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Edited Transcript of CORE earnings conference call or presentation 6-Nov-18 5:00pm GMT

Q3 2018 Core-Mark Holding Company Inc Earnings Call

South San Francisco Nov 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Core-Mark Holding Company Inc earnings conference call or presentation Tuesday, November 6, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher M. Miller

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

* Milton Gray Draper

Core-Mark Holding Company, Inc. - Director of 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

* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Kelly Ann Bania

BMO Capital Markets Equity Research - Director & Equity Analyst

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Presentation

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Operator [1]

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Welcome to the Core-Mark 2018 Third Quarter Investor Call. My name is [Hilda], and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ms. Milton Draper. Ms. Draper, you may begin.

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Milton Gray Draper, Core-Mark Holding Company, Inc. - Director of IR [2]

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Thank you, operator. I'd like to welcome everyone to Core-Mark's Third Quarter 2018 Investor Call. Joining me today are Scott McPherson, our President and Chief Executive Officer; and Chris Miller, our Chief Financial Officer. Also in the room is Matt Tachouet, our Chief Accounting Officer. Core-Mark issued its earnings press release earlier this morning. You can find a copy of it on our website under the Investor Relations tab. Today's discussion will include both GAAP and non-GAAP financial measures. A reconciliation to GAAP of these non-GAAP financial measures is included in the earnings press release. We will also be discussing forward-looking statements. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from management's current expectations. We refer you to the documents we periodically file with the SEC, specifically our 10-K and 10-Q's for a discussion of risks that may affect our future results.

I will now turn the call over to Scott McPherson.

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

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Good morning, everyone, and thanks for joining us. Chris is here with me. And after a review of our quarter, we'll open it up for questions. We delivered another solid performance in Q3 highlighted by improving profitability. We saw margin expansion and strong earnings growth as we continue to improve upon execution and focus on quality of earnings and driving cost out of the business, which has been a priority for us this year. The most significant challenge in the quarter was sales, which were down slightly a little under 1%. I'll provide more color on that shortly. For the quarter, EBITDA was up 23% over prior year coming in at $59 million, helped by continued improvement in cost leverage and margin performance. Earnings per share of $0.63 were up 70-plus percent year-over-year. Our earnings results included a $5 million net benefit from a onetime tax gain, partially offset by onetime expenses. Chris will add the details there, but even with the significant onetime aid to earnings, we still performed well in the soft industry environment.

Based on third quarter results, we will be adjusting upward our expected guidance range for the diluted EPS, EBITDA and free cash flow. Achieving these targets in 2018, will represent a return towards the type of performance our shareholders have come to expect. As we move in that direction, we remain focused on 3 primary strategic objectives: Growing sales and margins faster than the industry, building out our skill sets as the leader in category management solutions and leveraging cost to drive profitable growth. As I look at the sales landscape, we faced some headwinds that have led us to adjust our top line guidance. The year started with unusually weak cigarette sales caused by same-store cartons being down more than twice the historical average. We've seen a slower-than-normal pipeline of small- to mid-sized chain wins, which affected our market share growth, and we also managed through a significant number of Rite Aid store transitions.

Finally, as part of our focus on improving profitability, we have been pruning underperforming stores from our customer portfolio that did not meet our profit targets. This has had the intended positive impact on gross margins, but it's held back store count and overall sales growth. On a positive note, we continue to deliver same-store sales growth for the 31st consecutive quarter, driven by nicotine, fresh and foodservice. We've also executed pretty well on adding independent stores we're up over 750 net new customers to date this year and are redoubling efforts in Q4 now that we're through the busy summer months.

