Core-Mark Holding Company, Inc.
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Welcome to the 2015 Fourth Quarter Investor Call. My name is Christine, and I will be the 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, Christine, 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-Ks, 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 and year end 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; Bill Stein, Senior VP of our Eastern Divisions; and Chris Hobson, our Senior VP of Sales and Marketing. Our line-up 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 fourth quarter. We will then open up the call for your questions. Now, I'd like to turn the call over to our CEO, Tom.

[Thomas Perkins:]

Good morning, everyone. Thanks for joining today's call. I wanted to kick off today's call by recognizing the thousands of employees from both Murphy USA and Core-Mark that led to the successful transition for more than 1,300 stores across 24 states. The team's careful planning and cooperative efforts resulted in a speedy and efficient integration, completing this project for such a large and important new customer is a great way to start our new year. As a reminder, we expect to generate approximately $1.7 billion in annualized revenue from our partnership with Murphy USA. For those that are unfamiliar with this retailer, they have a high cigarette mix representing about 90% of the total revenues we expect to generate. All 1,300 plus locations are serviced from 10 of our existing divisions allowing us to leverage our fixed cost and distribution footprint in those areas. Our CapEx budget for this launch is now expected to come in below our original plan of $5 million. We are very excited about this partnership on all fronts. In addition to the Murphy USA contract, we have won a number of regional customer bids as well. While they do not individually reach our threshold for disclosure in aggregate, they certainly do -- in aggregate they certainly do and we expect these new customers to contribute to our 2016 growth in a meaningful way. These midsize customer wins bolster our optimism that our approach to the market is the right approach and customers are responding with their commitment to us. The rollout of these 800 plus new stores is expected to be completed in the next few weeks, and let's not forget that we have the 7-Eleven business starting in the fourth quarter this year. I think it is fair to say that 2016 will be a tremendous growth year for Core-Mark. Now, let's review our 2015 financial results. Core-Mark had good growth in 2015 with sales up more than 9% adjusted for FX. We saw healthy growth in both carton sales and non-cigarette sales for the full year, however, non-cigarette sales in the fourth quarter were a little soft compared to the rest of the year. Same-store non-cigarette sales grew 2.4% in the fourth quarter. This is the lowest growth rate we have seen in several years. The economic environment in Canada was a contributing factor. In addition, same-store carton sales were down modestly for the first time in over a year. The decline was only 0.5% for the quarter, but this suggests that we have lapped the CVS exit from this category and we are headed into tougher comps. Our non-cigarette sales for 2015 grew about 6% or 8% adjusted for FX, which was driven by food sales growth of approximately 10%. More importantly, we saw remaining gross profits for these important profit driving categories improve 33 basis points. Our core strategies are driving this improvement and make these strategies essential in an environment where we are seeing soft center store sales and modest inflation. On the cigarette side of the business, sales grew 8.4% or over 10% for the year adjusting for FX. The primary driver to this growth was a 6.6% increase in cartons, a result of market share gains, including the Karrys acquisition and same-store carton growth for the year. We also recorded over $10 million in cigarette holding gains and approximately $9 million in cigarette stamp holding gains in our 2015 results. We certainly expect carton growth from market share wins will be a very significant driver to our 2016 results and we are anticipating cigarette holding gains as we do every year. Operating expenses in 2015 grew about 9% and included incremental expenses from both the Ohio division and the Karrys Bros. acquisition. Excluding those incremental expenses, our OpEx increased nearly 6%, driven by the handling of approximately 6% more cubic feet of product, 9% more deliveries and 6% more miles driven. We also invested over $6 million in infrastructure, people and technology to support our future growth and approximately $1.1 million associated with hiring, training, and overall readiness to on-board our new customers. We made a commitment to provide a nearly seamless transition to our new customers and we paid a little more in the fourth quarter to ensure that result. For example, we did not reduce headcount in the fourth quarter that we normally would do to match labour cost with the seasonally driven reduction in sales. We felt it was important to hold on to our personnel ahead of a very large ramp-up of new customers. The bottom line is, our EBITDA was up over 10% for the year, despite some missed opportunities to leverage operating expenses during some softness in fourth quarter non-cigarette sales. This growth was driven by our market share gains, our 33 basis point improvement in non-cigarette margins, inventory holding gains offset by our investment spending. My confidence in the fundamentals of our Company and the industry we service continues to be strong. Our vendor consolidation and fresh initiatives had their best year since these programs were initiated generating $138 million of incremental sales. These critical strategies were the primary drivers to our non-cigarette sales and margin growth. With our recent market share wins, we see ample opportunity to penetrate further with these important programs in 2016 and beyond. Our ability to bring efficiency to the supply chain of our customers and the industry overall remains a large opportunity for us. We are constantly refining and researching new programs and new products to enhance what we offer our customers, as consumer demand evolves over time. We will continue to focus on expanding the categories we service in our stores through vendor consolidation and fresh food offerings, which we firmly believe increases our customers' profits and relevancy. Our Core Solutions Group has exceeded their goal of 3,000 FMI surveys and marketing plans for 2015. This strategic program allows us to partner with our independent customers and results in their incremental non-cigarette purchases growing 2.5 times faster than the independent stores that were not surveyed. In addition, we continue to see a significant reduction in customer turn rates as a result of this program. Perhaps, most importantly, our customers have a real opportunity to improve their profits by implementing our recommendations. The profit improvement our customers are reporting back to us average between $25,000 and $30,000 per store annually. This improvement has been driven by the acceptance of over 65% of our marketing ideas, and continues to validate the importance of this program in bringing value to our customers. Our Core Solutions Group has developed other great tools which help the division with competitive intelligence. For example, they've rolled out and continue to support our CRM software, which helps our divisions tack their sales efforts and increase the probability of our divisions gaining market share. They have also recently rolled out a web-based customer data solution plus an internal data solution for our operations and logistics team. This team is immensely important to our Company. Finally, our core strategy has been to grow our footprint through acquisitions. We continue to seek market share expansion that brings us closer to the customer and allows us to leverage our distribution network and drive efficiency in the industry. We are optimistic that there will be opportunities in 2016 for strategic acquisitions. We continue to have a dialogue with and evaluate potential partners and expect to increase long-term value creation through this strategy. Moving on to 2016 guidance. As noted in our press release sales growth is expected to exceed 20% at the low end of guidance and over 24% at the high-end. Market share gains in regional and national chain accounts are driving this tremendous growth. As a result, we expect this new business will have a compressing effect on gross margins, but allows us to leverage our operating costs as a percentage of sales. Start-up costs are expected in Q1 and Q3 as we ramp up the new business and we will continue to invest in our business to ensure we have a solid foundation and infrastructure to support our continued growth. To that point, we will also transition our Las Vegas division to a new facility to handle their future growth, which includes a significant piece of the 7-Eleven business. With all that considered, we expect EBITDA growth of at least 13% in 2016 with the high-end of guidance coming in at 18%. To conclude, we had another record year in 2015 and the organization finished the year focused on getting ready to on-board substantial new volume with the goal of impeccable service to these valued new customers. This is an exhilarating time at Core-Mark with our significant market share gains and our opportunity to leverage our competitive advantage in the markets in which we compete. We still need to focus on the fundamental to execute our plan and post the strong results we're all expecting. The convenience store industry remains strong, representing more than 34% of all retail locations and our market share remains relatively small. Given all the new business wins and the countless opportunities ahead of us, I view 2016 as a pivotal year for the Company. Last, but not least, as you may have seen this morning, we shared Stacy's plans to retire as CFO this year. Stacy has spent 26 years at Core-Mark. That is truly a remarkable and wonderful achievement. Her contributions to Core-Mark have been innumerable. On a personal level, working along Stacy all these years has been an honour and a pleasure. Core-Mark is a better place because of Stacy and she will be missed. As part of her thoughtful planning process, Stacy has been pairing our CAO, Chris Miller, to take over this important role in our Company. Chris has been a key part of our finance team since 2007. He is a strong and thoughtful leader and I am confident that he will be a great CFO for the Company. Before I turn the call over, I will finish my prepared remarks by once again thanking Stacy for her immense service to Core-Mark. We are very happy for her and wish her the very best in her retirement. Stacy?

