Core-Mark Holding's (CORE) CEO Thomas Perkins on Q3 2016 Results - Earnings Call Transcript

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About: Core-Mark Holding Company, Inc. (CORE)
by: SA Transcripts

Core-Mark Holding Company, Inc. (NASDAQ:CORE) Q3 2016 Earnings Conference Call November 7, 2016 12:00 PM ET

Executives

Milton Gray Draper - Director of Investor Relations

Thomas Perkins - President and Chief Executive Officer

Christopher Miller - Senior Vice President and Chief Financial Officer

Analysts

Benjamin Bienvenue - Stephens Inc.

Chris Mandeville - Jefferies & Company

Benjamin Brownlow - Raymond James Financial Inc.

Christopher McGinnis - Sidoti & Company, LLC

Operator

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

I will now turn the call over to Ms. Milton Draper. Please go ahead.

Milton Gray Draper

Thank you, Eric, 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 third 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 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 third quarter. We will then open up the call for your questions.

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

Thomas Perkins

Good morning, everyone. Thanks for joining today’s call. The first nine months of 2016 can only be characterized as a period of rapid growth. We have observed a substantial increase in the number of retail outlet serviced and the volume handled. This growth has been driven by the new customers we have gained in the acquisition of Pine State and we aren’t slowing down.

We have focused a great deal of our time and energy in the first nine months on onboarding the new customers and getting prepared for the 7-Eleven rollout in the fourth quarter. I am so proud of what this organization has been able to accomplish. It has been a total team effort as the growth has been felt by the majority of our divisions. It’s truly remarkable what we have been able to achieve in a relatively short period of time.

We have recently begun deliveries to the 900 7-Eleven stores over the last several weeks. We are currently servicing about 85% of the new 7-Eleven stores out of three of our divisions, Salt Lake City, Las Vegas and Sacramento.

We started with a few stores early in September; then Salt Lake City rolled out their stores in a seamless transition; followed by Las Vegas, which was rolled out in two waves. The most challenging effort by far has been rollout of the store serviced by our Sacramento division. This division has largest number of stores to service and is covering a fairly large geographic footprint. This is in fact the largest single division expansion in our company’s history.

This rollout has been a bear, as we knew it would be, but things have gone very well due in large part to intensive preparation and advance of the rollout. 7-Eleven has been a great partner in this endeavor. Serving this important retailer is very exciting for this organization. And we take our commitment to providing excellent service to them very seriously.

In conjunction with the 7-Eleven rollout, we have opened our new state-of-the-art facility in the Las Vegas region. We have implemented some new warehouse technology in this building, one, being the loadout loop. This will prevent any bottlenecks in the particular line from slowing down our loading process. It allows us to pack and stack 12 different trucks into circulation at the same time, which significantly increases efficiencies in the warehouse.

We will also deploy a mobile tote-wrapping system that frees our employees from this necessary, but time-consuming task.

Our corporate operations group and division folks did a great job and getting this building up and running so well. This has been a real success for the organization.

To update you on our Pine State acquisition, we have now renamed our Pine State division as Northern New England. We have begun the process of aligning our two New England divisions, so they can present a cohesive message to the customers in the New England state.

I am very pleased with this division with its better-than-expected operational and financial performance. The simulation of this latest acquisition has been very smooth and we plan to convert them onto our system and our processes in the fourth quarter of 2017. Driving this smooth transition has been our shared values and shared culture. So we are very happy to have them as part of our family.

Moving on to the quarter, during the third quarter the sales grew about 34%, driven by a 34% increase in cartons and 33% increase in other tobacco sales. These growth rates reflect the volume from Murphy and other market share wins as well as the additional volume from our Pine State acquisition. We also saw a healthy growth in our food categories. Non-cigarette sales grew about 21%, driven by market share wins and same-store sales growth of over 3.2%. This is slightly lower than the 4.2% we saw on the second quarter, but still a healthy rate for us.

