Core-Mark Holding Company's (CORE) CEO Thomas Perkins on Q2 2016 Results - Earnings Call Transcript

| About: Core-Mark Holding (CORE)

Core-Mark Holding Company, Inc. (NASDAQ:CORE)

Q2 2016 Earnings Conference Call

August 9, 2016 12:00 PM ET

Executives

Milton Draper - Director, Investor Relations

Thomas Perkins - President and Chief Executive Officer

Christopher Miller - SVP and Chief Financial Officer

Analysts

Benjamin Bienvenue - Stephens, Inc.

Benjamin Brownlow - Raymond James

John Lawrence - Baraboo Growth LLC

Christopher McGinnis - Sidoti & Company

Christopher Mandeville - Jefferies

Operator

Welcome to the Core-Mark’s 2016 Second Quarter Investor Call. My name is Andrea, and I will be your operator for today’s call. At this time, all participants are in listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

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

Milton Draper

Thank you, operator, and welcome, everyone. I would now like to read the statements about the use of forward-looking statements and non-GAAP financial measures during this call. Non-GAAP financial measures will be used in this presentation. Reconciliations to the most comparable GAAP measures are included in the most recent earnings press release available on the Investor Relations portion of the Core-Mark website.

Statements made in the course of this call that state the company’s or management’s hopes, beliefs, expectations or predictions of the future are forward-looking statements. Actual results may differ materially from those projections. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our SEC filings including our Form 10-K, our 10-Qs and our press releases. We undertake no obligation to update these forward-looking statements.

We are holding this call to review our second quarter results and to answer any questions you might have. If you have additional follow-up questions after the call, please call me at 650-589-9445.

Joining me today is the Chief Executive Officer of Core-Mark, Thomas Perkins; and the Chief Financial Officer, Chris Miller. Also in the room is Bill Stein, our Senior VP of our Eastern Region; and Scott McPherson, our Senior VP of Business Operations and Development; and Matt Tachouet, our Corporate Controller. Our line-up for the call today is as follows. Tom will discuss the state of our business and our strategy going forward, followed by Chris who will review the financial results for the second quarter. We will then open up the call for your questions.

Now, I’d like to turn the call over to our CEO, Tom Perkins.

Thomas Perkins

Good morning, everyone. Thanks for joining today’s call.

We have had rapid growth in the first-half of 2016. Including the Pine State acquisition, we have added about 7,500 retail stores and 1,200 employees. Our focus has been on the hiring, training, and absorbing the large increase in our volume. Our number one priority has been to deliver on our commitment to our new customers without impacting service to our current customers. I believe we have done a very good job of doing this. To say, we have had a busy 2016 so far would be an understatement. I’m so proud of what this organization has been able to accomplish in such a short period of time. What an exciting year for the company.

We completed the acquisition of Pine State with the closing occurring in the first week of June. This was an excellent acquisition for us.

I’m very pleased with how these two companies have combined in such a short period of time. We are thrilled to welcome the Pine State employees and customers in the Core-Mark family. We share very similar values and philosophies as this is a very good fit. This combination solidifies our footprint in the Northeast, and this division has been named New England North to reflect that. I’m happy to report that the Core-Mark logo is now more pervasive than ever throughout the New England states.

Moving on to the quarter, during the second quarter, sales grew 31%, driven by a 35% increase in cartons and a 29% increase in OTP sales. These growth rates reflect the volume for Murphy USA and other market share wins, as well as the backup volume from Rite Aid that was – that we brought on during the summer of last year.

In addition, our second quarter results reflect a partial month of June from our Pine State acquisition. Non-cigarettes sales grew about 16%, driven by market share wins and same-store sales growth of over 4%. This is an improvement from the same-store non-cigarette sales growth in the first quarter of 3%. The U.S. same-store non-cigarette sales grew 4.8% this quarter, while Canadian same-store non-cigarette sales were down 0.6%. This is a very nice recovery for Canada compared to the last quarter when their same-store sales were down over 8%.

