Core-Mark Holding Company, Inc. Q4 2007 Earnings Call Transcript

| About: Core-Mark Holding (CORE)
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Core-Mark Holding Company, Inc. (NASDAQ:CORE) Q4 2007 Earnings Call March 18, 2008 12:00 PM ET


Milton Gray Draper – Director of Investor Relations

J. Michael Walsh – President, Chief Executive Officer and Director

Stacy Loretz-Congdon - Chief Financial Officer and Senior Vice President


Jonathan Lichter - Sidoti & Company

Gideon King - Loeb Partners

Greg Bennett - Smith Barney

Rob Loughnegger - Great Gable

Blaine Marder - Loeb Partners


Good morning, everyone. Thank you for joining us. We would like to welcome you to Core-Mark Holding Company’s fourth quarter earnings investor conference call. You are all in listen-only mode until we open up the call for as many questions as time permits.

The call is scheduled to last 60 minutes. We ask that you limit yourself to one question and one follow-up question so that others can get an opportunity to have their questions addressed. (Operator Instructions)

At this time, I would like to turn the call over to Ms. Milton Draper, Director of Investor Relations.

Milton Gray Draper

Thank you, operator and welcome everyone. I would now like to read the statement about the use of forward-looking statements and non-GAAP financial measures during this call. 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 fourth 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, Michael Walsh and the Chief Financial Officer, Stacy Loretz-Congdon. Also in the room are Chris Miller, our Chief Accounting Officer, and Greg Antholzner, our Vice President of Finance and Treasurer.

Our lineup for the call today is as follows. Mike Walsh will discuss the state of our business and our strategy going forward, followed by Stacy Loretz-Congdon, who will review the financial results for the fourth quarter. We will then open up the call for your questions.

Now, I would like to turn the call over to our CEO, Mike Walsh.

J. Michael Walsh

Good morning to all. Last week the company announced a share repurchase program. This announcement culminated a very thorough exploration and review by the Board, management and its advisors, Morgan Stanley, of the strategic options to maximize shareholder value.

Now, I’m not going to go into any detail about the specifics of the work performed, except to say that we’ve been busy for quite some time in pursuing and testing the various alternatives. We do share in the frustration regarding the trends in our share price. However, we see the current price as an opportunity to make an investment in us, our vision, business model and prospects for the future.

We have listened to our shareholders and have received substantial input in the past 60 to 90 days. I believe the scope of the share repurchase program is properly balanced. That is, we want to be opportunistic in deploying capital to maximize returns but we also want to maintain our flexibility in growing the company through market share gains, acquisitions and VCI, fresh initiatives.

I am pleased of the Board’s decision and I hope that all of you welcome the announcement.

I would now like to comment on our year-end and quarter ending 12/31 of 2007. Overall, the year was not that eventful. Results were okay, but no home runs. Before I delve into the details and carve out some of the noise, I would like to remind everyone that our EBIT was up 23% for the year on a FIFO basis.

In large measure, the one-time Washington OTP tax gain was a big contributor, but money is money and we worked years to capture it. Enough said.

Now to some observations. Revenues were up for the year 4.6%; unadjusted cigarette dollars grew 2.1% while non-cigarette grew at a healthy 10.9%. Certainly the aggregate increase is below the average growth rate of the past several years. We started 2007 about 5% in the hole due to the loss of Imperial Tobacco volume in Canada.

Setting that fact aside, one factor we can point to was the acceleration in the decline of carton movement. Philip Morris recently reported a 4.6% decline in their 2007 volume. Now, excluding the loss of Imperial and the gain of the Klein acquisition, our carton volume was down 2.1%.

Before we jump to conclusions about national consumption I want to point out that four divisions of Core-Mark constituted essentially all of that decline. Each of these divisions had unique circumstances; Las Vegas, for example, where laws were passed at the beginning of last year limiting the locations where one could smoke.

While examining our empirical data does not lead to the conclusion about national consumption, we have and will be affecting the transition over time of trade channel support from cigarettes to non-cigarettes.

There is no question in my mind that if cigarette consumption continues to decline, other product lines will have to carry more of the burden. You may be aware of the efforts by some to increase prices on beverages a year or two ago, as an example of this issue.

The industry simply has no choice; as I have stated before, Canada was a clear case study of what happens when cigarette volume declines for the distributor. We expect the Canadian experience to play out in the U.S., but in slow motion.

The other factor in our overall 2007 sales growth was the lack of major account wins which we could book in 2007. One simply can never predict the timing of such events. However, over the years we’ve enjoyed our share of victories. The good news is that in the fourth quarter we signed up approximately $400 million in new accounts, but lost $100 million, with MAPCO comprising one-half of the wins.

Now speaking of cartons, as a result of these wins, I do look for our carton volume to be relatively stable to 2007. However, we do not view market share increases as the solution to declining same store carton movements.

In addition to the previously mentioned sales momentum, we started up the Toronto distribution center in the third week of January. I am very pleased and very proud of our Core-Mark team in Toronto for executing a very smooth startup.