As I look ahead, we are confident in closing on the 1 major renewal we have for 2018, and we've developed a good pipeline of regional chain opportunities from which we hope to have good news to share soon. As we start to make headway on the market share front, we'll be in a better position from a cost standpoint to take full advantage, thanks to a lot of hard work this year. The issues with our troubled divisions have been put to bed, and our warehouse expenses were down nearly 5% year-over-year. SG&A expenses remained under control from an operational perspective, though they did increase in the quarter due largely to a onetime legal expense. The one challenging area remains transportation due to the ongoing and critical driver shortage affecting the broader distribution sector. We recently launched an internal program providing our warehouse and other qualified employees a tuition free path to acquire their commercial license. We have partnered with driving schools across the country to provide employees the opportunity to become a professional driver for Core-Mark. We've graduated 50 people through the program this year, and we'll have another 150 candidates in some phase of training by year-end. This program has generated some great success stories and marks clearly a strategic business initiative for the company. It's also proving to be life-changing for some of our valued family members.

Looking ahead, I'm optimistic about where the company sits today and the opportunities in front of us. Near term, we remain focused on driving seasonal costs out of the system to ensure we finished the year on a high note. We're executing well at the warehouse level and accelerating the leverage of technology across our operations through efforts like the driver handheld implementation and the latest voice technology. We're building out our category management plan for the future, including a center of excellence for customers, vendors and employees at our new headquarters in Westlake, Texas. And we have a focused plan in place to drive market share gains through regional chain wins and the addition of independent stores. We're also steadfast in our pursuit to pay down debt with the strong free cash flow results we are producing, positioning us to be opportunistic with acquisitions at a time when many think the industry is right for more consolidation. In short, we delivered a good quarter in the busiest period of the year, and we're looking forward to finishing the year strong and making 2018 a return to solid performance for Core-Mark. Thanks, again, for joining us.

And now, I'll turn it over to Chris.

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

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Thank you, Scott, and hello, everyone. To kick things off, I will review our profitability metrics and the key drivers behind our strong financial results. I'll then provide an update on our guidance for the year. Net income for the quarter grew 73% to $23.7 million or $0.51 per share compared to $13.7 million or $0.29 per share in last year's third quarter. There are a few items impacting the comparability of earnings for the quarter worth calling out. The first item is a $7.4 million or $0.12 per share onetime cigarette stamp inventory holding gain that is offset by several smaller items totaling approximately $0.04 per share. Secondly, LIFO expense was $0.12 per share for the quarter this year versus $0.08 last year. And lastly, the impact of the reduced federal income tax rate provided a benefit of approximately $0.11 per share in the quarter this year. For more details on these items, you can refer to the table on our press release. Looking at earnings adjusted for the aforementioned items, EPS totaled $0.44, a healthy 19% improvement over last year's third quarter. Adjusted EBITDA was also strong increasing 23% to $59 million, driven by sales growth in our non-cigarette category, improved operational performance and the net impact of the onetime items I just mentioned.

As Scott mentioned, our sales were down 0.9% for the quarter and totaled $4.3 billion. The loss of the Kum & Go business in April this year impacted sales in the quarter by about 2% overall. Cigarette sales were down 2.8%, driven by a 4.1% decline in same-store carton sales for the quarter, a greater decline than the 2.5% we saw in Q2. Non-cigarette sales increased 3.4% or 7.7% adjusted for Kum & Go for the quarter. Same-store non-cigarette sales grew 8% in the quarter, an increase of over last year's 6.8% growth.

