margins will be compressed due to the heavy tobacco mix. In addition with the large increase in volume, we should see greater efficiencies in our operations. The RONA [ph] on the contract is healthy and meet to our standards of this partnership will be very good for the Company. I am sure everyone saw our press release last week announcing our five-year contract with 7-Eleven. 7-Eleven is the best-in-class retailer and we're proud to partner with them. We will begin servicing approximately 900 stores in three regions in October of 2016. Three of our divisions Sacramento, Salt Lake City and Las Vegas will service these stores. We will begin ramping up for this business as we are closer to start day and we believe we will be taking cost out of the supply chain due to our closer proximity to these stores. Both of our companies are in alignment on the importance of increasing the efficiency of the supply chain through vendor consolidation and expanding the amount of fresh and good for you product sold in the c-store channel. We look forward to this partnership very much. In addition to the 7-Eleven and Murphy USA contract wins, we have won a number of smaller regional bids that don’t reach our disclosure threshold. So we will not be naming them. I believe our core strategies along with our flexibility and creativity in providing retailer solutions are driving our market-share gains. These customer wins make a very proud of our people and honored that we are being selected by these exceptional retailers. Moving on I would like to give you a brief update on our partnership with Rite Aid. We have completed the roll out of the tobacco category at Rite Aid and we are seeing improvement in the supply chain efficiencies we expected from the addition of these products. We continue to partner with Rite Aid and are explained ways to expand their fresh and good for you product selection. We remain focus on helping this important drug retailer continue to improve their offerings and to add efficiencies to their supply chain. However, we also did announcement that we’re ordering plans to acquire Rite Aid. In the near-term we would not expect any significant changes to our business with Rite Aid. Our contract doesn’t expire until the middle of 2017, so it is business as usual as we like to see if this deals get regulatory approval and if there are any changes in their strategy. Today we announced a 23% increase to our fourth quarter dividend. This is the fourth increase since the dividend inception in fourth quarter of 2011. Our attention is to increase shareholder value with our capital allocation decisions. This increase reflects the confidence that we have in our financial strength and the optimism we have for our company. Core-Mark had a solid third quarter and we remain very optimistic about our business especially considering our new customer wins. For the quarter our sales increased 11.3% adjusted to foreign currency fluctuations and we continue to see same-store sales increase in both the cigarette and non-cigarette categories. Same-store sales for non-cigarette increased 3.45 and our total fresh categories grew by a robust 19%. We continue to see soft sales in some of the traditional center of the store categories and a lack of inflation in those categories other than cigarettes. All in our non-cigarette sales increase 8.3% for the third quarter after adjusting for the impact from FX. On the cigarette side of the business, we saw same-store carton sales increase for the fourth quarter in a row, up 1.1% this quarter. We continue to suspect that this is a result of some combination of lower fuel prices, a recovering economy and the exit if CVS from the tobacco business. We will begin CVS’ exit from the back of business from the fourth quarter, so we should be able to get a better feel on how much of an impact this has had on our carton sales. Cigarette revenue increased 12.7% adjusted for FX driven by an 8.4% increase in carton volume and a 4.1 increase in our sales price per carton. The improved economy is helping this category as well as market-share gains which we expect to continue into 2016. Operating expenses in the quarter were little higher than we were expecting. As a percentage of sales total OpEx increased 11 basis points driven by warehouse and delivery expenses which increased 6 basis points, we have a 6.8% increase in cubic feet of product handled and a 14% increase in the number of deliveries. Operating expenses also reflect an increase related to our expansion activities which included the addition of the new Ohio division and the absorption of the Karrys business. excluding the impact of these two items operating expenses as a percentage of sales was up 4 basis points. We continue to focus on productivity improvements in our warehouses, so we can further leverage our operating expenses. So bottom-line is EBITDA was up over 13% for the quarter and is up 17% year-to-date. The third quarter growth was driven by the tax stamp inventory holding gain, the 41 basis point improvement in non-cigarette margins and market-share gains offset by our expansion in investment spending. My confidence in the fundamentals of our company and the industry we service continues to be reinforced. We’re on pace to post record VCI and fresh incremental sales this year. These sales grew more than $42 million in the quarter or 97.5 million year-to-date. We continue to focus on expanding the categories we service in our source to win a consolidation and expansion of the fresh and good for you products which we firmly believe increasing the source of profit and relevancy. As we mentioned in our last call, we began the roll out of partnership program with Boyd's Coffee and this has gone very well so far. Since July we have added over 200 of our existing stores to this program. The annualize revenue projection for just these stores is $2.2 million. We continue to examine and refresh the marketing programs we provide to our customers in order to assist them and meeting the needs of their customers. Our core solutions group continues to find innovative ways to assist the organization to further penetrate the markets in which we compete. The group has conducted over 2,200 FMI surveys year-to-date with a stated goal of 3,000 for the year. The average profit improvement in our survey stores remains in the range of 25,000 to 30,000 per year and the acceptance rate of our recommendations is currently higher than 65%. So we are making incremental improvements each year. In addition, we are gaining traction using upgraded version of the FMI survey to close the deal on some customer win. Convenience store industry is healthy driven by the growth in convenience shopping, a history of flexibility in meeting consumers' needs and the low fuel prices. This is a good time to be in c-store industry and an excellent time to be at core mark, we're having a very good year and we're continued to grow our business. We are focused on the fundamentals and exceeding our plan in order to post strong results for the year, recognizing that we still need a $4 million to get price increases to deliver our annual guidance. Stacy will provide more detail on changes to our full-year EPS guidance in a moment. I believe the growth and customer partnerships is reflection of the success of our approach, the reputation we have built in the forms of our core strategies are the right strategies for the industry and our customers. As we plan and prepare for the on-boarding of our new customers in 2016, we will continue to invest in our people, technology and infrastructure to support our future growth. We look forward to our new partnerships and believe the wins in 2015 puts us on a path to have an exceptional 2016. With that, I will now turn things over our CFO, Stacy Loretz-Congdon. Stacy?

