Performance Food Group Company (PFGC) Q2 2013 Earnings Report, Transcript and Summary

Welcome to the Second Quarter Investor Call. My name is Chris, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Ms. Milton Draper. Ms. Draper, you may begin.

Thank you, Chris, 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 second 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, everyone. I would like to begin with a brief overview of the quarter and then discuss the industry and our strategies. We have generated solid sales momentum in the second quarter with the addition of Turkey Hill, which rolled out in the middle of May. Sales for the quarter increased 10% driven by a 14% increase in non-cigarette sales. I was particularly pleased to see the robust sales for the non-cigarette products that are such a critical component of our key strategy and tactics. The same-store non-cigarette sales increased 6.8% on healthy demand by the consumers and by the positive impact of our FMI, VCI and Fresh programs. The sales momentum continues with the recent win of Rutter's, which we began delivering from our Pennsylvania division a few days ago. In their press release, Rutter's indicated that we were chosen as their supplier because of our capacity to deliver more frequently, with shorter fulfillment times and superior category management skills. As you can imagine, we were very pleased to see that public endorsement, and we will do everything we can to service this important retailer to the best of our abilities. The healthy pace of the growth in sales in the second quarter generated 11.7% increase in our gross profits. Non-cigarette remaining gross profits, which grew 14%, was the primary driver. Non-cigarette margins were up 4 basis points or 12 basis points excluding the compressing effects of the new Turkey Hill business. As we move our organization towards selling of higher margin non-cigarette items, we are going to incur additional operating costs, particularly as measured as a percent of sales. That being said, we continue to monitor these metrics, which did increase 6 basis points in the second quarter. We also watched cubic feet data to measure operational efficiency. We saw a 6% increase in the total number of cubes handled and a 2% decrease in the cost per cube in the second quarter. So operational leverage is occurring at the warehouse and delivery level. Some aspects of what appears to be operational inefficiency is driven by the constant change we have been undertaking as necessary to support our growth. As a fast-growing company, we almost never have a static period. We are either on-boarding the large chain or merging and integrating a new division. There are onetime costs in any sort of ramp-up like these, and it can take time to convert a new division to the Core-Mark systems, process and culture. And over time, we expect and demand greater efficiencies. In addition, we are investing in our sales force as we focus the organization on assisting our important independent retailers grow their sales and profits. We need to ensure we are generating the return we expect on this investment. I thought this perspective might be helpful to consider. The bottom line is our adjusted EBITDA grew over 9% for the quarter. I am pleased with that and feel that we are well-positioned to post record results for 2013. We are pleased to be in an industry as healthy as a convenience store industry. As we expected, the consumer demand returned to the normal levels we see as we entered our high season. It is always nice to see your positive expectations confirmed. The industry continues to grow, and we expect to outreach the growth rate of the industry because we take market share and sell deeper into our existing customer base every year. We are, in fact, the fastest growing distributor in the industry and the only significant consolidator. We plan to continue to grow our business through market share gains and acquisitions. We must also continue to exploit our competitive advantage to take market share wherever the opportunities arise. One of the opportunities we see developing is the blurring of the different retail channels. We are seeing drugstores and dollar stores sell items historically sold in the convenience stores. I believe our combined experience in the distribution of both traditional convenience store items and perishable items is a competitive advantage in these evolving channels. We are very confident that this retail development provides an opportunity for us and a rather large one at that. We hope to have development in this area in the future, which would allow for public discussions. And as always, we look to take market share in the traditional C-store space, like the Turkey Hill and Rutter's business. I do have a current concern for the industry, which is the lack of inflation in the non-cigarette products we sell. Historically, we have seen inflation rates of 2% to 3% in these products. But for a couple of years now, we have seen -- we have not seen inflation anywhere close to these rates. As many of you know, we bid for business on a net variable and cost-plus basis, so we benefit from inflation. Due to this pricing methodology, we priced our contracts with certain assumptions about price inflation. If we determine that this lack of inflation is a permanent or semipermanent market condition, then we will need to adjust how we handle our pricing models and sell to our competitors. This is not a material threat of any kind, but just another adjustment we and others in the industry need to make as the market evolves. Speaking of evolution, Foodservice and Fresh Foods now represent approximately 60% of inside store sales and more than 26% of inside store gross margin in the C-Store industry. Best-in-class retailers in the industry are well north of 20% and 30% of their inside store sales and gross margins, respectively. Our anticipation of the growth in these categories has driven the design of our programs and the package that we utilized when we go to market. We believe part of the reason we are the fastest-growing distributor in the industry and are on pace to post record results, is because we have the right strategies to help the future