Performance Food Group Company (PFGC) Q4 2012 Earnings Report, Transcript and Summary

Welcome to the fourth quarter investor call. My name is John, and I'll be your operator for today's call. This call is scheduled for 60 minutes in length. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Milton Draper. Ms. Draper, you may begin.

Thank you, John, 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. 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 10-K, our 10-Q 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 questions after this call, you may call me at (650) 589-9445. Joining me today is the Chief Executive Officer of Core-Mark, Thomas Perkins; and our Chief Financial Officer, Stacy Loretz-Congdon. Also in the room is 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: Tom Perkins will discuss the state of the business, our strategies and opportunities ahead, followed by Stacy Loretz who will go into some details about the financials. We will then open up the call for your questions. Now, I would like to turn the call over to our CEO, Tom Perkins.

Good morning, everybody. Before I get to the results, I want to say a few words. I feel very fortunate to have been promoted to CEO at a time when the company is in such a healthy position as we enter our 125th year in this business. I am very thankful to Mike Walsh, our former CEO, for all that he has done for this organization, and I think the shareholders feel the same way. It is now my responsibility to continue this legacy and take it to the next level. I embrace that challenge. Now, a brief review of the 2012 financial results. First and foremost, we achieved our EBITDA guidance of $102 million after backing out conversion and start-up costs for our recent acquisition. Both sales and EBITDA increased by roughly 10% and were record results. A significant portion of 2012 revenue growth was generated from the new contract we won in our largest customer in the Southeast from Forrest City acquired in May 2011. Overall, our strategies are working well, resulting in healthy growth and very sharp increases in certain targeted non-cigarette categories. Our non-cigarette sales grew at about 15%. And excluding our expansion activities, non-cigarette sales grew 6.4%. Remaining gross profit for our non-cigarette categories increased over $32 million. [Technical Difficulty] I'll just go back over the last sentence. Remaining gross profit for our non-cigarette categories increased over $32 million or 11% for the year despite an almost $4 million reduction in inventory holding gains. Cigarettes remaining gross profit increased about $12 million and excludes cigarette holding gains, which were relatively flat. The earnings improvement was driven by healthy sales growth in the higher-margin categories. Operating expenses as a percentage of sales were essentially flat excluding onetime items. We did experience higher operating expenses during the summer ramp-up in business. However, we corrected those trends as the year progressed. We continue to concentrate on operating expenses relative to gross profit earned at the division level, and we expect divisions to reduce operating costs whenever gross profit falls below expectations. We call this the iron bar. While certain divisions in 2012 did not fully implement the iron bar, I am encouraged to see the division absorb a 19% increase in cubic feet of product, or cubes, while decreasing the cost per cube by 6%. This tells me that we have been able to efficiently absorb the increased volume from the higher-margin categories. You can bet that we will be focused on leveling labor requirements as we prepare for the 2013 summer season. Our FIFO EBITDA, which is a key metric we monitor internally and guide to externally, grew to record levels in 2012 as we delivered our guidance of $102 million excluding the impact of the acquisition. The largest contributor, by far, was the increase in remaining gross profit from our non-cigarette categories. We believe our VCI, Fresh and FMI strategic initiatives will continue to drive future growth in these categories. We closed out the year with the acquisition of J.T. Davenport, an organization extremely well regarded in the industry with a stellar reputation for customer service. I am very excited about this acquisition and expect their sales volumes and earnings to be accretive to