In looking at our key categories on a same-store basis, fresh sales were up 6.4% with food and OTP increasing at 3.6% and 6.3%, respectively. Sales of alternative nicotine products increased over 50% and continue to drive the strong performance in the Health, Beauty & General category, which was up about 38% in the quarter. Gross profit increased $11.6 million or 5.2% to $233.8 million, driven by the increase in non-cigarette sales and the onetime tax stamp inventory holding gain. In addition, similar to 2017, cigarette manufacturers raised the prices in September and we earned $5.9 million in inventory holding gains this year compared with $6.6 million last year. We'll carry over about $3 million of holding gains into Q4 from the September price increase this year. Remaining gross profit, which excludes inventory holding gains, LIFO expense and OTP tax refunds increased 2.8% to $227.7 million from $221.6 million last year. Remaining gross profit margin expanded 19 basis points to 5.33%, primarily due to the sales mix shift to higher-margin non-cigarette products. Cigarette remaining gross profit was flat to $57.9 million, while non-cigarette remaining gross profit was $169.8 million, a $6.1 million increase over last year's third quarter. Non-cigarette remaining gross profit margin was flat compared to last year, driven primarily by the mix of non-cigarette products sold. Total operating expenses increased $2.1 million or 1.1% to $198.9 million for the quarter as we achieved good improvement in warehouse productivity and held SG&A expenses fairly steady. Operating expenses came in at 87.4% of remaining gross profit in the quarter compared with 88.8% last year and also improved from 90% in Q2 this year. Total warehouse and delivery costs were $137.6 million, essentially flat with last year's third quarter. As a percentage of remaining gross profit, warehouse and delivery expenses were 60% of remaining gross profit this year, down from 62% in last year's third quarter. Transportation costs were up approximately $1.8 million, primarily due to challenges in driver staffing and turnover. As Scott mentioned, we are aggressively pursuing drivers internally and externally where transportation will continue to be a challenge in the near term. SG&A expenses increased 3.2% in the quarter as a result of the previously mentioned legal costs that would have otherwise been flat despite higher employee bonus accruals and stock compensation costs. Excluding the legal costs in the quarter, SG&A expenses as a percent of remaining gross profit improved approximately 50 basis points compared with last year's third quarter. Overall, we feel good about how the company is executing on keeping the operating costs in check. This will benefit us as we execute on our sales growth objectives. Free cash flow was $175.6 million for the first 9 months of the year, an increase of approximately $114 million compared with last year. The balance of our credit facility at the end of the third quarter was reduced to $350 million despite carrying significant investments in inventory at the end of the quarter in anticipation of manufacturer price increases. We've since sold through the additional inventory and reduced our debt level to $225 million at the end of October. We are on track to finish the year with our debt leverage being in the range of 2 to 2.5x adjusted EBITDA, which is consistent with the expectation we previously communicated. Capital spending was about $15 million, and we repurchased 502,000 shares through September at an average price of about $25. We repurchased an additional 87,000 shares in October, leaving approximately $22 million remaining in the authorization plan as of today. As called out in our press release, we updated our 2018 outlook to reflect our third quarter results. We raised the low end of adjusted EBITDA to $162 million from $157 million, while maintaining the high end of the range at $167 million representing growth of over 21% at the midpoint compared with last year. Diluted earnings per share expected to be between $0.88 and $0.96 and $1.31 and $1.40, excluding LIFO expense, representing increases of 28% and 36% at the respective mid points. We've lowered our top line expectations to be between $16.2 billion to $16.4 billion, a reduction of $400 million or about 2%. The new guidance represents a 3.8% increase at the midpoint over last year's $15.7 billion of net sales.

Free cash flow is expected to be approximately $80 million to $90 million, driven by the expected strong earnings growth and focus on reducing our working capital requirements. At these levels, we'll be in a good position to provide capital allocation flexibility as we balance investments in our business to grow market share, potential M&A and return of capital to shareholders through stock repurchases and cash dividends. In summary, through the first 9 months of the year, we've accomplished a lot in our work to reposition Core-Mark for profitable growth. Our margin expansion and strong EBITDA performance in the third quarter reflect our progress in shifting over mix toward higher-margin products and improving our operating efficiency and productivity. As we close 2018, we expect to continue to drive cost out of our operations, improve operating leverage and focus on growing sales. We look forward to finishing the year on high note and entering 2019 well positioned to deliver solid growth and drive shareholder value. Now we'll return the call to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christopher Mandeville from Jefferies.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [2]

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Chris, just beginning with the updated guidance here, I want to make sure that I'm thinking about this correctly since it seems like the market maybe interpreting kind of how I'm looking at things a little bit given the share response. If we take the net of the tax stamp gain with the onetime cost, well, I think was $5 million in EBITDA. Does that not assume that actually Q4 expectations need to come down for relative to the consensus? And if that's the case and is there anything else to read into that other than just simple cadence?

