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Edited Transcript of CORE earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 Core-Mark Holding Company Inc Earnings Call

South San Francisco Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Core-Mark Holding Company Inc earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher M. Miller

Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO

* David Lawrence

Core-Mark Holding Company, Inc. - VP of Treasury & IR

* Scott E. McPherson

Core-Mark Holding Company, Inc. - CEO, President & Director

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Conference Call Participants

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* Andrew Paul Wolf

Loop Capital Markets LLC, Research Division - MD

* Benjamin Shelton Bienvenu

Stephens Inc., Research Division - MD

* Christopher Mandeville

Jefferies LLC, Research Division - Equity Analyst

* Kelly Ann Bania

BMO Capital Markets Equity Research - Director & Equity Analyst

* Robert Kenneth Griffin

Raymond James & Associates, Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good morning and welcome to the Core-Mark 2019 Second Quarter Investor Call. My name is Brandon, and I'll be your operator for today. (Operator Instructions) Please note, this conference is being recorded.

And I will now turn it over to David Lawrence. David, you may begin.

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David Lawrence, Core-Mark Holding Company, Inc. - VP of Treasury & IR [2]

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Thank you. 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 in the company's 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 useful to investors, in our earnings release and our quarterly report on Form 10-Q. I'll now turn the call over to Scott.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [3]

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Thanks, everyone, for joining us today on our 2019 second quarter call. I will start out by providing an overview and some highlights for the quarter, then Chris will add color around our financial performance and key metrics. So let's get started.

Following a good first quarter performance, I'm pleased with our continued progress in the second quarter, including improved growth in non-cigarette sales, continued strength in our non-cigarette remaining gross profit margin and the benefit of operating expense leverage that drove adjusted EBITDA growth of 26%.

Our results this quarter reflect continued success, executing on our 3 key strategic priorities: to grow sales and margins faster than the industry, lead the industry in providing category management solutions and leverage cost to drive profitable growth. I'm proud of the hard work and commitment from our Core-Mark family, which has been the catalyst in delivering strong performance so far this year.

Breaking down the revenues for the quarter. We delivered nearly 9% growth in non-cigarettes, partially offset by the decline in carton sales, resulting in an overall growth of 2.7%. Our sales growth includes the benefits of new customer wins discussed last quarter, independent store gains and strong same-store sales growth, helping to offset the impact of cigarette declines.

Cigarette cartons declined by 4.5% on a same-store basis, partially offset by cigarette price inflation and net market share gains. On the non-cigarette side, we delivered same-store sales growth of 7.5%, led by our food, fresh and alternative nicotine categories. Alternative nicotine sales drove about half of the overall same-store sales growth. We also saw strong same-store sales growth in moist tobacco and an acceleration of alternative oral nicotine products.

I believe it's important to note that Core-Mark's total nicotine sales, including cigarettes, moist tobacco, cigars and alternative nicotine, grew by about 2% in the quarter. We also continue to be encouraged by the growth in CBD. Despite limited product selection and state distribution restrictions, this category is showing promise. From a profit perspective, remaining gross profit increased 10% over prior year, led by the growth in sales and expansion of our non-cigarette margins.

Our margin improvements reflect continued focus on our category management solutions, driving the improved sales mix and the success we are seeing from our strategic pricing initiatives. Our pricing initiatives focus on working closely with our customers to drive mutually beneficial growth in higher-margin non-cigarette categories and to better align our pricing structure with the evolving consumer market basket.

Turning to expenses. We delivered another quarter of improved leverage. We continue to benefit from technology solutions and our efforts to leverage costs. One of our technology initiatives for 2019 is to process 90% of our customer credits in a frictionless manner at the point of delivery by leveraging our driver handhelds, providing an improved customer experience and labor efficiency gains. We are well on track to meet this goal.

And on the SG&A front, our initiatives focused on centralizing transactional processes by leveraging SAP are also ahead of schedule. I am pleased with our overall execution this quarter, driving profitable growth in the business through a focus on our strategic priorities. Our progress through the first half of 2019 is encouraging and reinforces my conviction that there is significant opportunity for Core-Mark to deliver sustained shareholder returns.

For the balance of 2019, our drivers of top line growth 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's 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 joined Core-Mark 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 company's loyalty and digital platform, along with its social media initiatives. Chris also led the design of a commissary and bakery solutions 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' leadership, I'm excited about the opportunity to take Core-Mark's 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-Mark 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.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [4]

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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 $0.38 per share compared to net income of $11 million or $0.24 per share last year. LIFO expense was $7.4 million or $0.12 per share compared with $0.11 last year. Earnings per share, excluding LIFO expense, increased to $0.50 compared with $0.35 in the same quarter last year. And 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 shift and operating expense leverage. Total sales increased 2.7% for the second quarter, driven by an 8.8% increase in food and nonfood sales, offset by a slight decrease in overall cigarette sales.