[Stacy Loretz-Congdon:]

Good morning, everyone and thank you Tom for such kind words. My decision to retire after 26 years at Core-Mark is bitter sweet for me. My work has been challenging and rewarding and has allowed me to grow personally. Many of the people here have become my second family and I owe them a debt of gratitude for their support and confidence in me over the years. The convenience industry has been dynamic and fascinating and I am proud of the innovative customer solutions we've brought to bear and the challenges we've outsmarted or creatively found solutions for, and 2016 will be no exception. That said, I'm also looking forward to the next stage of my life with excitement. I've enjoyed working with all of you in the investment community and I'm sure my very talented successor will enjoy working with all of you as well. Chris is very capable and has been my right hand and trusted advisor for many years. I will continue to work closely with him until I hand over the reins on May 1st and continue to support him in an advisory capacity through the end of the year. I feel very confident that he will make an ideal CFO for the Company and that I am leaving my role in good hands. I also want to take a moment to thank my finance team, our Boards and the executive team and you, Tom for your stead leadership. Lastly, thank you Chris, for all of your hard work and support. You've earned this recognition and I wish you great success. Congratulations.

[Chris Miller:]

Thank you very much Stacy for that introduction. I'm truly grateful to you in many ways and I feel honoured by the organization's confidence in me. I've learned a great deal about this Company in the nearly 10 years that I've served as Chief Accounting Officer. I'm excited to tackle the challenges this new role will bring and I'll do everything I can to help this great company continue to thrive. I look forward to working with those in the investment community and will continue Stacy's good work and ensuring that you all understand our business and our expectations. So, I'll be speaking with you all again in May to discuss the Company's results for the first quarter, but for now, I'll hand the call back over to Stacy to take you through the numbers.

[Stacy Loretz-Congdon:]

