Core-Mark Holding Company, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Welcome to the 2014 Third Quarter Investor Call. My name is Christine, and I will be operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Milton Draper. You may begin.

[Milton Gray Draper:]

Thank you, operator, 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 projections. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our SEC filings, including our Form 10-K, our 10-Qs and our press releases. We undertake no obligation to update these forward-looking statements. We are holding this call to review our 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 [phone]. 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 Official [ph]; and Greg Antholzner, our Vice President of Finance and Treasurer. Our lineup for the call today is as follows

[Thomas B. Perkins:]

Good morning, everyone. I would like to begin with an update on our Rite Aid partnership, our new Ohio division and our CNG conversion program and then touch on our third quarter results. I will finish up by updating you on our core strategies. Our rollout of Rite Aid is essentially complete, and we are servicing over 4,200 stores today. I am extremely pleased that this organization could roll out such a large number of stores in such a short period of time. Between now and the end of the holiday season, we'll be focused on execution. Currently, we are delivering frozen, fresh and refrigerated products. These include such items as home meal replacements, deli meats, cheeses, yogurts, breads and fresh beverages. In addition, we are delivering an extensive list of bakery items. For the next couple of months, we will be focused on fine-tuning the current set of products. Then, when the holiday season is behind us, we and our partners at Rite Aid will explore which products are the best to roll out next and which stores to target for those product enhancements. These 4,200 Rite Aid stores offer a significant sales opportunity for our company. Today, we are not delivering all the products we could be delivering. This partnership is profitable today, but we have significant opportunity to expand our product offering, resulting in additional sales and profits in the future. We are committed to our long-term partnership with Rite Aid to help them maximize the efficiencies of their supply chain and to optimize the products they sell in their stores to meet the needs of their customers. Today, our new Ohio division is servicing approximately 800 of the Rite Aid stores. Our team got this division up and running very rapidly and was receiving product and delivering to the stores by the end of September. We plan to transfer about 1,000 other stores to this division by the end of the first quarter of 2015. We will have about 140 total employees when this transfer is executed. As we mentioned before, we believe that we can service these stores much more efficiently and economically from this location than from where they are currently being serviced. With the transfer of these customers, we estimate the synergies will save about $2 million per year in transportation cost. In addition, there are significant market share opportunities in this region. We are in discussions with a number of retailers in the area, and we are hopeful this will lead to new business. This is a very exciting and busy time for our organization. We recently announced our partnership with U.S. Oil to support the opening of natural gas stations under the brand name GAIN. They have opened 1 station in Aurora, Colorado and plan to roll out 4 more. These will be located in Sanford, North Carolina; Smyrna, Georgia; Tampa, Florida; and Forrest City, Arkansas. These GAIN stations will complement our own stations located in Wilkes-Barre, Pennsylvania, and Corona, California. We have over 140 CNG tractors on the road today and expect another 60 by the middle of 2015. This will represent about 30% of our fleet. We are still learning and establishing best practices for the operation of these trucks so we expect savings to accelerate over time. Our current estimate for net annual savings is approximately $2 million. This assumes only 30% of the fleet are converted to CNG engines. As we move to the latter part of 2015, we might have up to 40% of our fleet converted, which should increase the cost savings of this program. We are committed to this conversion, wherever it makes economic and operational sense. Under current market conditions, there is about a $2 spread between the price of diesel and CNG on a gallon equivalent basis. This transition to CNG will allow us to purchase more environmentally friendly fuel, reduce our carbon footprint, while lowering our transportation cost. As for the current financial performance, we had a very good quarter, with EBITDA up over 22%. We had an increase of nearly $15 million in gross profits, excluding LIFO expense, which really drove these improvements. We did see healthy growth in our inventory holding gains in the quarter, particularly in the candy category. As most of you know, our business benefits from inflation, which has historically offset increases in our operating expenses. We continue to focus on growing the higher-margin, non-cigarette categories, which grew over 6% in the third quarter. Fresh categories continue to show healthy growth while center store sales continue to lag. Same-store non-cigarette sales grew 4.3%. This is on top of last year's same-store sales growth of nearly 7%. The fact that we grew our same-store sales at a healthy pace with such tough comps tells me our strategies have more room to grow with our existing customers. Remaining gross profit margins for the non-cigarette categories