The U.S. same store non-cigarette sales grew 3.9% this quarter, while Canadian same store sales were down a little over 2%. Our core strategies continue to drive results as well. Food grew over 15% and Fresh over 16%. Even with a large growth in other tobacco sales we saw a 7 basis point increase in our non-cig remaining gross profit. This profit growth is why these categories are part of our core strategies and will drive our sustainable earnings growth in the future.

In addition, these categories assist our customers and staying relevant and profitable. We will remain focused on these vitally important categories.

Our same store cartons had decline of 3.3%, which was much higher than we saw in the first-half of the year, but does a reflect return to this normal historical level that we have been expecting. Our same store carton decline was slightly better than the industries, which is also the norm.

Warehouse and delivery expenses increased almost 27%, including the expenses generated by our new acquisition, while our sales increased about 34%. As a percentage of sales, these expenses decreased 16 basis points. We were able to leverage these expenses to a degree, while also increasing our operating activities. We increase the cubic feet of product shipped by 10%, increased the deliveries by more than 10% and increase the miles that we drove by over 12%, and these are all excluding our Northern New England division.

With such an enormous increase in business we have not experience the efficiency in the new hires hoped for. With more than 1,200 new hires, we should not find it especially shocking, but it is a little disappointing. Keep in mind we have added over 3,000 new retail sites this year, not even accounting Pine State.

What is more important to us is that we were able to deliver on the commitments we’ve made to our customers. We must continue to focus on hiring, training and retaining talent as we absorb the new volume through the rest of the year. SG&A expenses on the other hand were leveraged much more significantly. As a percentage of sales, these expenses declined 32 basis points with an increase in dollar spend of only 9%.

The bottom line is our EBITDA was up 17% for the quarter adjusted for the one-time stamp holding gain in 2015. In addition, we had $1.4 million incremental startup and expansion cost at third quarter compared to last year’s third quarter. This was a solid quarter. And my confidence in this company and the industry remains quite strong.

Our vendor consolidation and fresh initiatives continue to perform very well. For the third quarter, we had over $39 million in incremental vendor consolidation and fresh sales. Our goal - our original goal for the year was to add $100 million of the incremental sales for these core strategies.

As of the end of the third quarter, we had an excess of $120 million in incremental sales generated by these programs. So we are obviously on pace to outperform our original goals. Our vendor consolidation initiative is designed to take costs and inefficiencies out of the supply chains and is often the catalyst for getting fresh into the store.

We must ensure our customers moving to the fresh food service and good free products that consumer demand would dictate. We have many food service programs that address those needs. We also continue to develop new food programs to help our customers adjust to the changing consumer demands and help them thrive in the competitive environment.

We have several new programs that we are launching in the fourth quarter which include a nitrogen-infused cold brew coffee in partnership with Boyd’s Coffee. This program features a 100% or Arabica beans; sustainable sourcing practices; single origin blends with updated graphics to better reflect this upscale product.

We have also launched our Just Food program, which is a branded ready to eat platform with an all natural line of products with no preservatives and a clean label. It is packaged in a method that removes all oxygen, which prevents bacteria from growing. This allows us to extend the shelf-life to 45 days, which really expends the number of c-stores that can sell these sought-after products.

In addition, we launched our Warm Bakery program, which is a restaurant-quality bloom [ph] pastry line of products. It is sold warm and we have received very favorable feedback on its taste profile. We are constantly developing new food and fresh programs to help our customers innovate and succeed.

Our core solutions group, who are responsible for the FMI surveys, are doing excellent work. They have conducted almost 2,400 surveys year-to-date with a 64% acceptance rates. Our goal is to complete 3,000 surveys in 2016, so we’re on a good pace. We continue to see meaningful reduction in churn rates and our non-cigarette sales growth rates are significantly higher than the stores that have not participated in this program.

In summary, I’m very proud of this organization in what we have accomplished in the first nine months of the year. The exceptional pace of growth in our business is really quite impressive and continues with the onboarding of the 7-Eleven business. We remain fully engaged to execute our plan for the remainder of the year, and continue to focus on training to improve productivity through the rest of the year and beyond.

