Q2 2019 Earnings Call
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For four more to deliver sustained shareholder returns.
For the balance of 2019, our drivers of top line growth to remain unchanged. We are focused on accelerating our market share growth and expect continued strong performance in our same store sales results.
We believe there is a tremendous opportunity to drive sales growth over the long term in what remains a very fragmented market.
In addition to our efforts to grow our independent store count we are actively engaged in evaluating opportunities to expand our relationships with existing customers new chain customers and potential acquisition candidates I am optimistic about these opportunities, but remain focused on ensuring that we are adding profitable volume and integrating it efficiently.
On the category management front, we believe there is a significant opportunity for convenience retailers to address evolving consumer demands driving mutual growth in sales and profits.
To solidify that opportunity I was thrilled to announce in may that Chris Murray join Cormark as the SVP of marketing.
Chris brings tremendous vision and innovation around the future of convenience retail in his most recent role leading marketing for a progressive convenience retail chain, Chris was the innovation behind the Companys loyalty and digital platform along with its social media initiatives. Chris also led the design of a commissary and bakery solution focused on growing food and fresh sales through innovative product offerings.
Category management has been a critical factor in our ability to drive 35 consecutive quarters of same store non cigarette sales growth under Chris his leadership I am excited about the opportunity to take form ARX category management capabilities to the next level, including the rollout of the center of excellence together with Bill Stein, our SVP of enterprise growth, who leads our efforts to gain profitable market share. The core of our team is better positioned than ever to deliver on our strategic priorities.
I will now hand, the call over to Chris to provide more details on our financial results.
Thank you Scott and good morning, everyone.
To kick things off I'll review, our profitability metrics provide some additional details and insights on our strong financial results for the quarter.
And then wrap up with an update on our outlook for the remainder of the year.
Net income increased to $17.7 million or 38 cents per share compared to net income of $11 million or 24 cents per share last year.
LIFO expense was $7.4 million or 12 cents per share compared with 11 cents last year.
Earnings per share, excluding LIFO expense increased to 50 cents compared with 35 cents in the same quarter last year.
Adjusted EBITDA increased 26% to $53.5 million.
Consistent with the first quarter our results for Q2 reflect the benefit of higher gross profit margins.
Due to a favorable product mix shifts and operating expense leverage.
Total sales increased 2.7% for the second quarter, driven by an 8.8% increase in food non food sales offset by a slight decrease in overall cigarette sales.
And the food non food category, we saw strong year over year increases in most categories driven by same store sales growth and the addition of new customers.
Our health beauty and general category led with a 35% year over year increase driven by alternative nicotine products, which are included in this category.
The food fresh and beverage categories exhibited stronger growth this quarter with each category, increasing approximately 7% year over year.
The other tobacco category.
Which grew 2% for the quarter was impacted by significant product shortages by cigar manufacturers.
Excluding cigars 40, P. sales increased 6.6% for the quarter and overall food non food sales increased over 10%.
As Scott mentioned gross profit and remaining gross profit increased 10% in the quarter as compared to the same period last year.
Remaining gross profit margin expanded 38 basis points, 5.6%, reflecting the benefit of the favorable mix shift towards higher margin food non food products as well as higher overall margins in the food non food category.
We were pleased with the margins for the quarter that included the benefits of a strong year over year growth in higher margin alternative nicotine products and margin expansion in our food fresh beverages and OLTP category.
While we expect to continue to drive higher year over year remaining gross profit margins in the second half of 2019.
We face a more difficult comparison, the rest of the year given the strong sales growth we experienced in the second half of last year and higher margin alternative nicotine products.
Total operating expenses increased to $210.5 million compared to $198.6 million last year.
As a percentage of remaining gross profit operating expenses decreased to 886.8% compared to 90.1% last year due primarily to the increase in remaining gross profit and leverage in warehouse and Thats unique expenses.
Warehouse and delivery expenses as a percentage of remaining gross profit improved 190 basis points to 59.1% driven primarily by leverage of warehousing costs.
Sq to expenses, which increased $2.9 million or 4.7% in the second quarter include approximately $1.6 million in costs associated with our headquarters relocation.
For the year, we incurred approximately $2.4 million related to the move which is below what we expected.
And we do not expect any significant costs related to the relocation going forward.
As DNA expenses as a percentage of remaining gross profit improved 140 basis points.
The 26.6%.