increased 16 basis points, or 19 basis points excluding the compressing effect of the large customer we won last year in the fourth quarter. This improvement reflects the growth of the higher-margin commodities our core strategies are focused on. My confidence in these strategies is further reinforced with each quarter. Total operating expenses increased $9.9 million or 8.2%. We had a $2.3 million increase in performance bonus expense due to the improvement in profits and a $1.2 million increase in health care costs. In addition, we had costs associated with the opening of the new division and the rollout of the large number of stores for Rite Aid. Some of these costs are startup in nature and some of them are not. We will recognize additional onetime startup costs for our new Ohio division in the fourth quarter. We saw some improvement in our transportation cost in the third quarter due mostly to a reduction of our net fuel cost. We plan to continue to reallocate customers among divisions, as with our new Ohio division, reroute at our existing divisions to constantly maximize efficiencies and increase the number of CNG tractors on the road into -- in order to improve our operational performance. We do continue to experience acute driver shortages in 3 divisions and we are working on solutions to address those, both in the short term and longer term, for the entire organization. We believe the tightening of the driver pool will continue, and we are looking at creating driving schools at some of our divisions that will give warehouse employees a chance to become drivers and earn more money, and we are also considering adding shorter trucks to the fleet that do not require a Class A license. In the end, the most important metric to us is improved profits. I am pleased to see our EBITDA grow 22%. I am proud this organization could generate such solid profits while onboarding a large group of new stores, opening a new division and converting a sizable portion of our fleet to CNG. This gives me great confidence for our future. Our fundamentals are healthy, and this contributes to my confidence of achieving our EBITDA guidance. I do hope that you noticed that we have increased our dividend for the third year in a row. We have increased our dividend by $0.02 a share or 18%, and it is our intention to continue to increase the dividend so long as we do not have more strategic uses for excess free cash. I want you to understand that management and the board are always exploring ways to increase value to our shareholders. Now an update on our progress in our core strategies. The VCI and Fresh initiatives are performing well. The incremental vendor consolidation and Fresh sales generated $25 million in the quarter and over $96 million year-to-date. This represents roughly 50% of the non-cigarette sales growth for the quarter or almost 60% year-to-date. I think it is fair to say at this point that we are going to beat our $100 million incremental VCI and Fresh sales goal for the year. In fact, I believe we will post a record increase in this strategic metric. Our Core Solutions Group continues to make good progress. This group harvest data to help our independent retailer be more important to the consumer and more profitable. We have generated more than 2,500 FMI surveys year-to-date and are on pace to exceed 3,000 for the year. The acceptance rate from this customer base continues to exceed 60%, and our growth rate for non-cigarette purchases is almost 3x that of the non-surveyed stores. We also leverage this important core strategy to win new accounts. The ability to show and impart the value we bring to our customers is a powerful sales tool. We continue to pursue our acquisition strategy [indiscernible] strategy that is not entirely within our control. We must find the right partner at the right price and under the right circumstances. This requires a measure of patience. But given the fragmented nature of this industry, we believe acquisitions will be part of our strategy for some time to come. In conclusion, I would like to remind you of the strength of the C-Store industry, which has over 175,000 stores in the U.S. and Canada. With approximately 4% to 5% share of what is sold in those stores, we have a compelling opportunity for continued growth, not to mention the opportunities in alternatives retail channels. The soft sales in the center of the store categories is a bit of a concern, but this condition makes the execution of our core strategies all the more critical. I am very pleased with our third quarter financial performance, and I'm confident the investments we are making to grow our business are the right investments. I am not surprised this organization could successfully roll out so many vital projects at once. It makes me proud to be part of such a great company. We are very excited about our partnership with Rite Aid and our other valued customers. We are also quite pleased to have partnered with U.S. Oil to help ensure more natural gas stations are available for us and others in the community. Finally, I remain absolutely confident that our core strategies are the right ones for us in the industry in which we compete. We expect 2014 sales to approach $10.4 billion, and we will reach the EBITDA goals that we have guided to, assuming a cigarette price increase occurs in the fourth quarter as expected. In closing, I remain very optimistic about the strength of our organization. We have enormous opportunities ahead of us. I am pleased with the 2014 results so far and look forward to the remainder of the year. With that, I will now turn things over to our CFO, Stacy Loretz-Congdon, who will review our financial results in greater detail. Stacy?

