Q3 2020 Core-Mark Holding Company Inc Earnings Call

God I will point out that core Mark 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 Companys SEC 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 to the most directly comparable GAAP measure and other related information, including a discussion of why we consider these measures are useful to investors in our earnings release and our and.

Who will report on form 10-K, I will now turn the call over to Scott.

Thanks, David and thanks, everyone for joining us today on our third quarter call.

With each passing quarter, we continue to be the beneficiary of an incredibly committed workforce, coupled with great customer and vendor partnerships we.

We had all hope by now that COVID-19 would be in the rearview mirror, but that clearly is not the case. Despite the daily challenges the pandemic poses our employees have continued to operate safely and efficiently, allowing the company to achieve meaningful cost leverage in the face of ongoing headwinds surrounding sales mix and margins.

Surely the duration of this pandemic remains uncertain, but I'm confident the steps taken during the crisis will position us to emerge a stronger and more profitable company.

Weve also seen continued recovery in the performance of our non C store customers, including mass drug airports casinos in schools year over year sales to these customers once down over 30% improved throughout the quarter, finishing approximately 10% below prior year.

Turning next to margins remaining gross profit continued to be a headwind in the third quarter with compression of 39 basis points compared to 58 basis points in the second quarter benefiting primarily from improved sales mix.

Personally signing exclusive partnership agreement with skip a leading provider of frictionless mobile payment solutions for convenience retailers.

This technology is featured in our center of Excellence and provides our retail partners and economical frictionless payment solution for their customers.

Beyond technology, we remain on track to complete the phase one rule out of our private label and Colmar curated product offerings before the end of the fourth quarter I'm excited about the potential these new products and solutions possess and driving sales and margin growth for our customers and for former.

Turning to customer contract renewals I provided an update last quarter that we had resigned three of the four top 10 customers that were up for renewal in 2020, the fourth customer representing approximately $250 million in annual sales did not elect to renew their agreement with former while this was a competitive bid that we're <unk>.

On each one.

Thanks, Scott and good morning, everyone.

I'll start off by covering our third quarter performance provide an update on our balance sheet and cash flow.

To wrap up with commentary on our revised outlook for 2020.

Net income for the third quarter increased to $23 million compared with $22.5 million last year.

Diluted earnings per share for the quarter increased to 51 cents from 49 cents per share last year.

Excluding LIFO expense diluted EPS was 60 cents for the quarter.

Okay.

Are you over your margins and alternative nicotine continue to be impacted by the benefit of incentives last year tied to volumetric growth targets and shifts and vendor sales next.

Near term, we expect continued margin pressure on a year over year basis, reflecting a combination of continued outperformance a cigarette sales as compared to non cigarettes continued mixed challenges within non cigarettes, and lower margins and vapor.

Or a cigarette inventory holding gains for the third quarter, where five $6 million compared with point $3 million in the same period last year.

The increase in cigarette holding gains reflects the timing of the third price increase for the year from R. J Reynolds.

Last year, the third price increase from the major manufacturers incurred in mid October.

This year R. J Reynolds elected in earlier price increase in mid September.

Altria any other manufacturers recently announced price increases which are reflected in our revised guidance.

The higher cigarette inventory holding age for the quarter for more than offset by five 8 million dollar candy inventory holding game in the third quarter last year.

Historically significant price increases from candy manufacturers have only occurred every three to four years.

Total operating expenses declined by $12.5 million or five 9% to $200.2 million for the quarter.

Offsetting the impact of the five 2% decline in our remaining gross profit.

The decrease in operating expenses include the five 5% reduction in our warehouse and delivery expenses and a seven 3% reduction and SG&A.

As we discussed last quarter, we have clearly benefited from some of the significant cost savings this year and we do not expect to realize next year.

This includes 401k savings of approximately $3 million associated with our decision to temporarily suspend the employer match for about half of the year reduced phone is expense.

Lower health care costs and travel a meeting costs consistent with what other companies are seeing during the pandemic.

We also expect that we will begin to ramp back up or selling and merchandising head count beyond 2020, as the economy further reopens and we have greater opportunities to grow our market share and drive growth in same store sales and margins through our merchandising programs.

We do however expect to retain on an annualized basis $2 million to $4 million a permanent fixed cost savings as a result of cost cutting actions we've taken this year.

Primarily in SG&A.

Those savings are in addition to incremental savings associated with our finance transformation that I mentioned last quarter.

Outstanding.

The guidance assumes no new acquisitions or large customer wins.

And lastly capital expenditures for 2020 are still expected to be approximately $35 million.

A few other items worth, noting on our fourth quarter guidance.

Given the relative strength of our results in the third quarter and year to date.

We elected to resume our four one k. mass for the fourth quarter.

We expect this cost and impact the fourth quarter by approximately $1.5 million.

In addition to the following K., we've cautiously increased travel and meetings there.

During the third quarter were authorized and hope to continue that in Q4 consistent with governmental guidelines.

We have also resumed purchases under our stock repurchase program next.

You would realize from pulling back on the four O. One came out Chang and some of the benefits it was about $8 million.