operators improve their business and financial results. Bottom line, our programs are resonating in the marketplace. I am happy to report that we had another good quarter with our FMI program. We have completed an excess of 1,500 [ph] surveys so far this year and are on pace to reach our 2013 goal of 3,000 stores. We continue to see churn rates significantly reduced for FMI-independent stores compared to our other independent stores. Other changes to the stores that we recommend, 60% are being accepted and implemented, resulting in an impressive non-cigarette growth rates for these stores. We have seen our nontobacco sales growth nearly double for survey stores in the FMI program compared to non-survey stores. As a reminder, the profit impacted a 60% acceptance rate, resulting roughly $25,000 per store or roughly a 40% increase in their profits, which I think would be impactful for any business. In 2013, we have focused our efforts on selling the VCI concept to our independent retailers, who can benefit from a reduction in their supply chain costs and an increase in the frequency of deliveries to their stores. We specifically created an ideal [ph] design for independent retailers, which we have nicknamed the black box. This tool is designed to take DSD data input and calculate the gross savings for the retailers if he decides to replace the DSD vendors with Core-Mark. We have displaced DSD vendors in over 1,000 stores utilizing the black box, and we are in the process of analyzing another 1,000 stores. I am relatively pleased with our results from a store count perspective. However, the number of DSD deliveries, consolidated on to our trucks, which is needed to maximize the impact of this concept, is lagging. We are making progress and continuing to train our territory managers on how to become better business consultants to our independent retailer. The VCI and Fresh incremental sales for the quarter was more than $26 million or $36 million year-to-date. These programs got off to a slow start at the beginning of the year, but we are starting to build momentum resulting in very good results for the quarter. We are projecting data over $100 million in incremental sales for the year. As the acceptance rate -- as the acceptance of any consolidation grows within our independent retailers, this number should accelerate. The potential opportunity is $1.7 billion for our approximate 10,000 existing independent retailers. Maximizing opportunities, everyone in this organization must be committed to and understand how critical this concept is. As to our acquisition strategy, we will continue with the strategy for many years because the industry is still very fragmented with approximately 300 distributors in our space. We want to grow our geographic footprint through acquisitions so we can cost effectively compete for market share throughout North America. We continue to have conversations with a number of potential targets, and we hope to have another acquisition in 2013. As to our latest acquisition, our new Carolina division, is doing well. We expect to convert them onto our systems this fall and will incur onetime conversion costs in doing that. Once completed, we would expect to gain efficiencies and cost reductions and continued adoption of our marketing programs in our key strategies. In summary, my current focus is ensuring that our investment in the sales force results in additional penetration of the independent stores in both the VCI and FMI programs. As always, we continue to pursue additional market share gains to grow our business. I remain confident that we will post record results in 2013. This confidence is driven by sales momentum we have generated with the Turkey Hill and Rutter's contract win and by the continued success we're experiencing with our key strategies. We continue to expect sales to reach between $9.8 billion and $10 billion in 2013, and adjusted EBITDA to reach between $112 million and $115 million. With our competitive advantages and experienced team, I'm optimistic we will reach our goals. With that, I will now turn things over to our CFO, Stacy Loretz-Congdon. Stacy?

Thanks, Tom, and good morning, everyone. The second quarter results were strong, and we are on pace to meet guidance in all respects. Adjusted EBITDA for the second quarter increased 9%, and year-to-date was up about 4%. The second quarter more than offsetting soft first quarter results. Year-to-date, adjusted EBITDA was $48.4 million and represents about 42% to 43% of our annual guidance, which is $112 million to $115 million for the year. We expect our current momentum and new contract wins will tip the back half of this year and allow us to deliver our EBITDA guidance. Diluted EPS for the second quarter was $1.01 compared to $0.87 last year, a 16% increase. Excluding LIFO expense, EPS was $1.20 for the quarter compared to $1.09 last year, a 10% increase. Year-to-date, diluted EPS was $1.23 compared to $1.18 last year. Excluding LIFO expense, EPS was $1.57 versus $1.54, the second quarter making up and surpassing our first quarter GAAP as expected. We are still forecasting diluted EPS between $3.10 and $3.25 for 2013, which includes an estimate of $16 million for LIFO expense, a 40% tax rate and 11.8 million diluted shares outstanding. 