Q4 2019 Earnings Call
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I'll now turn the call over to Mr., David Laurent.
Mr. Lawrence you may begin.
Thank you today's call will be led by Scott Macpherson, our President and Chief Executive Officer, and Chris Miller, Our Chief Financial Officer before turning the call or the Scott I will point out the core arc intends to take advantage of the safe Harbor provisions of the private Securities Litigation Reform Act as noted in the earnings release, we filed this morning.
Please remember that our comments today may include forward looking statements, which are subject to risks and uncertainties and actual results may differ materially from those indicated or implied by such statements.
Some of these risks are described in detail in the company's FCC filings, including our annual report on form 10-K. The company does not undertake any duty to update such forward looking statements. Additionally, we will refer to certain non-GAAP financial measures. During this call you can find a reconciliation of these non-GAAP financial measures.
The most directly comparable GAAP measure and other related information, including a discussion of why we consider these measures useful to investors in our earnings release in our annual report on form 10-K, I'll now turn the call over to Scott.
[music], thanks, everyone for joining us today on our fourth quarter call.
2019 was certainly a dynamic year for our industry and I'm proud of what Cormark accomplished and a year of accelerated cigarette carton declines an unprecedented regulatory disruption we executed on our strategic priorities, leading the company to records and revenues and profits headlined by 29% growth.
Pre tax profits.
And 16% growth in EBITDA strong non cigarette sales gross margin expansion and cost leverage where the catalyst that allowed us to deliver solid here.
This morning, I'll start out by providing color on our fourth quarter and full year results and finish with details around our 2020 strategic priorities and guidance.
Our results for the fourth quarter in line with our expectations showing continued growth in sales accompanied by margin expansion that helped drive strong growth in EBITDA.
Sales growth of 1.6% was driven by 5.4% growth and non cigarettes or same store sales growth is down from where you're at an average of 6% due to flat year over year alternative nicotine sales for the quarter caused by the regulatory disruption a third quarter retail load and manufacture flavor elimination.
Experienced during the quarter. Despite the headwinds we still delivered quality revenue growth.
We delivered another quarter of margin expansion through continued improvement in our sales mix and gains from strategic pricing initiatives.
That drove a 24 basis point improvement and non cigarette remaining gross profit margin.
Operating expenses were impacted by higher employee bonus and stock comp given stronger performance for the year compared with 2018.
Adjusted for the difference and these accruals and excluding the benefit of inventory holding gains we delivered EBITDA growth of 12%.
In summary, we are pleased with our results for the quarter, which demonstrate our ability to drive meaningful earnings growth in the face of elevated industry carton declines and flat year over year growth and the vapor category caused by the aforementioned regulatory and manner manufacturer disruptions.
Doesn't during the quarter from a full year perspective, we delivered 190.7 million in EBITDA.
The 16% growth over 2018.
Excluding the benefit of the unplanned candy games and cigarette inventory holding gains greater than guidance, our 2019, EBITDA would've been approximately 180 million putting us at the upper end of our original guidance.
Overall, it was a strong performance by the company and we are proud to have delivered on our profit commitments to our shareholders.
Our results for 2019 reflects successful execution on our strategic initiatives focused on growth in sales of higher margin food fresh and alternative nicotine categories, the rollout of our strategic pricing initiatives and cost leverage.
We delivered sales growth of 1.7% for the year, despite the downward pressure of burden to clients.
On a year of modest top line growth. We've proven we have the ability to continue to elevate profits and leverage costs in a meaningful way.
In non cigarettes, we delivered 6% same store sales growth above the industry average or closer to 4% on the strength of the food fresh and alternative nicotine categories.
Outperformance, we delivered this year is directly attributable to our commitment to providing industry, leading category management solutions to our customers.
As Chris will discuss in a bit more detail our free cash flow for the year came in lower than our guidance strictly as a result of the timing of your end cigarette lies in anticipation of a price increase in early 2020.
However, we ended the year with financial leverage of approximately two times, leaving significant availability under our ABL facility.
Our liquidity and capital structure are well positioned as we evaluate our capital allocation priorities for 2020 and beyond.
Before I turn to our 2020 guidance and strategic focus I want to share a few additional thoughts on the vapor category as a follow up to my comments on our last call.
The decision by the FDA to ban vapor flavors other than tobacco and menthol and increase the minimum legal edge to 21 were consistent with our expectations.