Now that I’m talking about startups, I also want to congratulate our folks in the Southeast in affecting a smooth transition for MAPCO, which began in the last few days of December. I think these two events again demonstrate our capacity to take on large increases for the benefit of existing and new retailers, without significant disruption to either their business or ours.

Now to margins. On a FIFO, basis which is the way I look at the business, our year-to-date cigarette margins were actually up about 10 basis points. This is the result I obtained when I factor out holding gains at a small accounting true-up in 2007.

Our year-to-date non-cigarette margins were up a healthy 21 basis points. I arrived at this conclusion by again adjusting to that same small accounting true-up and the swing in our non-product related income.

Now, going down the P&L statement, here is a summary of our operating expenses, which totaled a little over $35 million more in 2007 versus 2006. The reason for this increase in descending order of magnitude were:

Incremental operating expenses of Klein, 24%;

Increases to our bad debt reserves, 17%;

Volume increases on warehouse and delivery expenses, 15%;

Miscellaneous one-time G&A cost and income; for example, the shutdown cost of Victoria and insurance proceeds from the 2002 Denver fire, 9%;

Miscellaneous warehouse and delivery cost and income such as Toronto and MAPCO startup cost, 5%;

And expansion of facilities in four of our distribution centers, 5%.

Now, I just covered about 75% of that increase that we saw year-over-year. The remaining 25% or about $9 million of the increase we can attribute to three primary items. Number one, driver salaries, which were above the inflation, created by tight, labor market. That was approximately $5 million of the $9 million. Excessive turnover in Calgary and some other distribution centers about $3 million and the remaining amount being about $500,000 in uncovered fuel cost.

The leveraging operating expenses by controlling turnover while we accommodate growth of the business is a high priority for us, one which we intend to make progress toward this year, 2008. We do feel that the labor markets are easing somewhat and eventually we will be lapping the driver salary increases.

So what does all this mean? I’m sharing with you what I see happening to the core business, no pun intended, in 2007. Our year-to-date EBIT on a FIFO basis was up about 23%, as I mentioned.

Now, incorporating all of the adjustments, which I previously outlined, principally the Washington OTP, holding gains and increases to bad debt reserve − those were the three big items − and to a lesser degree the aforementioned other miscellaneous, unusual, non-repetitive items, our EBIT increase was still about 13%.

Now, before I move off the quantitative aspects of my comments, I would like to touch on the fourth quarter. Now, Stacy is going to cover this in more detail in her comments. Sales were up about 5%, but as published Philip Morris data would indicate, the fourth quarter showed an acceleration in the decline in our carton volume, but not quite at the level of Philip Morris’ decline.

Our analysis shows that a 100% of this decline is, again, attributable to only six divisions in this case, which experienced unique circumstances like the Ameristop bankruptcy effect on our Kentucky division.

We’ve been living with the national decline in the rate of consumption at least since I’ve been with Core-Mark, which covers the past 17 years. We fell short of our guidance for 2007 by the unexpected increase in this decline occurring in the fourth quarter.

Now, we didn’t suffer the loss of any significant sized account during this three-month period, although by this period, we were experiencing the full impact of the two retail bankruptcies that we previously announced. Tobacco analysts are forecasting 3% to 4% decline in 2008. Of course, our new wins help to counter this trend.

But our challenge is to make up for the shortfall in profits associated with this decline on a same-store basis. We have a plan. We do not view this threat as unmanageable. But on the other hand, we can’t close our eyes to it either.

We do not view VCI or Fresh as the solution to a decline in carton volume. They are standalone, incremental initiatives to our business model. We look to other solutions to resolve this shift in the marketplace.

Now on the margins; margins did take a dip in the fourth quarter. For cigarettes, U.S. margins were actually up. Canada’s were down, due to a shift from premiums to generic cigarettes, with the latter associated with lower gross profit margins.

In addition, we had a change in program monies from our largest remaining cigarette manufacturer. We’ve recovered some, but not all, of this decline in program dollars and expect some additional improvement in the first quarter of 2008.

For non-cigarettes remaining gross margins as a percent of sales were slightly down, but only relative to the comparison of the quarter year-over-year, not due to a systemic change in rates. We didn’t see quite the merchandising income from candy manufacturers in 2007 that we did in 2006, and we experienced higher inventory shrink.

Otherwise, our margins run rate is in fairly good shape. The good news is that we finally got a little leverage out of our operating expenses with sales going up 5% and adjusted expenses only 3.6%.

On a FIFO basis, the quarter to-date for 2007 unadjusted EBIT declined by 27%. However, recognizing the adjustments, primarily differences in holding gains and other miscellaneous unusual non-repetitive costs and incomes, our EBIT actually shows an increase of a little over 15%.

So much for the numbers. I would like to focus briefly on what we see ahead of us for 2008. Since our world revolves around the convenience retailer, we can start the discussion with what we see and hear regarding their situation. I think a number of retailers are experiencing some trend toward a softening in their sales. I don’t know whether the cause is attributable to the high price of gas, the economy or a combination of both.