our 2013 results. We believe we can learn from this organization and they will also benefit from our unique marketing programs and strategies. As you know, the primary objectives of our key strategies are to grow market share and add value to the retailer by providing the products and services their customers want. In addition, we believe consolidating multiple vendor deliveries on our trucks is the most cost-effective way to get the product to the convenience retailer. A significant focus for our organization in 2013 is to leverage our key strategies and help the 10,000 targeted independent retailers we service today increase their sales and profits. Both our FMI initiative and our newest VCI tool are specifically designed to address the needs of the independent retailer. The objective of our VCI program has always been, and continues to be, to bring substantial cost of goods savings our customers, reduce our in-store inventories, reduce our in-store out of stocks and reduce their transaction costs. The chains have understood this concept for some time and many have adopted some aspect of our program over the years. For over 5 years, we have targeted $100 million incremental sales for VCI and Fresh and we have either met that target or come very close as we did this year. This is a very successful program and we have now designed a tool that will make the VCI and Fresh programs more accessible to our independent customers. We believe this new VCI tool will accelerate the rate at which we absorb more DSD deliveries for our independent retailers and will provide platform for increased deliveries per week, which is essential for our customers who want to be in the Fresh business. We estimate that the DSD sales for the 10,000 independent stores we service today represent a $1.7 billion opportunity, excluding the very big brand names like Coke and Fritos, so we think this is an opportunity worthy of our focus. We are also excited about our focused marketing initiatives, or FMI. We have complete detailed marketing surveys on over 4,000 retail locations from inception to the end of 2012 and we have targeted an additional 3,000 for 2013. We provide the independent retailer with a list of recommendations they can implement to improve their store's profitability. The current acceptance rate of these recommendations is in excess of 60%. For the stores we have performed the marketing surveys, we are seeing their nontobacco purchases grow more than 3X faster than the independents who have not participated. Our retailers have indicated that at this acceptance rate, store profits will increase by about $25,000 a year, which we estimate is about a 35% increase over the current store profit. In addition, we are seeing the churn rate for these stores drop in 1/2. I continue to be very enthusiastic about this program and its likely impact on our independent base business. Our strategy to grow our geographic footprint through acquisitions will continue to be important for us. We want to take our business model to where more people are located and fill out our geographical footprint, so we can efficiently compete for market share. The industry is still very fragmented with approximately 300 distributors in our space, and only having a 4% market share indicates we have room to grow. We continue to have conversations with a number of potential targets, and hopefully, we will have another acquisition in 2015. For 2013, I am confident that we can again post record revenues and profits for the year, targeting growing revenue and EBITDA by 10%. We expect sales to reach between $9.8 billion and $10 billion in 2013 and adjusted EBITDA to reach between $112 million to $115 million. In order to achieve the high end of our guidance, we will need modest market share gains, see the return of normal inflation and continue to execute on our key strategies. Our guidance does not include the impact of any new acquisitions. With our competitive advantages and experienced team, I am optimistic we will reach our goals. However, this won't happen day 1. We are seeing softer sales at retail as consumers react to the impact of the payroll tax and fuel prices and this may make our quarter 1 comps difficult. Some of you may recall we had a very good first quarter last year. With all that being said, I am still excited and confident about our goals and opportunities