Core-Mark Holding Company, Inc.
Q4 2014 Earnings Call Transcript
Published:
- Operator:
- Welcome to the 2014 Fourth Quarter Investor Call. My name is Laura, 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. Ms. Draper, you may begin.
- Milton Gray Draper:
- Thank you, Laura, 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 fourth 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; and Greg Antholzner, our Vice President of Finance and Treasurer. Our lineup for the call today is as follows
- Thomas Perkins:
- Good morning, everyone. I would like to go over the state of our business and briefly review the financial results for the year, and then discuss our core strategies. I’m sure most of you saw our press release this morning announcing the completion of an asset deal in Canada to acquire Karrys Bros, a distributor in Ontario. Like Core-Mark, Karrys has been in business for more than a century and has a reputation for providing excellent customer service. They also deliver fresh, frozen and refrigerated products, so this business should be a nice fit for us. We paid approximately $10 million for most of the assets and expect to spend about $1 million on start-up and transition costs in 2015. While this is not a large acquisition, it is an important one for our Canadian division. It should generate approximately $100 million in annual sales and will contribute to leveraging our Toronto division’s fixed cost and help generate higher profits. We look forward to servicing their customers and welcoming many of their employees into the Corel-Mark family as we fold this business into our Toronto division in the spring. Speaking of Canada, you may have noticed in our 10-K that our Canadian division’s profits have improved considerably in 2014. We picked up a large customer, maximized holding gains and a keen focus on our operational efficiencies all drove the results. The addition of the Karrys business should continue the momentum in this important segment of our business. Our partnership with Rite Aid is going well, we continue to focus on the chilled, fresh, frozen and bakery items in the approximately 4200 stores added this year. These items are selling at very healthy rates, indicating to us and our partners at Rite Aid an improvement in their fresh and food offerings. We want to help Rite Aid continue to expand their fresh food offerings, their customers and the streamlining of their supply chain, but this will be a gradual process. I do want to be clear that this is a profitable account with very significant opportunities for future growth. Our Ohio division is now up and running servicing about 1400 stores with plans to transfer an additional 200 stores before the end of this year. Construction is completed and we are covering a territory from Rochester, New York, Chicago, Illinois and from West Virginia to the Upper Peninsula. There are significant market share opportunities in this region, we have just won a new customer with 44 stores and are in discussions with a number of other potential new customers in the area, so I’m very encouraged by these prospects and the overall performance of this division so far. I know many of you want to know how we’re feeling about or partial conversion to CNG trucks given the recent decline in fuel prices, including diesel fuel. These declines have lowered the spread between CNG and diesel from 2 to 1 to now 3 to 2, but the transition still makes financial sense, assuming the current spread among fuel prices remain about where it is today. Not only will we save money in transportation costs, but we will reduce our carbon footprint. In the fourth quarter, we saved over $1 million in fuel cost and a percentage of that was due to the CNG trucks we have in our fleet. We now have 141 CNG trucks on the road and still anticipate about 30% of our fleet to be running on CNG by the middle of the year. In addition, we own two CNG stations, one in Wilkes Barre, PA and the other in Corona, California. Three additional CNG stations were opened in partnership with U.S. Oil GAIN and are located in Aurora, Colorado, Forrest City, Arkansas and Sanford, North Carolina. GAIN is breaking ground on our fourth station in Atlanta with the fifth one planned in Tampa later this year. Core-Mark had a good year in 2014. I’m very pleased with our 12.1% growth in adjusted EBITDA, which exceeded our guidance. I’m also pleased with the growth trends we saw in our comparable same-store non-cigarette sales as the year progressed. These results continue to strengthen my confidence in the fundamentals of our company and the industry we service. Non-cigarette sales grew 6.8% for the year or 7.7% adjusting for the foreign currency impact. Comparable same-store sales for non-cigarettes improved to 5.5% in the fourth quarter, showing improvement over both the second and third quarters. This metric confirms for me the direction we’re taking the company is the right one. Our core strategies VCI, Fresh and FMI are significant drivers to the continued growth in our non-cigarette sales. Non-cigarette remaining gross profits grew almost 8% for the year, while margins increased 13 basis points or 20 basis points if you exclude the compressing effect of the two large customers we won in the second half of 2013. In the cigarette business, we saw a 4.5% increase in sales on a 1.2% increase in cartons sold and a 3.3% increase in the average cigarette price. We believe cartons are up due primarily to market share gains and vendor promotional activities in 2014. Same-store carton sales for the fourth quarter were up almost 1%, which is a fairly rare statistic in our industry and might support the theory that the C-store industry is benefiting from the CVS exit from the cigarette business. Warehouse and distribution expenses increased about 7%. This increase was driven by a 7% increase in cubic feet of product handled