Thanks Chris. Let me begin with the 2015 full year results versus expectations and then move on to 2016 guidance. Our sales in 2015 came in as expected with $11.1 billion in revenues or 8% growth. We came in close to the upper end of EBITDA guidance delivering $135.2 million or 10.2% growth over prior year. GAAP EPS came in above expectations at $2.21, driven primarily by the LIFO income recognized in the fourth quarter. EPS excluding LIFO expense, where our guidance was the most aggressive came in lower than expected at $2.26. This result was driven largely by our higher-than-expected operating expenses as we readied ourselves for our new customers and lighter non-cigarette sales in Q4. I'll touch on both of these things in a moment. For 2016, our sales are expected to reach between $13.4 billion and $13.8 billion with an implied growth rate between 21.1% and 24.7%. This includes Murphy USA and the other regional customer account Tom mentioned, as well as additional organic growth during the year. We're moving full steam ahead and everyone is keenly aware that it is imperative that we leverage our competitive advantages to grow this business in a fast, smart and profitable manner. For 2016, we expect adjusted EBITDA to fall between $153 million and $160 million representing 13.2% to 18.4% growth over 2015. This includes approximately $4.6 million in start-up cost to on-board new business and cost associated with moving into a new building in Las Vegas later this year. In recent years, our rate of EBITDA growth has outpaced our sales growth driven by the success of our core strategy. The big difference for 2016 is our largest account win at a customer where 90% of the business is cigarette, which as you know have lower gross profit margins than our other products. That being said, net-net this account is still adding significant dollars to our bottom-line. GAAP EPS is expected to be between $2.26 and $2.41, including approximately $0.34 of LIFO expense. EPS excluding LIFO expense is expected to come in between $2.60 and $2.75, which has an implied growth rate between 15% and 22% and includes $6.6 million pre-tax related to on-boarding new customers and the Las Vegas building cost, this time including depreciation. Key assumptions include, LIFO expense of $13 million, 23.4 million shares outstanding and 38.5% tax rate. We expect CapEx expenditures of approximately $50 million, including $11 million for the new building in Las Vegas. This building will allow us to on-board 7-Eleven later this year and prepare for additional feature growth and better leverage our logistics platform. Excluding the Las Vegas investment remaining CapEx budget is about 40% maintenance and 60% expansion investments, which includes lead expansion, totalling $7 million to support our new business. Excluding CapEx, free cash flow is expected to be about $35 million in 2016. This is lower than historical, due mostly to working capital investment for our new business, primarily higher inventory levels net of accounts payable and increased accounts receivable supporting higher sales. In addition, we are forecasting higher cash taxes related to higher profit and higher interest costs driven primarily by an increase in working capital to support our new business volume. Moving on to the fourth quarter financials, total sales increased 7.9% or 8.2% adjusted for foreign currency and the extra sales day during the fourth quarter 2015. Foreign exchange created about 2% compression on sales during the quarter, but was nearly offset by the extra sales day. Cigarette sales increased 9.6% driven by a 7.4% increase in carton sales, benefitting from market share gains, including the volume from our largest drugstore customer. Same store carton sales were down 0.5% for the first time in over a year based on tougher comps. Our food, non-food category sales increased 4.3% during the fourth quarter, led by a 10% increase in our fresh categories, which includes fresh foods, meat, dairy and bread. Selling deeper into these categories continues to be a very important strategy for us. This quarter, we did see an uptick in snacks, which has become the new way to eat for many young adults. Strength in this category was led by salty snacks, nut, seeds and dry fruit as well as health bars. Candy and smokeless moist tobacco categories fared well, offset by a decline in the sales of Canadian cigars and a slight decline in e-cigarette driven by manufacturer mandated returns in a shift towards lower price point brands. Gross profit did well during the quarter, increasing 10% or $15.5 million to $170.1 million. We reported $4.7 million of cigarette inventory holding gains resulting from the manufacturer's price increase that occurred in early November and completed the recognition of the third quarter tax stamp inventory holding gain, adding another $700,000 to the fourth quarter. We also reported $7.3 million of LIFO income driven primarily by deflation in two of the three PPI indexes we use to measure our LIFO position at the end of the year. We did expect to see more inflation in these indexes by the end of the year, but that just did not materialize. Remember, our LIFO expense or income is based on government indexes and not something we directly control. Remaining gross profit, which excludes the aforementioned items and what we believe to be a better indicator of the underlying fundamentals increased $11.3 million or 7.7% to $157.4 million. Remaining gross profit margin was essentially flat as a percentage of sales. Cigarette remaining gross profit increased by $0.3 million or 13.3% to $45.2 million. Cigarette remaining gross profit margins increased 8 basis points and remaining gross profit per carton was up 5% in the quarter. Non-cigarette remaining gross profit increased $5.9 million or 5.6% to $112.2 million. Remaining gross profit margins for non-cigarette increased 15 basis points