in 2013. You may be asking why I have so much optimism about our company. Well, let me tell you what -- let me share with you what I see are the near and long-term opportunities that supports my confidence. I don't think a lot of our investors understand that nearly 35% of all retail outlets in the U.S. are convenience stores and that C-store count continues to grow at a steady pace. As of the end of 2012, the C-store count in the U.S. was nearly 150,000; and in Canada, there are another 23,000 C-stores. We currently service about 29,000 stores. We estimate, at wholesale, the inside sales in convenience stores is roughly $170 billion including both the U.S. and Canada. About 75% of our 2012 sales were to traditional convenience stores. This would suggest that our current market share is only 4%. Considering that roughly 50% of the in-store products are provided by broad-line distributors like us, you are still talking about only having an 8% market share. Couple that with Core-Mark being the fastest growing distributor of any size in the C-store space, provides us with significant opportunities in this industry. Last quarter, I indicated that we have submitted or in the process of submitting bids for over $570 million in annual revenues with 6 traditional C-store chains. We have won 2 of these bids. We are waiting to hear from the others, and we continue to bid on additional business. As I mentioned above, we have a very small percentage of the traditional C-store universe and we will always have a large number of bids in the hopper. And as I have seen over the years, we win more than we lose. In 2012, our nontraditional convenience store sales represented approximately 25% of our total revenues. Historically, these customers are retail locations like gift shops, movie theaters, college and corporate campuses and the like. In the last year or 2, there seems to be a developing trend for some larger-format retailers to expand their offerings to include fresh and more C-store-type items in order to attract the convenience shopper. We think this channel blurring could have a meaningful impact on our industry and is a significant short- and long-term opportunity for Core-Mark. Last quarter, we talked about some named retailers whom we would certainly not consider traditional C-stores. We are currently under confidentiality agreements with some of these retailers, so we cannot discuss in any detail. But we are currently in some stages of bidding for nontraditional volume that we believe to be a significant opportunity. This has the potential to significantly alter our growth patterns, but also alter perception of our leadership in the Fresh category to the entire CPG marketplace. I am not saying that we are going to win all of these, but these opportunities and our history of winning our fair share does provide me some insight into where we might be headed in the next 5 years or so. I believe that traditional C-store industry and these nontraditional convenience opportunities will continue to drive our growth in the years to come. In the near term, I am excited about the conversion of our diesel tractors to natural gas. We now have our first trucks on the road with more in order in the CNG stations in the final testing and permitting phase. We expect once this is fully rolled over the next 2 years, up to 75% of our tractors will be running on natural gas, generating somewhere in the neighborhood of $4 million to $5 million in annual savings. That is a pretty specific profit enhancement project. In addition, we will be converting Davenport to our systems in the fourth quarter while leveraging their customer-facing technology throughout our organization. VCI is expected to build momentum as our sales force leverages the new tools to better communicate with and educate our independent customer base. And we believe we can provide a mobile technology platform for independent retailers such as frequent shopper programs and mobile payment programs. For 2013, we will focus on the fundamentals, as well as growing our market share. We've always shaped our future as the industry and consumer preferences change, and I believe our key strategies place our company to be the distributor of choice wherever CPG products are sold in the convenience setting. With that, I will now turn things over to our CFO, Stacy Loretz-Congdon. Stacy?

