Q4 2020 Core-Mark Holding Company Inc Earnings Call
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Yeah.
Welcome to the core Mark fourth quarter 2020, Investor call. My name is John of your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you do have a question press Star then one on your Touchtone phone.
Please note the conference is being recorded and I will.
I'll now turn the call over to David Lawrence.
Thank you and good morning, everyone. Today's call will be led by Scott Mcpherson, Our President and Chief Executive Officer, and Chris Miller, Our Chief Financial Officer before turning the call over to Scott 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 and the Companys SEC filings, including our annual report on form 10-K.
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 used.
Pool to investors and our earnings release and our annual report on form 10-K, I will now turn the call over to Scott.
Thanks to everyone for joining us today on our fourth quarter call the fourth quarter and put an explanation point on the challenging but successful year for former and.
And once you again, thank our core Mark family and their display of courage and perseverance throughout this pandemic.
Not only did our frontline drivers warehouse staff and sales team members work to provide essential goods and services to our customers and communities, but they showed incredible dedication and delivering improved productivity safety and attendance levels.
We also work closely with our retail partners to minimize disruptions and what remains a very fractured supply chain. These.
These efforts produced strong fourth quarter and full year results for core Mark and set the foundation to continue our strong performance and 2021 and beyond.
And as demonstrated by the outlook we provided today.
Reflecting on the fourth quarter, we delivered revenues of $4 3 billion, representing a two 3% increase over the prior year driven by the continued strength of cigarette and tobacco sales trends.
<unk> from pandemic related consumer behavior from a profit perspective, we delivered EBITDA for the quarter of $55 1 million or 14, 1% improvement over prior year.
The outperformance was highlighted by our continued ability to leverage costs across our network with 240 basis points of cost leverage improvement. We also saw continued margin recovery during the quarter with the remaining gross profit, finishing and five 1% a significant improvement over the last two quarters.
And also benefiting the fourth quarter was the uncharacteristic fourth price increase from rentals, which resulted in higher cigarette holding gains and anticipated.
And all of the outperformance for the quarter demonstrated the resiliency of our business model and our retail segment that continues to be pressured by the impacts of it depend on it.
From a full year perspective, we delivered strong sales of 17 billion along with record setting EBITDA of $202 million. Our topline was certainly buoyed by the pandemic related consumer behaviors reversing decade long trends of cigarette consumption decline and accelerating tobacco growth. Conversely, there was significant.
Compression on other key retail categories, causing significant margin declines throughout the year.
For perspective, our full year remaining gross profit margins reflected a decline of 30 basis points, but we did see a continued recovery throughout the year as I previously mentioned.
Like many companies, we were forced to make tough cost cutting decisions across our organization and the timing and decisiveness of those actions allowed us to achieve strong performance from a cost leverage perspective from.
The full year, our cost as a percent of remaining gross profit for both selling general and administrative and warehouse and delivery were both below prior year levels.
Delivering meaningful savings that more than offset pandemic related non tobacco sales and margin compression.
Chris will go into the details of our outlook for 2021, but at a high level our guidance reflects our confidence that core mark is well positioned to deliver another strong performance as we enter the year and on the heels of hosting our 2021 Presidents' meeting our entire organization is acutely focused on executing our strategic <unk>.
<unk> of growing sales and margins faster than the industry, leading and category management solutions and driving cost leverage.
I would like to take a moment to reflect on the meaningful achievements logged in 2020 positioning core mark for the future.
From a growth and margin standpoint, obviously, the pandemic caused significant disruption to consumer behaviors compressing margins and growth opportunities behind the scenes, we were able to accelerate and complete a comprehensive restructuring of our sales organization.
Lining our compensation to drive growth for both our retail partners and for Mark.
I am confident this transformation will drive an acceleration of our same store sales growth and market share wins as the impacts of the pandemic retreat.
Beyond sales structure, we are also continuing to enhance our technology capabilities around creating optimal pricing algorithms that benefit core mark and its customers, which we refer to as our strategic pricing initiative.
