Q1 2021 Core-Mark Holding Company Inc Earnings Call
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Welcome to the core Mark first quarter, 2021, and burst or call. My name is Karen and I will be your operator for today's call. At this time, all participants are and a list and only mode. Later, we will conduct a question and answer session. During the question and answer session and you have a question. Please for style and one and your Touchtone phone. Please note that this.
[noise] conference is being recorded I will match and I'll call over to David Lawrence, David and give me begin.
Thank you and good morning, everyone. 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 over to Scott I would point out that for Mark and tends to take advantage of the safe Harbor provisions of the private Securities Litigation Reform Act as noted and the earnings for it.
Please 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 company SEC filings, including our annual report on form and.
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 and 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 can sit.
For these measures useful to investors and our earnings release and our quarterly report on form 10-Q, I will now turn the call over to Scott.
Thanks, David and thanks, everyone for joining us today on a first quarter call.
We recently signed for 200 store customer so the PDI branded loyalty platform and have a number of other changes currently engaged we are also leveraging PDI to bring technology to our independent customers as our exclusive top off loyalty solution provides independent operators with access to a comprehensive loyalty on.
<unk> and mobile application that will be launching and the next two weeks and.
Additionally, we have over 225 customers utilizing the PDI scan data aggregation tool and cloud based point of sales solution.
And finally from a cost lever standpoint, and we recently opened our new enterprise business Services Center, which is located and the same building as our corporate headquarters and Westlake, Texas. This center will house multiple functional groups, including accounts receivable and payable are division services finance and accounting team and our recently centralized customer.
Our service organization.
The centralization of these functional groups is not only driving cost efficiencies, but providing increased visibility to key operating metrics focused on improved performance in the case of customer service. The center provides better visibility and to real time metrics and enhancing our customer experience and satisfaction.
As we execute on our strategic initiatives, we are taking steps to mitigate the continued supply chain challenges specifically, we're working closely with our vendors to improve inbound fill rates, which are running nearly 10% below historical norms.
And through a combination of strategic investments and inventory safety stock and creative sourcing and we're working hard to provide our customers the industry's best fill rates and a very challenging environment.
Additionally, as we begin to head into our peak summer season, we are actively addressing anticipated challenges and seasonal staffing given the difficult labor market as it relates to filling warehouse and driver positions.
We have deployed and robust digital and recruiting strategy for divisions and areas of the country that face the greatest hiring challenges and continue to aggressively recruit new talent to the core of our team.
Turning to our financial performance for the quarter, we delivered sales growth and both cigarettes and non cigarettes adjusted for one less selling day and the impact of foreign exchange and we saw continued recovery and our remaining gross profit representing our third consecutive quarter of margin improvement.
For bringing our first quarter performance provided and update on liquidity and wrap up with some additional commentary on guidance for 2021.
We delivered solid year over year results and the first quarter. Despite the pantry loading related to COVID-19 that benefited the first quarter last year.
Net income increased eight $5 million compared to for $3 million last year.
Diluted earnings per share for the quarter increased to 19.
From nine cents per share last year.
Excluding LIFO expense diluted EPS increased approximately 64% to 36 cents per share versus 22 last year.
We're pleased with our operating results for the first quarter, and our continued strength and driving operational efficiency and effective cost management.
Total sales and the quarter decreased by 2% to $3.9 billion and.
Adjusted for the impact on one leg selling day and foreign exchange total sales increased approximately 1% per per quarter.
Total cigarette sales increased one 2% on a comparable basis led by cigarette price inflation, partially offset by a decline and telecard and sales we.
And we saw a small decline and cigarette cartons for the first quarter on the same store sales basis.
And reflecting growth and January offset by monthly declines and both February and March.
Ah results and March reflected to decline and same story cigarette card and sales are for 6%. However, it's against the five 6% increase and March of 2020, which benefited from COVID-19 pantry locally.
Non cigarette sales increased by 2% on a comparable basis, reflecting growth and all commodities other than food and candy.
Despite the continued mix challenges related to the pandemic as Scott mentioned and we deliver the first quarter of same store sales growth since the start of COVID-19 with improved trends across every significant category.
Total remaining gross profit margin for the quarter declined by 16 basis points from 551% to 535%, reflecting both the continued mix shifts toward lower margin cigarettes, and lower margin sales mix and non cigarettes.