[Stacy Loretz-Congdon:]

Thanks, Tom, and good morning everyone. I would like to start my comments with the discussion regarding our third quarter EPS and adjusted EBITDA performance and then move onto guidance. Adjusted EBITDA increased 4.8 million or 13.2% on improved gross profit. Diluted EPS increased 10.2% while EPS excluding LIFO expense decreased about 4%. You might find this confusing at first glance, so I would like to highlight some of the key drivers given the importance of these two profit metrics. First of all the fully diluted EPS growth of 10.2% benefited from a $3.2 million pretax decrease in LIFO expense, excluding LIFO expense EPS was down 4% compared to prior year due primarily to pension expense, a reduction in tax benefits and a foreign exchange loss compared to again last year. These three items represented at $0.10 per share reduction in EPS compared to the prior year. The disconnect to the decrease in EPS versus the increase in adjusted EBITDA both excluding LIFO expense has to do primarily with a $1.6 million increase in depreciation and amortization, the $1.2 million increases in stock comp amortization and $700,000 foreign exchange loss, all of which impacted our EPS all in but are added back in our adjusted EBITDA calculation. Depreciation and amortization represents investments in our infrastructure and stock comp represents incentive to our employees for current year performance. As to our guidance, we are reiterating our sales, adjusted EBIT and CapEx expectations for the year. We also still expect about a 38% tax rate and are now forecasting 23.3 million diluted shares. Our LIFO estimates which are based on producer price indexes did come in lower than expected for the third quarter, so we are lowering our full-year 2015 LIFO estimate to 12 million previously 16 million. In addition as the U.S. dollar strengthened at an accelerated pace during the third quarter, our investments in Canada have resulted in the foreign exchange transaction loss. We're forecasting continued weakness in the Canadian dollar through the end of the year also we have recently announced our new contract with Murphy USA which we will begin servicing during the first quarter next year. This will require that we begin our preparation for the on-boarding of this very large customer during the fourth quarter. When combined with the preparation for other new customer wins, we anticipate spending approximately $1 million of start cost during the fourth quarter this year. We anticipate both foreign exchange and new business startup cost will have a negative impact on the fourth quarter, so we are lowering our diluted EPS excluding LIFO expense by $0.05. However for our GAAP EPS which includes the $4 million reduction for LIFO expense or $0.10 per share, we are increasing our GAAP EPS by $0.05. This reflects the $0.19 increase in our revised LIFO estimates offset by the $0.05b decrease related to foreign exchange and new business startup costs for our new customers. Moving on to the financial, total sales increased 8.9% or 11.3% adjusted for foreign currency. Foreign exchange created about 2% compressor on growth rate for all categories. Cigarette sales increased 10.3% or 12.7% adjusted for the FX impact as Tom already pointed out. The carton increase of 8.4% was driven primarily by market share gains; however, excluding the larger account win and Karrys acquisition, carton growth is still over 2%, field by same-store sales up 1.1% for the quarter compared to an industry decline of 0.9%. We continue to see cigarette volumes that are more robust than in previous years, even if we lack the channel shift from CBS exiting tobacco in the fourth quarter, we expect with Murphy oil to see growth in this category though 2016. Our food/non-food category sales increased 5.9% or 8.3% adjusted for FX. This increase was led by our food categories which increased 8.6 including the FX compression. Fresh foods in particular were up 19% and now represent approximately 21% of our food category. We are seeing certain food commodities that are proceed -- good for you takes the place of some of the traditional categories what we refer to a center store where we have seen soft sales for more than a year. To address this consumer trend, we have