Another pillar of growth for the company as acquisitions, which have been a critical and successful driver of revenue and earnings over the past 10 years.
Although the pandemic has paused much of the acquisition activity and the space. We continue to be optimistic about accomplishing meaningful acquisitions of convenience distributors over the next 12 months to 18 months, while also looking at adjacent opportunities and parallel pursuit.
As I have discussed previously given the hyper changing consumer preferences, and the importance of innovation and our food and fresh programs. We continue to actively explore potential partnerships exclusivity arrangements and acquisitions that will enhance our offering and capabilities.
Despite the headwinds of the past year and continuing into the first half of 2021, I am confident and the company's ability to drive growth.
We advanced our leadership position and category management, and 2020 with meaningful partnerships focused on creating a differentiated experience for our customers the headliner being our recently announced exclusive agreement with fresh and ready foods to solidify our product sourcing for our fresh food and national supply chain through our exists.
Any redistribution network we're.
We're excited about this opportunity, which builds on our strategic objective to capitalize on the increase and consumer preference for healthier and fresher convenience items.
Starting in Q2 of 2021 and scheduled for completion nationally by year and this initiative will enable <unk> to distribute our consistent fresh food offer to our customers across the lower 48 states.
Also bringing value to our customers is the exclusive agreement with PDI.
Providing a loyalty solution to retailers nationwide, which couples well with our skip technologies frictionless payment Alliance.
These three exclusive partnerships along with our center of excellence spring core Mark's existing and future customers a differentiated wholesale partner focused on growing their sales and profits.
As the final element of our strategy 2020 served as proof that despite a world pandemic, we have recessionary resilience and our business model demonstrated by the cost leverage achieved and our 2020 results as I have discussed in the past a meaningful portion of our work force is variable and we were able to effectively flex easily.
<unk> with the volume fluctuations.
Additionally, as we continue to centralize many transactional aspects of our business, we are seeing longer term cost savings opportunities consistent with our previously communicated levels approaching $8 million. We have also deployed technologies like omni tracks, one to optimize our fleet and driver efficiency and invested in robotics and voice.
Selection solutions to gain efficiency and our warehouses we.
We will continue to deploy technologies and work to centralize the transactional aspects of our business and are confident we have a meaningful pathway to continued cost leverage in 2021 and beyond.
Moving to our capital allocation strategy core Mark has a long history of delivering value to shareholders through reinvesting capital and the business successful acquisitions share repurchase and dividends.
Entering 2020, we were confident and our business model and the strength of our balance sheet demonstrated by the announcement of a $60 million share buyback plan, and 9% increase and our dividend and the continued pursuit of acquisitions and.
Unfortunately, the impacts of COVID-19 forces to pause our share repurchases only spending $10 million and disrupted many of our acquisition conversations. We did however move forward with the growth of our dividend for the ninth consecutive year.
We enter 2021 with tremendous confidence and the resiliency of our business the strength of our balance sheet and our ability to drive growth and profit with that perspective. The board of directors has approved the replacement of our existing share repurchase program with a more robust three year $375 million.
Shareholder return plan that supports both more aggressive share buybacks and continued growth and our dividend.
We are confident our approach to capital allocation provides sufficient flexibility to execute on our strategic priorities, while driving strong shareholder returns.
Looking back I'm proud of the commitment shown by the form our family and 2020 and as we set our course for 2021.
Our customers have been incredible partners, and we will work to bring them increased value and differentiation throughout the year.
And finally, I am very optimistic about <unk> future as we look to build upon our strategic priorities propelling us to the forefront of our industry and the supplier of choice and the retail convenience space now I will turn the call over to Chris who will provide some additional color on our financial performance and 2021 guidance.
Thanks, Scott and good morning, everyone.
I'll start off by covering our fourth quarter performance share some thoughts on our capital allocation strategy and wrap up with commentary on our guidance for 2021.