I also want to briefly touch on the impact of cigarette and candy price increases for the year.
On the cigarette Bryant, a second 2019 cigarette price increase of 60 cents per carton.
Was announced in mid June that impacted most of our significant cigarette brands.
Resulting in an inventory holding gain of $3.8 million that was recognized in full in the second quarter.
This compares to cigarette holding gains of $3.5 million in the second quarter of 2018.
For additional context to 2018, a second cigarette price increase occurred in late September and resulted in a $1 per carton increase on most major brands.
And brought the total cigarette price increase to $1.90 per carton last year.
Through June this year, we've seen a total increase of $1.70 per car.
Given the year to date price increase per carton was below the prior year level and the timing of price increases has accelerated it seems likely that the cigarette manufacturers will announce third price increase on major brands before the end of the year.
We are taking steps to maximize our holding gain in the event. There is another increase this year.
However, we cannot be certain of the timing or the amount of the potential third price increase.
Regarding candy in July Mars, Springleaf, and Hershey announced price increases of approximately 9%.
Impacting a variety of products, we estimate that our holding gain from these price increases will be in the range of $5 million in the third quarter.
Turning to our balance sheet the amount drawn on our revolver increased by 149.
He was due to normal seasonality and the timing of payment on certain large accounts the seasonal and other working capital fluctuations do not change our outlook with regard to our full year free cash flow expectations.
Of approximately $100 million, assuming no significant year end inventory purchases.
As we outlined in our earnings release. This morning, we are reaffirming our financial guidance for the full year, which we announced on March Onest.
We are pleased with the results through the first half of the year, which are slightly ahead of our expectations.
While we had a good start to the third quarter from a sales perspective, we will need to continue to grow market share and drive strong same store sales through the balance of the year.
On the earnings front.
We remain confident in our ability to deliver earnings within our guidance range.
To summarize we are pleased with our start to the year and we are focused on continued strong execution through the back half of the year.
We are very optimistic about our future we remain highly focused on growing faster and more profitably than the industry being the leader in category management and leveraging our fixed cost structure.
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And from Stephens Inc., we have been BNP new please go ahead.
Yeah. Thanks, good morning, guys.
I want to ask about.
The guidance for this year you guys.
Are putting up pretty good numbers for the first half of the year.
Both.
Linked quarters in one Q2 Q.
You've now got the benefit of a.
Andy pricing increase holding game.
Thank you.
Sounds like it might not be incorporated into your guidance.
There's possibility of cigarette holding gains being higher than previously anticipated.
So just curious around the decision to maintain guidance versus increased.
For the year.
Is it.
Is that a reflection of just a more measured approach to guidance for the full year or is there anything from a trend perspective and two in the second half of the year that we should be cognizant of.
Sure Ben I think let's let's take the EBITDA side first.
I think you called out a couple of the key considerations. There one of them is we did we did have a candy price increase.
We're still getting kind of the final calculation on that so that's definitely going to be a benefit but there is no certainty that there's going to be a cigarette price increase we're anticipating that but you know theres definitely been a break in the cadence from the cigarette manufacturers. So that's a key element.
Of our of our thinking and then the last thing is just.
We're going into third quarter, it's the biggest revenue and sales are in profit quarter of the year.
We feel really good about our positioning but I think it was prudent for us to revisit at the end of third quarter on the EBITDA side.
On the revenue side.
We feel really strong about how our same store sales performance has come in.
We've seen some traction in the second quarter.
But we're going to have to continue to grow share in Q3 and Q4.
And in light of some of the recent stuff with Altria coming out and saying they may see an acceleration in carton decline.
We're going to have to perform we see a path to get there, but we're going to have to perform really well in the second half.
On the revenue side.
Okay. Thanks.
And then Chris looking at the balance sheet, you talked about the working capital increases some of which is associated with the potential to maximize cigarette holding gains.
But if you would just revisit your expectation around.
Year end debt balance and the implied leverage associated with that.
Helpful.
Sure.
I feel pretty good that.
By the end of the year will be at say, one and a half times from a leverage standpoint.
Again that kind of.
Assumes a more normal.
Level of buying inventory at the end of the year, but I think we'll be in the one and a half.
Times range.
Okay and then last question for me on the food and fresh revenue category really strong results in a nice sequential improvement from one quarter Twoq can you talk about what contributed to that.
And.
Improvement driven.
Disproportionately by independents or a larger chains.