They certainly are being impacted by credit card fees, declining carton consumption, government regulation and taxes and a squeeze on gas margins. Nonetheless, we see reasonable low unemployment, the consistently high value consumers place on anything that saves them time, and more marketing creativity and innovation in the industry than I’ve ever seen before.

All these factors are helping retailers to really focus on ways they can reduce costs and increase in-store merchandise sales and margins.

For example, now think of this. An average 2,500 square foot convenience store has 20, 30 and sometimes as high as 40 suppliers making 40, 50 and yes, as high as 60 deliveries or more to the same-store each week. None of these deliveries are in truck load quantities.

The opportunities to consolidate these shipments and improve the efficiency of the supply channel are real. We have been spearheading this movement as most of you know. We have and will continue to lower cost of goods of retailers in a very meaningful way, without sacrificing our already thin margins. That’s the best contribution we can make to the industry in terms of shaving their cost.

Secondly, as the industry looks to better in-store merchandising sales to offset the squeeze on gas margins, Core-Mark is turning ideas into reality by offering a new array of fresher, healthier, and more delicious items to increase store traffic and margins for both our customers and us.

Since I’ve last visited with you, we have beefed up our organization with fresh expertise. We have partnered with new manufacturers and vendors to source new products and offerings to help our customers create their own vision of the fresh movement, which is aggressively being pursued by industry leaders like 7-Eleven.

Now, what does all this really boil down to for Core-Mark in 2008? One, we do look for reasonable sales growth this year. With recent wins and opportunities for market share, we are currently pursuing, and acquisition activities we are involved in, I see no reason that 2008 shouldn’t be another good year for us, the decline in carton volume notwithstanding.

Number two, the organization is more focused than ever on VCI and fresh. As carton volume ebbs, the industry and Core-Mark will need to replace the associated decline in gross profit. These two factors should enable us to continue to increase our margin percentages as we have done in the past two years.

Number three, we see stabilization of our public costs that, while high, can be leveraged over time with sales increases. Next, we have organized our corporate operations group to restore the level of warehouse and transportation productivity we have historically enjoyed. Finally, we do not anticipate that the tight labor market we experienced in the past year-and-a-half will continue forever.

Turnover has been our single biggest issue in maintaining a stable trained operating work force, which of course is a prerequisite in being efficient and controlling expenses. We have unsurpassed systems and technology that, when properly leveraged, will enable us to provide excellent service at the most competitive price.

I’ll conclude my comments by addressing my favorite topics, VCI and fresh. Here are some fourth quarter highlights. We added 179 customer stores to the dairy program during the fourth quarter.

Fourth quarter VCI revenues were up 40% year-over-year. We kicked off our dairy offering in Pennsylvania. Non-cigarette growth from anchor tenants, not just VCI, but the total non-cigarette growth from anchor tenants was up 19%.

Now, looking at 2008 and beyond, let’s talk about dairy. Five divisions kicked off their dairy programs in January and February. Currently, we have 16 of 17 U.S. divisions now selling dairy.

We added 283 customer stores to our dairy program in January and February. Finally, we look forward to enrolling three major customers, who will serve us as anchor tenants for about a half a dozen divisions in the next 90 days or so.

Now comments on fresh. We’ve recently rolled out our Fresh Food Fast program to all U.S. divisions in February. This new initiative is a comprehensive retail solution, which allows Core-Mark customers the opportunity to get into the fresh food business and includes the following:

Open air equipment solutions;

Scalable depending on store size and volume;

Complete merchandising kit for our customers including equipment, graphics and in-store point of sale;

Product lineup and equipment specific plan-o-grams including salads, cut fruit, cut vegetables, yogurts, fresh snacks, sandwiches, smoothies, premium teas and juices.

We are expecting to implement this program in over 500 stores by the end of the year. In addition, we anticipate that there will be other customers, who will be purchasing selected fresh items, but won’t necessarily be on the “Formal Program.”

Now, approximately 40% of our fleet is now tri-temp capable. I am confident that our investment in resources to support the industry’s evolution towards fresh has and will continue to set us apart.

As always, thank you for your interest in Core-Mark and I’m going to turn this over now to Stacy to discuss fourth quarter financial results in more detail.

Stacy Loretz-Congdon

Thanks, Mike and good morning to everyone. I’d like to take this opportunity to recap some of what Mike covered and to provide a little more detail on the financial results for the fourth quarter.

Sales to our customers increased by 5% for the fourth quarter or $65.4 million. This increase included approximately $26 million or an 8% increase in excise taxes and is net of both gains and losses to existing customers as well as sales to new customers.

The sales impact of both Imperial Tobacco’s decision to sell direct to stores in September of 2006 and our Pennsylvania division purchase in June of 2006 are not called out since fourth quarter year-over-year is comparable with respect to these two issues.