Net income for the fourth quarter and increased to $19 million compared to $16 2 million and the fourth quarter of 2019.
Diluted earnings per share for the quarter increased to 42.
And from 35 per share and the prior year quarter.
Excluding LIFO expense diluted EPS increased approximately 27% to <unk> 57 per share versus <unk> 45.
And the fourth quarter of 2019.
In spite of the continued impact of COVID-19 on sales mix and margins. We were pleased to deliver solid earnings growth and the quarter on the benefit of continued strength and operational efficiency and effective cost management.
Total sales and the quarter increased two 3% to $4 3 billion.
Total cigarette sales increased by four 6% led by cigarette price inflation and a slight increase in total card and sales.
Carton sales for the quarter continued to significantly outperform historical trends.
We believe this shift primarily reflects a change and consumer buying behavior. As a result of COVID-19, consistent with the trends we saw throughout the second and third quarters.
Non cigarette sales decreased one 8% for the quarter compared to a decrease of two 6% and the third quarter.
In addition to continued strong sales of Otp, we saw sales improvement on a sequential basis, and the dairy grocery and beverage categories How's.
However, consistent with trends and the third quarter, the food Candy and health beauty and general categories logged year over year declines and the fourth quarter.
Total remaining gross profit margin for the quarter declined by 21 basis points from five 4%, 2% to five 1% driven largely by the shift and our overall sales mix.
However, the 21 basis points decline for Q4 compares to a decline of 58 basis points and 38 basis points for the second and third quarters, respectively, reflecting continued margin recovery driven largely by improving sales mix.
From a total sales mix perspective cigarette sales increased 140 basis points to 66, 7% of total sales for the quarter, which compressed our overall remaining gross profit margin by 14 basis points.
The remainder of the decline was due to sales mix and rates within the non cigarette category.
Consistent with the trend and the third quarter growth and otp and relation to other non cigarette categories and lower rates and our vapor products drove the majority of the decline and non cigarette margins.
Our year over year margins and alternative nicotine continued to be impacted by the benefit of incentives and 2019 tied to volumetric growth targets and shifts and vendor sales mix.
Our cigarette inventory holding gains for the fourth quarter were $9 4 million compared with $10 1 million and the same period and 2019.
As I discussed last quarter, we had anticipated lower cigarette price increases and the fourth quarter, given the fact that RJ Reynolds announced their third price increase of the year during the third quarter.
Also worth noting is that we benefited from a $1 $1 million candy holding gain and the fourth quarter of 2019.
As I've mentioned in the past large candy price increases have historically only occurs every three years to four years.
Total operating expenses declined by $8 5 million or four 1% to $197 1 million for the quarter offsetting the impact of the one 6% decline and our remaining gross profit.
The decrease in operating expenses includes a four 9% reduction and our warehouse and delivery expenses and a 3% reduction and SG&A.
Total operating expenses as a percentage of remaining gross profit declined from 91, 3% and the fourth quarter of 2019.
And to 88, 9% and Q4 of 2020.
While our cost leverage and warehouse and delivery was consistent with our performance and the third quarter.
We saw a decline and cost leverage and SG&A on a sequential quarter basis due primarily to the impact of the resumption of the 401 K match and higher bonus expense on the strength of our fourth quarter and full year performance.
Turning to the balance sheet, we continue to focus on tight working capital management and increasing liquidity.
And for the year ended December 31 <unk>.
Net cash flow from operating activities was $147 $8 million.
Impaired to $89 7 million and the same period last year.
Our improved operating cash flow was due to primarily to working capital management, largely driven by a reduction in accounts receivable and increased payables, which more than offset the impact of elevated inventory levels associated with our strategic year and cigarette inventory build.
We generated $117 1 million and free cash flow.
Was used primarily to fund dividends of $22 3 million share repurchases of $10 4 million and repayment of debt.
We ended the year with $258 million drawn and our credit facility and $402 million available to borrow.