[Stacy Loretz-Congdon:]

Thanks, Tom, and good morning, everyone. I'd like to begin with a brief discussion of EPS and guidance before moving into the numbers for the quarter. Diluted earnings per share were $0.59 compared to $0.53 last year. Excluding LIFO expense, this translates to $0.76 for the third quarter compared to $0.59 last year. We are happy to see some return of commodity inflation with the long awaited candy inventory holding gain, representing approximately $0.14 per share of this quarter's earnings. We maximize these types of increases whenever possible. In addition, product inflation, which has been minimal in the last several years, helped offset inflation in our operating cost. We revised EPS guidance to reflect our current estimates for LIFO expense and a reduction in our expected tax rate. We have adjusted our LIFO estimate to approximately $18 million, up from $15 million, due primarily to an expected increase in the confection Producer Price Index. In addition, we reduced our expected tax rate to 37.5% for the year from 39% previously. The decrease resulted mostly from tax true-ups in the third quarter related to prior year returns that were finalized in September. The net effect is a $0.05 reduction to prior EPS guidance, driven primarily by higher LIFO expense. We now expect earnings between $1.68 and $1.76 per diluted share for the year. Excluding LIFO expense, this translates to a range of $2.17 to $2.25 per diluted share or an increase from prior guidance of approximately $0.05 a share. LIFO expense will be monitored for further adjustments, depending ultimately on the published U.S. Producer Price Index, which we use for book purposes. Our current LIFO projections reflect our best estimates, with cigarette and candy categories representing almost 60% of this year's expense. We have factored in modest inflation for cigarettes in anticipation of the Q4 price increase that we are counting on to meet our guidance projections. However, the final LIFO number will ultimately depend on how much the cigarette manufacturers take prices up as well as the U.S. government's interpretation of the candy and cigarette inflation in their PPI index. We continue to expect between $35 million and $40 million of free cash flow for the year, which includes $50 million per capital spending. This translates to a range of $1.50 to $1.70 per share before funding our dividend and share repurchase program. With that, I'd like to move on to our third quarter results. Sales increased 4.8% in Q3 from $2.6 billion last year to over $2.7 billion this year. Sales, excluding the impact of foreign exchange, increased 5.5%. The weakness in the Canadian dollar reduced Canada's contribution to sales by about $17 million for the quarter and $63 million if you're looking at year-to-date results. Cigarette sales increased 4.2% in Q3 to $1.86 billion and cartons sold increased almost 1%. Price per carton increased 3.4%, driven primarily by manufacturer price increases since last year. And our same-store carton sales decreased 1.3%, which was less than the industry, which reported volume declines of 2.7%. Our non-cigarette sales increased 6.2% in Q3 to $889 million compared to $837 million in the same period last year. Of the $52 million increase in non-cigarette sales, over 50% was driven by an increase in food sales. While we continue to see some weakness in traditional categories, like gum and groceries, we saw particular strength in our snack category led by meat snacks and healthy options, including nuts and seeds as well as health bars. In addition, our Fresh and fast food categories increased during the quarter, driven by Hostess sales, increased traction of Foodservice offerings as well as consumer demand for foods perceived as better for you. Gross profit increased $10.6 million to $151.4 million, an increase of 7.5% for the third quarter of 2014. Candy holding gains of $5.2 million were offset by an increase in LIFO expense of $4.3 million. And we benefited from 2 other tobacco product tax refunds, totaling $2.3 million. Associated costs of $300,000 related to the tax refunds are included in our operating expenses. This tax settlements are unusual and infrequent. However, we do pursue them whenever the opportunity arises, and we focus on maximizing the refunds as much as possible. You may have also noticed our subsequent events footnote related to another tax settlement that will be booked in Q4. Remaining gross profit, which excludes LIFO expense, OTP tax refunds and inventory holding gains, increased $7.4 million or 5.2%. Total remaining gross profit margins continue to improve driven by the food/non-food category, offset slightly by the compressing effect of cigarette price inflation of approximately 6 basis points. Cigarette remaining gross profit dollars overall and on a per carton basis were essentially flat. We did see improvement in cash discounts resulting from the price increases and improvement in certain manufacturer incentive programs. However, much of this was offset by foreign exchange and customer mix. Non-cigarette remaining gross profit