and sold, in addition miles driven increased 6% and we had a 7.4% increase in deliveries. We are beginning to see some improvement in transportation costs, which spiked earlier in the year. We believe that overall the driver pool across North America will remain tight, though some slight loosening is being seen in regions dependent on the oil industry. On a more positive note, we expect to see cost savings in 2015 related to the relocation of customers now serviced by our new Ohio division. Also, if fuel prices continue to remain at current levels, we should continue to benefit, but some of these savings maybe diminished as we reduce the fuel surcharge we have in place for many of our customers. SG&A expenses increased 9.6% or about 7 basis points when measuring these expenses as a percentage of sales. We had some spending in 2014 representing investments in our future, particularly in our people. We will continue to invest in our company in 2015 to ensure we are supporting our future growth. The bottom line is our adjusted EBITDA increased 15.3% to $36.1 million in the fourth quarter and 12.1% or $122.7 million for the year. I am very pleased with these results. This organization was able to complete a number of major projects, execute on the fundamentals and maximize income opportunities such as the candy price increase, holding gain and tax refunds. We know that candy holding gains and tax refunds will probably not recur in 2015, but when these opportunities present themselves we take advantage of them and generate cash and profits for our business. For those of you that have been following our industry for a number of years, you understand we have a sizeable number of one-time events. Most of these are good, but not all. Historically, we have been successful at maximizing these opportunities and on the opposite end minimizing our risks. We had a very good year executing our core strategies and we’re focused on repeating this performance in 2015. VCI and Fresh had a record year, generating over $113 million in incremental sales dollars. Innovation continues to drive these results in these key categories. We continue to develop new programs and products to advance this important strategy. For example, we have launched an organic and plant-based dairy program. This is being included in our largely vendor-funded fresh food cooler program. We believe this will do very well in the stores in more affluent neighborhoods. Our recently launched Farm to Market program is also doing well with over 1000 merchandising racks placed in our customers’ stores during 2014. FMI also had an excellent year as we performed over 3000 surveys which are an integral part of making our independent retailers more relevant and profitable. Surveys were prepared for new stores, re-dos of existing stores and for potential new Core-Mark customers. We are planning on performing an additional 3000 surveys in 2015. Our acceptance rate continues to be above 60% and we are seeing purchases from FMI stores growing three times faster than non-FMI stores. Our Core Solutions Group is focused on mining data to help our sales force help our customers grow their sales and profits as well as our own. We use this data to identify gaps in our existing stores where key products are not being purchased and sold. In addition, we are capturing market share and competitive data using our customer relationship management software. In 2014, this tool helped us identify and prioritize accounts that should be purchasing from Core-Mark. This tool assists our field sales force in targeting their efforts to gain market share and should assist us in growing ourselves in 2015. Bottom line, our core strategies continue to resonate with our customers and we plan to further refine and expand these creative solutions for the markets we serve. For 2015, we are targeting the revenues of $10.7 billion to $11 billion and adjusted EBITDA of $125 million to $129 million. At first glance, it may appear we are being ultraconservative on the low end and more modest in our expectations on the high end. However, there are several factors to consider as we move into 2015 in addition to our general approach being a conservative one. First, we have not included any large customer wins and no acquisitions other than that carries asset deal in our revenue guidance. The growth rate implies the 4% to 7% range led by a continued shift to higher margin non-cigarette categories and continued cigarette consumption declines offset in part by market share gains. On the profit side, we have approximately $14 million related to candy holding gains and OTP tax refunds offset by approximately $5 million for certain transitional and non-recurring expenses that are not included in our 2015 EBITDA guidance. Excluding these items, the anticipated EBITDA growth is at the 9% to 13% range. In addition, we will be investing in our company, mostly in our people, to ensure our infrastructure supports our future growth. We will update you on our expectations as the year progresses. In summary, business is good. I am very pleased with the fourth quarter and year-end results and feel even more optimistic about 2015. We continue to outpace the growth of a pretty healthy industry with saw an approximate 1% store count growth in 2014 and we’re ensuring through innovation that we are providing the products and solutions to our customers’ need to be more relevant and more profitable. We must also continue to invest in the future growth of the company and technology, people, systems and assets. We’re very excited to welcome the Karrys organization into our family and are very pleased about the partnerships we have developed with our customers. I believe our core strategies are working and are a key contributor to our improved financial performance. With that, I will now turn things over to our CFO, Stacy Loretz Congdon. Stacy?