Any detail you could provide there would be great.
Sure I think you know Ben we've worked really hard to work with our customer base on really understanding the complexities of being in the food and fresh business.
You know I'd say, it's fairly balanced Weve got a couple of pretty sizable chains really embrace.
Food program, so maybe a little slanted towards the change.
But really it's just us working with our customers executing on our category management strategies, a and you know I think if you look at what we're seeing from the millennial engines, the consumer which is I think very encouraging to convenience.
There there are frequent snaggers, they consider convenience outlets as a as a optimal location for food snacking on that I think the industry is starting to capitalize on that and I think that's that's benefited us as well.
Okay. Thanks, good luck going forward.
Thanks Ben.
From BMO capital, we have Kelly Bania. Please go ahead.
Hi, good morning, Thanks for taking my questions.
I also just wanted to dive in a little bit on the first half margin.
Performance relative to what the guidance implies for the second half can you maybe just isolate the last couple of quarters, just the impact of alternative nicotine and the mix shifted there on the margins and.
Maybe just how much that impacts.
The margin outlook and then also what is embedded in your guidance with respect to a third a cigarette price increase.
So let me take the last one first because that's easiest Kelly, we have $19 million in cigarette price increase.
In our guidance and I think year to date were idle.
12.6.
So definitely we anticipated to be in a much higher level, but they've they've certainly change the cadence and the amount so.
Still anticipating to see that third one and to be you know close due to our our guidance range on cigarette price increase income.
On the margin front as I've called out you know a number of times I think in the long range. I think you know 10 to 20 basis points is is a good a good range for for you to think about from from our standpoint, well. Obviously, we had two really strong quarters, we were it.
28, and 38 basis points of growth now if I break those into buckets, you know big buckets would be.
No alternative nicotine is about a third of that and obviously, we're going to run into much stronger comps in the second half of the year.
And then you've got mix you know is another bucket and then we've also made really strong progress in our strategic pricing gains.
And that's something that we've worked on now for at least 12 months and I and we're definitely getting some traction there as well so.
I think about us definitely being in the higher end of that 10 to 20 range, if not exceeding a little bit this year.
And you mean 10 to 20 for the for the full year.
Yeah, 10 to 20 basis points for the full year and like I said I will be at the higher end of that range or slightly higher than that.
Okay. That's that's helpful.
I guess with respect to Altrias comments.
You just mentioned and there the the cigarette declines maybe accelerating just curious what you guys think on that are you seeing that do you agree with that it is.
Do you have a view if that comes at the expense of.
You know growth and alternative nicotine.
And just how how that could be.
Positive or negative for you as that plays out.
Sure I mean right now we have.
We have outperformed the market. So on a same store sales basis, our decline is not quite as strong as what the market is seeing and I think a lot of those we've worked really hard not just an alternative nicotine, but in combustibles to make sure our customers have the right product mix to satisfy the consumer.
That said I, certainly and I just sat with Altria recently, there is certainly a shift.
From combustible users are using innovative as an alternative.
And there is even a shift where combustible uses are completely leaving combustible score of eight.
You know primarily jewel.
For us it's definitely a revenue headwind, but you know as I called out.
Total total nicotine for us was actually up and from a profit standpoint quality of earnings standpoint, so far it's been good.
So you know there is definitely some trade off from combustible too.
Two alternative nicotine, which is a revenue headwind, but I think is generally profit neutral.
At this point.
Okay. That's helpful.
And then just last one from me just can you help us think about what <unk>, what maybe organic sales growth was for the quarter excluding <unk>.
Any kind of chunky customer wins or losses.
We lapped most of our.
Historic losses in the first quarter.
So if you look at Q2 with the exception of.
A little bit with.
We are a little bit of Rite aid departure, which we called out a number of times.
I think we started the year with a thousand rite aid stores give or take and we're down to about 500.
But outside of that I would say that the growth for the quarter. It was a combination of market share and same store sales growth and was pretty clean.
Okay, and then sorry really last.
Are you seeing.
Anything competitively I guess, maybe from a clean.
Specifically just curious on how things are trending on RFP cycle and competitive bidding cycle.
Yes were.
We have a couple coming up next year and the year after and we're in the process of working on a couple of right now.
I think mclean's is a very rational competitor.
And as I believe we are on I think the market is is also been very rational and the bids that we have been a part of recently.
Thank you.