The 5% increase in sales is comprised of a 3.3% increase in cigarette sales, and a 9.1% increase in non-cigarette sales.

Cigarette sales improved by 3.3% despite a 4.7% decrease in carton volume due primarily to an approximate 6% increase in the sales price per carton driven predominantly by roughly a 13% increase in the excise tax per carton. But as we have been saying for quite a while now, our focus is to continue to grow the more profitable non-cigarette categories.

Our non-cigarette sales grew 9.1% in the fourth quarter, with snacks, fast food and cigar categories leading the way. Our Canadian divisions had significant growth in cigar sales, due to new product offerings that have been well-received.

While coffee sales drove the fast food increases and health bar sales in the U.S. led snack sales. Our VCI sales were a major contributor to our growth improving by approximately 40% over prior year’s fourth quarter.

Included in our total net sales for the quarter is approximately $28 million related to foreign currency exchange gains, of which approximately $19 million is related to the cigarette category. Keep in mind that a portion of the foreign exchange impact is embedded in the excise tax increase.

Gross profit for the fourth quarter 2007 was $75.3 million, compared to $80.4 million for the same period last year. LIFO expense was $3.8 million this quarter, versus LIFO income of $0.8 million for the same quarter a year ago. This increase was driven primarily by grocery, health and beauty care products and other food and non-food categories, representing just over 75% of this expense for the quarter.

We call out the effects of LIFO adjustments because they can fluctuate significantly from period-to-period, depending on the inflation rates for the various commodities and they relate to a non-cash item. We focus on FIFO results because we operate and manage our business on a FIFO basis.

During the fourth quarter we benefited from $0.6 million in cigarette inventory holding gains left over from September’s cigarette manufacturer’s price increase. In the fourth quarter of 2006, we enjoyed a much larger gain of $3.5 million that was related to the Arizona excise tax increase that went into effect in December of 2006.

While holding gains are unpredictable, they are a major component of our wholesale business model and management will continue to focus on maximizing these opportunities as they present themselves.

Remaining gross profit which excludes LIFO expense and cigarette inventory holding gains, were $78.6 million this quarter versus $76.1 million last year, a 3.3% increase. Included in remaining gross profit for the fourth quarter are adjustments related to our Calgary division excise taxes and rebates relating to prior periods. Adjusting for these items, gross profit actually improved by 4.5%, slightly below our 5% sales growth.

Remaining cigarette gross profit margins adjusted for these items decreased by approximately 14 basis points as a percentage of sales. Two basis points was related to excise tax inflation and the remaining 12 basis points driven by the shift to generic cigarette brands in Canada, as well as a reduction in incentive program monies from our largest cigarette manufacturer in Canada.

Remaining non-cigarette gross profits were up 6.4% for the quarter or 7.5% if you ignore the Calgary accounting adjustment. As Mike indicated, this is slightly below our expectations and below our sales growth rate of 9.1%.

Even excluding excise taxes, our non-cigarette sales growth out-paced margins at 8.7%. Digging into the numbers, we find this disparity driven primarily by lackluster candy promotions, in addition to Calgary adjustments, which impacted primarily non-cigarette inventory shrink.

Moving on to operating expenses, they increased 4.8% in the fourth quarter from $66.5 million last year to $69.7 million this year. There is a bit of noise in our numbers that we called out in the supplemental table attached to our press release. If you adjust for the items related to operating expenses, you will see that they grew only 3.6% or $2.5 million over last year’s fourth quarter.

Warehouse and delivery costs are up about $6 million for the fourth quarter or 30 basis points as a percentage of sales. Let me address facility costs first. Approximately $0.3 million of this increase relates to expanded warehouse space and $0.6 million related to a straight line rent adjustments that reduce our 2006 facility costs.

For the remaining warehouse and delivery cost you would expect an increase in the neighborhood of $1.7 million to support our 5% sales increase, in addition, normal salary and benefit inflation would approximate another $0.6 million in additional costs.

Other primary drivers to our increase included approximately $0.6 million related to our Toronto startup and MAPCO integration; rising fuel costs contributed another $0.5 million; driver salary increases above inflation of approximately $0.5 million, with the remaining costs explained principally by turnover.

At some point we do expect to see comps related to driver salaries to get easier as the tight labor market cannot last indefinitely.

SG&A expenses for the fourth quarter decreased by $3.1 million or 11.6%. Unusual items were about even between periods with 2006 enjoying approximately $3.4 million in benefits related to the Denver fire insurance proceeds and favorable workers’ comp experience.

This compares to 2007 fourth quarter benefits of $3.1 million, related to continued favorable prior year workers’ comp claims experience that benefited from the California workers’ comp reform which is finally showing an impact.

Division integration, startup and closure costs offset by a slight increase in our bad debt provision this quarter pretty much offset one another between years. As a percent of sales, fourth quarter SG&A improved 30 basis points before adjusting for unusual items and 37 basis points afterwards. A significant component of this improvement was related to second year starts efforts being less intense than last year.