- Stacy Loretz Congdon:
- Thanks, Tom, and good morning, everyone. I'd like to start my comments with a brief discussion of our earnings per share for the quarter and the year. Diluted EPS for the fourth quarter was $0.62 compared to $0.65 last year. For those of you that model EPS excluding LIFO expense, this translates to $0.69 for the quarter compared to $0.65 last year, a 6.2% improvement. For the year, diluted EPS was $1.83 in 2014 compared to $1.79 for 2013. We had guided to a range of $1.68 to $1.76 and beat that expectation due primarily to our LIFO expense coming in a bit lower and a better tax rate than expected. As a reminder, our LIFO expense is tied to the Producer Price Index and reflects estimates in the various product categories. Excluding LIFO expense, we earned $2.26 in 2014 compared to $2.02 last year, an 11.9% increase. This result was above the higher end of our guidance which targeted $2.17 to $2.25 per share. For 2015, we’re guiding to an EPS range between $1.84 and $1.91. This includes estimates of $16 million for LIFO expense, $8 million for cigarette holding gains, a 38% tax rate and 23.4 million dilutive shares outstanding. Excluding LIFO expense, we are guidance to an EPS range of $2.26 to $2.33. The candy gain and the net OTP tax items represented approximately $0.36 per share for 2014 and are not expected to recur in 2015. In addition, integration, acquisition, legal settlement and legacy insurance claim costs compressed 2014 EPS by approximately $0.13 per share. Normalized for just these items, guidance for 2015 EPS excluding LIFO expense indicates a range of growth between 10% to 14%. Moving on to our fourth quarter results, sales increased 4.7% to $2.6 billion compared to $2.5 billion last year. Excluding the impact of foreign currency, sales increased 5.8%. The weakness in the Canadian dollar reduced Canada’s contribution to sales by about $26 million for the quarter and nearly $90 million year-to-date. Sales in the fourth quarter were comparable for acquisitions and large account wins that were consistent in both periods. Fourth quarter cigarette sales increased 4.3% to $1.8 billion compared to $1.7 billion last year. Excluding the impact of foreign currency, cigarette sales increased 5.4% driven by a 1.3% increase in carton sales and a 3% increase in the average sales price of carton. Same-store carton sales increased 0.6% during the fourth quarter, with over half of the US divisions showing growth in this category. In contrast, industry carton shipments were down a modest 2% with carton manufacturers citing stronger consumer demand and lower gas prices. The future expectations for industry carton declines remain in the 3% to 4% range. Our non-cigarette sales increased 5.6% in Q4 to $844 million compared to $799 million in the same period last year. Excluding the impact of foreign currency, sales increased 6.6%. Food products contributed over 55% of this growth, increasing 7.2% during the quarter including foreign exchange impact. Meat and healthy snacks as well as nuts, seeds and dried fruits drove the snack category up 12%. Our fresh categories which include dairy, bread, fresh products and meat increased nearly 16% during Q4, benefiting from the Rite Aid expansion and the execution of our core strategies. Gross profit increased $11.3 million to $154.6 million, an increase of 7.9% for the fourth quarter of 2014. We recorded $7 million in net OTP tax items and the remaining holding gain associated with the candy price increase. This was offset partially by $2.7 million in LIFO expense. Cigarette holding gains in Q4 was slightly above prior year. The remaining gross profit which excludes the aforementioned items increased $7 million or 5% to $146.1 million. Remaining gross profit margins increased about 8 basis points for the quarter, but were compressed by 6 basis points due to the increase in cigarette manufacturer prices. Cigarette remaining gross profit increased 1.5% to $39.8 million, benefitting primarily from the 1.3% increase in carton sales. Remaining gross profit per carton was essentially flat for the quarter. Non-cigarette remaining gross profit increased 6.5% to $106.3 million for Q4 2014. Remaining gross profit margins for non-cigarettes increased 11 basis points. The comps for inventory shrink which was slightly higher than historical norms this quarter compared to a favorable inventory adjustment during the same period last year had a 9 basis point compressing effect. Excluding this, remaining gross profit margins increased 20 basis points, much closer to what we’ve seen in recent quarters. Moving on, operating expenses were $131.6 million in the fourth quarter this year compared to $119.5 million for the same period last year, a 10.1% increase. Operating expense as a percentage of sales increased approximately 20 basis points, driven largely by SG&A costs which I will discuss in a minute. Warehouse and delivery expenses increased $4.2 million or approximately 5.4% to $81.4 million during the fourth quarter 2014. This increase supported a comparable 5.2% increase in cubic feet handled. In addition, miles driven were up 7.6% and deliveries increased 12.6% driven by the new Rite Aid business. The increase in operating costs was offset by lower fuel costs. CNG units drove nearly 15% of total miles, up from 12% in Q3, contributing