increased our focus on these categories and continue to believe our core strategies are appropriately geared towards enhancing our customers profitability as well as our own. Moving on to the driver of our third quarter results, gross profit increased 20.2 million to 171.6 million, an increase of 13.3% for the third quarter of 2015. We recorded 8.3 million in tax stamp inventory holding gain and expect to recognize the remaining 0.7 million during the fourth quarter. Cigarette inventory holding gains were modestly up by 0.4 million and LIFO expense decreased 3.2 million compared to the third quarter last year. Remaining gross profit, which excludes the aforementioned items increased 15.8 million or 10.5% to 166 million. Remaining gross profit margin increased about 8 basis points for the quarter or 14 basis points if you adjust for the 6 basis point compressing effect of cigarette manufacturer price increases that occurred since September of 2014. Cigarette remaining gross profit increased 5.5 million or 13.1% to 47.6 million, including additional volume from Rite Aid. Cigarette remaining gross profit margins increased 5 basis points and remaining gross profit per carton was up over 4% in the quarter. Non-cigarette gross profit increased 6.3 million on lower LIFO expense offsetting last year’s candy holding gain of 5.2 million and other tobacco product tax refunds of 2.3 million. Non-cigarette remaining gross profit excluding these items increased 10.3 million or 9.5% to 118.4 million for the third quarter. Remaining gross profit margins for non-cigarettes increased 41 basis points, which is more than double our stated goal of consistently raising this metric by 20 basis points excluding a course of compressing events that we usually call out. We are quite pleased with the strength in our food programs particularly fresh which is contributing meaningfully to this margin growth. Our goal is to continue to drive sales in fashion other food commodities through our core strategies. Moving on to operating expenses, warehouse and delivery expenses increased 9.3 million or approximately 11.1% to 93.8 million during the third quarter. As a percent of sales warehouse and delivery increased 6 basis points. Excluding the incremental operating expenses for Ohio and Karrys warehouse and delivery expenses increased 5.7 million or 6.8% and as a percent of sales were essentially flat. The 1.8 million in fuel cost savings we saw in the quarter was partially offset by increased labor cost to support seasonal business and new business as evidence by higher cubic feet and the number of deliveries. Delivery expense and particular stated as a cost per delivery decreased approximately 8% driven by lower fuel prices. In the warehouse, cost per cubic foot was up 2% and 8% increase in cubic feet handled. We believe we could have been even better had we managed seasonal labor in certain divisions more efficiently, while some divisions were spot on, this is an area company wise that presents further opportunity to leverage. SG&A expenses increased 5.8 million or 12.3% during the quarter. Excluding incremental cost related to Ohio and Karrys comparable SG&A increase approximately 4.9 million or 10.5%. As a percent of sales, SG&A increased 5 basis points with and without Ohio and Karrys. In addition, investment spending on information technology, infrastructure and people was approximately 1.9 million during the quarter, representing approximately 6 basis points. In prior calls I’ve mentioned our estimate of between 6 million and 7 million of investment spend in our 2015 forecast. So far we’ve spent approximately 4 million year-to-date, notable investment spending during the third quarter included the consolidation of one of our warehouses into another and the continued build out of our financial system. Approximately 75% to 80% of this investment is one-time in nature and the rest predominantly are investment in people will continue into the future. These investments reflect expenses that are necessary to sustain our growth and create long-term value. Moving on to cash flows, cash generated from operations before working capital changes increased 11% from 72 million for the first nine months last year to 80 million for the same period this