In the food and nonfood category, we saw strong year-over-year increases in both 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, OTP sales increased 6.6% for the quarter and overall food and nonfood 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 and nonfood products as well as higher overall margins in the food and nonfood 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 OTP 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 to the rest of the year given the strong sales growth we experienced in the second half of last year in 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 86.8% compared to 90.1% last year due primarily to the increase in remaining gross profit and leverage in warehouse and SG&A 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. SG&A 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. SG&A expenses as a percentage of remaining gross profit improved to 140 basis points to 26.6%.

I also want to briefly touch on the impact of cigarette and candy price increases for the year. On the cigarette front, a second 2019 cigarette price increase of $0.60 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 that resulted in $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 carton.

Given the year-to-date price increase per carton is below the prior year level and the timing of price increases has accelerated, it seems likely that the cigarette manufacturers will announce a 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 amounts of a potential third price increase.

Regarding candy, in July, Mars, Wrigley and Hershey announced price increases of approximately 9%, impacting a variety of their 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 million on a sequential quarter basis to $310.7 million, reflecting the normal seasonal build in our working capital, most notably, an increase in our cigarette inventory as we build for a potential price increase and an increase in accounts receivable.

The increase in accounts receivable is 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 1. We are pleased with the results for the first half of the year, which are slightly ahead of our expectations. While we've 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, and we remain highly focused on growing faster and more properly than the industry, being the leader in category management and leveraging our fixed cost structure.

Operator, you can now open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And from Stephens Inc., we have Ben Bienvenu.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [2]

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I wanted to ask about the guidance for this year. You guys, as you said, are putting up pretty good numbers through the first half of the year, both solid seen in quarters 1Q and 2Q. You've now got the benefit of a candy pricing increase holding gain in 3Q. It sounds like it might not be incorporated yet into your guidance. But if there's possibility of cigarette holding gains being higher than previously anticipated, just curious around the decision to maintain guidance versus increased guidance halfway through the year. Is it a reflection of just a more measured approach to guidance for the full year? Or is there anything from a trend perspective into second half of the year that we should be confident enough?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [3]

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Sure, Ben. I think -- 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 have a candy price increase. We're still getting kind of the final tabulation on that, so that's definitely going to be a benefit. But there's no certainty that there's going to be a cigarette price increase. We're anticipating that but there's definitely been a break in the cadence from the cigarette manufacturers. So that's a key element of our thinking. And then the last thing is just we're going into the third quarter. It's the biggest revenue and 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 the 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, yes, 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 a revenue side.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [4]

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Okay. 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, that'd be helpful.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [5]

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Sure. I feel pretty good that by the end of the year, we'll be, let's say, 1.5x 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 1.5x range.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [6]

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Okay. And then last question for me on the food and fresh revenue category, really strong results and a nice sequential improvement from 1Q to 2Q. Can you talk about what contributed to that? And was the improvement driven disproportionately by independents or larger chains? Any detail you could provide there would be great.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [7]

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Sure. I think, 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. I'd say it's fairly balanced. We've had a couple of pretty sizable chains really embrace food programs so maybe a little slanted towards the chains.

But really, it's just us working with our customers, executing on our category management strategies. And I think if you look at what we're seeing from the millennial and Gen Z consumer, which is, I think, very encouraging to convenience, they're frequent snackers. They consider convenience outlets as a optimal location for food snacking. And I think the industry is starting to capitalize on that, and I think that's benefited us as well.

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Operator [8]

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From BMO Capital, we have Kelly Bania.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [9]

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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 shift 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 cigarette price increase?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [10]

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So let me take the last one first because that's the easiest, Kelly. We have $19 million in cigarette price increase in our guidance. And I think, year-to-date, we're at 12.6%. So definitely, we anticipate it to be on a much higher level but they've certainly changed the cadence and the amount. So still anticipating to see that third one and to be close to our guidance range on cigarette price increase income.