Our core strategies continue to drive results as well. Food grew a 11% and fresh 15%. We temporarily lost some focus on some of these core products as we made sure the on-boarding of all the new business was successful. These products are key to our long-term strategies, so we will refocus our energies on these vitally important categories.

And finally, our same-store cartons had a small decline of only 0.3%, which was more favorable than historical norms and more favorable than the industry. We expect the same-store cartons which generally reflect consumption to return to historical norms longer-term.

Operating expenses as a percentage of sales decreased 52 basis points, while remaining gross profit margin decreased 63 basis points. This indicates we did not leverage our operating expenses as much as we had hoped. We were not able to reach the level of efficiency as quickly as I had anticipated. However, we were able to deliver on our commitment to our new customers and execute on the delivery of the tremendous increase in new volume.

In the second quarter, we saw 14% increase in cubic feet and 19% increase in units handled, a 15% increase in deliveries, and a 17% increase in miles driven. Excluding our acquisition, we added and trained over 700 new employees and added nearly 2,900 new retail sites into our existing divisions so far this year.

This organization has exceeded my expectations in handling the significant growth that we have experienced and we are not done yet. We have significant additional new volume to absorb in the fall when the 7-Eleven business begins. Our focus will be on successfully on-boarding this new business, while improving our productivity throughout the company. It really has been a remarkable year so far.

The bottom line is our adjusted EBITDA was up over 13% for the quarter, including all the investment spending we made in our new people, capital, technology upgrades, as well as buying Pine State. We did more than a good job and my confidence in this company, in the industry we serve remains quite strong.

Our vendor consolidation and fresh initiatives are doing very well. For the second quarter, we have had – we had over $41 million in incremental fresh and VCI sales. Our goal for the year is to add $100 million of incremental sales from these very important strategies with over $80 million incremental sales generated by these programs year-to-date, I have full confidence that we will exceed that goal and have a record year.

In addition to helping customers take costs out of their supply chain, we must ensure our customers move into the fresh food service and [indiscernible] products that consumers are looking for. We have many food service programs that address those needs and continue to develop new food programs to help our customers adjust to the changing consumer demands and to help thrive in the competitive environment for convenience. For example, we are rolling out a fresh baked cookie program and enhanced bakery program in the second-half of this year and we are planning to complete the product revision for good health to go [indiscernible].

We also have Hispanic snacking program and a Hispanic fountain program under development. In addition, we continue to enhance our coffee programs to offer more solutions for our customers for this important category. These are just a few examples of how we partner with our customers to ensure they increased their profits and relevancy in the markets in which they compete, by expanding and improving their food offerings.

Our core solutions group who create the FMI surveys are doing excellent work. They have conducted over 1,500 surveys year-to-date, which are averaging a 65% acceptance rate. Our goal is to complete 3,000 surveys in 2016, so we’re on a good pace. We continue to see a meaningful reduction in churn rates and our non-cigarette sales growth rates are significantly higher than stores that have not participated in this program.

Our core solutions group have also developed a sophisticated tools for leveraging data collection around market share opportunities. Most recently, they have developed a very sophisticated analytical tool which can auto generate business review decks to share with targeted customers.

This data harvesting tool should really improve our sales organization’s ability to capture new customers and sell deeper into existing ones. Our core solutions group have developed and implemented various programs to help provide actionable, intelligence for growing our business, leveraging our CRM software and for measuring our activities in the field. This is a highly valued work.

In summary, I’m very proud of this organization and our accomplishments during the first-half of the year. The extraordinary pace of growth in our business is really quite impressive. We’re fully engaged with the planning to on-board 7-Eleven in the fourth quarter. We have begun to move our Las Vegas division into its new building, so we are preparing for the additional volume that will be added in that market.

We will continue to focus on training to improve our productivity and maximize our earnings power. Our strategies for growth are resonating in the markets, which – in which we compete. We will continue to invest in our business to ensure we are positioned to handle current and future growth.

And with that, I will hand off the call to our CFO, Chris Miller.