Unfortunately, we also have to devote some attention on effectively transferring over 1,100 Circle K stores in January of 2017. This is a very disappointing loss for us, but Circle K remains an important customer. And we are hopeful that we can win this region back in the future.

However, Core-Mark must remain disciplined in its financial return standards and deliver reasonable profits for the capital we invest in the customers that we serve. Our strategies are resonating in the markets in which we compete, and we will continue to leverage those strategies to take market share and grow our business.

We continue to invest in our business and these capital investments should create additional efficiencies and prepare us for continued growth in the future.

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

Christopher Miller

Thank you, Tom and good morning everyone. First, as noted in our press release, we have reaffirmed our guidance for 2016, which we increased subsequent to the Pine State acquisition. We are pleased with our financial performance so far in 2016 and we’re on track to post record results for the year.

Now, turning to the third quarter results, diluted earnings per share for the third quarter was $0.29 compared to $0.33 last year, excluding LIFO expense EPS was $0.34 for the quarter compared to $0.36 last year. In the third quarter last year, we had a cigarette stamp holding gain that equates to $0.10 per share that did not occur in 2016, nor was it expected.

There are a few additional items impacting the comparability of EPS year over year. We had a pension settlement charge of $0.02 per share this year in Q3 compared with $0.01 last year and $0.02 per share of identifiable business expansion cost this year relating to the onboarding of 7-Eleven and the acquisition of Pine State compared with $0.01 per share last year related to the acquisition of Karrys Brothers.

Adjusting for these items, diluted EPS was $0.38 for Q3 this [Technical Difficulty] $0.28 last year, an increase of approximately 36%. Total sales increased 33.5% during the third quarter of 2016 or 23.6% of you adjust for the Pine State acquisition. Sales of Murphy U.S.A. combined with other market share gains accounted for the lion’s share of the remaining increase in sales for the quarter.

Cigarette sales increased approximately 39%, driven by a 33.5% increase in carton volume including additional volume from Pine State. Our same-store cigarette carton sales were down 3.3%, which was slightly below the percentage reported by the cigarette manufacturers for the quarter. Our same-store carton sales were impacted by tax increases in a few states and the decline in oil and fracking industries which impacted sales at a few of our larger chain customers.

Non-cigarette sales increased 20.9% during the third quarter led by OTP sales, which grew nearly 33.4%, and fresh sales, which increased over 16%. The increase in OTP was again driven by the addition of Murphy U.S.A., other market share wins and the continued shift to smokeless moist tobacco products.

Our fresh categories include fresh food, meat, dairy and bread, and are essential categories for us and for our customers. Consistent with the first-half of the year, fresh sandwiches, chilled beverages and bread showed the strongest sales growth in the third quarter.

In addition, we continue to see strong sales of snacks, exemplifying the trend of the new way to eat for many young adults. Gross profit increased 15.9% or $27.3 million in the third quarter this year compared to Q3 of 2015. As I mentioned earlier, we had an excise stamp inventory gain last year which was $8.3 million and did not occur again this year.

We also recorded $3.7 million of LIFO expense this quarter compared to $3.3 million in the third quarter last year. Remaining gross profit, which excludes holding gains and LIFO expense increased $36.2 million or 21.8% for the quarter. Remaining gross profit margin decreased about 50 basis points, driven primarily by the addition of Murphy U.S.A., given its substantially higher sales mix of tobacco product, which have significantly lower margins. The impact of Murphy on our margins is in line with what we were expecting and what we had communicated previously.

Cigarette remaining gross profit increased $10.6 million or 22.3%, while cigarette remaining gross profit margins decreased by 28 basis points due mainly to the addition of the Murphy U.S.A. volume. Non-cigarette remaining gross profit increased $25.6 million or 21.6% compared to the third quarter last year.

Remaining gross profit margins for non-cigarettes increased 7 basis points during the quarter. Excluding the impact of Murphy U.S.A. and Pine State, remaining gross profit margins for non-cigarettes were up over 20 basis points. These margins were also compressed by about 20 basis points, due to the increase in OTP sales after excluding the new business.