increased $7.6 million or 7.6% for the quarter. Remaining gross profit margins increased 16 basis points to 12.16% compared to 12% during the same period last year. Our growth in sales of other tobacco products, which have lower margins than many of the other food/non-food categories, compressed these margins by 6 basis points. Moving on to operating expenses. We saw an 8.2% or $9.9 million increase to $131.2 million in the third quarter of this year compared to $121.3 million for the same period last year. This includes a $2.3 million increase in employee bonuses resulting from better performance and a $1.2 million increase in health care costs driven by the severity of certain claims and an increase in the number of employees covered. Operating expenses as a percent of sales increased 15 basis points to 4.78%. The increase in bonus and health care costs contributed 12 basis points, while the shift in sales to the non-cigarette products, which have a lower price point than cigarettes, contributed 9 basis points. Warehouse and delivery expenses increased $4.1 million or approximately 5.2% to $83.5 million during the third quarter. We shipped 4.3% more cubic feet of food/non-food products during Q3, drove 2.6% more miles and the number of deliveries we made increased 5.3%, driving labor and other related costs up. We continue to expand our CNG fleet, and these tractors drove 12% of all miles during the quarter and 7.5% year-to-date. This contributed to our net fuel savings, which helped to offset increase labor costs, in addition to diesel prices decreasing almost 2% compared to prior year. And Tom already touched on our driver program. As a percentage of sales, warehouse and delivery increased only 1 basis point, despite the 6 basis point increase resulting from the shift in sales to food/non-food categories. SG&A increased $5.7 million or 13.8%. As a percentage of sales, SG&A increased 13 basis points. The additional bonus in health care costs previously discussed contributed 10 basis points and the shift in sales to the food/non-food categories contributed 3 basis points. Moving further down the income statement. Our effective tax rate for the quarter was 31.5% compared to 34.9% last year. Our third quarter is always impacted by adjustments to prior year estimates resulting from the filing of our tax returns. In addition, we did adjust certain tax accruals due to the expiration of the statutes of limitation on certain tax provisions. Moving to cash flows. Cash generated from operations was almost $70 million for the first 9 months in 2014 compared to $59.2 million last year. Remember, cash flows measure 2 single points in time, so period end inventory levels can have a significant impact on operating cash. Year-to-date, our average borrowings under our credit facility were $7.4 million and average unrestricted cash balances were $34 million. Some of you have asked, and it's probably worth repeating, that our net cash position varies widely day-to-day due primarily to the terms we receive on tobacco taxes. For example, this year, we have seen our net cash positions swing up to $100 million during any given month. You only see our balance sheet for 4 days out of the year, but because our tobacco tax liability is significant, we build cash reserves that allow us to satisfy these liabilities that become due the following month and then we start all over again. Free cash flow, which we measure as adjusted EBITDA, plus or minus changes in working capital, less CapEx, cash taxes and cash interest, was approximately $57 million year-to-date. This amount will come down as CapEx approaches $50 million during the fourth quarter and as we begin our LIFO inventory buy-in at year-end. Through September, we've spent $24 million on CapEx and had an additional $8 million committed. We continue to expect free cash flow between $35 million and $40 million this year, depending, of course, on any unusual year-end activities which I generally call out during our year-end call. Our capital allocation decisions continue to support our core strategies and focus on ensuring we have sufficient capital to fund CapEx, acquisition and expansion activities, dividends, opportunistic inventory buys and share repurchases. These remain our capital allocation priorities. We paid $2.6 million in dividends during the third quarter and announced an 18% increase in our fourth quarter dividend, as Tom already addressed. To summarize, the third quarter was very good. We're focused on reaching our 2014 guidance, with sales expected to approach $10.4 billion and EBITDA coming in between $118 million and $122 million. This should create a good foundation as we enter 2015. We believe the success of our core strategies is driving our same-store sales growth and helping us gain market share. And we continue to generate meaningful free cash flow, allowing us to execute our capital allocation strategies. I am honored to be part of such a solid organization with such stable fundamentals. And with that, I would 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 Christopher McGinnis from Sidoti & Company.