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [3]

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Yes. Chris, no, I don't necessarily think that's the case, but I think, we are assuming that cigarette cartons are going to be down 4% to 5% in the fourth quarter. So I'm not totally sure what's built into the consensus guidance out there. But no, that doesn't necessarily mean, that's the case.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. And then, you brought up with the tobacco case comps that you are expecting for Q4. Any color on quarter-to-date trends on the non-cigarette side since it was really impressive in Q3? And then, when it comes to sales growth expectations for 2019, I realize you're not providing official guidance quite yet. But I guess, it currently sounds like you're not necessarily picking up new accounts to the degree that you had been hoping, or while you're shedding some less favorable accounts. So I'm just trying to get a sense of when you think you can maybe begin to add new accounts and then ultimately get back to that, call it, 2% growth rate for your 6% sales algorithm that you typically earn?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [5]

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Yes. Chris, I'd say a couple of things. One is we clearly were focused on the quality of revenues, quality of earnings. And we shedded a significant number of accounts over the last 3 to 4 months. That said, we still had a net gain for the year-to-date. And I think we'll see continued momentum into next year as we look at the independent market share. The other thing that we saw that was pretty flat this year, and as you know, with the timing of different bids that come out, it's kind of cyclical as we didn't see a lot of activity in the small- to mid-sized chain opportunities in 2018. I'd say the pipeline there is pretty active. And I would say that we'll see some positive -- I expect to see some positive results there in 2019 in that small- to mid-sized chain bracket.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [6]

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And the quarter-to-date comp, would you be able to provide any color on non-cigarette?

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

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You mean fourth quarter to date?

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [8]

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Correct.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [9]

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No.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [10]

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Okay. Then my next question would be, I suppose, there is a general consensus that vaping is actually incremental, and not purely cannibalistic to nicotine consumption. So I guess, first off, I'm curious, if you'd agree with that statement? And then, given the potential for some regulatory change in the coming year, can you provide kind of your view on how things may unfold, and ultimately how that may impact the Health and Beauty category? And to what degree that offerings actually contributing to that category today?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [11]

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Yes, I mean, obviously, the nicotine space has been dynamic this year. It's been a significant contributor to our Health and Beauty category clearly. When I look at the landscape, Chris, I think, about the FDA. And when they took oversight over cigarettes, the first thing they did is restrict flavors, restrict advertising and really enforce the age enforcement piece of it. They did the same thing with cigars. They restricted flavors and advertising and did the same thing with age restriction. And I think nicotine, I mean, the vape category kind of got out of our skis so to speak. There wasn't a lot of enforcement. It launched with a whole lot of flavors. And I think some of that appeal to the younger demographic could have been caused by that. But I think it's clearly a safer alternative to combustible cigarettes. And I think the FDA will likely follow the same pattern or I think they should follow the same pattern and that is to restrict flavors and to push it into the C-store channel, which has really been the chosen channel for carding and with alcohol and tobacco to use that channel as governance on age restriction and get it out of the Internet channel and some of the other channels that you see its holding. So I think that's where it's headed. Clearly, the FDA has taken aggressive action to kind of rein in that channel. So I think in the short run, I think, we'll see some regulation and some bounce in the long run I see it will -- I think it will conform much like cigarettes and cigars did.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [12]

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So Scott, maybe a follow-up. If they were to move in the direction, that category had been a nice contributor to Penny profits in recent quarters. How quickly could you adjust your business model to account for a potential loss of those sales?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [13]

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Well, I don't anticipate a loss of those sales necessarily. And I think, you're going to see definitely -- because that's been a very quickly emerging and growing category, I think you may see a slowing in growth. And I think as you see an elimination of flavors, you may see -- I don't think you'll see a constricting of the category, but I think you'll see a slowdown in growth.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [14]

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Okay. And just quick modeling one for Chris. G&A was down roughly 2% year-on-year. How should we think about the runway on a go-forward basis?