We’re pleased with the increase in our non-tobacco margins, driven primarily by the success of fresh and our other marketing programs.

Moving to operating expenses, total operating expenses increased $30.5 million or 20.9% for the quarter on sales growth of 33.5%. As a percent of sales, OpEx improved approximately 50 basis points in the third quarter, due primarily to the shift in sales mix to cigarettes, which have higher price points than our non-cigarette categories.

We did incur costs of $1.8 million in the quarter, including acquisition-related costs for Pine State of $0.5 million, identifiable startup costs related to the rollout of 7-Eleven of $0.9 million and $0.4 million for the opening of a new building in the Las Vegas area. This compares to $0.4 million incurred last year for the acquisition of Karrys Brothers.

Warehouse and delivery expenses increased $24.6 million or 26.5% during the third quarter. The increase in these expenses include $7.5 million of operating expenses for Pine State, startup costs related to 7-Eleven of $0.8 million and the $0.4 million of cost to open our New Las Vegas building. As a percent of sales, warehouse and delivery expenses decreased 16 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 in certain divisions.

SG&A expenses increased $4.8 million or 9.1% compared with the third quarter last year, the main driver for this increase was the addition of Pine State. Also we incurred pension settlement charges of $1.2 million in the third quarter of this year compared with $0.9 million last year. As a percent of sales, SG&A expenses decreased approximately 30 basis points, of which 10 basis points was due to the shift in mix to cigarettes from the new business.

Leverage of our SG&A expenses drove the remaining 20 basis points of improvement as a percent of sales. Regarding the pension settlement charges, over the past two years we’ve been operating lump-sum payments to plan participants in order to reduce the size of our overall pension liability and the associated funding risk.

In September this year, our Board of Directors approved a motion to terminate the pension plan, which has been frozen to new employees since September 1986. Very few of our current employees are included in the plan. We expect to complete the plan settlement over the next 12 to 18 months, and which time we will incur non-cash charge between $16 million and $19 million, which represents the unamortized losses that have accumulated over the years.

We will likely have to make cash contributions between $4 million and $6 million to fund the plan prior to final settlement. By terminating the plan, we will eliminate future cash contributions; reduce administrative expenses; and free-up internal resources to focus more on growing the business. Our effective tax rate was 33.2% for the third quarter of 2016 compared to 37.6% for the same period last year.

Federal tax credits which have been available for the full year of 2016 were not approved by congress until the fourth quarter last year, what were thus included in our tax rate at that time. We still expect our effective tax rate to be approximately 38.5% for the year.

Moving to cash flows, our free cash flow, which is calculated like by taking net cash from operations less net CapEx and capitalized software, was a net usage of $107.5 million for the first nine months of 2016 compared to net cash provided of $73.7 million for the same period of 2015.

Net working capital used in operations was $146.9 million compared to the generation of cash of $24.7 million for the same period last year. This increase in usage was driven primarily by additional inventory and receivables to support our two large new customer wins. We also had an increase in working capital needs as we began loading in cigarette inventory in anticipation of a price increase in the fourth quarter.

We spent $44.5 million of CapEx in the first nine months of this year, compared to $24.7 million last year. The increase is due primarily to the opening of our new business outside Las Vegas and additional logistics equipment to support our growth. Our target for CapEx is approximately $50 million for the year.

During the third quarter, we spent $3.8 million on cash dividends and $3.7 million for stock repurchases. We also announced our quarterly dividend of $0.09 per share to be paid on December 15 to shareholders of record on November 23.

Our total debt increased to $274 million at the end of the quarter driven - primarily by investments in working capital to support our growth, and the $88 million acquisition of Pine State.

You may have noticed that we amended our credit facility to increase it by $150 million to provide additional liquidity and financial flexibility. As we’ve grown, our working capital requirements have become much larger. The increased credit facility will allow us to maximize inventory investment opportunities, while allowing capacity to take advantage of other growth opportunities.