The upcoming FDA pre market approval deadline will likely result in a meaningful contraction in the open tank vapor market, which relies heavily on flavors. We believe in the long run consumers will continue to shift to close systems.
Like jewel views and enjoy where sales are led by the C store channel.
Further the CDC recently stepped back from their broad based recommendations against vaping, which should help to moderate the health safety overhang for the category. While we expect there may continue to be some near term choppiness in the vapor category as users adapt to the market changes. We believe this category will continue to grow over.
The longer term.
And C stores are well positioned to be the dominant sales channel.
Changing gears I want to provide the highlights of our 2020 guidance and then share some insights into our strategic focus.
Our guidance this year reflects sales growth ranging from approximately 1.4% to 2.6% predicated on continued elevated cigarette carton declines no major customer wins or acquisitions and modest growth in E. Cigarettes are EBITDA growth ranges from approximately 5% to 11% after adjusting for the 2000.
19 candy price increase income.
7 million, which is not expected to re occur and the cigarette holding gains forecasted at 20 million versus 23 million earned in 2019.
We continue to refine our strategic priorities around growing faster and more profitably than the industry, serving as the industry leader and category management solutions and driving cost leverage throughout the organization.
From a growth perspective, we are actively working on a number of new potential customers along with opportunities to expand relationships with existing customers. We continue to focus on accelerating the pace of market share gains with specific focus and 2020 around churn reduction salesforce structure and incentive alignment, while leveraging the meaning.
We'll investments we've made in our category management capabilities.
I'm pleased to report that we open the center of excellence or in short the Seo easy in January and have already had several customers come through the facility and provide very positive feedback. The sealy provides an immersive and collaborative experience that enables our customers to explore the latest and C store innovation and.
With actionable strategies and data analytics to drive growth in same store sales and margins.
The CFO. He is designed to evolve along with the industry and I'm excited about the incredible opportunities to grow sales and earnings for our customers and performer.
We also recently launched a platform to provide our customers with access to real time data analytics through online and mobile platforms. This rollout techs are focused marketing initiative to the next level as we are able to provide our customers and our sales organization real time access to actionable intelligence to help drive.
We'll sales.
In addition to growing profitably through improved sales mix and growth our strategic pricing framework will continue to play a role and enhancing our margin profile Im pleased with our progress in 2019 and see significant opportunities ahead.
Driving operating expense leverage both in SGN, a and then warehouse and distribution remains a top focus we continue to make smart investments in technology to improve efficiency and drive our efforts to consolidate the transactional activities in our business.
This includes investments we have made in robotic process automation to drive efficiency in our accounting and finance functions as well as voice tech and driver handheld capabilities to improve our warehouse and distribution efficiency.
We are confident our ability to continue to drive cost leverage throughout the organization.
I want to wrap up my prepared remarks with a few comments on our capital allocation priorities. We continue to actively pursue opportunities to acquire traditional C store wholesale distributors that enhance our scale and capabilities provide a pathway to profitable growth and meet our return requirements. Additionally, given the hyper changing consumer pro.
References and expectations in the industry and the importance of innovation in our food and fresh programs. We are also actively exploring potential partnerships exclusivity arrangements and acquisitions that will enhance our offering and capabilities.
And finally, given our current leverage free cash flow generation and stock price. We're also committed to share repurchases, we completed 22 million and share repurchases in 2019 and reduced our outstanding shares by almost 600000, we recently announced at our board approved a new $60 million share repurchase program.
We will strategically execute share repurchases in accordance with the board approved plan and our return objectives in closing I want to thank the 8500 Cormark employees, whose commitment made 2019. The success I will now hand, the call over to Chris to provide more details on our financial results.
Thank you Scott and good morning, everyone.
I'll start off by providing some full year highlights and provide commentary on the quarter and close with additional insights on our 2020 guidance.
For the full year net income increased 26.8% the $57.7 million diluted earnings per share increased 26.3% to $1.25 and EBITDA increased 15.8%.
The $190.7 million.
Strength of our full year results reflect overall sales growth of 1.7% led by a non think sales growth of 6.6%.
I don't think remaining gross profit margin expansion of 36 basis point.
And the benefit of operating expense leverage.
In short we're proud of the results for the year, we delivered double digit earnings growth through successful execution, our key strategic initiatives.