Great. Thank you, Tom, and good morning to everyone. I'd like to start with a brief discussion of our earnings per share. Diluted EPS for the fourth quarter was $0.83 compared to $0.45 last year. Or for those of you who model EPS, excluding LIFO expenses, this translates to $0.90 for the quarter compared to $0.75 last year, a 20% improvement. For the year, diluted EPS, which exceeded our guidance, is $2.91 compared to $2.23 for 2011, a 30% increase. On a FIFO basis, we earned $3.55 this year compared to $3.17 in 2011, a 12% increase. We had guided to a FIFO range of $3.53 to $3.63. However, our guidance does not include the costs associated with the Davenport acquisition, which lowered our earnings by approximately $0.09. In addition, the impact of lower inventory holding gains across all categories this year versus last of about $10 million equaled about $0.51 per share for comparative purposes. For 2013, we are guiding to an EPS range between $3.10 and $3.25, which includes an estimate of $16 million for LIFO expense, a 40% tax rate and 11.8 million diluted shares outstanding. We expect an increase in LIFO expense as we do not expect to lower LIFO inventory levels further and we expect some inflation from then nontobacco manufacturers this year. The $3.7 million year-over-year increase in LIFO expense has the effect of reducing our EPS guidance by about $0.19 on a GAAP basis. Excluding LIFO expense, our 2013 EPS guidance translates to a range of $3.90 to $4.05 per diluted share, a 10% to 14% increase over 2012 results. I think it's worth mentioning that we generated sufficient excess cash in 2012 to purchase Davenport, pay out dividends of $0.89 per share, including the 2013 Q1 dividend we accelerated into December and repurchase some shares while continuing to invest in our business. Our financial condition is very healthy. Moving onto the numbers. Tom already covered year-to-date results, so I'll spend most of my time on the fourth quarter. Sales increased 2.9% in Q4 from $2.13 billion last year to $2.19 billion this year. Cigarette sales increased 1.5% and our non-cigarette sales increased 6.2%. We lapped ourself in the fourth quarter as it relates to the Southeast expansion, more specifically our new customer agreement, which supported the opening of the Tampa division in September of 2011. Cigarette sales increased 1.5% for the quarter or 3.4%, excluding excise taxes despite same-store carton sales, which were down 2.3% and 1 less selling day during the fourth quarter this year versus last. The increase in sales dollars was driven by manufacturer price increases during the year, which resulted in a 2.1% increase in our average sales price per carton. Cartons were sharply down in 3 divisions that lost a non-major accounts that we mentioned during our Q3 call. We expect comparisons will ease as we move through the year. More importantly, our non-cigarette categories increased nearly $40 million or 6.2% despite lower product inflation and 1 less selling day. Same-store sales increased 5.2%. Diving deeper, food, beverage and other tobacco categories increased about 7% while our general merchandise category increased over 10%. The increase in food was driven by our vendor consolidation, focused marketing and fresh initiative resulting in higher fast food, snacks and fresh sales. Beverage sales benefited from expansion of bottled water sales and juices and the consumer trends towards smokeless products continues to benefit other tobacco categories and general merchandise. We are pleased with the successes we are seeing in our marketing programs, which focus the organization on growing higher-margin, non-cigarette categories at a faster pace than cigarettes. Gross profit increased $12.1 million or 11% for the fourth quarter of 2012 while remaining gross profit increased $7.2 million or 6.4%. Gross profit margins for the quarter were up 40 basis points and remaining gross profit margins, which exclude LIFO expense in cigarette holding gains, increased 17 basis points. Cigarette remaining gross profit increased 2.5% or approximately $1 million and the remaining gross profit per carton increased 3.1% for Q4. Non-cigarette gross profit increased by 9.5% for the quarter and remaining gross profit for non-cigarette categories increased 8.3%. Non-cigarette margins improved 24 basis points despite lower product inflation, which compress margins by 10 basis points compared to prior year's fourth quarter. This improvement is reflective of our success in growing the higher-margin product categories at a time when no large contracts or large acquisitions are compressing the margins on a comparable basis. A little more inflation would be well received by wholesalers, and as I've stated before, manufacturer price increases have been anemic in 2012. Next quarter, when Davenport is reflected for a full quarter in our numbers, I would expect our overall non-cigarette margins to be compressed. This is because Davenport, as with most of our acquisitions in the beginning, is more heavily indexed to cigarettes and traditional non-cigarette items than the company as a whole. Over time, as some of our marketing initiatives are implemented and our non-cigarette offering is expanded, we expect our non-cigarette margins will improve significantly. Moving on, operating expenses were $105.6 million in the fourth quarter compared to $101.1 million for the same period last year, a 4.5% increase which is supported our sales growth, specifically our non-cigarette categories which increased 