I think you all know we take capital allocation decisions very seriously. Our first priority is investing back into our business to support our growth. We are committed to our core strategies which have been successful in driving the growth of our company. In addition, acquisitions 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, we had a solid quarter, growing our top line by approximately 34% and growing adjusted EBITDA by approximately 23%, adjusting for the stamp holding gain last year and other one-time items I previously discussed. We are on track for a record year both in terms of revenue and EBITDA. We feel very optimistic about where the company is positioned, and we continue to see leverage of operating cost as an opportunity.

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 are working to capture market share and help our customers succeed. We remain focused and committed to the execution of our plans.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ben Bienvenue from Stephens Inc. Ben, your line is now open.

Benjamin Bienvenue

Yes, thanks. Good morning.

Thomas Perkins

Good morning.

Benjamin Bienvenue

You had talked a little bit about the warehouse and distribution costs in the third quarter. They were notably higher than we were expecting in our expectations. I’m curious, at the same time you reiterated your guidance for the full year. Should we interpret that as present improvement in 4Q around the leverage you expect to get on the warehouse and distribution costs or are you now expecting maybe results to come in closer to the bottom end of the prior guidance range?

Thomas Perkins

Well, right now, I think what we’re looking at, Ben, is to deliver within our guidance range between $157 million and $165 million. I think that, one, we’re generating more income, which is helping our EBITDA performance, and it’s helping us offset some of the higher warehouse and distribution costs that we are spending. We are definitely not happy with the leveraging of our warehouse and distribution cost. Personally, I thought we would be much quicker at absorbing all the new business and adding the number of people we did, but we just haven’t been able to.

That’s not to say that in the fourth quarter we’re going to - we will see an improvement in those metrics. But we also are focusing our energies right now on the successful rollout of 7-Eleven. So we definitely are ensuring that the service we provide to the 7-Eleven stores are going to be excellent, so that if we have to spend extra money we’ll do that.

Benjamin Bienvenue

Okay, fair enough. And then I noticed in your 10-K - or 10-Q you had some commentary around the Circle K business. You noted that you had retained the other 900 stores and you expected the loss of the 1,100 stores to be mitigated by new customer wins in the U.S. and Canada. I’m just curious, as that relates to your pipeline, as we typically ask sort of what the landscape there looks like and sort of your thoughts on your opportunity to continue to win market share in the industry?

Thomas Perkins

Yes. We definitely have opportunities that we’re working on. It’s nowhere near where we saw in 2015, Ben. I think the other thing what we have is we will have carryover revenues from all the customers we added in 2016. For instance, 7-Eleven we’re only going to have about 2.5 months of full sales for the 900 stores. And so, of course, that will carry over into 2017. But definitely we always have opportunities that we are looking at. And as we’ve been shown in the past, we’re very successful on picking up new business and we’ll continue to do so.

Benjamin Bienvenue

Okay, great. And then last one for me. Chris, you talked a little bit about the higher working capital requirements associated with the ramp in new business. You had a little bit more debt on the balance sheet at the end of the quarter. Obviously, you’re ramping new business there. But I’d be curious, what are your expectations for the go-forward carrying amount of debt on your revolver and at what point borrowing any significant contract wins down the road, do you expect the typical seasonality of sources and uses of cash on the working capital side to sort of normalize?

Christopher Miller

Yes. So I think following the end of the year - so we’re as I mentioned, we are or we have started the load-in in anticipation of a cigarette price increase, so that’s driving up the debt a little bit. But after the end of the year that should come down and we should start to see us getting back to normal, I guess, working capital sources and uses. But our debt will still remain a little bit higher than it has in the past, just given the fact that the Pine State acquisition and the significant investment of working capital for both Murphy and 7-Eleven.

Benjamin Bienvenue

Okay, great. Thanks, best of luck.

Thomas Perkins

Thanks, Ben.

Operator

And your next question comes from Chris Mandeville from Jefferies. Chris, your line is now open.

Chris Mandeville

Hi, good morning.