Improved sales mix margin expansion and operating expense leverage.
We also benefited from approximately $10 million of nonrecurring inventory floors by gains earned during the year.
For the fourth quarter results net income increased 43.9%.
$16.2 million diluted EPS increased 34.6%.
35 cents and EBITDA increased 23.8% to $48.3 million.
Our strong results for the quarter, primarily reflect the benefit of strong non cigarette sales growth.
Remaining gross profit margin expansion or non cigarettes, and higher inventory holding gains.
Total sales increased 1.6% over Q4 2018 to 4.15 billion.
Non cigarette sales increased 5.4% for the quarter driven primarily by an increase in same store sales of approximately 4% and net market share gains.
Total cigarette sales declined 0.3% in the fourth quarter compared with Q4 2018, driven primarily by a decline in same store carton sales of approximately 4%.
Offset by price inflation and market share gains.
Remaining gross profit, which excludes significant inventory holding gains in LIFO expense decreased 2.8% to $225.2 million for the fourth quarter.
Remaining gross profit margin increase six basis points to 5.42%.
Driven by strong non cigarette remaining gross profit margin expansion of 24 basis points.
However, our cigarette remaining gross profit margin declined by about 22 basis points.
Cigarette margins in Q4 were impacted by the timing and amount of vendor incentives and higher inflation versus prior year quarter.
For the full year, our cigarette remaining gross profit margins were down by only five basis points, which was due primarily to the higher level inflation in 2019 compared to 2018.
We believe this is more reflective of cigarette margins going forward.
Our cigarette inventory holding gains for the quarter of $10.1 million came in higher than expected.
Resulting from price increases for certain brands that exceeded the historical average price increase and resulted in our total cigarette holding gains exceeding our guidance of $19 million for the year.
We also had $1.1 million and candy again in the quarter now were deferred from the Q3 manufacturer price increase to align with the sell through and the corresponding inventory.
Our operating expenses as a percentage of remaining gross profit in the quarter were flat year over year.
Scott mentioned as DNA expense included $3 million of incremental employee incentives compared with Q4 2018.
The large spread is due to a combination of stronger performance in Q4 2019.
Compared with somewhat weaker performance in Q4, 2018, which resulted in us having to lower accruals for incentive.
Turning next to cash flow, we delivered approximately $61 million and free cash flow for the year.
Below our expectation of $100 million due to the timing of year end cigarette prepayments.
Given our anticipation of a cigarette price increase early in the first quarter. We chose to begin building inventory in late December resulted in higher cigarette inventories than expected.
It's also contributed to a higher loan balance at the end of year.
Our total capital expenditures for the year came in at $29 million approximating our guidance of $30 million.
We also paid approximately $21 million in dividends in 2019.
As we outlined in our earnings release. This morning, our 2020 top line mix expectation.
And 16.9 billion with $17.1 billion. This guidance does not incorporate any large customer wins or business acquisitions.
Our EBITDA guidance is 190 million to $200 million, which represents growth of 5% to 11% over 2019.
Excluding the benefit of a nonrecurring candy and excess cigarette inventory holding gains.
Diluted EPS is expected to be between $1.15 and $1.30 per share and diluted EPS. Excluding LIFO expense is expected to be between $1.66.
And $1.81.
Free cash flow for 2020.
Expected to be between 80 million and $100 million.
Our guidance assumes $20 million cigarette inventory holding gains and no other significant holding gains.
It's worth mentioning in 2019, we saw three cigarette price increases.
Totaling $2.60 per carton, which with a substantial increase over $1.90 per carton in 2018.
We believe the higher price inflation in 2019 was driven by certain market factors and do not expect to see the same elevated level of cigarette inflation in 2000 to form.
Other key assumptions in our guidance include.
LIFO expense of $32 million.
26% tax rate and 46 million fully diluted shares outstanding.
Our capital expenditure guidance for 2020 $45 million and includes the budget for the relocation of a distribution facility.
And funds for certain other upgrades in addition to our normal maintenance capex.
In summary, we are excited about the significant opportunities this year to drive growth in revenues and earnings on multiple fronts.
We are committed to delivering quality revenue growth.
We believe the we have the right initiatives and resources in place.
The gain market share and reduced customer churn.
And as Scott discussed we are actively exploring traditional M&A as well as opportunities may Jason industries to help accelerate our growth.