year. Working capital which measures two single points in time resulted in the generation of approximately 26 million in cash year-to-date 2015 compared to the use of nearly 3 million in cash for the first nine months of 2014. The 28 million swing in cash used for working capital was due primarily to differences in year-end inventory levels. As we’ve said in the past, our peak inventory levels are generally June 30th before the July 4th holiday and December 31st, when we are building inventories for the holidays and to preserve our LIFO position. We’ve also indicated that one of our uses of free cash flow always focused on maximizing speculative inventory opportunities. Year-date, we have recognized 8.3 million in cigarette tax stamp inventory holding gains and 5.4 million in cigarette inventory holding gains. These various types of inventory holding gains occur when we have inventory on hand in our warehouses and the manufacture price of that particular inventory increases. We can then immediately sell the existing inventory at a higher price plus our usual market. We speculate on inventory categories when we think a manufacture may be about to increase prices, by carrying heavier than normal inventory levels when the price of the product increases, we can maximize our inventory holding gains and produce an extremely attractive return on our investment. We're forecasting an additional 4 million for cigarette inventory holding gains in the fourth quarter to refer adjusted EBITDA on EPS goals. This of course is reliant on manufacturers taking the price of cigarettes up as they have historically done during the fourth quarter since 2008. We still expect full year free cash flow will be in the range of 65 million to 70 million subject to any unusual spike at year-end related to inventory levels over the holidays or for LIFO preservation. We had spent over 24 million of CapEx for the year and continue to believe that we will spend approximately 35 million by the end of the year. In addition this year, we spent about 7.5 million in information systems and technology related projects that will support our future growth. Average debt for the quarter was 48 million compared to about 2 million in 2014, and our peak set position was 119 million on July 2nd. Our higher debt position supported the speculative tax stamp purchases resulting in the $8.3 million tax stamp inventory gain this quarter. We expect 9 million on share practices though the third quarter and paid over 9 million in cash dividend. At Tom mentioned the Board once again approved an annual increase to the cash dividend that we returned to shareholders. Our capital allocation decision support our core strategies and focus on ensuring we have sufficient capitals of fund initiative that will ultimately return value to you our shareholders. Our investments in CapEx and related infrastructure and our acquisition and expansion activities are also focused on long-term value creation. Opportunistic inventory bias maybe sorter terms that are integral parts of wholesalers business and help us maximize free cash flow that allows us to find our dividend and share repurchase program. To summarize, we're having a good year and are very optimistic about our future. While we continue to have success winning market share, we also are continuing to focus on infrastructure cost control and leverage opportunities that will help improve earnings. As we said before, the best predictor on the future is our past performance. With 2015 guided revenue at the midpoint growing 9% since2008 and were adjusted EBITDA at the midpoint for 2015 has grown 11.6%, both on the compounded basis. We have also that our results in growth may not be linear impacted by large market share wins or acquisition, Murphy USA is expected to contribute to 2016 top line growth well above our previous friendly; however, over the long term we still view ourselves as the Steady Eddy company and believe these benchmarks should set reasonable expectation. We will be giving 2016 guidance when we release earnings for the full year, but we are feeling very optimistic about our future. 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:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mark Wiltamuth from Jefferies.