Christopher Miller

Thank you, Tom, and good morning, everyone. I hope you saw on our press release that we have reaffirmed our guidance for 2016, which we increased in June subsequent to the closing of a Pine State acquisition. We are on pace to have record sales and profits this year. Related to Pine State, the total purchase price was $89.2 million, which was less than the $112 million we were expecting, due to lower inventory and accounts receivable balances at the time of closing. This was mainly due to the timing of cash receipts and inventory purchases.

Since closing, we’ve added approximately $20 million in inventory and about $9 million of accounts receivable, which was offset by approximately $26 million in accounts payable. Thus the impact of Pine State on our overall working capital was minimal for the quarter. In addition, the purchase resulted in $11.6 million of goodwill and $13.3 million of intangible assets mainly related to their customer lists. These are preliminary numbers, which we will finalize by year-end.

Now moving to the results for the second quarter, diluted earnings per share for the second quarter was $0.35, compared to $0.29 last year. For those of you, who model EPS excluding LIFO expense, this translates to $0.39 for the quarter compared to $0.33 last year, an increase of 18.2%.

For the first half of 2016, diluted EPS excluding LIFO expense was $0.55 versus $0.48, an increase of nearly 15%. Total sales increased 31.2% during the second quarter of 2016 were 31.9% if you normalize for the impact of foreign exchange compared with the second quarter of 2015.

Sales to Murphy U.S.A. combined with other market share gains, accounted for over 75% of the increase in sales for the quarter. The remaining growth came from Pine State, same-store non-cigarette sales growth of over 4%, driven by our core strategies and cigarette price inflation.

Cigarette cartons sales increased approximately 35% driven mainly by new business. Our same-store cigarette cartons sales were down a modest 0.3%, which was much better than the industry decline of approximately 2%. Our overall sales mix was 71.4% of cigarette sales for the second quarter of this year compared with 67.6% last year and approximately 70% for the first quarter of 2016.

The increase compared with Q1 is due to having a full quarter of Murphy U.S.A. this quarter versus about two months in the first quarter. Non-cigarette sales increased 15.9% during the second quarter, led by OTP sales, which grew nearly 29% and fresh sales, which increased almost 15%. The increase in OTP was driven by the addition of Murphy U.S.A. other market share wins and the continued shift to smokeless moist tobacco products.

Our fresh category includes fresh food, meat, dairy and bread. Selling deeper into these categories continues to be a very important strategy for us. During the second quarter, fresh sandwiches, chilled beverages and bread showed the strongest sales growth.

In addition, we continue to see a strong sales of snacks was grew more than 10% for the quarter, exemplifying the trend of the new way to eat for many young adults. Gross profit increased 18.3% or $29 million in the second quarter of this year compared to Q2 of 2015.

We had $7 million of cigarette inventory holding gains in the quarter, compared to 33.8 million in the second quarter last year driven primarily by an increase in carton sales. We also recorded $2.9 million of LIFO expense of this quarter, compared to 3.5 million in the second quarter of 2015.

Remaining gross profit, which excludes holding gains, LIFO expense and OTP tax refund $0.9 million in 2015 increased $26.1 million or 16.6% for the quarter. Remaining gross profit margin decreased about 60 basis points, driven primarily by the addition of Murphy U.S.A. and writing [ph] which have a higher sales mix of tobacco products.

Our expectation was to see a compressing effect of 45 to 50 basis points, mainly due to Murphy U.S.A. For Q2, Murphy U.S.A.’s impact was about 50 basis points, due primarily to higher sales of OTP than expected. In addition increases in cigarette prices compressed remaining gross profit margin by approximately five basis points.

Cigarette remaining gross profit increased $12.5 million or 28.9% while cigarette remaining gross profit margins decreased by 15 basis points, due mainly to the addition of Murphy U.S.A. volume. As a reminder, large chain customer typically require less working capital allowing us in most cases to offer lower prices to achieve a healthy return on our investment.