6.2%. Excluding the start-up costs in both years, our operating expenses as a percentage of sales increased 6 basis points. The biggest impact to the quarter were our health and welfare costs, which are subject to the timing and severity of claims under our self-insurance programs, increasing $2.4 million or an 11 basis point impact on total operating expenses for the fourth quarter. This effect was less severe on a year-to-date basis. Warehouse and delivery expenses increased $3.5 million or almost 6% to $64.7 million during the fourth quarter this year. As a percentage of sales, warehouse and delivery expenses increased 7 basis points. Again, the largest single driver was health and welfare expenses, increasing costs by 6 basis points. On the surface, it appears we didn't leverage warehouse and delivery. However, we believe we did achieve efficiencies as evidenced by the metric we use to measure cost per cubic feet of product shift. Warehouse and delivery cost per cubic foot for the quarter decreased 1.3% while the number of cubes shift increased 7.3%. This indicates that we are shifting more of the higher-margin categories with non-cigarette cubes increasing 8.2% and cigarette cubes, consistent with lower carton volumes, decreasing 2.1%. SG&A, as a percentage of sales, was essentially flat or down 4 basis points for the fourth quarter after you normalize for the increase in health and welfare expenses. Moving further down the income statement. Our effective tax rate for the quarter was 38.2% versus 36.6% for the fourth quarter 2011. For the year, our effective tax rate was 38.8% compared to 39.4% last year. Substantially all of the increase in the tax rate for the quarter related to the nondeductible acquisition costs, and a decrease for the year was driven by a higher portion of our earnings being generated in states with lower tax rates. Encouragingly, our Canadian operations continue to improve as noted in the segment reporting for Canada for the year. Warehouse and delivery costs improved and we recorded a higher-margin contributions as a result of rationalizing the customer base and rerouting certain customers. In addition, we are starting to see sales increases from VCI and expect improvement from the 2 contracts Tom mentioned earlier that will benefit Canada later this year, including increases in dairy sales, which could be significant. Keep in mind, our net invested assets in Canada are structurally very minimal so returns on net invested assets are an important metric to consider. Moving onto cash flows, cash generated from operations before working capital changes was $80.6 million for 2012 compared to $73.5 million last year, a 9.7% increase. Changes in working capital, which measures 2 single points in time resulted in a use of cash in 2012 of $9.4 million, compared to a use of $62.2 million in 2011. Timing of receivable collections, inventory levels, related prepayments and payables were primary drivers to the working capital changes. As a reminder, we measure free cash flow as adjusted EBITDA plus or minus changes in working capital less CapEx, cash taxes and cash interests. Free cash flow generated in 2012 was about $50 million using 12/31 numbers. At the end of the year, we did have a temporary spike in the use of cash to support our year-end LIFO position for which we spent about $7 million more this year compared to the end of 2011. All in all, our free cash flow was in line with our Q3 projection of $50 million to $55 million. We expect free cash flow to be between $55 million and $60 million in 2013, an increase of over 10%, depending of course on any unusual year-end activity. Average debt for the year was $26.3 million, compared to $21.1 million in 2011. Average interim month working capital swings were approximately $53 million and our peak debt position was about $92 million in May in advance of the Memorial Day holiday, compared to a peak operating cash position of $56 million in September. Our current ratio is strong at 2:1 and our average monthly cash conversion cycle was approximately 13.8 days in 2012 compared to 14 days last year. You should note that we include both accounts and tobacco taxes payable in our cash conversion cycle due to the significant role they both have in our working capital management. Our capital allocation decisions support our key strategies and focus on ensuring we have sufficient capital to fund acquisitions, CapEx, opportunistic inventory buys, dividends and share repurchases. As previously discussed, we purchased J.T. Davenport on December 17 and paid $34 million at the time of closing, largely funded by our credit facility and some excess cash. There is a $4 million indemnification holdbacks that has not been paid yet, but is expected to be paid over the next 4 years. For CapEx, we spent $28.6 million in 2012 and expect not to exceed $30 million in 2013. Share repurchases totaled $5.2 million for the year and we paid $10.3 million in dividends in 2012, including the acceleration of our first quarter 2013 dividend. To summarize, we had a strong quarter and record earnings for the year. We are growing our business at a healthy rate and continue to generate substantial free cash flow with very modest debt. We are executing our key strategies well and continue to work hard to take market share while controlling our costs. And with that, I'd like to thank all of our employees, our vendors, our customers and you, our shareholders, for your continued support. Operator, you can now open the lines for questions.