[Mark Wiltamuth:]

Congratulations on all these big account wins and I wonder if you could spend a little time talking about how the margin structure looks for each of them, clearly Murphy is heavily tilted towards tobacco so it's going to be lower gross margin business and if you could maybe talk about the operating leverage you will get on your existing facilities and how the overall operating margins look for that overtime? And then similar discussions for 7-Eleven, if you could because we can see the revenue but it's little harder for us get through the margin work?

[Thomas Perkins:]

Yes, I think because of the size of the Murphy, definitely we operate aggressive pricing for that business. We also as we went through the process of the synergies, there are a lot of synergies within our Existing operations. The stores where there stores are located we're driving by and so we're able to get a lot of synergies in our operating costs. I think right now a mark from our overall margin will probably see a 45 and 50 basis points decline in our overall margins, but on the flip side you'll probably see the thing on our operating expenses just because of the heavy tobacco volume in those accounts. From a 7-Eleven perspective which is more akin to a traditional convenient store, higher percentage of non-cigarettes definitely margins will be higher than Murphy because of that mix. But again based on the size and based on the number of stores we got, we are aggressive in the bidding, but definitely will have similar margins to our other chain business -- store chain business we have.

[Mark Wiltamuth:]

So the Murphy is really kind of margin neutral at the bottom-line for operating margin, is that right?

[Thomas Perkins:]

I think right now we have a better feel as we were preparing our 2016 plan and then we able to buy guidance and march to everybody. But definitely for each of these we will have operating start-up cost. So we will see one-time cost that occur in 2016 which will sort of take away some of the profits we’re anticipating from these accounts. But as we give our guidance we’ll sort of give you insight as to what those one-time costs are. But definitely we -- they should be accretive to our -- both accretive to our EBITDA and earnings in 2016.

[Mark Wiltamuth:]

And how about the pave on ramp-up there, is there a start-up period where you're just not as efficient when you start with this business. How long does it take to get done in?

[Thomas Perkins:]

So right now we’re starting on the on-boarding really the project teams currently as we look forward to starting the delivery of the stores in early part of 2016. So definitely what happens is we go out and we hire new employees, they go through a training process, we hire the drivers get them into the routine what our processes are and definitely with a large account like this it usually takes 90 days to sort of get all the buzz worked out through the -- from a delivery process and operation process. We’re really good at this and we’ve done many in the past. And so our whole focus right now is to ensure a seamless on-boarding of these stores. And so we’re going to be spending the money for training and support at each of the divisions that are going to be servicing these stores.

[Mark Wiltamuth:]

Just on 7-Eleven, you got 900 stores there, but nationally 7-Eleven has 10,700 stores. So is there an opportunity to expand into that account and some of those are franchise versus some of them -- so how does that work for in terms of servicing account?

[Thomas Perkins:]

So today we do -- we service two of their largest licensees which is 7-Eleven stores of Oklahoma in a lawn which is the 7-Eleven stores in the Southwest, so southwest convenient. For the near-term for our contractor it will just be the 900 stores, but hopefully through this process there will be some opportunity longer term with 7-Eleven.

[Operator:]

Our next question is from Ben Bienvenue from Stephens, Inc.