to fuel cost reduction. As a percentage to sales, warehouse and delivery was essentially flat compared to prior year. SG&A grew $7.9 million or 19% during the fourth quarter and as a percentage of sales, increased 23 basis points. Fourth quarter can often be impacted by a number of year-end adjustments and non-recurring activities, so I will point out the larger items. We saw higher stock comp versus last year’s fourth quarter when the performance shares were cancelled and bonus expense increased on good results which contributed $1.7 million collectively to this increase. In addition, we accrued $1.2 million during Q4 for settlement, litigation and related fees and another $1.9 million for legacy insurance claims, professional fees associated with the OTP tax refunds and bad debt exposure. Our health care costs were slightly higher during Q4 this year, offset by higher comparable integration costs this year versus 2013. Lastly, we reported a pension curtailment gain in SG&A last year that did not recur this year. All of these items represented a little over 70% of the increase, meaning everything else increased about 5%. The remaining increase was driven by SG&A salaries, excluding benefit. Those were up about 9%, meaning we did leverage some of the other SG&A line items. This increase in salaries was due primarily to Ohio and an investment in bench strength primary in sales, IT and some back-office functions. Moving further down the income statement, our effective tax rate for the quarter was 35.1% versus 35.3% for the fourth quarter last year. For the year, our effective tax rate was 35.7% compared to 37% last year. The decrease for the year was driven primarily by larger positive adjustments of prior year estimates and by the expiration of statutes of limitations for certain tax provisions. Moving to cash flow, cash generated from operations before working capital changes was $96 million for 2014 compared to $88 million last year, an 8.8% increase. Changes in working capital which measures two single points in resulted in a use of cash in both 2014 and 2013 of just over $29 million. The largest increase in our working capital was for cigarette inventory purchases related to our LIFO buy-in at the end of the year, which ran about $20 million higher this year compared to 2013. Free cash flow, which we measure as adjusted EBITDA plus or minus changes in working capital, less CapEx, cash taxes and cash interest, was slightly over $23 million for 2014. However, if you add back the $20 million temporary spike in inventory, we came in slightly above our expectation. Our capital investments were $54 million this year compared to $18 million in 2013. Our new Ohio division represented approximately $16 million of our total spend this year. For 2015, we are guiding back to a more normal level of $35 million for CapEx. Free cash flow per diluted share was $1.01 this year or $1.87 excluding the incremental year-end inventory buy-in. In addition, the $4 million additional CapEx spend over the $50 million we guided to represents another $0.17 a share. For 2015, we expect free cash flow to be between $65 million and $70 million, depending of course on any unusual year-end activities which I normally call out. On a per share basis, we’re expecting a range of $2.75 to $2.95 for free cash flow. Average debt for the year was $14.8 million compared to $35.3 million in 2013. Average inter-month working capital swings were approximately $55 million for the year, with our peak debt position at about $80 million in December when we started buying inventory in anticipation of the cigarette price increase. Our current ratio continues to be strong at 2 to 1 and average monthly cash conversion cycle was stable at 14 days compared to 14.3 days last year. We were able to generate sufficient excess cash in 2014 to return value to our shareholders consisting of $10.7 million in dividends and $8 million of share repurchases. And you may have noticed our first-quarter dividend announcement of $0.13 per share in our press release this morning. In addition, we continue to invest in our infrastructure and human capital to support our long-term growth strategies. As many of you know, our return on net asset standard is 20%, which means we focus on meeting or approaching that standard when making our investment decisions. The net assets we monitor include inventory, accounts receivable and fixed assets less accounts payable, tobacco taxes payable and accrued liabilities, all major components to our working capital management and monitored on a daily basis. For 2014, our RONA was just above 19% compared to 18% in 2013. Our capital allocation decisions support our core strategies and focus on ensuring we have sufficient capital to fund CapEx and related investments in our infrastructure, enable us to focus on acquisition and expansion activities, take advantage of opportunistic inventory buys and return value to you, our shareholders, through our dividend and share repurchase programs. To summarize, we had a good fourth third and a very good year in 2014, delivering record top line and EBITDA results. We’re very optimistic about 2015 in leveraging the foundation we are building for the 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:
- [Operator Instructions] And our first question comes from Mark Wiltamuth.