Our debt leverage at the end of 2020 was one three times adjusted EBITDA compared with one seven times at the end of 2019, excluding the impact of capital leases.
At this point I wanted to provide a few additional comments on our capital allocation strategy and follow up to Scott's comments and reflect on our capital allocation priorities over the last three years.
It is important to recognize that in 2017 on the heels of two large acquisitions.
Companies that have risen above its leverage target of two five times adjusted EBITDA.
Since that time, the company has generated over $440 million and operating cash flow, which is deployed as follows.
51% to debt repayments.
8% to maintenance and growth capital expenditures, 14% to dividends and <unk>.
7% to share repurchases and the balance to other financing and investing activities.
While we paused and 2020 on more significant share repurchases given the uncertainty related to the Covid pandemic, we remain committed to our two growing our dividends and generated strong free cash flow and support of our revised capital allocation strategy.
Through our new three year $375 million shareholder return plan.
We are committed to pursuing more aggressive share repurchases and continued increases and our dividend.
As I mentioned, we target financial leverage of two five times or below but are comfortable with short term increases and our financial leverage of up to three five times adjusted EBITDA and support of M&A opportunities.
In short, we feel confident about our ability to execute on our three year capital allocation plan, which reflects a more aggressive approach to return of capital to our shareholders, while still being able to execute on meaningful acquisition opportunities and staying within our leverage guidelines.
Turning to our outlook for 2021.
We will benefit from the cost savings initiatives and operational efficiency gains realized in 2020.
But we anticipate some partially offsetting cost and profit headwinds as we enter 2021.
On the cost front and consistent with our prior communications, we will have returning 401, K and travel expenses, along with expected increases and healthcare cost due to the pent up demand caused by the pandemic.
From a profit perspective, we have guided to $28 million and 2021 and cigarette holding gains as we anticipate three increases for all major manufacturers and flat to declining and cartons consistent with prior historical trends.
We of course faced tough Comparables and the first quarter of 2021, given that the first quarter of 2020 was not significantly impacted by COVID-19.
And actually included some benefit from pantry loading leading into the height of the pandemic.
Despite the aforementioned headwinds we believe are positioned to deliver strong performance in 2021 as reflected by our guidance.
We anticipate revenues to be between 17, 2% and $17 5 billion.
Driven by same store sales growth market share gains and inflation.
From a margin perspective, we anticipate continued improvements throughout 2021 as we work to regain our historical margin growth algorithm of 10 to 20 basis points and non cigarettes, and five to 10 basis points overall.
Our continued work to achieve cost leverage throughout the supply chain, coupled with sales growth and margin expansion.
<unk>, our adjusted EBITDA guidance range of $208 million to $218 million and 2021.
Our overarching assumptions related to the pandemic reflect Q1 experiencing similar impact of prior quarters Q2, showing steady improvement over a pandemic related impacts.
And with Q3, and Q4, largely returning to normal historical consumer trends.
Our 2000 and 'twenty, one guidance assumes no new acquisitions or large customer wins, and lastly capital expenditures for 2021 are expected to be approximately $45 million, which will be utilized primarily for maintenance and technology initiatives as well as upgrades to certain distribution facilities.
And the relocation of one facility.
Thank you everyone I will now turn the call back over to Scott for some closing comments.
Thanks, Chris to summarize I want to highlight three main takeaways from our call. This morning.
First in 2020, we took decisive action at the outset of the pandemic reducing costs across the business in order to drive solid performance and a challenging environment.
Our business is strong we're generating significant cash flows that we are allocating towards dividend increases and expanded share repurchase to drive value for our shareholders and third we are executing clear strategic priorities to drive growth that give us optimism for 2021 and beyond with that I will now turn it back to the opera.
Later to begin the Q&A session.
Thank you, we'll now begin the question and answer session.
A question Press Star then one on your Touchtone phone.
And we should be removed from the queue. Please press, the conferencing and or the hash key.