[Ben Bienvenue:]

Thanks. Good morning. So you had a number of large contract plans and some small ones it sounds like as well. Can you update us on what the pipeline for contracts looks like today? And then in light of some of the larger contracts, what is the capacity that your existing distribution center network look like as you fold in these new contracts?

[Thomas Perkins:]

I think, I’ll actually answer your second question first. From a capacity issues I think the wins we’ve had it's really well into our existing infrastructure. So really there is not -- if you think about Murphy USA and the amount of revenue and stores will be servicing it's going to be spread among 10 divisions, it cigarettes and tobacco products and other non-cigarette products. So there is really not a heavy investment from a CapEx perspective to operate those stores. So I think what most of those divisions will go to a six-day work week, which allows them to really to handle the increase throughput to do their building. 7-Eleven definitely is a bigger cube volume accounts, which again will probably put most of our -- the three divisions offering them into a six day work week with night deliveries. So with it has the ability to sort of reflect the number of hours we can work in a day and service our customer. So that will be good. So today I think, I feel really good about how the new business is sort of spread among our existing infrastructure. So there is not a need to have new buildings et cetera to service them. I am sorry what was the first question? About the pipeline?

[Ben Bienvenue:]

Yes.

[Thomas Perkins:]

We still have -- the pipeline is always going to be, there will be our contracts up open for bid, I think that -- I think I certainly state in the second quarter that the RP environment was the most robust, I guess that I’ve seen and definitely what we are seeing is we are winning a good majority of the business that we bid on. There is still some other ones out there and definitely we’re not going to hold back as the opportunities present themselves to us.

[Ben Bienvenue:]

Great to hear. And then maybe looking at the Murphy deal that’s helpful color on the margin side. The incremental $1.7 billion of annualized revenue, what are the assumptions that are baked into that, does that assume any new store Murphy builds organic growth there, sort of how did you come up with that number?

[Thomas Perkins:]

That’s really the numbers that were in place at the time we're going through the RFE process. I think Andrew try that Murphy can probably give you better insight on what their growth pattern is going to be from a number of stores, but one of things that I know he said is that, you know, they don't -- they're not in a front of every Walmart store today. So our intent as he grows his company, we grow along with them. So just the time will tell and that's going to be a Murphy decision on what they do.

[Operator:]

Our next question is from Andrew Wolf from BB&T Capital Markets.

[Andrew Wolf:]

Could you remind me of what the threshold is you to announce the customer and I guess, if some of the regional you've said were below the threshold, if you combine them what it makes the thresholds so we can just to help our models?

[Thomas Perkins:]

Our threshold today is $300 million so that's when we announced single new win. I would say that if you combine some of the regional chains, it would probably be add or little bit above that threshold, but again it's what we try and do is we have these things in our normal growth. And so part of our 6% excluding acquisitions will be big issuance are made up of these regional five chains in the independent store win, but that's you'd probably get more of a flavor of that when we give our guidance for 2016.

[Andrew Wolf:]

Thank you and back at the capacity question, Tom, like the two big wins play out nicely not yet again any part of the Company or any individual, but what I am thinking about is just overall what is the bottlenecks taking on a lot more new accounts, if there is one, is it more the changed management and making sure each of the new big wins is service right or is it, you know, are there any either actual distribution centers or just space within them that would have to extend fresh or something, how do you think about actually managing the opportunity and what the limit is?

[Tom Perkins:]

I think the first priority and probably the critical piece of this thing with the customers that we won is really the people, right, so we're going to be hiring people into the organization. So we have to go out and hire drivers and warehouse selectors and customer service people. So that's a key priority and we know we've talked about drivers shortages out there, so we put a full court press on that. We believe from the capacity issue at least with these accounts, the nice thing in both Sacramento and Salt Lake, we built new buildings there. We the Salt Lake, the new Sacramento building this year and we built it large enough to handle customer like this, like 7-Eleven which is good in Salt Lake City we did the same thing about two years ago, so we sort of being out in front of that. The other think too is, what we've done in the past is when we do get to capacity issues within our existing building, we have the ability to expand freezers, coolers chilled box and/or we can go into a second building to let's say for like full case product and be in product which allows that growth. And the addition of the Ohio facility in Midwest, Ohio will benefit from some of this business, and so I think we built that just in time to really start to leverage those fixed costs with new volume.