- Mark Wiltamuth:
- I wanted to get some idea of how much you’ve got built in for Rite Aid for the year and is there an opportunity for the performance to improve there throughout the year? And then I have one other question.
- Thomas Perkins:
- Mark, one of the things we don’t and we really can’t comment is on particular sales of specific customers. I think one of the things if you look at our 2014 results, our biggest growth in the fourth quarter was in the food categories and the fresh category really a lot of that growth was driven by the Rite Aid stores. If you think about the Rite Aid, we finished the rollout at the end of October, we’ve gotten to the holiday season, so our intent and Rite Aid’s intent is to continue to add product lines and to help streamline their supply chain. So we have numerous discussions going on with them currently and anticipate those revenues will continue to grow in the future as some of these strategies come to fruition through our discussions.
- Mark Wiltamuth:
- Are you contemplating getting into candy and cigarettes or is it just like more things around fresh and frozen?
- Thomas Perkins:
- I think, Mark, there’s opportunity in all the categories you mentioned, I think what we bring to the table for Rite Aid is definitely the expansion of fresh into their stores, which we know draws foot traffic and helps their overall revenue growth. But there is also opportunity to streamline the supply chain, at any time you talk of streamlining supply chain, cigarettes and candy will be in those discussions.
- Mark Wiltamuth:
- And then the follow-up question I have is on the Pantry acquisition by Couche-Tard, obviously Couche-Tard is your largest customer, about 15% of sales now. Do you anticipate the pantry volumes shifting over to you and who is servicing those accounts right now and just give us some thoughts on that right now.
- Thomas Perkins:
- The Pantry today is being serviced by McClain and they had just re-signed a five-year contract about I want to say nine to 12 months ago. We definitely know that pantry is a very good fit for us that they want to expand in their fresh offerings and definitely we are the supplier to help them do that and we have a very good relationship with Couche-Tard, our largest customer. But right now what we don’t know is how the change in ownership might affect either when the bid will become available or if there are changes to the Pantry strategy on how they go to market, so that’s sort of a wait and see, but definitely we like it, when our customers get larger, they buy chains and they get larger, because it usually helps us. So that’s pretty much where it is today.
- Operator:
- And our next question comes from Andrew Wolf.
- Andrew Wolf:
- Tom, as I try to adjust, take out the candy and OTP and add back the costs you mentioned, kind of comes out like the same exact EBIT margin before - using remaining gross margin since 2012, 70 bps, so interesting to just do that and it looks like your guidance, at least as I’m modeling it, kind of you get to the almost the same thing towards the middle. So am I reading this right, is the business basically, because of mix or some other reason, running at a sort of steady state profitability? And if that’s right, is it a business that can produce operating leverage or is it just sort of the nature of either mix or the competitive market or what have you that is not quite leveraging the sales into higher operating profit growth?
- Thomas Perkins:
- I think as I look at our business is we do know and we have been sharing with you how our mix is changing, right, we are selling – a much higher percentage of our sales are in non-cigarettes, they’re higher margin and higher cost, we know that. And so the revenue growth is sort of being deflated by that change between the non-cigarette and cigarette. And at the same time what happens if you look on any of our metrics from a percentage of sales, especially from the expense line, you’re going to see the expenses grow from that level, are going to grow just because of that shift in product mix. I think the second thing is we invested in 2014, in particular, with the Ohio division which adds fixed cost to our structure and then as we add customers and we rolled out customers from the other divisions which happened in December of last year, we won’t really see leverage until we start to bring new business into that building. So that also drives, as we look at leveraging cost, that’s not going to – we won’t be leveraging those costs until we get the business in that division up and running to what we expect it to be. I think the other thing that we talk about and we continue to do is to invest in our business. In 2015 we have approximately about $6 million to $7 million of investment for a variety of projects we’re doing. One of them we talked about was the Karrys integration, we have financial project, conversion project we have ongoing, we’re also investing in our salaries to support those growth. So there are additional costs in our expenses for 2015 that will be one-time shot, but we will be leveraging those once we get those in place and go into future years.