Using a speakerphone and may need to pick up the handset first before pressing the numbers.
Once again, if you have a question press Star then one on your Touchtone phone.
And our first question is from Ben and Vim Stephens, Inc.
Hey, good morning, everybody.
You bet.
I wanted to ask.
First on the 370.
$375 million shareholder shareholder return plan.
You.
You mentioned M&A.
Subset of that plan and you also talk about your willingness to go up to a higher leverage load on the balance sheet to support M&A.
Could you support.
Meaningful share repurchase and M&A or would you think about oscillating between the two if and opportunistic M&A.
Deal that's presented to you.
Yes, Ben and absolutely I think we can do both I think thats was the balance and the plan and the way we approached it if you think about our free cash flows and the $100 million range and then we're talking about 100 $125000 a year of of.
And repurchase and dividend.
Clearly, we would have the bandwidth to make meaningful acquisitions or multiple acquisitions and that three year period, and still fulfill that share buyback and dividend.
Okay great.
My second question, Scott you made mention of technology, and robotics investment and the warehouse and distribution capabilities of your business you also talked about larger.
Largely variable cost structure, when you think about the contribution to margin improvement and leverage in 2020, and you think about the contribution going forward. How do you think about those two pieces, obviously with sales coming back that variable costs would come back as well, but I would imagine investments you've been making and capability.
Should yield margin improvement as well going forward.
Yes, I think Thats fair bid and we are.
We definitely have have increased over the course of this year, our productivity and both were.
Our house and transportation, which was a big big part of Us.
Performing this year is not just eliminating some of the variable labor, but also creating a more productive workforce. So that definitely will will help enhance the margins from a cost standpoint, and then from a revenue standpoint, I think we will continue to see improvement in mix this year.
And we anticipated as the year progresses, we will get back to a normal and a margin run rate by the fourth quarter.
Both of those things combined will definitely help and I think that's really was the main driver behind what we consider a pretty aggressive guide for 2021.
Okay, great. Thanks, and congratulations on the results and best of luck for 2021. Thanks.
Thanks Ben.
Our next question is from Matt Fishbein from Jefferies.
Hey, good morning, Thanks for the question and congrats on great quarter.
Thanks, Matt.
I wanted to touch on I guess cost inflation and 21 as it relates to a couple of buckets.
That could.
Impact you guys, particularly.
I just wanted to understand how youre thinking about labor costs going into the year, what type of an impact maybe minimum wage may have on U S. As.
As we go into this year and beyond and then maybe on the food products and suppliers are talking about.
And if raw material cost inflation this year, particularly in the back half and just remind us how that works through your P&L and believe that some benefit to you if anything.
And then lastly, just on the distribution piece and transportation costs potentially with higher fuel costs.
Now relative to last year.
But you can just give any color on how those puts and takes kind of interact with each other it would be great.
Yeah, absolutely. So we'll start off with product inflation I think we definitely with the challenges we've seen and the supply chain and the challenges Thats caused manufacturers. This year I would not at all be surprised to see some product inflation over the back half of this year and I think thats consistent with a lot of.
What we've heard and seen.
But we haven't seen a lot of inflation to date outside of cigarettes, but that.
Not at all surprise me from a benefit from perspective.
And we definitely were on a cost plus markup scenario for most of our customers and we also get holding gain and inventory holding gains when we see price increases. So it is definitely a benefit to us when we see some inflation.
From a fuel standpoint.
I would anticipate some fuel increases the one thing that we have built into our.
Our pricing algorithms with customers is as fuel rises we get fuel surcharges as fuel declines obviously, those surcharges decline so theres a sliding scale there so it mitigates any any material impact on fuel increases.
And then the last one on labor.
We definitely have seen some inflation and labor rates over the last couple of years.
We've modeled out the impact even if we were to see a federal minimum wage of $15, we've modeled that out and deaths.
<unk> has an impact but I think we are we have a plan to navigate that if it if it comes to pass, but we definitely anticipate some wage inflation this year and have built that into our guidance.