However, the 16 basis points decline and Q1 compares to decline to 21 basis points and the fourth quarter of 2020 and reflects consistent improvement and our margins from a peak decline of 58 basis points and the second quarter last year during the height of the pandemic.
Non cigarette remaining gross profit margin also show and continued sequential quarter improvement declining by 30 basis points.
Repair and to 51 basis points and the fourth quarter last year and the peak of 81 basis points and the second quarter last year.
Are mixed within our non cigarette categories drove the majority of the decline and non cigarette margins.
Our cigarette inventory holding gains for the first quarter was 12, and a half million dollars compared with nine $1 million and the same period last year.
The increase and cigarette holding Gaines was due primarily to the timing and price increases by cigarette manufacturers and the first quarter.
In addition to cigarette hall inventory holding gains, we also realize and eight $3 million gain associated with a cigarette tax damn price increase in Colorado.
The company did and incredible job capitalizing on this opportunity, bringing incremental value to our shareholders.
This benefit was partially offset by a three $8 million expense associated with an excise tax claim and Ontario.
Shifting to operating expenses total opex declined by five $2 million for two 5% to $203 for a million dollars for the quarter.
The decrease and operating expenses and includes a three 6% reduction and our warehouse and delivery expenses and a 0.8% reduction and SG&A expenses.
SG&A expenses and the first quarter last year included the benefit of $2.1 million and lower employee bonus expense associated with uncertainty surrounding the impact of COVID-19.
Total operating expenses as a percentage of remaining gross profit increase from $96, 1% and the first quarter of 2020 to 96, 8% and Q on this year.
We delivered 30 basis points of operating expense leverage improvement and warehouse and delivery on the benefit of continued efficiency gains.
Excluding the impact of the employee bonus benefit last year on.
Operating expense leverage and SG&A would've improved approximately 30 basis points and the first quarter of 2021.
Interest expense for the first for this year includes approximately $700000 related to the Otp tack, playing and I mentioned earlier.
Excluding this item interest expense would've been $2.4 million slightly above our fourth quarter of 2020 interest expense of two $1 million.
Turning to cash flow and balance sheet, we generated $36 $1 million and free cash flow compared to 26 seven.
$7 million last year and ended the quarter with $259 million drawn on our ABL.
And Scott mentioned as we move into the second quarter, and we will be maintaining higher food and on food inventory levels and and effort to provide our customers higher he'll rates.
Has the manufacturer supply chain continues to be heavily affected by the pandemic.
Turning to our outlook for the year, we reaffirmed on 2021 guidance and the press release, we filed this morning.
And while we benefited from higher cigarette inventory holding gains and the first quarter as compared to the same period last year the.
The gains renew primarily to the timing of price increases from cigarette manufacturers and.
As I previously mentioned.
We do not anticipate for price increases again, this year and therefore have non adjusted our outlook for full year cigarette inventory holding gains of $28 million.
And while the gain on the cigarette tax stamp increase was not reflected on our 2021 guidance.
This gain was partially offset by the three $8 million reserve against the Otp tax claim.
Given this combined with how early we are and 2021 and we are not revising our guidance at this point.
To wrap up and we are pleased with our performance and the first quarter, we continue to execute against our strategic initiatives.
And we remain optimistic about the current based on the recovery that we are seeing and the market.
Thank you everyone I will now turn the call back to the operator, so open up the lines for questions.
Thank you we will now begin.
The question and answer session and you have a question on our side.
And and one I need touchtone phone and if you wish to be removed from the key please press the pound sign or the husky.
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Once again and if you have a question please for signs and one line and touched on stone.
And we do have our first question and from from.
And the meaning from Stevens.
Hey, Thanks for good morning, everybody.
Hi, there and how you doing and time.
So.
Glad to hear that.
Non sick.
Cough from turned positive I'm curious.
What does that look like relative to 2019, and you talked about March being kind of a stock up windows, maybe it's actually against and abnormally strong base, but I'm just curious how.
Close to normal our way in terms of returning back for that kind of trend line.
Yeah. That's a good question, but and we spent some time dissecting March of 19, and if you remember we had kind of a bigger on up kind of weeks two and three and then a big decline and week for of March and 19.
Or that no and 20 I'm sorry.
And 20, and so really 20 was a pretty good comp months.