In the case of Murphy U.S.A. the significant volume allows us to better leverage our fixed costs. Murphy U.S.A win does not represent a change in how we go-to-market or change in our core strategies just in collection of uniqueness of this business.

Non-cigarette remaining gross profit increased $13.6 million or 11.9% compared to the second quarter last year. Remaining gross profit margins for non-cigarette decreased 43 basis points during the quarter. Excluding the impact of Murphy U.S.A. regional market share gains and Pine State remaining gross profit margins were up 12 basis points.

Margins were also compressed by approximately 20 basis points due to the increase in OTP sales for the quarter. It is also worthy to note, our overall gross profit margins for the fresh categories increased approximately 60 basis points to about 20% of the second quarter.

Moving to operating expenses, total operating expenses increased $23.5 million and 70.2% for the quarter, on sales growth of 31.2%. As a percent of the sales, OpEx improved approximately 50 basis points in the second quarter, due primarily to the shift in sales mix to cigarettes, which have higher price points than are non-cigarette categories. We did incur acquisition cost for Pine State of $0.8 million during the quarter compared to $0.8 million incurred last year for the acquisition of Karrys Brothers.

Warehouse and delivery expenses increased $17.4 million or 19.6% during the second quarter. The increase in warehouse and delivery expenses year-over-year was driven by a 14% increase in the cubic feet of product processed through our facilities and a 15% increase in deliveries. As a percent of sales warehouse and delivery expenses decreased approximately 30 basis points due primarily to the shift in sales mix.

As Tom mentioned earlier, we do not fully leverage our operating costs as quickly as we expected. SG&A expenses increased $5.5 million or 11.6% compared with the second quarter of last year, the primary drivers for this increase for the growth in our business and the addition of Pine State.

As a percent of sales, SG&A expenses decreased approximately 30 basis points of which about 20 basis points was due to the shift and mix to cigarettes from the new business. Leverage of SG&A expenses drove the remaining 10 basis points of improvement as a percent of sales.

We still anticipate approximately $1.3 million of start up costs for the on boarding 7-Eleven later in the year and approximately $4 million related to the Las Vegas move was about half of that representing the write-off of certain warehouse assets. Our effective tax rate was 38.3% for both Q2 of this year and last year. We still expect our effective tax rate to be approximately 38.5% for the year.

Now moving to the cash flows, we simplified our free cash flow calculation to make it easier for investors to follow. It is now calculated by taking net cash from operations for the cash flow statement in our filings less net CapEx and capitalized software. Using this calculation, free cash flow thus far in 2016 is the negative $80.6 million compared with the negative $28.9 million for the first six months of 2015.

Cash generated from operations before working capital changes was approximately $53.4 million an increase of $5.3 million compared with 2015. Networking capital used in operations was $108.6 million, compared to $59 million for the same period last year. This increase in usage was expected and necessary to support the growth in our business from our new customer wins with Murphy U.S.A. accounting for the lion’s share of the increase.

In addition, we generally carry more inventory at the end of June to support the higher level of business during the seasonal summer months. We spent nearly $14 million of CapEx in the quarter and $23 million year-to-date. For capitalized software, we spent $2.7 million so far this year. These costs are primarily related to our new finance system and other technology investments. Our target for CapEx is approximately $50 million for the year.

Using this new approach, we now expect free cash flow to be between a negative $10 million and negative $20 million for the year. The investments in working capital for the new business along with increased CapEx are the main drivers to free cash flow being negative for the year. Our total debt increased to $233 million at the end of the quarter, primarily to fund the Pine State acquisition and support our working capital needs, as I’ve already mentioned.

During the second quarter, we spent $3.7 million on cash dividends and $1.7 million for stock repurchases. We also announced our quarterly dividend of $0.08 adjusted for our stock split to be paid on September 15, the shareholders of record on August 24. We in conjunction with our Board put a great deal of thought into our capital allocation decisions. We believe it is imperative to reinvest back into the business to support the company’s future growth, including CapEx and other investments in people and technology.