Great. Thanks, and just to follow up on the distribution and if you can give any color I guess on the shape of your drops to customers, whether it be like truck utilization and delivery frequency may be relative to normalized or 2019 levels.
It'd be helpful and.
I guess, how youre thinking about maybe that normalization as vaccines.
And consumer behavior kind of normalizes as well.
Yes, so one of the things that we benefited from this year as we worked really hard on our efficiency and routing and so our average drop size and.
And truck utilization was up this year.
Even in an environment where.
Sales were down so, especially non cigarette sales. So I think we expect that that will continue into next year I think that we've done a great job with with fleet utilization and efficiency.
I think from.
How does vaccines affect that going forward and I.
I think I think the biggest challenge that we think will face around driver and transportation next year is just availability.
And that's been a challenge historically and I think with the with the challenges and supply chain issues.
And over the course of this year, we think warehouse and driver workforce availability is going to be a challenge and we're working hard to position ourselves for what we anticipate to be a strong summer and this business.
Got it. Thank you very much I'll pass it on congrats again.
Thanks, Matt.
Once again, if you do have a question press Star then one on you touched on from.
Our next question is from Kelly from.
BMO capital.
Hi, good morning, Thanks for taking our questions.
Hi, just wanted to ask about your outlook for 2021, and a little bit more detailed.
And between the two categories between cigarette and non cigarettes, I think Chris maybe you mentioned flat to declining carton.
I guess, maybe it sounds like.
To be fair to say, a little bit better than the historical trends in terms of carton decline there and maybe just talk about that and and also just what youre seeing and and the non cigarette or food categories, and what kind of visibility you have there given some of the initiatives that you are seeing at many of your large customers.
Yes, So I think yes, Chris did callout, Kelly and his remarks that we anticipate.
Cigarettes to remain generally the same trends over over the first quarter of this year and into the second and we expect combustibles too probably head into a decline mode as we get into the back half of the year more.
Consistent with historical combustible norms and.
And so that's the way we've modeled cigarettes, obviously offset by inflation from a non cigarette standpoint, we have seen steady recovery, both in our convenience and non convenience channels and over the last two and a half quarters.
And we think that first quarter of this year will be fairly consistent with.
The fourth quarter of last year, and then we look to see steady improvement and non cigs and.
And I mentioned on an earlier question and I think we will see we look from mix and margin to be back to kind of a normal environment by the back half of the year, We show, our non cigs and our model of growing somewhere in the 5% to 8% range and.
Cigarette cartons being down slightly.
Got it that's helpful and I was wondering if you could talk a little bit more about your private label initiatives.
Yes, so we just kicked both of those off and the fourth quarter, we have a a private label initiative, where we've kicked off some candy and snack line and then we also have what we call a core of our curated and.
And that is where we really went to the market and are looking for manufacturers of.
<unk> unique products and brands and that's.
One of the things we see with today's consumer is a real demand for Kraft and unique and close to home and.
So both of those initiatives kicked off we'll kick off with.
And core more curated we selected five brand partners that will kick off from the first half of this year and we will start distributing their brands across all of our distribution centers and from a private label standpoint again, we will we've already rolled some of those products into our into our centers, but will rule on number of products that are consistent.
Across our network into our distribution centers over the first and second quarter of this year. So.
I think from a revenue and profit impact kind of yet to be seen but definitely we make a higher margin on all of those goods as do our customers. So I think we'll see really strong traction as that moves throughout the year.
Thank you.
Yes.
Thank you Kelly.
And we have no further questions at this time and I'll turn it back over to David for closing remarks.
Thanks, everyone for joining us. This morning, we appreciate your interest and core Mark if you have any follow up questions feel free to reach out to me David Lawrence My contact information is available under the Investor Relations section of our website. Thanks for joining us.
Thank you ladies and gentlemen.
Today's call. Thank you for participating and you may now disconnect.