Overall, and then if you look back at March obviously, we had increases 19 over 20, so I would say I look at it. This way we looked at it versus 20 and 20 seem to be a fairly even though it had some ups and downs and fairly stable months.
And we were up in March and every category.
Food was basically flat, but every other category was up so we saw really good momentum and March obviously February and and the quarter wasn't a strong because of the winter storm and some other impacts there, but that's a really positive momentum coming out of March.
Okay great.
And I want to revisit it and I think back to your legacy drivers of growth vendor consolidation focused marketing initiative.
I'm wondering.
How disruptive what's COVID-19 for that process did you guys continue to work for a survey.
And.
Guide your customers around assortment and pricing and coming out of COVID-19 with potentially from consumer behavior changes and in terms of traffic patterns and.
And the way and a shop the store.
The acceptance rates changed relative to the recommendation on that you're making from F&I have your recommendations change I just want to get a sense of how do we get back to normal to kind of getting that compounding growth and Jim back and place.
Yeah. That's a great question been I would say that it would be naive to think that the COVID-19 didn't impact to some extent I mean, it dead did impact the number of F and wise not dramatically, but definitely impacted on.
And I think in some ways just that engagement to be able to be out in the store all the time and have that engagement when youre doing enough for my and communicating and FMR. So our acceptance rates were also down a little bit last year.
I'd say wood from a from a positive note I think last year really allowed us to retool not only for my blood or category management tools more now using blue yonder and our ability to provide in a schematic and tell the customers is multiple too it's better than it was a year.
Ago.
So I think we've come a long way there and then the other tools that we've added to really help them skip.
Payment solutions and PDI for loyalty standpoint, I think we've added a lot of tools and the toolbox and then also I'm really encouraged by that kind of early results of our sales organization through.
Through the first quarter on how other executing so.
Yes, I think last year was impacted by I think it also allowed us to really reposition and retool.
Alright, Great and then one quick one for me and then I'll I'll call back and the Q.
You talked about.
Fill rates you talked about kind of building inventory to try and.
And slight yourselves from supply chain challenges, how notable are and.
And bow on delivery disruptions does it present any risks the sales. This year do you think and how much of it and you think has to do with.
And absenteeism versus maybe stimulus driving absenteeism.
Yeah. So so then and and give you a little perspective on and fill rates historically, we run about 1% manufacture out of stocks.
And it really since the Haida COVID-19 and it really hasn't gotten materially better through today, we run somewhere between five and 10% manufacture Addis bought stocks, depending on the manufacturer depending on the region of the country.
So it definitely has a material impact on our inbound and as we talked about and are prepared remarks, we're building inventory will use and secondary sourcing where we have two and some situations. We are having customers change items and their schematic to find a good substitute because the supply chain on those items just isn't good.
So that certainly supply chain has been a challenge I think it's going to be a challenge through much of this year.
And then the second half your question on stimulus what what exactly can you repeat that again.
And you talked about COVID-19 disrupting supply chain and.
And it really creating absenteeism, we've seen it.
And a lot of our other company for a while but we're also hearing company and talk about all of the stimulus on the system contributing taps and and as well.
Absolutely I again, and our remarks, we always talk about drivers and warehouse, we have for my whole career, but.
Think I heard on another investor call a couple of days ago I heard somebody ask they said they'd listened to for five investor calls and they've never heard the noise around staffing and work force availability that they are hearing right now and I'd say that's true.
I think the unemployment situation that people are able to draw on unemployment and the rates, they're drawing and combined with stimulus.
Makes it really really tough on the warehouse and transportation workforce. So we're doing we're doing more around staffing and hiring then we've done and the last three or four years combined it is definitely a challenge and I think that definitely has an impact on the supply chain.
Thanks, and good luck.
Thanks Man.
And we can have our next question from <unk> from BMO capital.
Hi, good morning, Thanks for asking a question.
Just curious and May.
And what's.
Giving a pause to kind of raise the guidance I get that.
On the tax stamp game, and I was partially offset and maybe more like $5 million and have eight on.
On a net basis.
But I think you guys were planning for EBITDA, roughly kind of similar to last year levels and.
So this quarter does seem to just be starting out stronger than expected. So just curious if there's one or two things that are standing out to give you pause or is just really too early and the year.
Yes, first off Kelly I'd say it gives us a lot of confidence.
That was definitely a shot and the arm and we have a lot of confidence and in the year that said, we definitely have inflation built into our plan I wouldn't say that we specifically had Colorado tax increase built in.