[Christopher McGinnis:]

I guess just to start off, maybe on the Rite Aid, just with the current kind of offering that you have there in the 4,200 stores. Can you give us a sense of maybe the revenue benefit to you?

[Thomas B. Perkins:]

I would love to, Chris, but I can't. All I can tell you, it's good, but it's going to get much better as we progress down the road with them.

[Christopher McGinnis:]

Sure. I tried. I mean -- I guess just can you talk a little bit about the experience of bringing in -- going into 4,200 stores as quickly, maybe some of the positives and some of the negatives you've seen so far?

[Thomas B. Perkins:]

I think it's just been a tremendous win for this organization. I mean, not only -- just the fact of -- if you think -- you go from the beginning of just setting up 4,200 accounts to ensuring you're hiring up the right number of people, you're adding the right fixed assets, capital assets to handle the business. And then I look at it from Rite Aid's perspective as they had to communicate and train and organize over 4,200 store managers, right, for this transition. And I think it's just a testament to both organizations' -- great organizations and great people that work for us. And so it's -- when you sit back and we first looked at it and said, 4,200 stores, there's no way. And I think as Core-Mark does, there was a way and we got it done. And that's how we go to market and that's who we are as a company.

[Christopher McGinnis:]

Okay. One with -- just a quick question on the food portion of the business. The increase you're seeing on that, is that a combination of maybe new customers coming in but also -- what's driving that? Is it maybe moving up the value chain? I know there's a number of levels on your food offering.

[Thomas B. Perkins:]

Yes.

[Christopher McGinnis:]

Can you just maybe dig in that a little bit more?

[Thomas B. Perkins:]

Yes. I think, really, if you think about it, it's really our core strategies. It's really the Fresh and Foodservice and good-for-you products. And as we sort of discussed last call and we're still seeing is that, that center of the store is sort of -- it's growing at -- minimally, but really on the out periphery of a store, where you have the Foodservice offering then you have the Fresh products and you have the good-for-you products, that's really where we're seeing growth. And our core strategy is -- are the right strategies because that's what the consumers are looking for. So really our growth in our Fresh categories is really what's driving the overall growth in the food categories.

[Christopher McGinnis:]

And just 1 last question. Just through the Rite Aid win and the press around it. Have you seen any new customers come into the base that you typically wouldn't have seen that are asking about business?

[Thomas B. Perkins:]

I think that we've -- we always have discussions, ongoing discussions with a variety of different customers. Some were ongoing prior to Rite Aid, and I anticipate that we'll have more come to us after -- with the Rite Aid business now under our belt.

[Operator:]

Our next question comes from Ben Brownlow from Raymond James.

[Benjamin Brownlow:]

You touched on the CNG and, obviously, that's a really encouraging initiative. Is there any reason -- I think you said that you could or were planning to get up to a 40% conversion, fleet conversion, in the latter half of 2015. Could that conversion go north of that? And just, can you discuss some of the hurdles to achieving that?

[Thomas B. Perkins:]

Yes, I think, Ben, it can. And I think, definitely, with -- now that we have a great partner in U.S. Oil, I think that will assist us in getting more sources or infrastructure in place for CNG to fill our vehicles. The one thing is we are going about this the right way, which is ensuring that we are going to be driving the right number of miles to produce the savings, which really offset the incremental cost that we pay for those CNG tractors. And so really there -- so as always, we're very patient and we're very thorough in analyzing the return on the investment. And so absolutely, as we get more experience, as we see the tractors we have in place and we see the efficiencies increasing and the savings increasing that, at some point, we probably will increase or accelerate the conversion of the fleet.