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [15]

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For depreciation and amortization?

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [16]

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Correct.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [17]

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It would be similar to go forward.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [18]

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Yes, it'd be similar to go forward, I think, and it'd be comparable to this quarter.

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Operator [19]

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The next question comes from Andrew Wolf from Loop Capital Markets.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [20]

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I joined the call a bit late so just maybe asking you to repeat. But on the guide down on sales, is that tied into -- you're looking for 4% to 5% lower carton -- cigarette carton growth in the quarter, fourth quarter and they in this quarter maybe being lower? Or is it broader based than that, could you elaborate on that?

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

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Yes, I think, Andrew, it was -- that's clearly a big part of it. Beyond that, we had called out in my prepared remarks a couple of things. One of them is we had -- over the last 3 to 4 months, we've had about 800 Rite Aid store transitions, which affected that. Also, we've been very aggressive in pruning underperforming accounts as we're focused on really quality of revenues, quality of earnings. So that was another headwind as far as sales go. And that along with the cigarettes, were really the primary drivers.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [22]

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Could you kind of quantify, maybe as a percentage of growth or something like that, either how much the Rite Aid stores or the pruning added up to or as separately or together, just so I have an understanding of how much of it is cigarettes.

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

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Well, you know what the -- yes, you know what the carton decline? Chris, just talked about that. We've pruned over 1,000 stores over the last, call it, 3 to 4 months. But I'm not going to give you a specific number on Rite Aid. We don't call out specific numbers on customers.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [24]

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Okay. But -- so we're close to 2,000 stores, and we can figure out the weightings ourselves or estimate them. That's helpful. Did a $0.04 of assorted offsets to the stamp tax again, I guess, you called out, was the legal cost in that? Or was that other items?

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [25]

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That's included in that.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [26]

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Okay. What was the exact pretax amount, because I don't know what tax rate you used in that $0.04?

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [27]

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The pretax amount for the legal?

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [28]

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Well, the whole $0.04 that you referenced of various sort of onetime costs.

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [29]

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A little over $2 million.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [30]

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Okay. Got it. And then my last question, if I could? I know you only want one. But on the regional chain, so you're talking to -- I assume they are well within your sort of risk parameters versus some of the bigger deals you've done? Or like, how you're thinking about risks so that investors can be comfortable that if you win a bunch of these, things will go smoothly.

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

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Yes, I think about regional chains as 50 to 200 stores. And clearly -- and that go across multiple divisions. And we clearly have the capacity and wherewithal to handle those kind of tuck-in chains. Definitely, we're not talking about some of the much bigger deals that we've absorbed in the past.

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Operator [32]

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We have a question from Ben Bienvenu from Stephens Inc.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [33]

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I wanted to ask about the remaining gross profit that's implied for 4Q in the guidance, I think at the midpoint of the guidance with the revenue and the EPS. We don't have assumed expense exemption, but it suggests that remaining gross profit would be more flattish, maybe slightly down in 4Q is our quick math versus up sort of 20 basis points year-over-year as a percentage of sales in 3Q. The comparison gets substantially harder year-over-year from 3Q to 4Q, but I just wanted to get a sense as to whether that's a function of mix within the food, nonfood category maybe vaping driving down profitability margins, whether it's a function of mix of cigarettes versus non-cigarette business or something else otherwise that we didn't contemplate, that might be impacting that remaining gross profit margin?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [34]

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Yes, Ben, I think, you touched on a number of them. Vape has a little bit of pressure on it. But really what's pressured the nonfood margin overall is the growth of OTP, which tends to have high revenue and a little lower margin within our nonfood category.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [35]