during the quarter, compressed by less pricing activity by manufacturers and in some cases, deflation which lowered margins by approximately 12 basis points, compared to the fourth quarter of 2014. Our goal continues to focus on driving sales in fresh and other food commodities through our strategies which drive margins up and for the year, we did see this result in a 33 basis point improvement year over year. Moving on to operating expenses. Total expenses increased $9.3 million or 7.1% to $140.9 million for the fourth quarter of this year. Warehouse and delivery expenses increased $10.3 million or 12.7% to $91.7 million during the fourth quarter. As a percentage of sales, warehouse and delivery increased 14 basis points. Notable items include $2 million of incremental costs associated with our Ohio Karrys Bros. acquisition, $1.5 million of identifiable new business start-up costs and infrastructure investment, offset by $1.6 million decrease in net fuel cost. In addition to the identifiable start-up cost, our labour costs were higher than originally expected, because we chose to hang on to existing employees and we hired and trained new employees during the fourth quarter, knowing that we had major on-boarding of new business starting in the first quarter of this year. SG&A expenses decreased $1.1 million or 2.2% during the fourth quarter. As a percent of sales, SG&A decreased 18 basis points. In addition, investment spending on information technology infrastructure and people was approximately $2 million during the quarter with approximately 70% of these costs being one time in nature. In prior calls, I've mentioned our estimate of between $6 million and $7 million of investment spend for 2015. We came in at the low end of that range, but we'll have some cost spill over into the first quarter. We will continue to see investments as we grow our business and have planned approximately $2.5 million in 2016 for continued technology improvements and infrastructure. In addition, we have another $2.5 million for start-up cost related to new business and a little over $4 million related to the Las Vegas move. These investments reflect expenses that are necessary to sustain our growth and create long term value. Moving to cash flow, cash generated from operations before working capital changes increased over 18% from $96.4 million in 2014 to $114 million this year. Working capital used approximately $37 million in cash year to date compared to approximately $30 million in 2014. We did not load in as heavy with LIFO buys at the end of the year given the natural growth in inventories as a result of our new business and a planned reduction of the excess LIFO buy at the end of 2014. Net-net the $7 million of additional cash usage was driven largely by increases in accounts receivable supporting higher sales. We said before that one of our primary uses of cash is to speculate on inventory to maximize our earnings potential. We did take inventories up significantly in the fourth quarter in anticipation of the November manufacturer price increase, resulting in $4.7 million in cigarette inventory holding gains for the quarter. Free cash flow at the end of the year was approximately $50 million, a little below our expectations, but a lot of this has to do with timing, including an increase of approximately $13 million in pre [indiscernible] to one of our larger tobacco vendors at the end of the year. In addition, cash taxes were $5 million higher than our original estimate. We spent over $30 million of CapEx for the year and we spent approximately $8.7 million on information systems and technologies to support our future growth. Average debt for the quarter was $43 million compared to $37 million in 2014, and our peak debt position was $96 million. This peak in November supported cigarette purchases that resulted in the cigarette inventory holding gain previously mentioned. I am assuming that all of you have seen that we have amended and expanded our credit facility. We felt it was prudent to support our growth and to ensure we had adequate coverage for our spikes in working capital expected by the on-boarding of all this new business. Other capital allocation decisions during 2015 included $9.2 million for share repurchases and $12.8 million for cash dividends. I'm sure you also noticed in our press release this morning, our first quarter dividend announcement of $0.16 per share for shareholders of record on March 11. We think we make very thoughtful capital allocation decisions which support our core strategies, and focus on ensuring we have sufficient capital to fund initiatives that will ultimately return value to you, our shareholders. Our investment in CapEx and related infrastructure and our acquisition and expansion activities are all focussed on long term value creation. Opportunistic inventory buys may be shorter term but are an integral part of any wholesalers' business and help us maximize free cash flow that allows us to fund our dividends and share repurchase programs. To summarize, we had a solid year and are very optimistic about the future. While we continue to have great success in winning market share, we are also focussed on execution, infrastructure and leverage opportunities that will help improve the earnings. As we said before, the best predictor of the future is our past performance. While the significant customer wins will push our growth rate higher than historical norms, in 2016, we still view ourselves as a Steady Eddie organization. Compounded average growth rate for sales of 9% over the last five years and 14% for EBITDA over the same period are more indicative of our long term expectations. I think 2016 will be a historic year for Core-Mark and the perfect spot for me to hand over the reins to Chris. 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] Our first question comes from Andrew Wolf from BB&T Capital Markets.