And from Raymond James We have Bobby Griffin. Please go ahead.
Good morning, and thank you for taking my questions. Just two quick ones from me first on the impressive food and beverage growth was that pretty much all volume driven or is there some price running through there also benefiting that year over year growth.
Are you talking about just revenue growth or margin growth or revenue growth sorry.
Yes, most of it is market share gain.
We did have specifically around Brett beverage some pricing initiatives that would have would have helped revenues a little bit but most of that is just share gain and same store sales growth.
Okay I appreciate it and then just quickly a modeling question should we assume any other relocation expense in Threeq you are about one or $2 million as called out in the in the 10-Q. This this quarters anything left on that.
Yeah, Chris called out in his script that we're pretty much anything material is behind us.
Okay.
Thats perfect I appreciate that that's the bulk of it yes.
All right well best of luck going forward. Thanks for thanks for the time.
Thanks, Bobby.
From Jefferies, We have Christopher Mandeville. Please go ahead.
Hey, good morning.
Scott we start off just with the monthly cadence on non Sig.
In the quarter itself and then.
Maybe if you'd be willing to offer up some quarter to date color.
In particular, I guess I'm kind of curious on health and beauty has been performing quarter to date, just given the considerable contribution that beeping, it's had to both sales and gross profit dollars.
So when you say the monthly cadence are you talking about the month by month in this quarter.
Correct.
Yeah I think.
We had a really strong.
April and.
I'd say may and June were probably kind of on par with each other so pretty good balance from a non cigarette same store sales growth.
And really even from a general merchandise growth through the quarter.
But I think like we mentioned when you're thinking about general merchandise and invade in particular, the real significant ramp up was in the back half of last year in Q3 and Q4, there was a significant jump from Q Q2 to Q3.
That said.
You know we still.
Feel like there's a pretty strong runway with jewel, we're continuing to penetrate new accounts.
The Canadian market really Didnt get.
Get going until this year.
So we've seen good growth there and jewels frankly, as you know is continuing to grow and same store.
So I think theres definitely.
You know.
A lot of momentum even into Q3 and Q4, but maybe not quite as much as we saw in the first half of the year.
Okay, and then just to be clear the guidance being maintained or reiterated.
That does or does not now include the price increase for candy.
Right now it does we called out that we got $5 million.
But I think we also as I said earlier right now we haven't gotten the second cigarette price increase.
Which is a similar amount.
So that's that's the main reason that and we're headed into Q3, which is our biggest quarter in why we didnt make any adjustments to guidance at this point.
Okay. So theres nothing that hasn't really changed the guidance to incorporate and it's just your conservatism going into the summer driving season for Q3.
You could you could call. It conservatism I think we're just being prudent in making sure we get that next price increase in that we have a strong third quarter right.
Okay and then the last one from me and I'll hop back in the queue I just on warehousing and distribution you guys are really showing great progress there I think it's running call it 4% or so year to date, if I look back at Historicals.
Generally speaking you've never really shown growth below the like the 7%. So just as we look to the back half of year can you just kind of remind us a little bit on.
Why or if we should be expecting an acceleration in growth or.
Maybe there's a new mindset surrounding expense control and the ability to to be below that.
Well I'm I'm always.
I think you know I'm very focused on expense control and if I look at the first half of the year and really the quarter.
It was really primarily driven in warehouse transportation, we did have an increase in queues for load, but it was kinda offset by labor, but we had good leverage in Q2 and I would expect that led the levers to generally continue through the balance of the year I think.
We're well positioned.
For the next next two quarters and will from a leverage standpoint in warehouse and trends.
Great. Thanks.
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And from loop capital markets, we have Andrew will please go ahead.
Thanks, Good morning.
So I still on the guidance I want to clarify where you're expecting when you set guidance or last quarter when you.
It did it did you contemplate the candy or did that come this quarter as a surprise.
Yes.
Any came as a surprise the one thing that I would maybe clarify to everybody on the candy price increases we anticipate it will be in the 5 million range, but the other thing that happens when we get one of those is that kind of.
It kind of supersedes all other increases that we get through the balance of the year. So.
We definitely anticipated some candy income over the course of the year and we kind of got it all at one time.
But it'll definitely be upside for us.
For for this year, when we think about guidance yes.
Oh I see so it's it's a then that would be a little less than that but you're just since it's a big number you call it out.
Yes, I wish like about it.