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Okay, great. And then if I think forward to next year, if you think it's reasonable that you could get back to delivering remaining gross profit margin expansion over the longer-term for the earnings algorithm?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [36]

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Yes, we clearly -- I think, the way we think about the business is, yes, clearly I think we can get back to growing that 10 to 20 bps. But that said, it also depends heavily on the dynamics within the nonfood category. If we see tremendous growth in OTP or in e-cigs, then it's going to be -- you'll see great growth in margin dollars, but maybe not in the percentage.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [37]

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Fair enough. And then on the culling of less profitable accounts, when did you start that process? And then, how long would you imagine that, that persists such that, that noise comes out of the numbers?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [38]

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Yes. I mean I think we did a big chunk of it. And when it really started, Ben, is when I looked at the business coming into Q3 and saw the pressure that we had on our distribution assets, we've kind of made the decision that we're going to take a hard look at our customer portfolio and prune anything that we didn't feel was our customer that we wanted going forward to kind of lighten the burden on our transportation group. And I think that was the right move. And I think the results show that. That said, it's something that we'll do every year, but I think, clearly, it will be diminishing -- the impact will be diminishing in future years as we improve the quality of the customer base.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [39]

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Okay, great. And then just one quick one from me. Really nice control, particularly during peak season on the expense side of the business. And what is the reasonable expectation? I think, Chris, you called out the noise in SG&A on the legal expenses, but what is the reasonable growth rate for SG&A on a go-forward basis?

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [40]

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I mean, I'd say on a comparable basis, barring any onetime items, its 2% to 3%.

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Operator [41]

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The next question comes from Kelly Bania from BMO Capital.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [42]

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I guess, just a question on the pruning of accounts. Was that in your guidance? It seems like one of the reasons that you called out for lowering the sales guidance. Just curious what your expectation was in that early in the year? And what the processes for those contracts that you just chose not to renew? Maybe just help us understand how that process works with those customers?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [43]

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Yes, so Kelly, most of our larger, I'd call, chains, mid- to large- to extra-large chains are all under contract. A lot of our independent customer base, we have a pricing agreement, but beyond that, it's an outwill relationship. And so we did a -- as we -- like I told Ben, as we looked at what we had facing us for the summer, we want to make sure that what we were filling our trucks up with was profitable business. So we did a deep dive on our customer base and identified customers that we clearly weren't profitable and went to those customers with options to change pricing or to buy more categories from us or the last option, but definitely an option that a number of them were forced to take is to find another supplier. And I think -- so, no, that wasn't considered when we looked at guidance for the year, this year. It was a midcourse correction this year when I came in and looked at what we were facing for the summer and said, I think, we need to improve the quality of our customer portfolio.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [44]

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Okay. And then, I guess, circling back on the last question, I mean, how much more of that could we see next year if this transportation kind of headwinds continue?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [45]

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Yes, like I said -- like I told Ben, it don't -- it will diminish, it should diminish every year because we did a lot of that pruning this year. We're always going to review that customer portfolio and say, there are definitely accounts that we either discontinue buying as much as they used to or their business is down considerably where we need to make changes in that relationship. And so I would say going forward, it would be -- it would have a lesser impact on future years for sure.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [46]

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Got it. And I guess, going back to the same-store cartons, I heard you say down 4% to 5% in the fourth quarter and missed this quarter, but maybe you can just talk what that was relative to your expectations? And what you're seeing in terms of elasticity compared to what you normally see given the recent price hike?

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

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Yes, I would say -- I think, when we talked about guidance this year, we said 3% to 4%. We saw Q4 at a little above 4%. And we saw the first month of this quarter to be a little more than that. And that's, I think, probably some impact of the price increase, but not significantly more than that. We didn't see a massive jump in the first month of the quarter.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [48]

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So Q3 was a little above 4% and sounds like October, a little bit worse?