Operator, you May now open the lines for questions.
Thank you.
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We have a question from Ben Bienvenu from Stephens.
Thanks, Good morning, everybody.
[music].
Starting out on the cigarette outlook.
Just kind of generally how you guys. Thanks.
[music].
There in 2020 relative to 2019.
And then on the pricing increases.
I believe again.
Price increase in the first quarter.
There is there upside that you are guiding for a similar magnitude of pricing increases in 2019 is it possible that we get the same level pricing increases in 2020.
And that could prove to be incremental to your guidance and then just generally how you think about cigarette consumption as we move through 2020.
Sure been.
From a carton declined standpoint, I think about a consistently with the guidance, we've seen from Altria and rentals and others in the four to six range.
And that's consistent with.
Our guidance range as well.
From a from a price increase standpoint last year, we had $2.60 a carton of price inflation.
Thats coming off of two or three years more in the $1.70 $2 range I think a lot of that was driven by the dynamics that took place with altria, making a significant investment in three different companies.
That the kind of drove what I'd call kind of an exceptional inflation rate I think about it more in the $2 range to low $2 range for this year. So I don't think it's likely we'll see one quite as quite as high as we saw last year and Thats why we move the price increase guidance down from 23 million to 23.
Or to 20 million.
Okay fair enough.
On your free cash flow outlook, you've got a little bit higher capex in 2020.
[music].
How should we be thinking about capex past 2020 year relocating facility that that's a.
One time costs, what is kind of a normal level of Capex for you guys.
And then.
Similarly.
The balance sheet.
You did de lever sequentially from Threeq to Fourq.
Seasonal working capital, but you still have some elevated working capital.
In the fourth quarter ahead of the pricing increase how should we be thinking of leverage in 2020, let's just say.
Even though I know you guys would like to consummate a deal.
Okay, I will let let's.
Let's start with the normal Capex I think a normal run rate for us is in the $30 million range.
That includes maintenance capital and some some moderate growth capital.
Obviously this year, we have a building relocation we do have another building a relocation unlikely in the next couple of years.
So you're likely to see a range in that 45 again in next year thereafter.
From a from a balance sheet standpoint, I think will we look to see our leverage next year in the one and a half to two times range.
And clearly we made a strategic decision at the end of the year, we get a very very easily hit the $100 million or free cash flow at a point in time at year end.
But we made a decision to start buying inventory in the last two weeks of the year, which obviously paid off because we had a cigarette price increase in February.
And so we needed the time to be able to build that inventory up so that I did I touch all your questions there.
That's perfect Thanks, and best of luck with 2020.
Thanks.
Thank you we have a question from Christopher Mandeville from Jefferies.
Hi, Good morning. This is Blake on for Chris I, just wanted to make sure I had I won't comment right on the alternative nicotine you said I believe you said that was those sales were flat for the year. Once you said they were for the fourth quarter.
They were not flat for the year they were flat for the fourth quarter, Okay would definitely up here.
Got it.
On me 2020, EBITDA guide is there any way you can kind of breakout the impacts there.
There was a little higher than we expected could you talk about.
Anyway, you could size up the headwind.
From alternative nicotine any kind of growth rate you can give us there and then maybe any benefits good size from operating expense leverage.
So from that alternative nicotine standpoint, we plan that up slightly so will the seeing the low low single digits.
We think theres going to definitely be some choppiness really probably over the next three months.
But we also think that there's going to be over the course of the year continued consolidation toward the C store channel as you see.
The regulation I think we'll have a big impact on opened tank sellers, who are continuing to sell flavors until the deadline of may.
So that that definitely continues to play alternative nicotine and then we see continued growth in other alternative nicotine items.
Which is like on and zone, which is a substitute for or.
Or things like Copenhagen, and other other items like that so.
We definitely see a contribution from alternative nicotine, we definitely have continued component of cost leverage in there.
And then the rest of that has built off of our growth for the year. Those are really the three drivers of our our EBITDA gain for the year.
Got it that's very helpful.
Hi can you give us an update on our last quarter, you talked about reorganizing our sales force focusing more obviously.
Midsize chains, you said you Havent included any in guidance yet any.
Early insights into conversations you can provide us any traction on that front and talk about your pipeline maybe for the next six months or so.
Sure. So we definitely have completed the kind of build out of a it's not a large team. It's a small team that's going to be focused on that mid size small to midsize chain grouping.