During the year through a lot of hard work and effort we rationalized our key control structure and streamlined the process to integrate SOX more fully into our day-to-day activities.

Consulting as well as audit costs associated with SOX were reduced. At the same time, we remediated our last remaining material weakness as noted in item 9a of our 10-K. Another contributing factor to the decline included lower corporate bonuses.

Our cash flow statement shows bad debt expense increasing by $1.4 million compared to third quarter. We did increase our bad debt reserves by $0.7 million for the two customers we discussed during our third quarter conference call.

The second customer filed for protection under Chapter 11 after we filed our 10-Q in November and while we continue to aggressively pursue all legal remedies, we are required by the accounting rules to reserve any potential exposures based on the best knowledge available at this time.

In addition, we increased general reserves for other customers by only $200,000. And reclassified $500,000 related to vendor receivables. At this time we do not anticipate in the foreseeable future a significant impact as a result of customer credit issues. We continue to pay close attention to our AR portfolio and believe that we are adequately reserved based on the size, structure and risk profile included therein.

Our provision for income taxes for fourth quarter 2007 was $0.8 million versus $4.2 million in fourth quarter of 2006. The effective tax rate for this quarter was 13.6%, compared to 35.6% for the same quarter last year.

This decline in our effective tax rate was caused by lower than expected Canadian pre-tax income, as well as reductions in the Canadian tax rate that were enacted during the fourth quarter. Our effective tax rate for the year was 35.9%, versus 39.4% last year.

In addition to the items which impacted the quarter, the rate for the year was also reduced by tax reserve adjustments related to the adoption of new accounting guidance for income taxes during the first quarter of 2007, and the expiration of the statute of limitations related to certain previously unrecognized tax benefits.

You can view our reconciliation of our tax rate in footnote 10 of our financial statements. The tax rate for 2008 could be positively impacted by further reductions associated with the expiration of the statute of limitations for unrecognized tax benefits as disclosed in that footnote.

Diluted EPS was $0.46 per share for the fourth quarter this year, versus $0.69 per share for the fourth quarter last year. Some of you may adjust for one-time items disclosed in our supplemental table provided with our press release using the effective tax rate for each quarter.

If you do this, diluted EPS on a FIFO basis would be approximately $0.65 per share for the quarter, compared with approximately $0.30 per share last year. However, remember that our fourth quarter 2007 tax rate was very low due to the reasons previously stated, and you may want to use the year-to-date tax rate when adjusting EPS.

Some of you are interested in our cash flow specifically non-cash items. Depreciation and amortization was $3.9 million for fourth quarter 2007, compared to $4 million for fourth quarter 2006.

Our reserve for doubtful accounts increased by $1.4 million this quarter with approximately half related to the two customers previously mentioned. Amortization of stock-based comp expense was essentially flat quarter-over-quarter. For the year, we generated approximately $67 million in cash from operating activities.

Working capital net contributed approximately $6 million of cash with the largest portion coming from the restoration of tobacco tax credit, offset by a decrease of approximately $15 million related to pension, claims and other accrued liabilities. The decrease in this line item is related primarily to worker’s comp and general liability valuation reserve adjustments.

We spent approximately $21 million for fixed assets, just short of our guidance, which indicated $24 million for the year. The differential was largely due to project accruals, not paid during 2007 that have been factored into our guidance for 2008.

Moving to our balance sheet, AR is down related to soft sales in the month of December. DSO remains steady with prior year. The tax accounts have moved around a bit due the implementation of FIN 48 during our first quarter of 2007. A reconciliation of that implementation is included in our Q1 filing and may serve as a good reference point for those that are interested in these accounts.

Some of you have expressed interest in understanding how much legacy Fleming balances we still have on our balance sheet and if the there is any upside opportunity as these balances come down.

To clarify, we have approximately $6 million of claimed reserves, net, on our books as of 12/31 related to Fleming. At this time we believe the reserves are adequate related to open Fleming claims. If these claims are settled for less than we have reserved, we would benefit from this reduction.

Turning to long-term debt, the quarter ended at $29.7 million, compared to $78 million at 12/31/06 and $53.7 million as of September 30, 2007. The reduction from prior year-end was due primarily to cash flow generated from operations including the restoration of tobacco tax credit term. While we expected year-end long-term debt to be closer to a third quarter balance, we were lower primarily due to two factors.

Number one, our LIFO buy was approximately $10 million less than we anticipated it would be, and number two, softening in our December sales volume reduced working capital requirements for inventory and accounts receivable.

As of December 31, 2007, our availability under our credit facility was approximately $160 million. Remember, our working capital swings peak around the 25th of each month and then come down. In addition, we have a springing dominion reserve as required by our credit facility. We had approximately $28.5 million in letters of credit outstanding and we were in compliance with all of our debt covenants.

As Mike, discussed in his opening remarks, the Board recently approved a share repurchase program. Both management and the Board agreed that a $30 million share repurchase was the right size because it not only enables us to return capital to our shareholders, but also provides us with the ability to continue to operate our business, make tactical investments and maintain our financial flexibility.