Correct me, if I'm wrong I think that was an annual number is that now with 401k matching turn it back on and four Q should we assume that that $8 million comes back on board in 2021.

And then I think you said you you have kind of line of sight to $4 million of annual operating expense savings that you expect to realize by the end of 2021 that I guess would net against that anything I'm missing there and any color would be helpful.

Yes, six to 27.

Okay, great. Thanks, guys best of luck.

Thank you Matt Thanks, Phil.

Our next question comes from Kelly.

Oh BMO capital.

Hi, Good morning, This is Kelly bania.

Wanted to just ask about your your guidance for fourth quarter, we're just kind of backing into numbers here and correct me, if I'm wrong, but it looks like you're you're planning for non cigarette sales to be down maybe in the 3% to 5% range I'm just curious if that's accurate and if you could talk about what you are.

Seeing now I I am guessing maybe there's some seasonality impacts between the quarters, but just just trying to understand what you are seeing if there really is a deceleration or if that's just a little conservative.

Yeah, no unsecured I mean, obviously seasonality definitely plays into it I think at the low end of guidance. We're thinking you know probably somewhat consistent with where we're at today and that in a 2% to 4% range and at the higher end of guidance. You know we would be you know see continued improvement over the course of the quarter.

Yeah.

Okay.

And in terms of cigarette volumes, obviously very volatile this year and Oh, maybe a lot of factors, but as you talk to your customers and suppliers.

What do you think is the largest drivers of the volatility of cigarette volumes and.

When do you think we kind of get back to that more normalized you know down maybe 4% to 6% range for for cigarette volumes.

Yes, clearly killer I see the driver is just being you know kind of the state of the country. We've got a lot of people that are spending a lot of time at home and I think I'll listen to Altria is called they called out. The exact same thing is that it is much easier in a in a home environment to smoke combustible cigarettes, you can step out on your back work for your for.

On porch, but in a work environment or a more public environment under today's regulation.

People tend to use alternative nicotine, which as you know vapor other forms of alternative nicotine so.

I think that is it's heavily predicated on what happens with co, but I think you know to the extent that.

People are not really going to work and that work places aren't at a 100% capacity I think you're going to see strength in combustible cigarettes.

Is that is that you know moderates and goes back to a normal environment. I think you then you'll get back to that you know call it 3% to 6% down and I think you'll see you know a market increase in alternative nicotine because I definitely we've seen very clearly a you know an inverse relationship there.

That's very helpful.

Also just wanted to ask longer term.

As a result of this environment over the past several months just any any insight into your customers' willingness to maybe invest in food service programs longer term or any any change in that interest to do that you mentioned and Murphy maybe.

Expanding their food service or or food category. So just curious on Murphy in particular, and just generally your customers' willingness to to invest there.

Well I think in general with customers I think you had over the last six months, there's probably not been a lot of investment in anything I haven't seen customers. Other than you know the short term impacts of of self service food that you know that still do exists we've seen customers kind of pull back in that.

Area of food until customers get more comfortable but I.

I do think that you know the the trend in food is here to stay and convenience I mean, I think that is going to be one of the biggest growth drivers in retail convenience for a long time. So I do see our customers will will continue to invest in food and the longer term specific to Murphy we've spent.

The amount of time with their folks in our center of excellence.

In recent weeks and really.

Murphy is really honed in on finding a food solution that fits their unique retail format.

And so we were kind of collaborating with them on different ideas and I think they've got some great ideas and and obviously, we'll we'll let them reveal that at the right time and I think they're they're on a path to really create a unique food offer.

Okay, and then last one from me just kind of trying to work through some of the numbers you gave on expenses.

Which was helpful, but I'm just trying to think about.

As the market, maybe normalizes or if you assume that the.

Industry, maybe starts to normalize is there any reason that you can't get back to your kind of algorithm in terms of.

EBITDA growth in the next couple of years.

No I don't think Theres any reason that we can't get back to that algorithm I mean, obviously.

It's you know Q3 and Q4, you know very unique because we've got margin compression, where historically, we've grown margins at 10 to 20 basis points in non food, but we're facing pretty significant margin compression, but we've also been able to.

Suspend some expenses and some of those are temporary and that's why I think we tried to make it very clear kind of whats temporary and what's going to come back as it relates to four one k. and travel cost and some other things, but I think we're in a really good position.

As this you know is coded dissipates disappears whatever takes place I think we're in a really good position to get.

Really continue a consistent EBITDA growth trend.

Thank you.

Thanks Kelly.

Our next question comes from Bobby Griffin.

Good morning, everybody I'm, sorry, we've talked before in the past about some of the maybe adjacent M&A opportunities are strategically doing some different things do to fill out density on on some of the routes opened obviously put the brakes on a lot of that work, but just curious if that's starting to kind of ramp back up again.

And from a focus from your side of things and is that still remain something interesting that could potentially happen in 2021.

Yes, I'd say Bobby the first thing you know our first priority during covered was to preserve the health of the company and you know it we're in a great position from a balance sheet standpoint to be able to pursue acquisitions inside and outside of our space.