On the margin front, as I've called out a number of times, I think, in the long range, I think 10 to 20 basis points is a good range for you to think about from our standpoint. But obviously, we had 2 really strong quarters. We were at 28 and 38 basis points of growth. Now, if I break those into buckets, big buckets would be alternative nicotine is about 1/3 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 is another bucket. And then we've also have made a really strong progress in our strategic pricing gains. And that's something that we've worked on now for at least 12 months, 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.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [11]

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And you mean 10 to 20 for the full year?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [12]

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Yes, 10 to 20 basis points for the full year. And like I said, I -- we'll be at the higher end of that range or slightly higher than that.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [13]

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Okay. That's helpful. And I guess, with respect to Altria's comments that you just mentioned and their -- the cigarette declines may be accelerating. Just curious what you guys think on that. Are you seeing that? Do you agree with that? Is -- do you have a view if that comes at the expense of growth in alternative nicotine? And just how that could be a positive or negative for you as that plays out?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [14]

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Sure. I mean, right now, 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. I think a lot of that is we worked really hard, not just on 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 using vape as an alternative. And there's even a shift where combustible users are completely leaving combustibles for vape, primarily JUUL.

For us, it's definitely a revenue headwind. But as I called out, total nicotine for us was actually up. And from a profit standpoint, quality of earnings standpoint, so far, it's been good. So there is definitely some trade-off from combustible to alternative nicotine, which is a revenue headwind but I think is generally profit-neutral at this point.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [15]

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Okay. That's helpful. And then just last one for me. Just can you help us think about what may be organic sales growth was for this quarter, excluding any kind of chunky customer wins or losses?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [16]

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Yes. We had 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 had a little bit of Rite-Aid departure, which we had called out a number of times. I think we started the year with a 1,000 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 was a combination of market share and same-store sales growth and was pretty clean.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [17]

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Okay. And then, sorry, really, last one this time. Are you seeing anything competitively, I guess, maybe from a clean -- specifically, just curious on how things are trending on the RFP cycle and competitive bidding cycle.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [18]

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Yes. We're -- we have a couple coming up next year and the year after, and we're in the process of working on a couple right now. I think McLane's a very rational competitor and as I believe we are. And I think the market has also been very rational in the bids that we've been a part of recently.

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Operator [19]

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And from Raymond James, we have Bobby Griffin.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [20]

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Just 2 quick ones for 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?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [21]

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Are you talking about just revenue growth or margin growth?

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [22]

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Revenue growth, sorry.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [23]

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Revenue growth? Yes, most of it is market share gain. We did have, specifically around beverage and pricing initiatives that would have helped revenues a little bit, but most of that is just share gain and same-store sales growth.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [24]

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Okay. I appreciate it. And then just quickly, a modeling question. Should we assume any other relocation expense in 3Q? About $1 million or $2 million was called out in the 10-Q this quarter. Is there anything left on that?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [25]

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Yes. Chris called out in the script that we're pretty much -- anything material is behind us.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [26]

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Yes.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [27]

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Okay. That's perfect. I appreciate it.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [28]

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That's the bulk of it.

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Operator [29]

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From Jefferies, we have Christopher Mandeville.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [30]

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Scott, can we start off just with the monthly cadence on non-cigs in the quarter itself? And then maybe if you'd be willing to offer up some quarter-to-date color. And in particular, I guess I'm kind of curious on health and beauty that's been performing quarter-to-date, just given the considerable contribution that vaping has had in -- to both sales and gross profit dollars.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [31]

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So when you say the monthly cadence, are you talking about the month-by-month in this quarter?

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [32]

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Correct.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [33]

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Yes. I think we had a really strong April. And I'd say, May and June were probably kind of at par with each other, so a 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 vape, 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 Q2 to Q3. That said, we still feel like there's a pretty strong runway with JUUL. We're continuing to penetrate new accounts.

The Canadian market really didn't get going until this year, so we've seen good growth there. And JUUL, frankly, is continuing to grow in same store.

So I think there's definitely 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.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [34]

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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?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [35]

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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 the main reason that. And we're headed into Q3, which is our biggest quarter, and why we didn't make any adjustments to guidance at this point.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [36]

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Okay. So there's nothing that necessarily changed the guidance to incorporate candy, it's just your conservatism going into the summer driving season for Q3.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [37]

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Yes. You could call it conservatism. I think we're just being prudent in seeing -- making sure we get that next price increase and then we have a strong third quarter.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [38]

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Okay. And then the last one for me and I'll hop back in the queue, 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. And If I look back at historicals, generally speaking, you've never really shown growth below the like of 7%. So just as we look to the back half of the year, can you just kind of remind us a little bit on why or if we should be expecting an acceleration in growth? Or if maybe there's a new mindset surrounding the expense control and the ability to be below that?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [39]

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Well, 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 cubes per load, but it was kind of offset by labor. But we had good leverage in Q2, and I would expect that leverage to generally continue through the balance of the year. I think we're well positioned for the next 2 quarters from a leverage standpoint and warehousing trends.