We intend to fund the program with excess cash that will be generated over time. We reserve the availability under our credit facility for working capital fluctuations and letters of credit, leaving enough room for tactical acquisitions and expansion initiatives. We feel like this is the right use of capital for the creation of long-term value to the shareholders.

In order to affect the $30 million repurchase program, we amended our credit facility to increase the basket allowed by our syndicate. We also took this opportunity to establish a new basket of $100 million related to permitted acquisitions.

As Mike, already covered, we expect $6 billion in sales for 2008; this is driven by market share gains and assumes some weakness in same store sales, especially as it relates to cigarette carton sales.

We expect capital expenditures to approximate $20 million for 2008. These investments include approximately $14 million in maintenance CapEx, needed to replace aging equipment; approximately $1.3 million for fleet expansion; approximately $3.8 million to outfit the remaining divisions with chill docks, et cetera, to support our VCI program; and then another $1 million or so for other expansion related projects.

In closing, I do hope that our investors understand the careful consideration the Board and management took to weigh the capital allocation decision, specifically those decisions that include reserving adequate capacity to support our long-term strategic growth objectives. We enter 2008 with much enthusiasm about our opportunities to fulfill these objectives.

With that on behalf of us here at Core-Mark, I want to thank our customers, our vendors, lenders, our employees and you, our shareholders, for your continued support.

Operator, you can now open the line for questions.

Question-and-Answer Session


(Operator Instructions) We have our first question coming from Jonathan Lichter - Sidoti & Company.

Jonathan Lichter - Sidoti & Company

Is there any thought to perhaps pulling back from Canada and focusing on other parts of the U.S.?

J. Michael Walsh

I’m not sure I understand your question. Pulling back from Canada? Pulling out?

Jonathan Lichter - Sidoti & Company

Yes. Over the last few years it looks like profitability there has been declining.

J. Michael Walsh

No question it has been. Canada went through tremendous turmoil for a couple of reasons; I still believe that Canada will restore its profitability and when it happens, I think that we’ll all be glad that we hung in there. There are some synergistic reasons that we’re in Canada. I think that we’ve seen the bottom and I think that going forward we’ve got some upside potential there.

No question, Jonathan, it is down and no question, it has hurt us in our overall company performance. But having said that, I do think that Canada, it’s going through a market shakeout and I think that we will emerge stronger than we were before. So I would hate to give up that potential.

Jonathan Lichter - Sidoti & Company

Okay. You mentioned that there was about a $100 million worth of business that moved away. What were the reasons there? Was it just price?

J. Michael Walsh

Yes. It was basically price. It was not service. It was a bid and we have certain thresholds that we need to achieve and you can understand that when there is some shift in the marketplace, as there was in the fourth quarter. We picked up some wins, but there’s going to be competitive reactions to that and we’re not in business to do business for no profit.


We have our next question from Gideon King - Loeb Partners.

Gideon King - Loeb Partners

Hi, thanks for your work.

J. Michael Walsh

Sure. Thank you, Gideon.

Gideon King

Perhaps I should say thanks to the management team, but perhaps not thank you to the Board. My question centers around creating value for holders and the Board process that took place. When you folks emerged from bankruptcy in April of 2005, I think your stock came out at around $26. And unfortunately, that’s where we are right now.

And when I look at our internal projections which I’m sure are flawed, as they always are, and I see that at the end of 2008, given $50 million of free cash flow − these are our projections, please understand.

J. Michael Walsh


Gideon King - Loeb Partners

Given $50 million of free cash flow, given net cash of anywhere from $20 million to $30 million and EBITDA in the $60 million to $70 million range, I look at the result of the board process, a $30 million buyback that is instituted and may or may not be consummated as weak, by no fault of management, because you really do appear to be doing a good job in a difficult business, at least by our estimation.

I conclude that the Board is a bit too sleepy in pursuing maximizing shareholder value. Because I just don’t get it. And unless there is a large acquisition on the floor right now, I don’t get why this entity with $50 million in free cash flow and $70 million of EBITDA and no debt at the end of 2008, I don’t get why all we’re doing is a $30 million buyback in light of the performance of the stock?

So perhaps if you could take us through what the reasoning is behind that in some more granular detail in terms of your budget for acquisitions. Because as far as I’m concerned it’s just not enough and it’s not enough of an expression of confidence in just how cheap your stock at least appears to be from our angle, trading at four times cash flow, trading with a free cash flow yield of 10%, excluding working capital items, obviously it’s higher with some of the benefits of the working capital adjustments.

So I don’t wish to be adversarial with you at all. I think you are doing a fine job running the company and we appreciate your hard work and your transparency, particularly in this call. But we think your Board has done very little to help us out and we think the stock price is clear evidence of that. So if you could just talk to that and also tell me whether or not you’ll ask the Board formally to reconsider, at least from this shareholder, Loeb Partners, that owns 7.5% of your company.