In addition, our acquisition and expansion activities continue to be a key strategy. It is also important to us to return value to investors through our cash dividend and share repurchase programs. We continue to focus on long-term value creation, while also ensuring we have sufficient capital to fund our operational requirements and other business needs.

To summarize the second quarter, we generated robust sales growth and healthy increase in adjusted EBITDA. We feel very optimistic about the rest of the year, but there’s still work ahead, especially in leveraging our costs. This is a transformative year for the company, where growth rates will be much higher than our historic past.

In the longer-term, we view ourselves as a steady and sustainable best-in-class company. We believe our core strategies, which are focused on improving our customer sales and profitability by making them more relevant with consumers are vital to our long-term growth.

And with that, operator, you may now open the line for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ben Bienvenu from Stephens. Please go ahead.

Benjamin Bienvenue

Yes, thanks. Good morning.

Thomas Perkins

Good morning.

Benjamin Bienvenue

So just touching on Pine State quickly, it sounds like that business being partially reflected in the quarter weighed on non-cigarette remaining gross profit margin slightly. I’d be curious to hear a little bit about the mix of that non-cigarette business. And then sort of what opportunities are there that lay ahead of you to maybe improve that mix in line with the rest of your chain?

Thomas Perkins

And you’re talking, Ben, specifically the Pine State?

Benjamin Bienvenue

That’s right.

Thomas Perkins

Okay, yes. Yes, so June is really not a – the second quarter is not a good reflection of Pine State. There we had I think 22 days of the month that we were included in the month of June only of the full quarter. So it’s a very small portion of our overall sales growth for the second quarter.

Pine State is probably a little bit more advanced from growing their non-cigarette sales than, let’s say, what we experienced when we first purchased J.T. Davenport. I think they were closer to 70%, 30% - 7, 68%, 32% in Pine State versus Davenport, which was more traditional, which was like a 75/25 mix.

I think the opportunity we have with Pine State is really focusing on our vendor consolidation. And then our fresh strategies they have been doing a really good job on their own and I think we’ll just be able to complement what they’ve done today. They have a very good sales force and good sales force automation and good relationships with their customers. So I think we’ll continue to help with their non-cigarette sales growth and really selling deeper with the focus on VCI and fresh.

Benjamin Bienvenue

Okay, thanks. And then maybe shifting gears to Canada that business reaccelerated nicely sequentially, and you mentioned in your prepared comments, but any further detail you could provide there that would be helpful?

Thomas Perkins

Yes, I think we’ve – a couple of things. We’ve had some really great wins this year, part of the new accounts we won, we won Shell Canada, which was about 500 stores across British Columbia to Ontario, the province of Ontario. We’ve actually won a couple other regional chains in that territory.

We’ve also seen some uptick in volume in our customer for the second quarter their same-store sales versus the first quarter. First quarter was really terrible up there because of really the economy. And so I think in Calgary, in particular, in Calgary, I think we saw a good uptick there. And I think unfortunately, some of that was driven by the fire they had in Northern Alberta, which then now caused the stores to reload and people to come in and they have a lot of construction and laborers up there to get that area back online.

So, but the Canadian divisions have done a really nice job this year and really selling deeper into their accounts and really adding some really good chain business.

Benjamin Bienvenue

Great. And then just lastly, one more Tom, I’d be curious to hear your commentary on what you’re seeing out on the acquisition market? And then maybe your thoughts on what may be the next year-and-a-half, two years look like on that front versus the contract pipeline? Thanks.

Thomas Perkins

So, okay. So acquisitions, I think one of the things that with the acquisition of the Pine State convenience business they were very highly regarded and had a great reputation. And other wholesalers sort of looked at them as – independent wholesalers looked at them as to how they should go to market, et cetera.

So we have actually had quite a bit of communication with other wholesalers just I think it’s just not only with us, but also the Canning – Keith Canning, who is now our division President has also had conversations with some of the peers when he was a private company. So that’s really good. So I do believe that acquisitions are still a key strategy of ours, but it’s again, it’s – when they come, it’s all up to the tipping point of the independent wholesalers as to when the time is right to sell their company.