[Andrew Wolf:]

So it sound like, you want people to take away that you could take on even and then you know next year or something, more big customers if there are any to me to had?

[Tom Perkins:]

I think what we're very good at on-boarding new customers. I think that and we're very creative and we're flexible to come up with solutions. It all depends on where they end up, I mean we've shown in the past when we've got the [indiscernible] business in the Southeast and Florida, we able to build a non-board of the 1000 customers and what 52 days. We on boarded Turkey Hill up in the Northeast in less than five weeks, so we're very creative and we've built buildings and we open up building very well if we have to. So on that, I think eventually we're going to have more than the number of divisions we have today in the next two to three years.

[Operator:]

Our next question is from Chris McGinnis from Sidoti & Company.

[Chris McGinnis:]

Just to think about the reason for win behind the 7-Eleven, some rumors about kind of their fresh program or them trying to get into it and was that kind of the key is like driver to get into that contract?

[Thomas Perkins:]

No, I think couple of things, they have been in -- they have established their own CDC there their own distribution network for their fresh daily deliveries many years ago and they did that because they didn't have a broad line supplier who would do that for them. I believe and I don’t want to put words in [Joana Pinto’s] mouth, but I think that there -- all their business has been in with on supplier and I believe that they are looking for flexibility and they are also looking for opportunities to sort of diversify their business into other suppliers. I think the right thing and when I talk to [Joana Pinto] as we were in alignment on our strategies, on vendor consolidation on fresh and I do believe that we can or time bring more value to their retail stores by combining some of their fresh deliveries on our trucks. But right now we’re going to just to be focus on on-boarding the traditional volume and then expand our partnership them in those 900 sores as we move forward.

[Chris McGinnis:]

Thank you for that. Stacy just quick on the Murphy deal, would that be and I haven’t done the number, so I apologize I know there was some time spank on it. But would there be compression in the gross margin for the cigarette sales versus like the -- like if you take a year-over-year comparison?

[Stacy Loretz-Congdon:]

I think as Tom already previously mentioned that we -- because of the volume we did give them some aggressive pricing. So yes, the 45 to 50 basis points was total margin compression.

[Chris McGinnis:]

Thank you for that. Operator And our question from John Lawrence from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Good morning, Tom. Would you comment on a couple of things as far as base business is concerned. Obviously the Ohio facility is some of the growth that you're seeing in the base business the result of what you expected by building Ohio and getting some of that I guess unserviceable business is that part of the strength in some of those new wins?

[Thomas Perkins:]

Yes, it is John I think when we were building the Ohio and we decided to do that we knew on horizon was some of our existing change were going to be acquiring business in the Midwest. And to put ourselves in position to service those we decided that Ohio was the correct move. And so, yes, they are going to be benefitting from some of the account wins we have won.

[Unidentified Analyst:]

Yes and a couple of other things just general questions, if you look at that the Rite Aid business now that you’ve gotten cigarettes out there, I mean on those not a lot of data but has that basket inside of the store be other the process improved -- are those improved now that you're selling cigarettes?

[Thomas Perkins:]

I mean it definitely has made as more efficient on our deliveries. So that was really -- and I think I know there are some discussions on some of the Rite Aid calls about really improvement in their supply chain to make that more efficient. I think what we’re seeing and we’ve had some comments about, we have a better fill rate on the tobacco products for them. So hopefully with a better fill rate you should have better sales just because you have product on the shelves. And the other thing too John was interesting, so they -- Rite Aid I think last week or a week before had national ads that they are running at their stores and if you look at all the product that was -- the food products that were on those national ads it was all the food products we carry. So really that’s really what they wanted right was a national provider so they can get consistent promotions across the stores.