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Operator [40]

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(Operator Instructions) And from Loop Capital Markets, we have Andrew Wolf.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [41]

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So still on the guidance, I want to clarify. Were you expecting when you set guidance or last quarter when you did, did you contemplate the candy? Or did that come this quarter as a surprise?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [42]

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Yes. Candy 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 will definitely be upside for us for this year when we think about guidance.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [43]

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Oh, I see. So it's -- the net would be a little less than that, but you're just -- since it's a big number, you call it out? Is that how we should think about it?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [44]

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Yes.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [45]

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Exactly right, sir.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [46]

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Okay. All right. So the net would be like $3 million or something, then you just don't usually would be showing a gross margin but not big enough to call out? I'm just trying to -- if you don't feel comfortable quantifying it.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [47]

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No. I would say, normally, we get between $1 million and $2 million of inflation in candy categories, overall, somewhere in that range.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [48]

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Over the course of the year.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [49]

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So your thinking is not far off.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [50]

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Got it. And then on the cigarette, 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 in. Is that in the guidance? And was that expected? Or, sorry...

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [51]

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Yes. We were expecting this year 2 price increases that generated $19 million. And that -- and to be fair, that includes some price increases in Canada. But primarily, that's all driven by U.S. manufacturer increases. So far this year, we did get 2 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 Altria's activity and investments in everything that they've done this year, I just -- we believe that there's a strong probability that they will have a third price increase.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [52]

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Okay. And that is in the guidance as well?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [53]

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Well, the $19 million is in the guidance. And so far this year, we've only been at...

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Principal Accounting Officer, Senior VP & CFO [54]

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$12 million or $13 million.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [55]

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$13 million. So the $19 million of cigarette price increase in income is definitely in there.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [56]

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Okay. And then in the first quarter, you called out some new customers. And if you could just -- is there much of a profit cycle with new customers like onboarding them cost you money, and then you start making money? Or is it -- like could you just sort of talk about how new customer wins cycle into the income statement?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [57]

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Sure. Yes. I think -- when I think about that, Andy, I think about independent customers' very, very low incremental start-up costs. The larger the customer, the larger the start-up cost. In the cases -- the customers that we've called out this year, we called out 3 different customers, all of them had 300 stores or in that range. I would say, it ranged -- a couple of them might say were fairly low start-up costs. One of them was fairly significant because it incurred a lot of divisions. But I would say that the start-up cost is all behind us in this quarter. We don't have anything going forward from a start-up cost standpoint. And really, all of those transitions went fairly smoothly.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [58]

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Okay. Back in last year, third -- [stayed] with JUUL or just those type of products. What caused that to ramp so quickly last year that you're now facing a challenging comparison?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [59]

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Well, I think alternative nicotine has been around for a while but nobody had kind of hit the magic formula, and I think JUUL did. JUUL came out with a device that was user-friendly, it delivered nicotine at levels and very [easily]. And it became -- I'd call it kind of a social media phenomenon. I mean, it was -- became very popular very quick.

And like I said, we had a big jump from Q2 to Q3, and that's continued on. I think the good thing about what's taking place there is I think that Altria and JUUL and others, from a social responsibility standpoint, have done a great job of moving this away from under-age users and making this a viable alternative for combustible cigarette users. And they're starting to see that turn out in the data fairly quickly. So I think that's positive for the industry and so far has been positive for us.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [60]

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Okay. Just one last question is -- looked 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 where -- what are you and the Board sort of looking at 2 to 5 years for that product type and specifically for Core-Mark and convenience stores? What could you see there?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [61]

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Andy, we're selling very select few manufacturers and a very select product mix today in a select number of states. And I would say that the customer acceptance has been very high. I think that all the numbers I see around CBD point to, it's going to be a multibillion-dollar category over the next 5 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 Cronos that positions them to doing that in the CBD game. So I think there's a long runway for CBD in the convenience space.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [62]

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Okay. Why do you think convenience? Is it compliant, making sure minors don't get it? Or is it -- or are there other...

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [63]

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Yes. No, Andy, I think convenience is, in my mind, the #1 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 anybody else, that I'd want it to go in.

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Operator [64]

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We've got no further questions at this time. We'll now turn it back to David Lawrence for closing remarks.

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David Lawrence, Core-Mark Holding Company, Inc. - VP of Treasury & IR [65]

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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.

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Operator [66]

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Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.