And so, but we definitely have seen some activity increases and we also – so, which excites us. From a pipeline on just traditional business, it – of course, last year was incredible. And so this year has been a little bit back to normal. There are some activity, there are some regional chain opportunities, but it definitely was nowhere near the quantity of opportunities that sort of showed itself last year so…

Benjamin Bienvenue

Understandable. Thanks and thanks a lot.

Thomas Perkins

Great. Thanks, Ben.

Operator

And your next question comes from Ben Brownlow from Raymond James. Please go ahead.

Benjamin Brownlow

Hi, good morning.

Thomas Perkins

Good morning.

Benjamin Brownlow

Congrats on the quarter.

Thomas Perkins

Thanks.

Benjamin Brownlow

The expense leverage was actually in line with my model, but you’d commented that the leverage and performance was slightly below internal goals. Can you give us some color around why the shortfall versus their internal target? And how are you thinking about leverage ability going towards the third quarter?

Thomas Perkins

Yes, it’s interesting. So when you have – when we’ve grown the volume like we have, so we did an excellent job of on-boarding all the new customers we hired, we trained, we stepped up, we’ve rolled out the business. And then normal business when you have large growth is, when you have sort of a sophomore slump. Two or three months after the first rollout, because you’re all focused, and then you find out that some of the people you hired either they don’t like the job, you go into the summertime, it’s a little bit busier.

And so then you start to turn over people and then you’re starting that training process again. So I think that I was expecting that sophomore slump to occur maybe a little bit sooner. And then before summer hit that we would be back with a normal staffing, the normal staff we needed for the summer, and so that sort of was the timing.

So our focus now is we’ve had attrition. We’ve added more people. Now we train. And so as we get into the third and fourth quarter, we should start seeing more of the leverage. Again, I think, what we’ve also talked about was our – when we talk leverages is 70% to 80% of our warehouse and delivery costs are variable in nature.

So every dollar or every cube we add, you’re going to just increase those variable costs. We did see the leverage in our SG&A cost, which is what we would expect to do, because our fix cost we did with the business we added, we did not have to add much fixed capital to handle the business. And so we did see leverage in those categories.

Benjamin Brownlow

Great. And shifting over to the inventory holding gains for the second quarter, towards the top end of historic gains, was that primarily led by the inventory on hand for Murphy and how should we think about the run rate, I guess semiannual kind of run right on that. And can you just give some color on what’s embedded into 2016 EBITDA guidance there?

Thomas Perkins

Yes, so we have – so it was – it’s always – our job is to maximize income opportunities. We definitely were expecting a higher – more stock gain because of the volume we were adding with Murphy in particular. So I think in our guidance we had like $10.5 million for full year, more stock gains from cigarettes.

In the second quarter that the Vice President of Purchasing did a very, very good job of speculating on when the increase was going to come, so we were able to add more inventory then we would normally have added, and then you coupled that with the higher cigarette volumes, sort of drove that better results and – in the holding gains.

I would say if you look out for the balance of the year, I don’t know if we’re going to hit it right on and be able to grow inventories much. But it’s going to be probably around $5 million or so in the back half of the year. That we would expect.

Benjamin Brownlow

Okay, so you’re looking for about $12 million for the – total for the year?

Thomas Perkins

Yes, yes. That’s correct just because of like I said that the circumstances around the first-half holding gain.

Benjamin Brownlow

Okay; thank you. And just one last one for me. On the – with the smoking age in California having gone in June, obviously well overshadowed by the market share wins you’ve had, but any color you can provide on the impact or what you’ve seen with the count in terms of how they’ve reacted with pricing and merchandise mix?

Thomas Perkins

No, no, real impact yet, it’s too early, I think we’re still – I think overall from a company, our carton – same-store carton growth was only declined 0.3% in the course of California to visions are in those numbers. So they’re decline was in any more significantly more than any of the other U.S. division.