J. Michael Walsh

On the latter part, absolutely, we will take your views to the Board. We try to be very attentive in listening to you and others and we always communicate our discussions with you to the Board. So absolutely we will do that. I don’t have a real good, absolutely snap answer that says ‘well, this is the reason.’ I think it boiled down to judgment.

We clearly lay out what we see in the way of acquisitions and growth and so forth. The Board takes that into account and I think we do have letters of credit and springing dominion and other things that you do have to take into account when you’re factoring how much flexibility that we have.

I would say it probably is a little conservative that the Board adopted the $30 million number. It’s probably a little conservative. We perhaps are a little conservative in nature, but we certainly wanted to do something to recognize that we have great faith in the future of the company. But, we also want to balance that with having some flexibility in pursuing growth and making acquisitions.

I’m not going to say to you, it should have been $40 million and I don’t think the Board would say that or $50 million or some other number. We’re listed for two years. It was something that we could get started in this direction. Reasonably comfortable with leaving all the other options open to our ability to grow the company.

But summarizing, it was judgment we probably were a little conservative. I like having the flexibility to grow the business and I’ll certainly take your message back to the Board.


(Operator Instructions) Again, we have Gideon King - Loeb Partners.

Gideon King - Loeb Partners

I’ll try to ask some less circular questions. Did the Board unanimously vote for this action? And two, do you feel, as I feel, even in light of the tough credit environment that we’re clearly in, that we could have secured an amendment to our credit line that would have given us flexibility, substantially north of the $30 million?

Again, it just seems extraordinary to me that a Board would look at the return on equity benefit of doing a substantial buyback, and I certainly don’t advocate hobbling the company with debt and ending right back in front of the bankruptcy judge as we did years ago. I am not a proponent of that; we own 7.5% of the company. Clearly I don’t want that.

But what I do want is a Board that takes its queue from what the best thing to do is with respect to the return on equity. So my question is, one, did the Board unanimously vote for this approach? And two, do you think there is greater flexibility on the part of your lenders?

Stacy Loretz-Congdon

Gideon, I’m going to take the second part of your question, just to clarify a little bit.

We did have $160 million of availability at year-end at 12/31, and remember that’s a point in time that we’re measuring that availability. I pointed out in my prepared comments that really we peak on the 25th and then we bring that level down. Our swings can be anywhere from $40 to $50 million intra-month on a regular basis.

Gideon King - Loeb Partners

I understand.

Stacy Loretz-Congdon

So basically, when we gathered with the Board and with our advisors, we gave them some scale on what our average availability has been running, what our projections were; backed off what we believed our working capital swing requirements were; reserved our springing dominion reserve, which is a $35 million reserve as required by our credit facility, and then we looked at opportunistic purchasing.

We take advantage of promotional activities, which requires additional investment in our inventory, and also we wanted to reserve sufficient capacity to fund any tactical acquisitions that we may be doing, and we did increase our basket associated with acquisitions.

So it was carefully weighed and we felt that the $30 million was the right size at this time to return capital to the shareholders as well as continue to give us some flexibility with operating the day-to-day business. And I’m hopeful that that helps a little bit.

J. Michael Walsh

Gideon, it’s a matter of judgment. I can’t comment to your first question, I can’t comment on the vote of the Board. That would be inappropriate for me to say. I would comment that the Board were well-advised; I think they looked at all of the different forms of the stock buyback.

There were pros and cons discussed to look at each and every one of them. The Board, I think, thoughtfully evaluated all of them and in the aggregate, decided to pursue this one. But I don’t think it’s appropriate for me to say what the vote was.

Gideon King - Loeb Partners

Okay. Folks, thanks very much.

J. Michael Walsh

Thank you, Gideon.


(Operator Instructions) We have Greg Bennett - Smith Barney.

Greg Bennett - Smith Barney

In previous calls you’ve stated that you haven’t been able to buy back stock because you’ve been in a restricted period, as far as discussions about acquisitions, at least that was the impression that I had gotten. And I think, Mike, that’s your main assignment for this coming year is acquisitions.

Is this stock buyback program going to be able to be implemented outside of a quiet period or a restriction? In other words, if we’re meeting in 60 days to hear about your first quarter results or if we’re meeting this summer, we’re going to be looking at the number of shares that have been purchased or not purchased.

And if you come back and say we haven’t purchased anything because we’re in a quiet period, I think your shareholders are going to be disappointed.

J. Michael Walsh

Right. We recognize everything you just said, but we’re working very closely with advisors. We’ve had lots of discussion about that limitation, and right now, as I talk to you today, we feel that we can accomplish all of the above and we do plan to buy stock.

There’s a certain mechanism as you know, 10b5-1s and others that we will be taking advantage of and right now, being well-advised, we do believe that we’ll be able to pursue our business strategy and we will be buying back some stock.

So believe me, I know exactly where you’re coming from. We’ve spent a lot of time discussing that with counsel and others and we’re saying to you, we believe that we’re okay to do this.