But probably more so than that is it is the first quarter, it's our smallest profit quarter of the year.
Not been are kind of historical patterns and make changes and guidance. After Q1, So we will definitely.
Look at that again, and Q2 and decide what we want to do that.
Okay and in terms of sales right on any color on specific category that you see that more and and how that's impacting your sales.
Just any update on on that point.
Yeah, and I would say if there's worn category that probably stands out it's cigars cigar fill rates were challenged pre come over there and have been disproportionate challenge after COVID-19.
Outside of that it's kind of surprised and Kelly it's.
Across and number of different categories, and and it's not just smaller manufacturers and some of our key major manufacturers. So we have a dozen manufacturers and make up a big a big portion of that Delta and obviously those are the ones that we're really focused with and working on day to day, but it's kind of it's not any.
And so the category other and for donors.
Okay, that's helpful and and I guess, just on the topic of inflation.
Uhm.
Can you just help us understand just for another quarter under the about.
What you are hearing for manufacturers and how how that compares to what you think is and your plan and are there more and price increases and the second half and could not be a talent.
Above and beyond what you expected or are you expecting that to.
How're you expect patio.
Yeah, I think we expected maybe a little higher inflation this year than historical that I wouldn't say that we plan on anything greatly disproportionate I would say that obviously everybody's here and a lot of noise about inflation I would say it through the first quarter, we really other than the cigarette price increase didn't see really any material.
Signs of of product inflation and other than that.
I do anticipate there will be some.
So I expect and maybe pick up a little tailwind as we move through the year, but we haven't seen a whole lot yet.
And you still there Kelly.
Yes. Thank you.
And we do have our next question from not since spring from Jesse.
Hi, Good morning, guys. Thanks for your question.
Hi, Matt.
Wanted to just follow up on Ben's question around the labor availability environment.
We have been hearing on on many calls and.
Similar feel.
Feeling that.
Tightness there this potentially.
Bigger problem going forward and then it has been and recent past, but would point out that probably looks different from industry and industry and the drivers behind it may be a bit.
Different.
From industry and industry. So I know you're pointed to stimulus is certainly a driver wanted to know from from core marks perspective, what are the other big drivers would be availability shortage as as it relates to the company specifically and is it a push from industry competitors too is it more driven by large companies from outside the industry.
And maybe stepping and and competing for that same skill set.
Or is it just more of the macro aging labor force dynamic maybe impact and the situation more recently because of the pandemic shock to the system. So to speak so just try and those are a couple of my ideas book interested in hearing your perspective.
Yeah, I think you've touched on a few really good key points not the one thing that I pay attention to his warehouse availability across the country and there's a couple of index is the kind of show warehouse space is available and I can tell you right now the warehouse occupancy as it is at its highest rates and a couple of decades.
Which means and and I think a lot of that and that comes from the fractures and the supply chain and people are trying to buy a space to store products and move product around.
And when that happens debt that increases demand for warehouse work force and I would say that.
Driver demand as tough too, but I'd say right now warehouse might be slightly edging driver availability and I think a lot of that is just because there's so much demand and so much occupancy and the warehouse space, So and a.
Certainly that is other players that are in the space I mean, obviously Amazon I think is least up half the warehouse space and the country over the last 12 months. So we definitely have other competitors out there for work force but.
And the other thing I'd say is it's a little more regional for US we probably have.
Five divisions and make up 80% of our challenges.
And so there's certain markets, where we are certainly exerting more resources to try and recruit people.
And and just to follow up on that it looks like you are in the process of relocating one of your distribution facilities and just looking at kind of a capex allocation marriage sounds like it's a move to a preexisting building so.
You touched on the.
The warehousing and.
Environment.
A bit do you as a company see any opportunities in the future to optimize their expand.
And just X footprint or is this more of a headwind for others that are looking to step on the gas too.
Span going forward.
Just going to ask and this is that going to impact you does it feel like your rates are necessarily variable.
When you are.
Renegotiating, we think.
Yes, I would say a couple of things I mean, obviously from a growth and expansion standpoint.
We're focused on acquisition and we think that's the most.
Fisher and profitable way for us to grow we move the building last year and Oregon, We have another one that we're evaluating for this year and that's part of our capital plan.