Thomas Perkins

Good morning.

Chris Mandeville

Tom, just kind of starting off in the non-cig category, can you walk us through the impact of deflation on your business? Obviously, it’s not as meaningful as it would be in, say, for instance the grocery channel. But there have been particular items, would it be milk, dairy, specifically, eggs in general that have been down quite meaningfully for the year or for the quarter for that matter. I’m just going to trying to get an understanding of what that type of impact was to your P&L.

Thomas Perkins

Yes. So the items you talked about dairy and eggs, that area we have seen deflation. For instance, we’re definitely selling a lot more units than we’re seeing an increase in the revenues. So but those are really the only categories we’ve seen any real deflation. So far, all the products that we have been buying from our vendors, they have not sort of translated lower cost for their products that they sell to us.

For instance, the meat snack companies haven’t reflected the deflation in meat, right, - in commodities within their products to us. So really the only thing is dairy and eggs. And again, that’s a part of our non-cigarette business. But it’s not enough to say, hey, we’re really been severely impacted by deflation.

Chris Mandeville

Okay, that’s helpful. And then, Tom, you mentioned a few times now that you’re disappointed by the lack of leverage in the quarter itself. And you also mentioned that Sacramento, I think, you had mentioned it as being quite the bear to get your arms around. Are those one and the same, and then I suppose any additional color on how you’re working to improve operations in Sacramento versus the other two facilities that are servicing 7-Eleven?

Thomas Perkins

Yes. I think that and I’ll answer in two different ways. So we had several divisions this year that experienced tremendous growth within their own division. So what that meant is that we invested in hiring and training new employees. We rolled out all the new business in the first quarter, and then as the second quarter - went through the second quarter, we started to turnover some of those employees, because again sometimes you hire people, and when the workload starts to increase, and in particular when you start to enter the summer time, they realize that maybe this is the job for them.

So they start to turn that - turnover. What that causes to our business is that causes, one, as you - you, one, have to rehire now and train, so your productivity goes down. Secondly, you start to rely on your experienced people, so you see your overtime goes up. And at the end of the day, we wanted to ensure that we had adequate resources to provide the level of service that we committed to our new customers.

And so all those sort of transpired into driving our cost much - actually our cost higher than we had wanted them too, but not leverage them, because of the new hires, the attrition and then also the increase over time to make sure we are servicing our customers.

Now from a Sacramento perspective is we are doubling the size of that division. So it is a bear from the fact that anytime you do that there are a tremendous number of employees you hire. You’re almost doubling your delivery and warehouse employee base. You are - the way we’re rolling out the stores in Sacramento, which has been over a nine month which - nine week process, which really create some difficulties in trying to hire at the right time to have enough people on hand, et cetera.

But I’m really pleased by how Sacramento is handling the new business. We have definitely been supporting that rollout with other Core-Mark division employees. So as we come up summer, what we do is we tend to start to see a decline in our headcount in the warehouse and to a certain extent in our delivery operation. But what we’ve been doing is flexing those additional bodies and bringing them in to support Sacramento to train new employees and to help to meet the service commitments we have to 7-Eleven.

So that again, it’s not identifiable, I think we identify the identifiable cost. But there are other costs that we are as a company seen. But that’s really just to ensure that the rollout to the 7-Eleven stores are seamless. And again at the end of the day, you only have one shot for that. And so far I would say that 7-Eleven is pleased with our rollout. They are very happy with the customer service and the attention to details. And so, I am really pleased by what the work has been done by really the total company and getting these 900 stores rolled out.

Chris Mandeville

Okay. That’s great color. And then, I guess more to high level, you guys are obviously in a very good position to gauge the help of the lower-income consumer. And I’m just being kind of curious of your thought for what type of comments you would put around that, given that at least in the quarter we saw kind of acceleration in the declines for cartons on the same store basis and there was a modest deceleration in the growth rate in the non-cigarette as well.