Exactly right right okay.
All right. So then that would be like 3 million or something and then you just.
Don't.
Usually would be shown in gross margin, but not big enough to call out I'm just trying to.
I and if applicable quantifying it.
No I wouldn't say I would say normally we get between one and $2 million of.
Inflation in can the candy categories overall somewhere in that range over the course of the year. So youre thinking is not far off.
Yes.
Got it.
And then on the cigarettes like Chris was asking and I apologize, maybe just not listening well.
So you haven't got a second price increase.
Which would be also I think you said around 5 million if it comes and.
Is that in the guidance.
And with that expected.
Our so we grew gardening.
Yes, no we were expecting this year to price increases.
The generated $19 million and that and to be fair that includes some price increases in Canada, but primarily that's all driven by us manufacturer increases so far this year, we didn't get to price increases. They both came earlier than expected or earlier than we had seen historically and they were less than we had gotten historically so that's why there's a delta in the price increase income and based on.
Altrias activity in investments and everything that they've done this year I. Just we believe that there is a strong probability that they will have a third price increase.
Okay and that is in the guidance as well.
Well the $19 million in the guidance and so far this year, we've only been at 12 30 13 million so.
The $19 million of ceramic pricing.
Income is definitely in there.
Okay, and then on the floor.
First quarter, you called out some new customers and could you give us his area.
Much of a profit cycle with new customers like you know.
Onboarding them cost you money and then you start making money or is it.
And could you just sort of talk about how.
New customer wins.
Sure Michael intending.
Income statement.
Yeah I think.
When I think about that any I think about independent customers very very low incremental startup costs.
The larger the customer the larger the startup costs.
In the case is the customers that we've called out this year, we called out three different customers all of them had 300 stores are in that range.
I would say you know.
It ranged a couple of might say were fairly low startup costs. One of them was fairly significant because for a lot of divisions.
But I would say that the startup costs is all behind us in this quarter, we don't have anything going forward from a startup cost standpoint, and really all of those transitions.
When when fairly smoothly.
Okay back in last year third quarter.
And with dual or are just so you know.
Those type of products.
Oh, what caused that to ramp so quickly last year, you now facing challenging comparisons.
Well I think I think alternative nicotine had been around for a while but nobody had kind of.
Hit the magic Formula and I think you'll digital came out with a device that was user friendly delivered nicotine.
You know at levels and very easily.
And it became I call, a kind of a social media phenomenon I mean, it was it was became very popular very quick.
Like I said, we had a big jump from Q2 to Q3.
And that's continued on I think the good thing about whats taken place. There is I think that altria and jewel and others from a social responsibility standpoint have done a great job.
Moving this away from under as users and making this a viable alternative for combustible cigarette users and they are starting to see that turn out in the data.
You know fairly quickly so I think thats positive for the industry and so far has been positive for us.
Okay and just one last question is.
Really pretty longer term is on the CBD outlook I mean.
Obviously, it's to be determined what's going to happen at the federal level and so on but.
Well you know what are you what are you on the board you know sort of looking at.
Two to five years for that.
Product type.
And specifically for core market and convenience stores.
Like what could you see there.
Any we're selling.
Very select few manufacturers in a very select product mix today in a select number of states.
And I would say that the the customer acceptance has been very high.
I think that.
You know all the numbers I see of around CVD point to its going to be a multibillion dollar category over the next five years I think convenience is extremely well positioned to be the primary distribution channel for that.
And I think we've picked really good partners.
Recently, Altria made some moves with kronos that positions them to become yet in the CBD gain so I think I think there's a long runway for CVD and the convenience based.
Okay. Why do you think convenience is it.
You know.
Compliant I thinking sure miners Alcan Entres are there on that.
Yes, no I, Andy I think conveniences in my mind the number one.
Age verification channel that exists in retail today, and I think they've proven that.
From a social responsibility standpoint, selling alcohol and cigarettes and other products and doing it.
At a high level of accuracy I think.
It's pretty clear to me that that's that would be the channel that if I were the FDA or or anybody else that I'd want it to go.
Alright. Thank you appreciate it.
You bet.
No further questions at this time, we'll now turn it back to David Lawrence for closing remarks.
Thank you all for joining our call. This morning, we greatly appreciate your interest in core Mark. If you have any questions. You can contact me directly my contact information is available in the earnings release, we filed this morning as well as on our website. Thanks so much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.