[Andrew Wolf:]

First, I'll just address Stacy. I'll just say, you'll really be missed and I want to wish you well on your next stage of what you do and I just want to say, among the many accolades I could say, the transparency you brought to what you do at Core-Mark from the filings to how you conduct yourself and tell us what we need to know is really second to none among a lot of CFOs I've encountered over time. You're very welcome. Thank you. I wanted to ask about the start-up costs, just help us kind of figure -- think a little bit about how the normalized margins might be? So, I think you called that $4.6 million to EBITDA. What does that compare to either, to what it was in 2015, so we could either -- just sort of like what's a normal on-boarding slash new facility? Is it more in the $1 million to $2 million range? Is that how we should think about maybe adding a couple of million?

[Thomas Perkins:]

Yeah, it depends on the size of either the customer or whether it's an acquisition or whether it is a new building, but normally on average, like the size of a customer win like Murphy USA, and or 7-Eleven, you're probably looking to $1 million and $1.5 million just based on the magnitude of the stores, the number of divisions and really it goes back to how many employees we're hiring in the training process, et cetera. Same thing when you look at a new building. It's usually $1 million to $1.5 million to really move out of one building into another building and again, most of that is related to -- those are actually costs related to the labour to get that move done, and when we look at acquisitions, you have usually a $1.5 million for conversion cost, and then it's about $1 million or more with legal costs. So, that's about $2.5 million.

[Andrew Wolf:]

So those are hard costs. What about sort of -- just sort of normal cost of truckers figuring out the new routes to service, a 1,000 or plus stores or getting the sliding right, because, each customer's a little different. How long does that take to work through, let's say, till that gets peaked up?

[Thomas Perkins:]

Yeah normally, it takes us about six months, because if you think about it, and based on the size of the number of stores in a particular division when you're adding -- let's say you're adding 20 to 30 new warehouse employees and maybe you're adding 10 to 15 new drivers, it takes about six months for people to comfortable and to get levels of productivity up to what an experienced warehouse person or driver would be. So, we look at about a six month sort of a timeline of getting people up to the maximum productivity levels that we would expect.

[Andrew Wolf:]

Just, second question is -- you mentioned you've got a new facility in Vegas, because it's maxed out. What is the capacity utilization with Murphy and with -- like a pro forma at the end of the year, with the new facility in Vegas and with the two big clients Murphy and 7-Eleven brought on-board, how much capacity will you have going into next year?

[Thomas Perkins:]

A lot of it depends on the product mix. So if you think about Murphy with 90% of the volume coming from cigarette, it is cartons and so it takes -- it's 22 cartons per cubic foot. So that's a much different customer a 7-Eleven which has a potential to be closer to a 50% mix non-cigarette and cigarette -- non-cigarette and cigarette, so you're definitely going to have a much higher cubic volume when we go into 7-Eleven, but what we've done and I think you know as we've gone forward is, if you think about it, where we're getting the 7-Eleven business in particular, we opened up a new building in Sacramento last year. We've opened up a new building in Salt Lake City, two and a half, about three years ago. Las Vegas will be a new building and plus, the other thing as we absorb this volume we expand our facilities from the five-day workweek to a six-day work week, and a lot of them will add a third shift, so you really get about a 15% to 25% growth in throughput, just by doing those few things. I thing going into 2017, we'll have plenty of capacity for continued growth and as we've been one to do it, we need additional capacity, we can go out and get a second building and move incremental volume into that building.

[Andrew Wolf:]

Thank you and just a follow-up on 7-Eleven. You might have covered this before, but maybe -- does working with Core-Mark versus some of the other distributors they've worked with, does that kind of allow them to either downsize or eliminate the CDCs, certainly the ones where you're operating? Are they going to be able to save money getting out of their fresh distribution side of things?