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

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Yes.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [50]

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Is that right? Okay. And I guess, as we're thinking about 2019, I mean, is there anything that you're seeing in your business that kind of changes the algorithm? Or do you see you getting -- yourselves getting back to kind of the normal algorithm? I guess, right now, it doesn't seem like there's much M&A impacting 2019. So maybe just -- what the normal algorithm would be? And also, how you are feeling about M&A going forward?

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

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Sure. So I think we talked a number of times about our capital allocation and it was largely focused on paying down debt to kind of reposition ourselves to be back in the acquisition game. I'd say that we've done a really nice job of doing that and paying down debt and putting ourselves back into a 2% to 2.5% leverage position. And I think that in '19 would definitely allow us to make a small- to- midsize acquisition comfortably. And If the right one comes along -- I've never stopped my, I guess, pursuit or kind of closed the pipeline down. I've continued to look at opportunities. And we'll continue to focus on paying down debt in '19 and positioning us to make bigger acquisitions as we go forward. So I think, the pipeline will continue to be active. And our historical was kind of 1 to 2 -- 1 acquisition a year or every other year. I think we made, what 8 acquisitions over 12 years or something like that. So I think, that's a reasonable expectation and there's definitely a runway in acquisitions in this industry.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [52]

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And any comment as we think about 2019 about your existing customers and RFP cycle and what could be coming up for rebidding and how you feel about that process in 2019?

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

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Yes, we have 1 customer that was up at the end of '18, and we're feeling pretty good about that situation right now and hopefully we'll be able to announce where that stands shortly. Like I mentioned earlier, there's a number of which was pretty slow this year, but next year we see a number of, what I'd call small- to- midsize chain bids right now that we're working on that could have some impact on 2019. But as far as existing customers, we don't have really anything significant in '19 except for -- right at the end of '19, I think we have a couple to come up in January of '20.

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Operator [54]

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Next question comes from Chris McGinnis from Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [55]

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Can we just start maybe on the organic maybe fresh and food. Can you just maybe comment on that just maybe backing out the impact of the Kum & Go?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [56]

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Yes, so we called out the biggest impact Kum & Go clearly was the strong food customer for the Iowa division so that definitely had an impact on our Food and Fresh growth. We still grew Fresh year-over-year, but food was down slightly. And really overall, if you look at our nonfood, I think, we were up 3%, 4%. And if you were to add that Kum & Go, we'll be in the 7.5% range. So they definitely had an impact on our nonfood sales growth.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [57]

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Appreciate that. And then -- sorry.

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [58]

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Go ahead, go ahead.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [59]

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I was going to ask just on Q4 for the SG&A was pretty high last year and it should not be an easier comp for the quarter or other costs that should come back, I guess, as we head into the year-end?

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Christopher M. Miller, Core-Mark Holding Company, Inc. - Senior VP & CFO [60]

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Yes. So I would say that it should be less than last year. There are some end of year things that we have to look at like medical and workers' comp and things like that. But I'd say, as I said earlier, I think, there were 2% to 3% growth barring any significant onetime items, but I don't think there will be significant as last year.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [61]

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Okay. And then just looking out to '19, I know it's a little early, but just with the onetime benefits in the quarter itself and it sounds like your maybe carryover a little bit in Q4. I think just how does that position you for growing in 2019 at least for the bottom line, if you could just comment maybe a little bit on that?

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Scott E. McPherson, Core-Mark Holding Company, Inc. - CEO, President & Director [62]

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Yes. No, I think, it is a little early. We haven't started constructing our plan for '19 yet. We did have some tailwinds that we called out, but we always have some headwinds too. So I still feel pretty optimistic about '19 and our ability to grow EBITDA at a strong rate.

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Operator [63]

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(Operator Instructions) At this moment, we show no other questions in queue. I would like to turn the call back to Ms. Draper for other remarks.

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Milton Gray Draper, Core-Mark Holding Company, Inc. - Director of IR [64]

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Thank you all for your participation. And if you have any follow-up questions, don't hesitate to call. Thank you.

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Operator [65]

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