- Andrew Wolf:
- I guess on a flip side of this is if your business model of gross profit dollars per stock is, you’re able to grow that through having fresh offering and other things, DST, vendor consolidation, it’s got to be much tougher, I would imagine or very tough for those folks who are really more traditional cigarette distributors. Can you comment on that, what you think is going on for some of your competitors you might be looking at or talking to, and is that what we could infer might have been the case in Canada with the asset purchase?
- Thomas Perkins:
- I think if you think about it, I go back to our acquisition of JT Davenport and discussions with Mark Davenport who is our division President now of the Carolina Division, we call it, one of the – he had family considerations, but the other thing was the business consideration and as he looked at the landscape, he has told and said publicly in front of other distributors that basically he couldn’t compete with Core-Mark on the fresh offerings that we have and he just doesn’t. He just didn’t have the capacity or the infrastructure to do that and I think that was one of his reasons for selling the company to Core-Mark in particular. What does happen though and you talked a little bit about the competitive nature is that when we bring a broad range of solutions with our FMI, our vendor consolidation in fresh to our customers and potential customers and so the only alternative our competitors have is a price alternative, which is to lower prices of cigarettes or something. So our job is to ensure we educate our customers on what a nickel of carton means versus saving you $25,000 to $30,000 through implementing recommendations we have from FMI. Secondly is definitely as the industry, and I think this is driven more by the industry, as the industry changes how they go to market with all the fresh offerings, the natural products and the good for you products, other traditional distributors are going to have a very hard time to meet the requirements of their customers and I think that will help I think speed up the process of some of them not been in business and/or desiring to sell.
- Operator:
- And our next question comes from Chris McGinnis.
- Christopher McGinnis:
- I guess just a follow-up on the beginning of the, kind of the leveraging, you talked about 20 basis points to support the contract wins from last year, obviously to your bottom line that’s pretty significant, how long does it take you to leverage, you talked about leveraging Ohio and may be the Rite Aid contract, can you maybe just talk what’s your thoughts about the leverage of the network?
- Thomas Perkins:
- I think you’re talking leveraging expenses and I guess I want to make clear on Rite Aid perspective, that account is profitable today. So I think we are generating profit from that contact what we have anticipated. So that’s being leveraged. I think from an Ohio division is again we spent the majority of all – from July, August through the end of the year to want to get the division setup, we transferred the customers, we started servicing Rite Aid stores from the division at the end of September and then we transferred customers from our Pennsylvania and our Kentucky divisions in the December timeframe. And so really we’ll start seeing those fixed cost be leveraged into 2015 and beyond and then the other big thing is then to add new customers, which we have several conversations going on with customers in that area, the geography of the US. So again, just like we talk about when you do an acquisition is what happens is we don’t want to do any harm, two, we want to start to put them in our systems, on our processes and procedures, and then three, we start leveraging our programs and our offerings in the acquisitions or in our divisions and really that’s about 12 to 18 months time period. So really that’s sort of any time you look at a large new customer coming on board or you look at a new division or a new acquisition, that really is the timing on when you start to see higher margins and leveraging the costs.
- Christopher McGinnis:
- Currently, I guess it started late, you’re not getting the full benefit at least in Q4 for Rite Aid revenue contribution, I guess you see that more so in Q1, right?
- Thomas Perkins:
- I think it laid up a good percentage of our fresh and – our fresh growth which is on our food categories in the fourth quarter. I think it’s real important that we – continuing to reiterate, so we’re servicing the fresh, frozen, chilled products and bakery items to Rite Aid versus if you look at a traditional community stores, we deliver a whole myriad of products. And so these – the four categories we are delivering today are very small components of what we service to a large convenience store. So I think we are seeing the impact of Rite Aid in our numbers, we are seeing improvement in those revenues, but it also take time for the customers of Rite Aid to know that they have a consistent food offering, so when they go in and they can buy a fresh sandwich or they can buy fresh bakery items et cetera which in the past they may not have been able to.
- Christopher McGinnis:
- And I guess just thinking – because there is so many one-time cost to some degree, what do you think the long-term margin profile of the company is when you think about it a few years out from where you are at today?