[Thomas Perkins:]

It's my belief that the most efficient distribution supply chain is to have all your products under one roof and put them on the same truck. Definitely that will be a conservation we have ongoing with 7-Eleven, but we believe -- we believe there is significant savings by doing that. We want to get the stores, the 900 stores rolled on and do a good job for them as we start it up and then we're going to have further conversations on those opportunities down the road.

[Operator:]

Thank you. Our next question comes from Mark Wiltamuth from Jefferies. Please go ahead.

[Mark Wiltamuth:]

Tom, you had talked previously about remaining gross profits being down maybe 45 basis points to 50 basis points. Are you still kind of anticipating that?

[Thomas Perkins:]

Yes, we are.

[Mark Wiltamuth:]

Okay, and then other things on the guidance, what are you thinking for same-store sales for tobacco and non-tobacco for the year ahead? Then maybe, give a little more color on why the fourth quarter was a little soft on the non-tobacco side?

[Thomas Perkins:]

I think, if you look at this year, I think our average is probably about 3.4% to 4%. I would anticipate that to continue for non-cigarettes, and cigarettes, I don't think we'll get back to the -- we were always better than what the average consumption decline was, which is 3% to 4%. We were always about 1.5% or so. I think we may get to those levels, but I think a lot of that is going to be dependent on the fuel prices, but 0.5% decline in the fourth quarter, sort of, I think that really isolated some of the CVS gains we got from them getting out of the business. I think the fourth quarter, it was a little strange. I think that there were quite a few retailers that reported lower sales in the fourth quarter. There's nothing I can put my finger on, except, I think that the store traffic was down. I think we definitely saw a large decline in our Canadian market, especially in Alberta with the oil price. They lost, I think 300,000 jobs in Alberta from the oil sands closing down. So, we did see a big hit from our Canada operations on our same store average in the fourth quarter.

[Mark Wiltamuth:]

Do you feel like the lower gas price is still helping because you're saying traffic is down in store?

[Thomas Perkins:]

That's my assumption. Just because I think that based on -- that's just my own assumption on it. I don't have any empirical proof on that. I guess Mark, it goes to this right, people get -- you get accustomed to a certain gas price and your habits change to that and then you just continue doing -- if the gas price is the same, they're going to be going at the same level. So, it doesn't necessarily mean that they're going to increase our store visits or decrease our store visits.

[Mark Wiltamuth:]

Okay, and just -- it sounds like, this collection of these regional wins are beyond what you would expect for your organic rates. So just, how big is the total for all those regional account wins in dollars?

[Thomas Perkins:]

Well, normally what we do is, we would publicly announce wins, customer wins if they're over $300 million. So, what I can say is they're over $300 million in aggregate.

[Mark Wiltamuth:]

Okay, and then what about that opportunity to grow with 7-Eleven over time? Does that -- you're in there for 900 stores. There are like 10,700 in the system. What are your thoughts on growing that over time?

[Thomas Perkins:]

I think right now. I think that we have a five-year contract with them, as our competitor does. I think really our focus right now is to do the best job for them and to provide them excellent customer service and then as they look at the future and how they want to sort of handle there their supplier needs, I want to put ourselves in a position to be able to take on more of their business, but it's not going to happen for a while.

[Mark Wiltamuth:]

Is the contract with the competitor also the same timing as your five year?

[Thomas Perkins:]

Yes.

[Mark Wiltamuth:]

Okay, all right. Thank you very much.

[Stacy Loretz-Congdon:]

Mark, just one clarification also. The same store sales, I think it's probably worthy of pointing out, the Canadian market definitely was compressing the quarter down to 2.4%, but U.S. did enjoy 3.4% same store sales growth. So, I think the lower gas prices in the U.S. definitely is still stabilizing the U.S. So, I just wanted to throw that out there.

[Mark Wiltamuth:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Ben Bienvenu from Stephens. Please go ahead.

[Ben Bienvenu:]

Stacy, I'd also like to extend my congratulations. It's been a pleasure working with you and look forward to working with you Chris, going forward.

[Stacy Loretz-Congdon:]

Thank you.

[Chris Miller:]

Thank you.

[Ben Bienvenu:]

Just circling back on the start-up cost for 2016, I think the original expectation that you had spoken to in the fourth quarter was for around $1.5 million of start-up cost and it inched upwards a bit. Could you talk about what were the drivers of that higher expectation now for start-up costs and the individual pieces within that?

[Thomas Perkins:]

Yeah, I think the original number we gave was really related to the Murphy on-boarding. So, for the first quarter -- so now what we've added is what the start-up costs are going to be really starting the third quarter and fourth quarter.

[Ben Bienvenu:]

Got it, okay.

[Stacy Loretz-Congdon:]

Then, the rest would be for the Las Vegas.