I think what the – more worrisome things when you look at California cartons is the – the proposition hat they have on the ballot to increase the excise tax by $2 a pack in California in November. So that’s more of a – that that in itself, will have – has potential have a huge impact on volume.

Benjamin Brownlow

Great. Thanks for the color.

Thomas Perkins

Okay. Thanks.

Operator

[Operator Instructions] And next question comes from John Lawrence from Baraboo Growth. Please go ahead.

John Lawrence

Hello, good morning Tom.

Thomas Perkins

Hey John.

John Lawrence

Just a couple of couple of questions, when you look at the overall network, now and the DC, going to move to Las Vegas and with all of this growth we’ve seen over the last year to 18 months, how do you look at the network in rationalize capacity. What do need to think about since these things have come and sort of capacity around the network, and more next to be address over the next couple of years?

Thomas Perkins

I think good question. I think the thing about and I’ll talk about 7-Eleven since that’s coming on board in a next couple months. But in the west we have really upgraded our facilities. We consolidated two buildings into one in Salt Lake City and that was to handle future growth and so they were also take on the 7-Eleven business with just a little bit about of extra capital and we also build a new building in Sacramento about a year and a half ago. We build it for growth, didn’t know it was going to come from 7-Eleven, but it is and so that’s good for that, and then Vegas was the other one.

So the other volume we brought it and of course with Murphy in particular was cigarette cartons. And so it did require a lot of capacity growth. It is more just throughput on your snappy lines. But we definitely are looking as we have leases come due is to say, okay, where do we put them? Where is the growth going to come? How big do you have? So, you know growth is coming from the Southeast. You know the growth will come in the Northeast and potentially in the Midwest. So definitely, as we build out infrastructure, those will be the three key areas we’re looking at as to when we need either build larger divisions and move existing divisions into and/or just add a new building in those – into those regions.

John Lawrence

Great, thanks. And just a follow-up, I guess, you built out Ohio and went back into Ohio with a new facility a couple of years ago. What can you tell us about the growth in that area once you got sort of ability to really have that facility and market better on the base business? What can you tell us about growth in that division?

Thomas Perkins

Okay. So when we decided to build the building one we had the Rite Aid business. So we wanted to service that and then we wanted to get some transportation synergies from our Pennsylvania and Kentucky divisions, but we realized. But the second thing we knew also when we built that we had changed that we were that we were servicing another market that we’re looking at expanding and that occurred this year.

So they’ve added – they not only added Murphy stores, but we also added another 150 to 200 stores from chain business that we sort of we’re anticipating. So that’s been really good that we had that building in place. And so it’s just a matter of again just like most of our divisions is getting productivity and efficiencies up as you add the large influx of business.

John Lawrence

Great. Thanks and good luck.

Thomas Perkins

Thanks.

Operator

[Operator Instructions] And your next question comes from Chris McGinnis from Sidoti & Company. Please go ahead.

Christopher McGinnis

Good morning. Thanks for taking my question.

Thomas Perkins

Good morning.

Christopher McGinnis

Can you just maybe as quickly talk and maybe you already did, I apologize if I missed it. Just on the, I guess, getting ready to onboard 7-Eleven and maybe anything special that you are doing to prepare since it seems to be such a big opportunity?

Thomas Perkins

Yes, one of the things in 7-Eleven is a unique retailer, because they’re very automated especially when it comes to the store level receiving the product. So we’ve been for the past nine months we’ve been the IT organizations from 7-Eleven and ourselves have been working closely to ensure that all of the systems talk to each other and that’s gone up well. We’ve done test orders. We’ve done test deliveries. We’ve done delivery of product at the store level to make sure everything is doing right. So that is unique from other chains and just, because of the depth and complexity of their IT systems.

Second thing is, we of course, focus on operations and making sure that we have the right plans in place for hiring and staffing and training those employees. And if you think about the cubes are in some divisions are going to increase double potentially what their volume they handle today. So it’s a big volume boost for those divisions. The other thing too, which is unique about 7-Eleven, a 100% of their deliveries are going to be delivered at night.