- Thomas Perkins:
- Our goal is always to grow our margins faster than our expenses, but I think to your point is we have been in the past and we continue to be in the past that we continue to invest in our business and we will continue to be a steady Eddie Company. I think if you look at us since 2012 or 2011 our revenues have grown 8%, our EBITDA has grown 10%. And I think that’s going to continue, that’s where we are as a company. And so I think we are going to continue to add business, we’re going to continue to acquire companies and – but we’re going to be a steady Eddie Company and I think that too we are and I think our past results and our future results will follow that line.
- Christopher McGinnis:
- And then just one last question I’ll jump in the queue, just the CRM rollout with the sales force, can you just may be give an update on that and how that maybe helping spur the fresh sales to the independents?
- Thomas Perkins:
- Really, I think today we probably have the best information we’ve ever had regarding what stores we don’t service in our geography, who services those stores and really what stores we want to go after. So what we’ve been using that for is targeted independent sales growth and so our sales people have the ability now to identify when their next – if they are in one of our existing customers, they can sort of do a query and see which stores around them we don’t have and they can visit those stores. So I believe as we – as our sales force gets comfortable and we constantly and continually train them on this that we will see independent growth, store growth continue from using those tools.
- Operator:
- And our next question comes from John Lawrence.
- John Lawrence:
- Tom, would you just sort of take that one step further on the model itself, so the range for 2015, if I’m looking at all the adjustments, we’re talking 4% to 7% revenue growth, and Stacy I think with your adjustments and everything, 10% to 14% bottom line, is that right?
- Stacy Loretz Congdon:
- Correct.
- Thomas Perkins:
- And adjusted EBITDA is about 9% to 13%.
- John Lawrence:
- So if you look at that and your comments, Tom, that is a little bit of an expansion of the range of the bottom line than we’ve historically had, is that not correct 10% to 14%?
- Thomas Perkins:
- That is, John, and I think one of the things that we are seeing now is we’re seeing a definite – our non-cigarette categories are accelerating and so I think that’s really why the bottom line, the adjusted EBITDA is growing at a faster rate than it had been in the past. And so I think that is a good thing for us and that’s been our stated objective of this company is to grow non-cigarette margins and sales at a much faster rate. And I think that’s what our guidance is saying.
- John Lawrence:
- And take just one step further that would even include some investments that we would not have realized or some of those projects that even without those projects that 10% to 14% would even be little stronger?
- Thomas Perkins:
- That’s exactly right, because that 9% to 13% adjusted EBITDA growth includes that $6 million to $7 million of investment spending we are doing in 2015. So yeah, to your point, John, I think our earnings guidance for 2015 when you rack and stack all of the investments we are doing it is probably more aggressive than or is guiding to a higher number than we normally would guide to.
- John Lawrence:
- And just a last point to that to sum that up, so the business is better on the non-cigarette side, we’re gaining share et cetera, we are leveraging the model, but you’re probably going to hold this business back from an investment standpoint and will probably not going to see 15%, 20% growth from a guidance standpoint, if you get there it would just be from a leverage standpoint, because you’re always going to reinvest in the business?
- Thomas Perkins:
- I think that’s right and I think the thing is we’re going to look for the long run and I think that we know that we have to do some of these projects that prepares for the future and over time the investment on those projects are going to provide us efficiencies, which is going to help us leverage our fixed cost. And I think that’s real important from our company’s perspective as that’s what the goal is, right, is to leverage our fixed cost and so a lot of these investment spend in 2015 is to do that. I would just say, John, and I think as you said, our guidance for 2015 includes those investment spend, $6 million to $7 million in 2015.
- Stacy Loretz Congdon:
- On EBITDA basically, there is growth in EBITDA margin.
- John Lawrence:
- And then as we look to 2015, two of those key points will be Ohio and then as you pointed out the Canadian division leverages just on the fixed cost, so that incremental revenue is a variable cost leverage point by getting more in the building?
- Thomas Perkins:
- Yes, absolutely. Once we get them moved over, it’s pure leverage over our existing fixed cost. That’s the nice thing about that. When we do opportunistic acquisitions like that, we can fold into our existing divisions without infrastructure investments. And so I’m excited by that, it really does.
- John Lawrence:
- So last question and not to beat this death, but when you open Ohio and then you do the absolute sort of profit by division, will those other divisions that you’re running two and three-day routes obviously on a segmented basis will all be more profitable?
- Thomas Perkins:
- Yes, because I think what’s happening and one of the main reasons for opening Ohio and more moving those customers was the transportation synergies and so definitely the metric I look at is the cost per mile and definitely what we see and we’re seeing that in our 2015 estimates is a lower cost per mile for those divisions as well as the Ohio division, because now that’s a lower cost to serve market for us.