[Thomas Perkins:]

Yeah, and the rest of the start-up we talked about was going to be for the Las Vegas building transition.

[Ben Bienvenu:]

Okay. Then, just looking at remaining gross profit in the fourth quarter being flat year-over-year, we've remaining gross profit ticking up for last four -- most of the last quarters. I'd just be curious to what the moving pieces are within that that maybe kept margins more stable relative to historical performance?

[Stacy Loretz-Congdon:]

You can tie this to the cost. Overall, it's due to the softness in the food, non-food and the shift mix towards a stronger growth rate in cigarettes. That was about 5 basis points for the quarter, and then the cigarette sales price inflation during the quarter, because we had a price increase with another 7 basis points.

[Ben Bienvenu:]

Okay, and then just last one for me, can you talk about the progress in the Rite Aid business? What's transpiring there in the midst of future potential merger with Walgreens? How's that business trending?

[Thomas Perkins:]

Actually, the business is going really well. We had an opportunity, Chris Hobson and myself had an opportunity to spend some time with one of their senior VPs, a couple of weeks ago and he was very complimentary of our relationship and he expresses belief in our partnership and really the strategy of consolidating all their products. Those categories are carrying lots of fire. So, I feel very strong with our relationship today and again, time will tell with Walgreens but I hope that there'll be more opportunity coming down the pipeline, but time will tell.

[Ben Bienvenu:]

Okay, great. Best of luck. Thanks.

[Operator:]

Thank you. Our next question comes from John Lawrence from [indiscernible]. Please go ahead.

[John Lawrence:]

Thank you. Thanks for the question. First of all Stacy, thanks again for all your help. Giving us those tutorials, back a decade ago, on the accounting works. We thank you for all that.

[Stacy Loretz-Congdon:]

You're welcome John. Thank you.

[John Lawrence:]

And Chris, we look forward to working with you.

[Chris Miller:]

Thank you.

[John Lawrence:]

Tom, could you -- I know you don't like to talk about divisions very much, but can you give us a little sense of Ohio? I mean, now you've been there for a period of time and would some of that base business you're getting in Ohio still outpace maybe some of the other parts of the country?

[Thomas Perkins:]

Yeah, so in fact John, I mean, one of them, as we were contemplating establishing a new division Ohio one, we're looking at the synergies that we've seen from moving current customers into that facility. So, we're closer to the customers, but secondly, we knew that there was opportunities with current customers with expansion plans in Midwest. So, I think we were right on time with that build. We were able to move some large volume from the new account wins into that facility which now will allow us to leverage those operating costs of those fixed costs that we've been absorbing.

[John Lawrence:]

Great. Thanks, and secondly, just a little bit on the guidance and just a way to think about that and I don't know if you can give some clarity of this, but obviously the Murphy business, you load it up and it's more of an expense structure savings than it is gross margins. We get that, but when you look at the 7-Eleven business, it really doesn't start sort of first quarter. So, if you take the two pieces and separate them, I would assume the 7-Eleven business will not really be mature profitability to what, third, fourth quarter of even getting into '17?

[Thomas Perkins:]

No. I think that -- our anticipation is that we're going to be starting the delivery to the store sometime in the October timeframe. So probably, it'll take the -- really the first quarter to get all the stores rolled out and get a fine tuning on that. Then it'll take probably the second quarter to get the productivity levels of all the new employees and the drivers and the routing and all that done, but I would say that we should really start seeing the full probability of that account starting sometime in the second quarter of 2017 going forward.

[John Lawrence:]

Okay, third quarter of '17?

[Thomas Perkins:]

Second quarter.

[John Lawrence:]

Second quarter of '17.

[Thomas Perkins:]

Yeah.

[John Lawrence:]

Thanks that helps and the, lastly, capacity wise, obviously you've got a lot on your plate and I don't think we've ever seen [indiscernible] rates this high? What's out there on the table left? You've always got things going or you're sort of pushing those to the side at the moment?

[Thomas Perkins:]

No, because, John, a lot of times what we find is that, you get a lot of stuff, you throw at the wall and you see what sticks, and so you've got to take advantage of the opportunities as they present themselves to us. So, we still have opportunities ahead of us that we're working on, and so that's sort of our mantra. We don't slow down. We just keep forging ahead and we'll continue to do that.

[Operator:]

Thank you. Our next question comes from Ben Brownlow from Raymond James. Please go ahead.

[Ben Brownlow:]

Good afternoon. I'll add my congratulations to Stacy and Chris on the retirement and promotion respectively. Just going back to the guidance, in terms of the operating margin outlook, with the Murphy deal been kind of margin neutral, can you give some details around the timeline of getting to that leverage when you back out the one-time start-up cost?