So that’s another sort of switch where we’re preparing for that scheduling to deliver 7-Eleven between the hour of seven, let’s say, 7 PM and 5 AM in the morning. So definitely, we have all hands are on deck. Everyone is focused on ensuring that the rollout of those stores goes smoothly.

Christopher McGinnis

Great. Thanks for the color and congrats on a great quarter.

Thomas Perkins

Great. Thanks.

Operator

Your next question comes from Mark Wiltamuth from Jefferies. Please go ahead.

Christopher Mandeville

Yes, hi it’s actually Chris Mandeville for Mark. Tom, the majority of my questions have been answered actually. But maybe could you just dig down a little bit deeper in terms of what you’re seeing or hearing from your customers? Is there been a discernible difference at all and from what you’re seeing from your chain versus your independent? And then we have realized the pretty nice letdown includes quarterly date. So just kind of curious what you’re seeing if there’s been a response in that regards or if you’re seeing any U.S. regional differences?

Thomas Perkins

I think that a couple of thing, I don’t think we’re seeing any difference from the marketplace from either chain or independent. But definitely, we are seeing some weakness in North Dakota right? We’re seeing weakness in West Texas. So really where the fracturing and stuff was taking place. So we’re definitely seeing weakness in those two areas, which is, in fact, in the divisions as well as, of course, Alberta in the oil sand.

So but overall, I think, it’s been – really have not seen much change in the communication or the outlook from our retailers in the second quarter from what we saw in the first quarter and last year.

Christopher Mandeville

Okay. And then, I guess, just with the Murphy contract, has that reached margin neutrality in Q2, or is that something that we’re still waiting to unfold in Q3?

Thomas Perkins

Margin neutrality.

Christopher Miller

In terms of the impact on the percent of sales metrics?

Christopher Mandeville

Yes. So I believe in Q1 the expectations were for you to realize incremental expense leverage to offset what gross margin erosion you were realizing?

Christopher Miller

Yes. So I think we have – we did see that in the second quarter about 50 basis points….

Thomas Perkins

Yes, right, particular to Murphy now, again, if – I expected us to be more efficient and that’s where sort of our shortfall is coming from. But I think from Murphy we’re seeing – it’s what we expected. And I’m pleased by that there may be some shift in mix in what we were looking at. But from a dollar and impact on sell on expenses and margin, it’s where we expected it to be.

Christopher Mandeville

Okay. And then I may have missed this, so I apologize. But what was the non-cig same store sales?

Thomas Perkins

A little over 4% growth, and the U.S. was 4.8% and Canada was down 0.6% and that was – last year total company was about – last quarter we were about 3%, same-store sales growth in Canada was actually a negative 8%. So we definitely saw some good improvement in our same-store sales in both Canada and the U.S. versus the first quarter.

Christopher Mandeville

Great. And then lastly for me, you mentioned you saw some nice margin expansion on your fresh offering, I thin it was around 60 basis points or so. Can you just provide a little bit of color in regards to what dove that?

Thomas Perkins

I think that we again based on the categories we’re seeing the growth on the sandwiches and fresh beverages and bread, we’re making higher margin on those categories. So that’s helping to drive the overall performance from a margin perspective. So I’d say, so I think as we continue to drive those categories, we continue to see those the categories we make the most margin on actually start to impact favorably the margins.

Christopher Mandeville

Great, all right. Thanks again guys.

Thomas Perkins

Thanks.

Operator

I’ll now turn the call over to Ms. Milton Draper for final comments.

Milton Draper

Thank you for your participation in our conference call and for your interest in Core-Mark. I would like to invite you all to our 2016 Investor Day on September 7 in New York City. Space is limited, so please let us know if you can make it we’ll be sending an invitation with all the details soon. We hope to see you there. If you have any additional questions please feel free to call me at 650-589-9445. Thanks bye.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.

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