[Unidentified Analyst:]

That’s helpful and one last one, Stacy if you strip out on the -- thanks for all that detail on the guidance. But you strip everything out, EBITDA growth with all the investment spending and the LIFO et cetera would still be in that range of that which was stepped up , I guess you move everything closer to 15% and that 7-Eleven has store for you, isn’t that correct?

[Stacy Loretz-Congdon:]

For the current year, yes.

[Unidentified Analyst:]

And then certainly what you’ve been saying all along and the only difference here is now is the FX and extra spending for getting ready for market?

[Thomas Perkins:]

That’s correct.

[Unidentified Analyst:]

Thanks. Good luck. Operator [Operator Instructions] We have another question from Mark Wiltamuth from Jefferies.

[Mark Wiltamuth:]

Hi. Tom on your last call you said that this is one of the biggest RFP seasons you’ve seen in your 30 years with the company. Are you done with flushing all those out or are there more things that you're still looking at today?

[Thomas Perkins:]

There are still more things we’re looking at today, I think that we talked about the two that we achieve were above our threshold that we announced. But definitely we have others in the hopper that we won and/or are still in discussions with on winning. And those are the smaller regional change. And like I said on the call Mark is we tend to win our fair share and I think international this environment we’ve definitely won our fair share.

[Mark Wiltamuth:]

Okay. And maybe can you give us a little update on how things are going with all the independence out there because I mean all this attention on the big change has been exciting, but the course story with the independence so we can give something there?

[Thomas Perkins:]

Yes, I know, with that still our focus -- it's great when you have market share wins because it really drives the growth in ourselves, but we continue to be focused on the independence and really helping them to be relevant and profitable and that's really what our core strategies are about our field sales force of over 1200 people are out there helping our independent to growth their sales. I think that sort of reflected in our same-store sales growth from a non-cig perspective. The other thing too is as we continue to see robust growth in our fresh categories this year was up, this quarter up over 19%. So we tend -- again at the end of the as 63% of stores are independent and that continues to be well over 50% of our business, and so that always will be a focus because we like that balance right. And so we definitely our programs, our support personnel, the core solutions group are all focused against helping our independent resellers to be more profitable and relevant.

[Mark Wiltamuth:]

Okay and just one for Stacy on the 2015 guidance, if you look at the EBITDA guidance and then maybe you could walk us through some of the things that are changing below the line to get us the EPS because we're having a little hard time getting from the EBITDA guide down to the EPS, are there any usual things happening in the tax rate or other swing factors below the line?

[Stacy Loretz-Congdon:]

Basically, I did point out that the tax rate is approximately 38%, there is a couple tax credits that unless are reinstated by the end of the year. We are going to be looking at low 38% range compared to the third quarter last year we were at 31% because we had some tax credits and benefits that are not recurring this year. The other thing is the foreign exchange loss which is added back to EBITDA is something that we didn't have the same magnitude last year at 700,000 for the quarter we're expecting something similar and the fourth quarter as well because we're not seeing any relief of the Canadian FX rate. And then I think I already pointed out that depreciation and amortization and stock based comp focuses metrics which you can see in our chart and our press release, increase during the quarter and for the full-year and that is added back to EBITDA whereas it's all-in in EPS, so I think those three items in the beginning remark I pointed out were about $0.10 and that's basically relative.

[Operator:]

And we now have the question from John Lawrence [ph] from [indiscernible]. Go ahead John, Your line is open. Lost him, okay and we have no further questions at this time.

[Milton Draper:]

Well, thank you for participating in our conference call and for your interest in Core-Mark. We're pleased with our results so far and very excited to execute on the remainder of 2015 and about the growth opportunities we have in 2016. If you have any follow-up questions, please give me a call at 650-589-9445. Thank you.

[Operator:]

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