[Thomas Perkins:]

Yeah, I think with Murphy and the other accounts we're bringing on we'll probably start to see that leverage begin probably in the latter second quarter, into the third quarter of this year, for that business and like I said, previously with 7-Eleven it'll probably be second quarter of 2017.

[Ben Brownlow:]

Okay, and just from a big picture standpoint, excluding gasoline prices and M&A opportunities, can you just give some big picture kind of ideas or color around where the operating upside is in terms of execution, just where do you think you're conservative in your outlook where you could have some upside under earnings guidance?

[Thomas Perkins:]

I think a couple things. As we have -- we tend to do really well on bringing on new customers and opening new buildings. So, we have a potential for some upsides in some of those start-up cost. I think the second thing is, we, with the Murphy stores, we've done a really good job of making sure that we are maximizing our routing and our availability capacity on our current routes and so, as we get more and more comfortable with that business, I hope to see a better, a higher efficiency in delivering those stores.

[Operator:]

Thank you. Our next question comes from Chris McGinnis from Sidoti & Company. Please go ahead.

[Chris McGinnis:]

Good afternoon and thanks for taking my questions and Stacy congratulations. It was a real pleasure working with you. I've just got maybe just a question on -- with the strong year in 2015 and the new contract wins, maybe talk about the competitive landscape and maybe is there any reaction to such a strong year?

[Thomas Perkins:]

We -- you know, it's interesting because we have seen some reaction, but the thing what we're finding is the customers, I think want to do business with Core-Mark and I think for a lot of things, one, our reputation precedes ourselves, for transparency and flexibility, our innovation to helping them streamline their supply chain and really, as we sit down with any potential new customer, our whole focus is on how we can help them grow their business profitably and what's their vision, and I think that resonates with a lot of our customers and there are some customers that want just a pure logistics player that they just need to get the product to their stores, but there's quite a few other customers that want what we offer and I think that's what we sort of showed in the wins in 2015, and coming on into 2016 is that we should be the supplier of choice for the c-store industry.

[Chris McGinnis:]

All right. Great, and then, I guess, you commented a little bit just on the acquisitions and I know they're kind of tough to get done, by nature of them but it sounded like you were confident in 2016 and maybe can you just open that or discuss that a little bit more that confidence?

[Thomas Perkins:]

Yeah, I think that there's opportunities that are going to become available to us this year. I think that we -- and I think it is the changing landscape. I think a couple of things are happening. One is, you do have consolidation of the convenience store chains, and we've been fortunate that many of our chains have been the acquirers, and so that helps them, but that does impact the smaller wholesalers that maybe doing the independent regional chains. So, I think that sometimes will sort of force people to re-examine, do they want to be in business or not and also I think, just the change in the industry and the change in the needs the consumer -- consumer needs with fresh product and vendor consolidation and all that stuff is a lot of the smaller wholesalers don't have the capacity for, and I think what we have the ability to do is to offer those in our core marketing, our strategies and then our systems and processes to help them to get to that next level. So I think those are really -- I think that's what's really why I have confidence in an upbeat acquisition landscape.

[Operator:]

[Operator Instructions] We have a question from Mark Wiltamuth from Jefferies. Please go ahead.

[Mark Wiltamuth:]

Hi Stacy, just want to dig in a little more on the divergence between the annual EBITDA coming in, in line with your expectations and EPS missing, was it just that big swing in the LIFO there at the end of the year?

[Stacy Loretz-Congdon:]

No actually, you're probably looking at FIFO EPS, which is where the miss was and I think it's just that we were a little bit more aggressive with the EPS target than we should have been. Really, that's what it comes down to. Secondly, the labour cost associated with on-boarding the new business, our original forecast weren't quite as steep as they came in. So, if you look at our warehouse and delivery costs, the labour component of that was higher than we originally forecasted.

[Mark Wiltamuth:]

Okay, your operating expenses were, I guess maybe $10 million higher than we were expecting and how much do you think from holding onto those employees longer, how much do you think that was?

[Stacy Loretz-Congdon:]

Well, we called out approximately $1.1 million of identifiable, something that we could actually put our hands around, but we did hire, I believe, the statistics I saw about 180 personnel during the fourth quarter. So you can imagine the labour cost went up related to that.

[Operator:]

Thank you. I will now turn the call back over to Ms. Milton Draper for closing comments.

[Milton Draper:]

Thank you, for your participation in our conference call and for your interest in Core-Mark. We had a record year in 2015 with good results and we expect 2016 to be even more exciting. We are focused on operational excellence as we [indiscernible] significant new business while continuing to service our existing customers with the very highest service levels. If you have additional questions, please feel free to call me, Milton Draper at 650-589-9445. Thanks.