Greg Bennett - Smith Barney

So you’re telling your shareholders basically that you’re pursuing acquisitions, you’re letting the world know that, at the same time, if the share price is the correct price, you’re going to be buying back stock?

J. Michael Walsh

We have stated consistently ever since we’ve been public that we are pursuing acquisitions.

Greg Bennett - Smith Barney

Yes. That is correct.

J. Michael Walsh

That is a part of our business plan, so yes, I am saying we are pursuing our stated business plan that we’ve laid out over two years; now, there could be circumstances, which would change that. I’m not saying, locking in the future forever. There could be. But right now, we think we’re okay, and we do plan to implement the share buyback program.


We have our next question from Rob Loughnegger - Great Gable.

Rob Loughnegger - Great Gable

I was wondering if you could provide some color on maybe what an SG&A run rate would be, if you strip out workers’ comp, and all these one-time bad debt and all those other items, what you think it could be going forward?

Stacy Loretz-Congdon

We don’t comment on forward-looking information like that.

Rob Loughnegger - Great Gable

Then on a trailing basis, maybe over the last three or four quarters, if you’d stripped out all of the one-time items, what a run rate would have been?

Stacy Loretz-Congdon

Let me circle back with you on that.

Rob Loughnegger - Great Gable

Okay. And then if you could also maybe provide a little more color on warehouse expenses and do you think those are bottoming or are they going to continue to get worse over the next couple quarters and that’s as a percentage of net sales?

J. Michael Walsh

I don’t think they’re going to get worse. I do think that warehouse and delivery expenses as we mentioned, there’s a couple things that are happening that are going to help, that I think that we begin to see helping us.

One is that, I think there’s been an easing in the labor market. Two, we will be lapping the increases in driver salaries over the last 18 months. And so we do not see them getting worse. We do see them improving.

Rob Loughnegger - Great Gable

Okay. Thank you.


We have our next question from Blaine Marder - Loeb Partners.

Blaine Marder - Loeb Partners

Let me ask that margin question in a different way. You’ve given us guidance for roughly 8% revenue growth in 2008. And if I look at your EBITDA stripped of LIFO expense, inventory holding profits, and various other and stock comp, if I strip all that out of EBITDA and just look at a core EBITDA number, would you expect EBITDA growth in 2008 to be similar to the sales growth or better or worse?

J. Michael Walsh

Blaine, they are kicking me under the table. I’m not in power to give guidance.

Blaine Marder - Loeb Partners

Okay. Well you talked about various cost items. You mentioned in SG&A in your script?

J. Michael Walsh


Blaine Marder - Loeb Partners

You mentioned warehousing and transportation?

J. Michael Walsh


Blaine Marder - Loeb Partners

Is there an opportunity to get what I am going to call core EBITDA, stripped of inventory, holding et cetera, is there an opportunity to get core EBITDA leverage in 2008 or does that look unlikely?

J. Michael Walsh

I would say, yes. I think if you’re asking me if I can get leverage on that, I think the answer to that is yes.

Blaine Marder - Loeb Partners

Okay. And is that a result of holding expenses flat? Or is that a result of mix shift towards the non-cigarette area?

J. Michael Walsh


Blaine Marder - Loeb Partners

Okay. And what about making progress on the vendor initiatives such that that’s getting a little bit of scale now?

J. Michael Walsh

I did comment on our progress. I’m just going back, in January and February we had five divisions that kicked off. Dairy, I keep talking about dairy. We’re pursuing dairy because we want to be more relevant to the retailer in not only doing dairy, which is a core item in this, but it goes back to that comment that I made about convenience stores getting 50 and 60 deliveries a week with five totes of this and six cartons of that.

That’s what we’re really after. The dairy is just a good metric for that. We had five divisions that kicked off dairy programs in January and February that weren’t on it. We have now all but one of our divisions in the U.S. that are on it.

We added 283 customers to our dairy program in January and February, and we’re in negotiations and so forth, but we look to enroll three really major accounts who will serve as anchor tenants for about half a dozen divisions in the next 90 days or so which will really give more I’m impetus to that.

I would say we’ve certainly focused the organization on the importance of this. I can assure you that my bonus and bonuses of a lot of executives and managers and mid-level managers, are predicated on us growing our VCI sales as we’ve laid out in our plan this year and if we do what we believe that we can do, it’s going to be a nice increase and that should have a positive effect on our margins.

It should have a positive effect on as we’ve seen with the new market share wins that we’ve had, which had a positive effect on that and certainly Core-Mark is much more pertinent in the aggregate to convenience retailers than ever before. So we think we’ve got pretty good momentum on that. We’re sure pushing hard and we’ve got everybody incentived so I wouldn’t bet against.

Blaine Marder - Loeb Partners

Thanks. And I’ll see you tomorrow.

Milton Gray Draper

Thank you all for your participation in our call and for your interest in Core-Mark. If you have additional questions please call me at 650-589-9445.


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

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