[Operator Instructions] Our first question comes from Andrew Gadlin from CJS Securities.

Wanted to ask you about your guidance and some of the components that go into it. Your guidance basically calls for about a $10 million to $13 million increase in EBITDA and I want to know how much of that is from Davenport inflation expectations, if there's any, and just organic sales increases?

We always plan some inflation, moderate inflation for the year in our guidance numbers. Definitely, Davenport is a big contributor to our increases in the revenue line and also in the EBITDA line. I would say about 4% is organic growth for next year and the remainder would come from the acquisition and also potentially any other large account wins we may have.

And in terms of the inflation, the modest inflation expectations, included in that guidance, is it more kind of a reversion to -- or a repeat of this year or a reversion to, longer term, what it has been?

We're looking for a return to normal inflation patterns. I think definitely what Stacy said and I've echoed, was that we really did have anemic inflation in our non-cigarette categories in 2012. And I think as we look out in 2013, we anticipate that getting more back to the normal levels.

Our next question comes from Ben Brownlow from Raymond James. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: Just to follow up on the guidance. How much inventory holding gains do you have included in the EPS guidance and same, I guess, with the stock option expense?

We have a moderate price inflation in the guidance.

And cigarettes, I would just -- Ben, I would just have you -- point you to historical levels. We usually, when we're looking forward, we're looking at historically what we've earned and we'll factor that into what we expect. And just on the food/non-food, we're expecting it to be a little bit higher going into 2013 just because of our expectation that the food manufacturers are going to have to pass through some of that costs. And your second question was related to stock comp, I believe? Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: Yes.

And I would assume a similar level as the current year, maybe a slight increase. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: Okay. And on the first quarter softness, is that weighted towards any specific category or broad based, and how would you characterize the demand as you progress through the quarter?

I think it's broad based right now. I've had -- we're seeing ourselves and I've had many discussions with similar key customers and they're seeing it. I think that it's sort of a consumer sticker shock where I think the customers, in particular, at the convenience stores, they see the higher fuel costs and it takes them a little bit of time to absorb and get accustomed to the higher price they pay for fuel. But I anticipate that as we progress throughout the end of this quarter and into the second quarter that we'll get back to those -- more of those normal sales patterns that we anticipate.

Our next question comes from John Lawrence from Stephens.

Tom, would you dig a little bit into the non-cigarette category? I mean, let's talk about the initiatives a little bit. You talked about the tool. Can you talk about the process that's -- how the tools are being implemented and maybe give us examples of what you're seeing as far as with some customers sets of how successful that's been?

We've been -- last year, we talked about how we've gone out and we've trained our territory managers, which really are key salespeople on the field on what we call concept selling, which is vendor consolidation, which is here's all the benefits from consolidating vendors on our trucks and here's the end goal is to increase your frequency of deliveries, gets you into the Fresh business, which your consumers are demanding and which will increase your profits at store level. And so we've gone through that process. We've developed internal systems, automated systems for our sales force to use. And so now what we've seen, we've been in this probably for about 2 -- a little over 2 months now, we're starting to get more and more traction. It's definitely a more harder sell to the independent retailers than the chain stores. I think the chains get it, vendor consolidation. And I think you're talking to, let's say, one person that covers a large number of stores whereas now it's an individual one-on-one conversation with independent retailers, I think they get it, but I also think that they also are dependent upon DSD suppliers for some of their labor at store level. So it definitely is a conversation that takes a little bit more time than you would expect. But right now, it's too early to tell. Right now, where we are, we do have quite a few customers, I would say, in excess of 500 customers that are in this, in our what we call our concept selling, a black box at some stage. And so I anticipate that just gathering steam as the year progresses and as our TMs get more and more comfortable selling the concept to our independent retailers.

So the tool itself, Tom, is helping you sell to more people more often? Is that the end result of the product end of that?

Yes, the end result is basically allowing -- telling them to go to an independent retailer and tell them that we can provide them the same product at the same price they buy today from DSDs, increase their numbers of deliveries and at the same time save them money on cost of goods through a dividend. And so I think that's a great story. And one of the things we try to do is try to improve our independent retailer's business because what we know is that they don't make as much money as the chain stores do and they miss those opportunities, so we're there to help them.

Our next question comes from Chris McGinnis from Sidoti & Company. Christopher McGinnis - Sidoti & Company, LLC: I guess, just on the -- Stacy, I think you mentioned that the increase in the margins on the non-cigarette, that's going to come down with the acquisition? Is that margin that you just put up, is that, I guess, a longer-term margin if you're not making acquisitions? Or could you higher than that, I guess, once -- just with all the different programs, just trying to get a better sense of that.