Both of those were moves to locations that were more favorable for them and employee standpoint, and and we're building that were simply didn't matter what technology, we put in and they were this building that you weren't going to optimize.
But I would still say that our focus on expansion and growth is really going to be through acquisition.
And.
Call that's helpful and one last one as it relates to our marks out of the pandemic.
Wanted to check in on how drop rates and drop size look sequentially since the beginning of the year and I think.
One of the airlines just pointed out that business travel looks to be back, 50% and a relative the normal levels and maybe a bit better and certain markets how was that travel.
Travel related component of your business trending.
Yeah. So obviously for us drop sizes are really driven by our non cigarette sales. So for the quarter on drop sizes were down for March when we start to lap and have non cigarette same store sales growth you're going to see our drive size and start to increase because that's really what drives our drop size.
Your comment on the airlines, absolutely we have seen a a market and very quick spike and volume and airlines and I'd say overall are non convenient and segment, although it's been slower to recover as I look back at that month to month quarter to quarter. It gets better every month and every call.
Water, but I would say over the last three or four months airlines have jumped disproportionately for sure.
Great. Thanks for your time.
Yep.
And as a reminder, and being for question.
Christyne Gonna one I need touched on song.
And cannot go next.
Question from John lines from benchmark.
Good morning guidance.
John longtime how're you doing.
And is fine from non thanks.
Just a couple of questions for me, let me ask you about.
These operators out there you mentioned some of the new initiatives PDI and.
Give us a sense post COVID-19, what kind of attention and can you get to these guys. I mean, obviously they came through COVID-19 all of the challenges through that.
And now and you've got a sales guy go on and they're trying to help from give us a sense of the response before and after after their need help for and.
Some examples might be of this technology of how that's helping.
Yeah, Joe let me break it into two book and so I think there's there's two buckets and where we can really help them. One of them is product selection and the changes we've seen as we've kind of advanced through COVID-19. The other ones technology from a product selection standpoint, I mentioned earlier Blue Yonder and are we have we have for them.
Dedicated folks at all day do is develop semantics and build out schematics and Blue Yonder and we work with all of our vendors on a regular basis to optimize and schematics and I'd say there was significant changes.
This year, we saw a lot of changes and product mix. This year and so we're working really hard and we have a lot of folks visiting our center of excellence now that we've open that back up.
And we had five people and this month five different groups, but really working to optimize their product mix and store. The other thing that I think COVID-19 did from a retail standpoint is I think the price of admission now is you've got to be on a path where you can make the.
The customer experience and a convenience store and more for channels and whether that means they are able to check out.
On their phone whether that means that they have and automated checkout, whether that means that they have a loyalty play whether they can order from the policy and you have to start adding technology elements and our partnership with skip and PDI essentially can do that all of those things I just talked about for and independent retailer, but also for us.
Small and medium sized chain and we mentioned we signed up our first PDI customers 200 store chain. So I.
I think moving.
Mmhmm into the technology space. So they can service and our customers more efficiently is there's gotta be critical for the future of us and for our convenience stores.
Great. That's real helpful. On second word can you talk a little bit about.
Obviously, these chains and and some of these independents through COVID-19 now your face and supply chain issues, you're facing labor issues.
And you are told for some of these guys and continue discussions with M&A do you see a little outside light at the end of the tunnel that they.
Maybe a little bit more ready to make a move and then before August.
Yeah, I mean I've sit on prior call is John and I think most of the the wholesale environment for convenience fared reasonably well through COVID-19.
I know there are a number of them that took PPE loans to to be able to pay.
Pay their folks and get through the the most challenging times, but the one thing I would say and I've seen it and my conversations is events like this make people kind of evaluate in other business prospects and I think we've already a multi rational.
Wholesaler and that's what most of them are out there I mean this is an event that makes you think how long do we want to do this.
And so there are a number of those conversations that I've had and I think this is an event that will probably be a catalyst that the accelerated some of those conversations and over the coming months and year.
Great. Thanks for your time, and we'll see you soon.
Thanks, Joe.
And we have no further questions at this time.
I'm Gonna turn it over to.
<unk> that's from finals on Mark's.
Thank you all for joining us this morning, and we appreciate your interest and core Mark if you have any follow up questions.
Please feel free to reach out to me through our IRR contact on our website. Thank you.
Thank you I mean, ladies and gentlemen. This concludes sales conference. Thank you for participating even have disconnect.
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