You know I'd say going back to March we spent a lot of time with various investment bankers looking at product opportunities exclusive opportunities and even acquisition opportunities and a couple of the things that we've been able to move forward with that we just announced in the last week is an exclusive agreement with PD I.

An exclusive agreement with skip which came out of some of those exercises. So I think we're definitely progressing down a path to continue to look at opportunities for growth and I think both of those things. Although they are not in a short term revenue drivers I think what it does for our customers is allow them to attract a broader base of.

Of consumer and in the long run that's going to drive their sales and profits and drive ours. So those are two kind of you know.

You know tangential kind of things, but I think they are very important to our customer offer.

Okay I appreciate that and then following up on the customer churn.

For us to try to clean up our models would it be fair for us to look at my corporate corporate EBITDA margin and take that on the 215 assume that's kind of what the the financial impact will be or is that overly harsher or doesn't doesn't account work correctly.

No that's probably a fair way to approach it.

All right and then I guess lastly, I just want to I might have missed some of the details I just wanted to see Chris can we just go through the the cost cuts of what permanent what's not permanent in just maybe help kind of get everybody on the same page of what a net impact is and should we look at that net impact again 2000.

19, EBITDA as like a starting base the 191.

Yes.

Yes, maybe address I will take I'll take a stab at it and I can fill in flags.

Ravi that's obviously a big question on pack.

So I would say in a maybe first from a warehouse and delivery standpoint, I think you know the warehouse and delivery we've seen definitely efficiency improvements that are going to be I think sustainable.

Both warehouse and delivery. The one thing that has changed and will change. His coded dissipates is frequency of deliveries when volumes were down we cut delivery frequency and some of that return during the third quarter and it will continue to return so as I think about warehouse and delivery going forward I would probably maybe even look to the.

The last couple of quarters of 2019 as kind of a benchmark and then maybe add some efficiency to that because we definitely gotten some efficiency I'm. So that's kind of maybe triangulate in a warehouse and delivery from a from a as DNA standpoint, you know, we can probably maybe the easiest way to look at it is in the fourth.

Or in the third quarter, I think year over year, our costs were down about $4.6 million, we've called out that we're going to bring back the four one k., that's a million and a half and then the other two things I think are important to call out of those.

Travel you know our travel for our salespeople, we brought some of that back and then also hello.

Health care costs is an interesting one I think every company right now is probably going to be dealing with in the fourth quarter and first quarter of next year, some pent up health care demand.

So I think you're going to see a little bit of increase in cost in those two areas and the four one k. So you know as you kind of balance that against 4.6 million that would give you a kind of an indication of where we think SGN a run rates are going to be.

So Chris you can fill in if I miss them, along but hopefully that's good color Bobby.

Yes, I think those are the big items.

We called out the vacation earlier and that's part of the 4 million permanent savings and then the finance transformation, we'll get some benefit from.

More next year, but yes.

Yes, those are the those are the big items.

Okay. That's very helpful. I appreciate appreciate the details.

Thanks, Bob as there are no further questions at this time.

Okay, great well, we appreciate everyone joining the call. This morning, we appreciate your interest in core Mark.

Oh, it looks like we have one additional question.

Okay. It looks like that we have John Lawrence just pop then caster question now.

John Your line is open.

Yes can you hear me Scott.

Yes, Hi, John how you doing just fine thanks listen I know, it's early but.

Can you comment you mentioned you broke down the that.

Some of the C stores were back and other channels is it too early at all the talk about Walmart plus and how might that might have been affected in store with the gas discounts associated with Walmart plus.

Yeah, I think it is I mean, obviously Walmart plus has an opportunity to two I think benefit Murphy.

Obviously indirectly benefits US right and then also Walmart is a customer of ours as well and and so I think you know we're only I think that really only a few weeks into that maybe maybe four or five weeks now so I I haven't heard of or seen any imperial evidence that that's had a big impact, but I know that they've played.

Great emphasis on that so I think you know nothing can come from that but good for us.

Thanks and last question is.

Through the pandemic or are you seeing in the pipeline you sort of mentioned it are you seeing anything in the pipeline where.

Some of these distributors or just because of Cove it.

I'm trying to make these transformations and efficiencies in this marketplace are really tough and that's creating more discussions for you.

Yeah, I'd say this theres a couple elements in play there John I mean, one is there were a number of independent wholesalers that got PPP loans, and so I would say that that as you know prop them up in some ways through some of the challenging times, but.

Clearly I think most of the the wholesalers in our market other than the big three or four our independent family owned businesses.

And covered clearly put tremendous pressure on those companies.

Then you know I think there's in every family company evolution. There's there's events that make you kind of reconsider the long run and I think this is definitely one of those events and so it definitely has opened up some dialogues and I think it will continue to to open up dialogues over the next you know.

It really depends on what takes place recover but we'll call. It over the next 12 to 18 months, Greg Greg Good luck. Thanks.

Thanks, John.

Okay well. Thank you all for joining this morning. We appreciate your interest in core Mark If you have follow up questions feel free to reach out to me directly. This is David Lawrence My contact information is available on the Investor Relations tab of our website. Thanks so much.

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

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