I think, Chris, I think the expectation is that they would go higher than that because we are growing our higher-margin non-cigarettes categories at a much faster pace than our cigarette category. And so if we didn't -- if everything was apples-to-apples and no acquisitions or no major account wins, large account wins, we would see that increase and probably that increase will get larger as the years progress.

And certainly, also would be benefited by a little bit of inflation because the inflation is definitely suppressing what our actual earning power is. Christopher McGinnis - Sidoti & Company, LLC: And then just on the acquisition of Davenport, they already have a fresh program in and can you maybe just maybe talk about, I guess, what you bring to them that's a little bit better?

They don't have a fresh program in. They were doing dairy on their trucks. They did have 3 temperature compartments on their trucks. They are actively bringing on our programs and really they're out and they source a commissary for fresh sandwiches and for fresh salads in that. So they are actively engaged in growing their fresh business, but they hadn't really been in prior to the acquisition.

[Operator Instructions] Our next question comes from Nelson Obus from Winfield.

I'd like to drill down a little bit in terms of the operating leverage that has been kind of very slow to come around. And let's start with health care costs. I'm very clear that this was a problem a couple of years ago and it appeared to have been brought under control. But it sort of just now raised its head again like Dracula and I wonder if you could discuss what's going on there because I thought we'd sort of put that behind us. Do we have a wellness program and what's our thinking there?

One thing I might mention, Nelson, just before -- certainly in the quarter, we had a tremendous impact but almost the entire increase in health and welfare occurred in the fourth quarter and a lot of that has to do with the timing and severity of claims that occur when they occur. But year-to-date, just to give you scale, the impact to operating expenses was only about 2 basis points. So year-to-date, it doesn't seem that out-of-control to us. We certainly are looking at the health and welfare programs on a regular basis and introducing a lower cost type of program to our employee base and trying to migrate employees from the higher-cost programs to the lower-cost programs. We have implemented wellness and we are working with outside consultants.

Right -- and exactly right. And I think what we've -- the focus we've had is that at our division level and improving their knowledge of how they in turn can control their own divisions' health care costs by utilizing our outside providers, doing wellness meetings, et cetera. So I think, again, the fourth quarter, we had -- it was a very tough comp because we were abnormally low in the fourth quarter of 2011. But like Stacy said, I think, for the year, I think our health care costs were okay. We didn't see any significant spikes. And so I think we're doing all the right things, Nelson. It's just a matter of timing, like Stacy said, on when those claims hit and when the severity of the claims hit.

Is this the kind of thing were a random claim or 2 can really move the dial?

Yes, absolutely.

Okay. Hey, look, I'll help you look at this as one question because I think it's all related to operating income. So the second part is the whole issue of, I guess, what I would characterize as long-term positives that have short-term drag and those would fall into 2 categories. One is extending your geographic footprint and the other would be, which is just something you mentioned that I hadn't really focused on that much, would be opening up a large account. So let me first start with expanding your geographic footprint. Isn't it true that we're sort of everywhere now, I mean, maybe except Appalachia or something? Let's start with that.

Well, Nelson, that's interesting to say. We are everywhere and we deliver to all 50 states and the provinces up in Canada up to Québec. But I think we have opportunities, synergistic opportunities, in geographies where we can actually lower our cost of service. The J.T. Davenport acquisition definitely filled a hole we had in really in the mid-Atlantic states, the Carolinas and Virginia and West Virginia areas. I think the last real hole that, that is apparent to us is up in the Ohio, Indiana area because we do service all those areas. It's out of our divisions but, it would be nice to have a division right centrally located there and we would definitely see some synergistic savings by doing that.

Isn't it true that if you were to double up in a geographic area, which what you'd call synergistic, that would have a less short-term impact on operating margins, or am I wrong about that?