So there are actively now pursuing conversations and leads and having discussions with with that group across the country. We have we have a handful I'd say a couple two or three larger chain bids.
Opportunities that would impact the back half of this year.
And those are those are current dialogues right now, but obviously nothing in guidance.
And then just as far as the sales organization as a whole on as I mentioned in my comments, we are definitely looking at.
Our structure and compensation and how we're positioned to continue to grow share and so we'll definitely be making some changes from that perspective as the year progresses.
Got it and last one for me just wondering could you walk us through how you're thinking about the pending flavor and menthol band HR two three threenine anyway, you know what are the odds you can you get passed by both the Senate and then also the president and any way you could size up menthol and flavors for us.
As a percentage of your sales.
While menthol in cigarettes is about 35% of total consumption flavors in on now and vapor.
As a small part of our sales.
But there's been a lot of choppiness over the last five months in flavors. So it's kind of hard to sum up the they piece I do not think it's likely at all at this point with with the current president that we will see that Bill passed I think that bill was far overreaching. The original intent of that Bill was.
This was focused on miners and moving to page 21, but I think they I think it was a buildup that outreached what the real intent was and I think that will be recognized as you see us and in both.
Got it thanks for all the detail.
You bet.
Thank you. Our next question comes from Kelly Bania from BMO capital.
Good morning, Thanks for taking my question.
Just wanted to ask if you can help us for modeling just where E. Cigarette dollar sales ended up for the year end 2019.
And as you look at that non cigarette gross profit margin I may have missed it.
Where did where did that end up and what was the cigarette impact on that.
So non cigarette gross profit margin ended up 36 basis points was up year over year.
I would break that into kind of three buckets Kelly you had.
Obviously east to exit was about a third of that you had mix was about a third of it and also strategic pricing initiatives that we had in place across the other categories.
You know what I look forward, though I think we had obviously an exceptional year of east said growth.
On a number of times on non cigarettes, we think about that from 10 to 20 basis point growth.
Yes, so I'd kind of think about that as I look towards next year.
We've not specifically called out.
Our Easter eggs, but it's pretty it's pretty simple to look at our general merchandise over the last three years as clearly been the driver of of the growth.
That gives you a pretty good have pretty good insight into what the volume was for this year.
Okay, and then in terms of you mentioned.
Compensation, you're evaluating the compensation in the Salesforce alignment.
And maybe some changes can you just elaborate on that and what is in your guidance with respect to that.
I wouldn't say anything specifically in guidance I mean, obviously, what what is in the guidance is continued growth in independent store count.
And so we continue as any company does to look at the effectiveness of our compensation plans and structure. So we're able to continue to drive independent store count growth.
Okay, and I guess on strategic pricing.
Where what inning do you think thats in what any opportunities as you move.
20.
You Kelly I would I would say.
I'd say, we're probably in ending number two or three we caught a few of the low hanging fruit things this year, but I think we've got a pretty good runway over the next two or three years to continue to to watch that evolve and continue to pick up some some.
Margin through that initiative.
Okay, and then I'll just maybe one last one for me just in terms of M&A.
Seems like a little bit at change in town, if I am touching that correctly. So.
In terms of kind of thinking a little bit outside the normal.
Okay.
Now that you traditionally looking so can you just help us understand what your what you're talking Sir.
Yes, so first off I would say our number one priority is still.
Acquisitions in the convenience wholesale space.
And we have we have a number resources myself included working on those discussions and and trying to drum up those opportunities for the company.
Beyond that we feel like not just cormark, but our industry needs.
Kind of up its game in the food and fresh arena.
So we have we have.
I have some some folks working on looking at opportunities around.
Branding opportunities are co branding opportunities exclusivity fees.
And even potential acquisitions that would that would help us accelerate our pace in the food and fresh game.
I don't want to get too much farther into it.
Than that because we obviously have some competitors have listened in on so that's kind of a strategy, we'd like to work on internally.
Thank you.
Thanks Kelly.
Thank you once again for any questions. Please press star one.
We have no further questions.
I will now like to turn the call over to Mr. Lawrence for final remarks.
Thank you everyone for joining the call. This morning. We appreciate your interest if you have any questions you could reach out to me directly my contact information is available on the Investor Relations section of our website. Thanks for joining.
Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.
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Alright.
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