[Benjamin Brownlow:]

Great. And last question for me. The -- switching to the food/non-food, gross margins were much better than I had projected. Any reason to expect that to slow down, given the past 2 quarters and the Rite Aid deal kind of shifting that mix more towards higher-margin food items?

[Thomas B. Perkins:]

No, I don't see that. I think, really -- and at the end of the day, our core strategies, our focus is growing the higher-margin categories that we see with the Vendor Consolidation and Fresh categories. And so that is really what's driving that, that -- those results. And I have no doubt that the increases on our margins will continue because we're going to continue to see an expansion of those core strategies.

[Operator:]

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

[Andrew P. Wolf:]

Well, I also wanted to ask on Rite Aid. And you mentioned the penetration opportunity going forward. Is that more in items that they currently do carry and Core-Mark could economically displace either a DSD vendor or another distributor or even self-distribution? Or is that more -- I'm not just asking more, I'm asking also for color, but also is that also around things they don't carry such as Fresh?

[Thomas B. Perkins:]

It's a combination of both. Definitely, there are opportunities. And again, it's all about vendor consolidation, right? So it's all about putting more on the trucks to provide 1 or 2 or 3 times a week delivery to the stores. But again, at the end of the day, the goal is to provide Fresh because they are looking to attract and offer the products that consumers are looking for, which are Fresh and good-for-you products. And so we definitely need traditional products to add to our trucks, but then also, it allows, it gives us the platform to deliver Fresh products to their stores, which they don't have today. And so really that is, I think, the long-term goal. That's where we're heading with them. And they see that also. They have the same vision as we do.

[Andrew P. Wolf:]

So it would be a mix of pretty much everything I mentioned essentially?

[Thomas B. Perkins:]

Sure, absolutely. Yes, absolutely. And I think wherever it makes -- to your point, wherever it makes economic sense and, again, what we know is that the more product we put on our truck, the better you leverage those costs. And so it's better for our customers.

[Andrew P. Wolf:]

Okay. If you get to that point in a year, whenever it is, can you discuss where that -- like the drop size might index out to, obviously, not the cigarette side, but just the non-food -- the non-cigarette, excuse me, drop size might index out relative to like a typical convenience store?

[Thomas B. Perkins:]

I think that what we've seen, and this is from prior experience, we've been doing a certain number of stores, one for Rite Aid that we've been doing for a couple of years and also for some other drugstore chains. And we definitely see the drops in those categories are usually 3x to 4x larger than a convenience store drop. They just have more foot traffic.

[Andrew P. Wolf:]

Okay. That's pretty exciting.

[Thomas B. Perkins:]

Yes.

[Andrew P. Wolf:]

Okay. And then I just wanted to ask one other question around the bonus accrual, $2.3 million on the health care. It looks like, versus kind of incoming trend, the health care spend is about on and the bonus accrual looks a little lumpy. Is that the right way to think about the expenses, those 2 expenses?

[Thomas B. Perkins:]

Yes, I think so, too. I think if you think about it, so every year, we accrue bonuses and pay for performance. And in years where -- last year, we know we didn't hit our guidance numbers. And so the bonuses weren't as...

[Stacy Loretz-Congdon:]

Robust.

[Thomas B. Perkins:]

Robust -- it's a good term -- than they are this year. So I think some of that is a better performance this year and not as good performance last year, coupled together to drive such a large increase.

[Stacy Loretz-Congdon:]

We're matching it to the quarterly earnings as well.

[Thomas B. Perkins:]

Right.

[Andrew P. Wolf:]

And just on the health care. Can you give us a little color, is that incidence-driven or is it a change in some accrual that...

[Stacy Loretz-Congdon:]

No, it's primarily just an increase in the number of employees plus the severity of certain claims. That's really all it is. Since we're self-insured largely, whenever we have large claims experience, that will pop that number up a little bit. And then that, coupled with the fact that we have more employees that are participating in our programs, is causing the cost to increase.

[Operator:]

[Operator Instructions] Our next question comes from John Lawrence from Stevens.