Definitely, you would see it in the long term because once -- it would take a year to convert them. And then what we would do is we would rationalize the customer base. And then we would move customers from one division to another. And so you acquire the company, you get them converted into our systems probably over the first 12 months of that time period of that acquisition. And then the longer term is when you start to -- you implement our systems; in the second, you start to see savings from our systems implemented in their warehouses and in their delivery vehicles; and then we move customers and rationalize the customer base and that's really where the synergies come from when we open up a new division in a geography that we need sort of more density, again closer to the customers.

Okay, so there'd be some short-term effect.

Yes.

The second factor would be they're opening up a whole new customer base in nontraditional locales or a landing a big kahuna chain that you don't have now, and I assume there's not much you can say about that in terms of short-term compression on operating margins because that would vary depending on the arrangement you struck. Is that fair?

That's a fair statement. It would definitely -- it'll be based on the customer, their product mix, where they're located, et cetera. Yes, that's a fair statement.

Is it at all possible to make a statement about which factor, i.e., new customer versus new geographic area would in the average have more of a dampening effect on leverage -- on operating leverage?

Nelson, I don't know. I guess it would all depend on the specifics of the customer.

Fair enough, fair enough. I just want to say one thing and I just hope everybody understands it within the company and I think the shareholder base ultimately would feel more in agreement with what I'm about to say that obviously the incredible free cash generation of this company is a very, very positive thing that makes everybody quite enthusiastic about the company. But I think it would pale in relationship to what the reaction would be if we were to see a modicum of operating leverage. And I think you'd get a double whammy of both increased earnings and an increased multiple, and I just think that's an important goal to look at. And I'm not sure that whole operating leverage metric was broken out that much in the earnings -- in this release, but I do think that's the key metric that would create operating -- that would create earnings multiple expansion. And we're perpetually looking for it and hopefully you'll nail it down.

Thanks, Nelson. Yes, one of the things, and I think that as we move, our growth is in the fast -- is faster and more than the cigarette categories versus the non-cigarette categories, which are higher-margin categories. And so we -- I tend to look at and I think a more applicable metric is, one, is looking at a cost-per-cube basis because the sell point on a non-cigarette categories are lower than cigarettes. So the percentage of sales is impacted from that perspective. But the real -- the testament is are we growing our profits at a faster rate than our expenses? And so I look at operating expenses as a percentage of our gross profit. And if I look at that in the quarter and also the year, we do show improvement in growing our profits at a much faster pace than our expenses. So never happy, always want to leverage and leverage our expenses more and we did have some hiccups in 2012 that we're going to ensure we don't have this year. But again, that's a good metric that I use, is looking at expenses as a percentage of gross profit because I think that really tells the story as we grow our non-cigarette, higher-margin products and the expenses are a little bit more to handle those products.

Well, look, I know it's not going to happen overnight. I'm very glad to hear that that's an important metric for you. And frankly, I think you bring some unique skills to increase the likelihood that we see that over the next couple of years. So good luck.

Our next question comes from Chris McGinnis from Sidoti & Company. Christopher McGinnis - Sidoti & Company, LLC: I just had one follow-up question. I know it's probably early, but just on the Affordable Healthcare Act, any thoughts on how that may help or hinder how you're positioned for that?

Right now, we're good for up until 2014. We've established everything that needed to be established with -- and a lot of the stuff we were doing already in our health care programs. We definitely are involved right now in detailed studies on the impact for the next 5 years to that. But at this time, I don't have all that detail yet. But for the next year or 2, I think we're fine. We're not going to see any major impact to our health care from that.

And we have no further questions at this time.

Well, thank you for your participation in our conference call and for interest in Core-Mark. We are pleased with the results of the year and believe that 2013 will be another terrific year for the company as we work hard to leverage our competitive advantages and to grow sales in higher-margin categories. If you have any additional questions, please feel free to give me a call at (650) 589-9445. Thanks, John.

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