- John Lawrence:
- And I’m sure I’m guessing, I’m going to try this anyway, I’m sure you won’t give it, but anyway you would give us a sense of the lowest profitable division to the highest of what that delta would be?
- Thomas Perkins:
- No, I can’t do that. What I can tell you is the more non-cigarette division sales, the more profitable they are. And that’s our goal for everybody is to get to that level.
- John Lawrence:
- And they are still running all those divisions to improve that?
- Thomas Perkins:
- Absolutely.
- Operator:
- [Operator Instructions] And we do have Andrew Wolf back in the queue.
- Andrew Wolf:
- I wanted to follow-up on what you’re seeing in wage inflation or driver shortages, you talked about before with Wal-Mart in the general talking about – there’s some wage inflation in the working sector.
- Thomas Perkins:
- I think, Andrew, we don’t – our wages we pay are competitive in our industry and definitely they’re higher than what Wal-Mart pays their employees today. So every six months your relatives and thus a wage survey out there and ensures that our wages are competitive with the marketplace and the industry we service. And so I feel real confident about that. I mean, annual wage inflation is 2% to 3% range normally and I think that keeps us abreast of what our competitors are doing. From a driver perspective, definitely drivers are tight and the only thing I can say is that the nice thing is in some of the areas I speak of Texas which were – probably had the tightest driver pools because of the oil fields, we’re starting to see some of the loosening up from that perspective, but our goal is to take control of our own destiny. And so we see great success with one having our internal driver training programs where we have – we give a career path for our warehouse employees who can go into a driver and make more money. Secondly, views in every form of social media and online advertising and really at the end of the day is leveraging with our drivers is that the majority of our drivers go out and come back the same day, so they’re not overnight route like lot of the long haul drivers are. And so I think that’s in our favor in how we go to market for drivers.
- Andrew Wolf:
- And I just have one follow-up more for Stacy, I guess, is in the non-cigarette business same store number, can you give us what the inflation might be in there, and I don’t know if you guys give out phases for non-cigarette?
- Stacy Loretz Congdon:
- We don’t you out the unit cases, we talk about cubes, which were up pretty significantly for the quarter that we broke it down between non-cigarette. I would say, it certainly does include some inflation and the candy, but you can see in the segment footnote how much candy has gone up. So it’s offset a little bit by volume. Our LIFO expense also is a good indicator of what inflation that we’re seeing in each of the various categories. So I don’t break it out, Andy, between – of the 5.5%, how much is inflation. It’s just a pure metric.
- Andrew Wolf:
- So if I were to guess on inflation using PPI or something like that, I work out to you pretty – the quarter having pretty good I think cubic or case volume growth, is that right at the same customers?
- Thomas Perkins:
- Right. And I think that 5.5% does reflect that.
- Stacy Loretz Congdon:
- Yes, a quarter of 5.5%.
- Operator:
- [Operator Instructions] We do have Chris McGinnis back in queue with a question.
- Christopher McGinnis:
- Just a quick follow up, just maybe a thought for 2015, how much, I know you said $6 million to $7 million is for growth initiatives, but how much is the margin profile maybe suppressed by the investment for the new clients or new customers to support them? Can you give maybe a basis point; let’s call out 20 basis points last year, is there like a 20 basis point headwind this year?
- Stacy Loretz Congdon:
- On margins, gross profit margins?
- Christopher McGinnis:
- Yeah, gross profit margins?
- Stacy Loretz Congdon:
- No, but Chris maybe this would be helpful to looking at EBITDA, I mean, all in, we’re at about 1.19% all in, but we called out the OTP and candy and then around $5 million of unusual expenses, part of that transitional type of expenses that we called out on the call. If you strip all that out, our EBITDA margin is about 1.11%. We’re guiding to about 1.17% inclusive of 6 basis points compression due to the investment spend that we called out, the $6 million to $7 million. So our EBITDA expansion is expected to go up to $1.23 million, all in, but then our investment spending a little bit to help support the infrastructure for the future.
- Operator:
- And we have no further questions at this time.
- Milton Gray Draper:
- Thank you for your participation in our conference call and for your interest in Core-Mark. We are pleased with the results for the year and believe that 2015 will be another terrific year for the company as we execute on our core strategies and take market share. If you have any additional questions, please feel free to call me at 650-589-9445. Thanks operator.
- Operator:
- Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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