[John R. Lawrence:]

Yes. Tom, would you -- not surprising, I want to touch on Rite Aid for a second, if that's okay. As you -- to make the point on -- we spent some time looking at a lot of stores in California. And obviously, that idea of that different planogram, I assume that -- can you tell us now -- I mean, I assume every store is really different or just different districts can -- of the stores you're in today, can you give us a sense of how many different planograms that could be?

[Thomas B. Perkins:]

I don't know that myself. I think that's one of the -- that is really part of that execution because I think if you were to ask Rite Aid, I think they probably didn't know that themselves when you have that number of stores. And so I think what we'll see over the next 3 to 6 months is really seeing a more of an insight into the different sizes of stores, the locations of the stores, and then really the customer foot traffic for those stores. And so I think, at the end of the day, we're going to have, probably, like you said, many different planograms to match where the store is located and who their consumers are.

[John R. Lawrence:]

Yes, it looked like there's -- obviously, you moved from Pasadena into Hispanic areas of L.A. and that set could be totally different.

[Thomas B. Perkins:]

Right. And then if you go to the East Coast, where -- you can see in some areas, those stores are much larger and newer, and a lot of the remodelings have been done in -- back in the East Coast. So I think that's -- so you definitely have a wide swing of different types of stores.

[John R. Lawrence:]

Great. And secondly, if you look at -- thanks for that clarity on the CNG. I guess 12% of the miles or I guess -- was that the number, Stacy, in the quarter? 12% of the miles were CNG?

[Stacy Loretz-Congdon:]

Yes.

[Thomas B. Perkins:]

Correct.

[John R. Lawrence:]

If you flip that the other way, and to another way of looking at fuel savings, can you give us any sense of what percentage of the miles will be affected by the Ohio DC?

[Stacy Loretz-Congdon:]

By Ohio?

[Thomas B. Perkins:]

You mean the number of miles we're going to be saving when we move to Ohio?

[John R. Lawrence:]

Yes. By just basically reallocating the routes.

[Thomas B. Perkins:]

Yes, I would say we've estimated about $2 million in savings. And it's probably, I would say, it's maybe 0.5 million to 0.75 million miles reduction. And don't -- that's just off the top of the...

[John R. Lawrence:]

Back of the envelope, right?

[Thomas B. Perkins:]

Exactly.

[John R. Lawrence:]

So as we look -- the right way to look at '15 is obviously that productivity number per box should improve, obviously, variances on what products are being carried. And then on the surface then we get this little bump from a CNG rollout on part of the chain. So all the arrows in the right direction?

[Thomas B. Perkins:]

Yes, I think so. And then I think that's where we're -- we know we're going to continue to add customers and so we got to do it as efficiently as possible. And we have to constantly be looking at ways to improve our efficiencies and reduce our cost. I think the second thing is, probably, is as critical, is just ensuring that we are addressing the driver shortage needs because what we do know is when we do experience driver shortages, it adds incremental cost to our system. And so our goal and our strategy is really focused around how do you mitigate those potential cost increases.

[John R. Lawrence:]

Last question. You mentioned a little bit in the commentary, but tell us what's going on in e-cig category?

[Thomas B. Perkins:]

E-cig is sort of flattening out. I think we saw some good bumps when -- with the Altria product and R.J. Reynolds product started to roll out. I think there's sort of a -- vape is definitely bigger and is growing at a faster pace, but it's hard to get a handle on those because a lot of those are on the unregulated businesses, the vape stores. If you're in California, you probably saw a lot of those in strip malls and stuff. And so I think there's still some wait-and-see. And in fact, you see -- read the press about the large companies trying to ensure that the FDA will definitely regulate the vape stores which will, in the end, help their business. But we still have a lot...

[Operator:]

[Operator Instructions] We have no further questions at this time. I will now turn the call back to Ms. Milton Draper for closing comments.

[Milton Gray Draper:]

Thank you for your participation in our conference call and for your interest in Core-Mark. We hope that you will be able to join us for our first Investor Day, which we will be hosting in Tampa, Florida, December 9, this year. We look forward to sharing in greater depth the reasons for our strong optimism about our organization. If you have any additional questions, please feel free to call me at [phone]. Thanks.

[Operator:]

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