Thomas Perkins

Right. Yes, we again are - we sort of our - what happens in our numbers are reflective of what’s happening to our customers. I know Murphy came out and talked about the switch from cartons to packs as that that is changing. We definitely are seeing an impact in certain areas of the country either from tax increases that they had in like Pennsylvania and Louisiana. We continue to see tremendous amount of pressure in the Eastern Panhandle of Texas and along came out with their numbers and it really showed a decline in their revenues from that, same thing in North Dakota and same in Alberta.

The problem with ourselves is when we see a decline in sales in our customers we still have to make that delivery. So we don’t have as much opportunity to leverage those distribution costs. Right, because we were definitely much more efficient and we make more money, if we can add more and more product to the trucks. But once you have a store that sees a decline in their own sales is you still have to make that delivery. So we’re not as efficient or profitable as we should be for those routes.

So definitely it’s been an interesting year. We started out great and I think we are seeing some of that slow down to what you said in a few, not in all the areas, but in quite a few of the areas of the country that we service.

Chris Mandeville

Great. And then just one last one, Chris, you mentioned - I think you mentioned there was $16 million to $19 million non-cash charge from the pension liability.

Christopher Miller

Right.

Chris Mandeville

What was the timeframe in regards to that again?

Christopher Miller

Well, it could be the fourth quarter of next year. It really is dependent on the timing of when we can complete the plan termination, which is somewhat subject to getting a determination letter from the IRS. But we think we think it could be in the fourth quarter of next year.

Chris Mandeville

All right. Thanks, guys, and best of luck.

Thomas Perkins

Thank you.

Operator

And your next question comes from Ben Brownlow from Raymond James. Ben, your line is now open.

Benjamin Brownlow

Hey, good morning, guys.

Thomas Perkins

Good morning, Ben.

Benjamin Brownlow

Going back to the guidance, I guess, specifically if you look at the revenue guidance, which implies a pretty broad range for the fourth quarter. Can you just talk about sort of the key factors that would lead to that top and bottom end of that range?

Thomas Perkins

I think that - again, I think if the cartons continue to deteriorate, there may be some risk to achieving the top end of the guidance. But I know that based on where we are today and the trends we’re seeing, we definitely will be - we will definitely achieve our revenue guidance for the year.

Benjamin Brownlow

Okay. So it sounds like there is some conservativism that you’re kind of sticking with that guidance at this point?

Thomas Perkins

Yes. I would say so, because again, I think what we saw in the third quarter with the carton decline. With that definitely was an impact that we had expected it to come back we just didn’t know when. So the question is will get worse or will it stay at that level.

Benjamin Brownlow

Okay. That’s helpful. And then on the bottom line guidance, what sort of inventory holding gains are you assuming there?

Thomas Perkins

I think we have - for the fourth quarter we have about $5 million of anticipated holding gains for a cigarette price increase that were estimated happen sometime in November. And I think, it goes back to, again, when Chris was talking about the uses of our working capital, and also the debt levels, the larger we get in particular with all the business we added, when we go, when we try to - we sort of try to buy extra inventory that number increases by a lot versus what we did in the past. So we definitely want to maximize the opportunities if the price increase comes to fruition.

Benjamin Brownlow

Okay, that’s helpful. And just one more and I’ll jump back in the queue. On the Tampa division can you just talk about your stepped up sales effort there and how you’re thinking about kind of at this point just an update on the expense deleverage as you look towards 2017 and how you’re progressing on recouping some of the anticipated loss revenue there?

Thomas Perkins

Yes. So definitely we have increased the level of sales folks in the field. They’ve done a really good job of any independent business, but definitely we are very active in the independent marketplace within the state of Florida. We also have some conversations going on with some of the larger chains that are based in and around the Florida marketplace, which would be nice to win to put into that building.

I think the other thing what we’ve done is we’ve done a review of our Southeastern business. And so we will be doing some restructuring and really realignment of customers. And so I think at the end of the day, I think we’ll see - still see a revenue loss, but definitely we should still see some opportunities for profit improvement and additional sales growth.

So that’s a work in process right now, but the southeast is a very important part of our business where the majority of the convenience stores are located. So we definitely are there to stay and so we are aggressively going after new business and new business opportunities. It’s interesting, I start this week actually this afternoon for two weeks to visit each of our operating divisions, and they present sort of we talk about their 2016 results and 2017 business plans in a couple of areas that we will be focused on is, one, leveraging operating expenses as you guys have mentioned and we agree.

And secondly, it’s really about growing our non-cigarettes products as well as our fresh categories in food service area. So those really are the focus for us to continue to grow our earnings at a faster pace than revenues.

Benjamin Brownlow

Great. Thank you, Tom.

Thomas Perkins

Thank you.

Operator

And your next question comes from Chris McGinnis from Sidoti & Company. Chris, your line is now open.

Christopher McGinnis

Good morning.

Thomas Perkins

Good morning.

Christopher McGinnis

Thanks a lot for lot of details. But, I guess, just following off of the last kind of question. Can you maybe talk about maybe same store sale trends in the fresh and how those are tracking versus a lot of large account wins? So you’ve seen solid growth, but maybe just on a same-store level for a little bit more…

Thomas Perkins

Yes. I don’t have the fresh categories at least in front of me, Chris, but we definitely can get that to you. One of the things though that, that I know that continues to drive our same-store sales growth within our existing customer is our core strategies. Now, that could be coming from the FMI surveys, right, which ensures we get the right product in the stores and priced at the right level.

But also, it means that we are also selling in our programs which include our fresh coolers, our fresh products, our food service offerings, et cetera. So when I try to say are we seeing success from our core strategies, I really look at the overall non-cigarette sales, same store sales growth at 3.2% and the U.S. at 3.9%. Those are all resonating with our customers and helping us drive our numbers.

Christopher McGinnis

I appreciate that. I guess, obviously, a lot of time has been spent on the operating structure - or the cost structure. You talked about the ones you can highlight that really account for maybe some over cost. But you also talked about other support staff. How much, I guess, just in a guess were you over the cost structure you thought of, maybe going into the quarter and where you should go?

Thomas Perkins

I think that we probably spent maybe 3% to 4% more than I had it, I wanted to in the warehouse and distribution arena. But not to the - and again I wouldn’t characterize as out of control from an operating expense perception or perspective. But I would say that we didn’t take advantage of getting efficient and productivity gains quicker. And maybe that’s just because we are - we definitely pride ourselves on absorbing business and getting back to business and because of the growth, the 34% increase in revenues, it’s been a huge task for our divisions.

But I do feel that the divisions have a good plan in place to reduce their operating expenses. One thing we are seeing are tremendous number of reroutes within our division. So now that the volume has been absorbed, but coming out of the summer that we’re able to now reroute our divisions and our customers. So we will be - we will see efficiencies from a reduction in miles.

So I see a lot of positive projects and action I’m taking place to get us back to where I want the distribution and warehouse cost to be.

Christopher McGinnis

Sure, makes sense. Lastly, I guess just anything on the competition or the competitive landscape in the bidding. Any big contracts maybe coming up for bids in the next six months that you can maybe give a little bit of color on?

Thomas Perkins

Now we still have one that we’re working on, and we continue to be optimistic about that. But really except for the Rite Aid contract that that comes up, and I think it’s in April or May of next year. We really have done a great job of really extending or renewing our contracts for all of our major customers. Now that, like we talked about the loss of the 1,100 stores for Circle K is disappointing, but we still have over 1,900 stores that we will continue to service, plus run the 3PL in Arizona. So they still are a large customer and very important customer of ours.

Christopher McGinnis

Great. Thanks again for the time today.

Thomas Perkins

Thanks.

Operator

We have no additional questions at this time.

Milton Gray Draper

Thank you for your participation in our conference call and for your interest in Core-Mark. The quarter’s results are solid and we are on track to post record results for the year and on track with our recently increased guidance. We appreciate your continued support. If you have additional questions, please feel free to call me, Milton Draper, at 650-589-9445. Thanks.

Operator

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