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. Moving onto the details for the quarter, sales reached $2.5 billion in the second quarter, an increase of $223 million or 9.7%. Cigarette sales increased 8% for the quarter, and carton sales increased 7.6% driven by the addition of our Carolina division and the new Turkey Hill contract. We also saw a cigarette price increase at the beginning of June that increased our sales and cost of sales. Cigarette product sales increased 10.5% compared to cigarette excise taxes increasing only 1.8% for the quarter. Excise tax growth was low due to carton volumes shifting from higher taxing jurisdictions in Canada to lower taxing jurisdictions in the U.S. Same-store carton sales declined 2.9%, better than the industry decline where 2 of the larger manufacturers reported 3.5% and 4.3% respective decreases during the quarter. Our food/non-food sales were $807 million for the quarter, increasing $97 million or 13.7% over the same period last year. Excluding the acquisitions and new Turkey Hill contracts, food/non-food net sales grew about 6%, driven by an improvement in same-store sales. The increase in same-store sales is indicative of the successful execution of our marketing programs that are focused on selling more items into existing stores with an emphasis on higher-margin category. Notably, excluding Turkey Hill and Carolina, General Merchandise and HBC grew 10%, driven by e-cigarette sales growth, which increased an impressive 5x the sales we recorded during the second quarter last year. This trend took off mid-2012 and has continued, but we may see some tapering in comps as we move into the fourth quarter. We believe e-cigarettes, along with smokeless tobacco categories, will continue to assist in the offsetting declining cigarette carton sales. Within our food category, we were very pleased that Fresh, including dairy and bread, grew about 20%. As we leveraged our marketing programs, we'll start to focus on the entire margin category. During the second quarter of this year, our gross profit increased $14.4 million or 11.7% compared to the prior year, while remaining gross profit increased $13.1 million, up 10.6% for the same period. Margins increased 10 basis points for gross profit and 4 basis points for remaining gross profit, bearing in mind that remaining gross profit excludes cigarette holding gains and LIFO expense. We recorded $3.9 million in cigarette holding gains as a result of the recent manufacturer increase in June compared to $3.2 million last year. Conversely, LIFO expense was lower than prior year, primarily due to lower forecast of inflation rates for cigarettes and certain nontobacco commodities. We will continue to reassess our LIFO projections in the back half of the year. Cigarette remaining gross profit increased 2.8% of $1.1 million to $39.9 million and represented 29% of our total remaining gross profit. As a percent of sales, cigarette margins were 2.34% compared to 2.46% last year. The remaining gross profit on a cents-per-carton basis was essentially flat, excluding the effects of our new Carolina division and the new contract, both which compressed cents per carton and resulted in an overall decrease of 4.5%. Food/non-food remaining gross profit increased 14% or $11.9 million to $96.9 million and represented 71% of our total remaining gross profit. As a percent for sales, food/non-food margins increased 4 basis points from 11.97% last year to 12.01% for the second quarter this year. Before the effects of a large new contract, which we anticipated with compressed margins starting in the second quarter, margins were up 12 basis points. We do anticipate further compression in Q3 from the contracts since we will then have a full quarter of activity in our numbers. In addition, food/non-food margins were compressed by a shift in sales mix within this food/non-food subcategory, most notably, the OTP category, which experienced sales growth of 16.3% all-in and had slightly lower margins than our food category that experienced 13.1% growth all-in. All else being equal, the lift in margins was the result of our key marketing strategies, which are all focused on driving more non-cigarette product sales, especially the ones with the higher margin. We believe FMI, VCI and our Fresh programs will continue to have a favorable impact on our remaining gross profit dollars and margins as we continue to focus on these important strategies to increase our customers' profits as well as our own. Moving to our operating expenses, we saw an 11.1% increase from $104.8 million last year to $116.4 million for the second quarter this year. Operating expense for our new Carolina divisions, including related amortization of intangibles, represented over 60% of this increase. As a percent of sales, operating expenses increased 6 basis points. We've mentioned before that as we grow our food/non-food sales at a higher pace than our cigarette sales, we will see operating expense percentages increase, since food/non-food sales have a lower price point per unit than cigarettes. As we drove down into our costs, warehouse and delivery expenses were $72.8 million, an increase of $6.6 million or 10% over the second quarter of last year. Excluding Carolina, warehouse and delivery grew almost 3.5%, supporting a comparable 6% increase in cubic feet of product shift. This corresponds to the 2.3% reduction in cost per cubes that Tom already mentioned. As a percentage of sales, warehouse and delivery costs were 2.9% compared to 2.89% in the second quarter, or essentially flat. SG&A expenses increased $5.1 million or 13.5%. SG&A expenses, as a percent of sales, were 1.71% compared to 1.65% in the second quarter of 2012. As previously mentioned, as our sales mix shifts, to the more food/non-food, we will see the percent to sales drift upward. That being said, we are monitoring this line very carefully. During the quarter, we did incur some costs related to the rollout of Turkey Hill and are starting to see some costs in preparation for the systems conversion in our Carolina division. Those project costs are isolated in SG&A for tracking purposes. However, amounts were not significant enough to carve out in our Q. Also, we continue to invest in the sales force and believe the recent momentum in sales growth will pay off longer term. And there were a few other line items where we incurred additional costs, increased reserves or chose to continue our investment spending for future leverage. However, none of these items individually are significant, but when taken in tandem with a shift in sales to food/non-food resulted in a lack of leverage. Moving further down the income statement, interest expense was slightly higher than last year driven by a capital lease we entered into last December and not by our external debt. You may have noticed that we amended our credit facility to extend our term 2 years to May 2018 and lowered our interest rates by 50 basis points. Our effective tax rate was 40.9% for both the second quarter of this year and last year, and we are still guiding to 40% tax rate for the full year. Moving to our cash flows, for the 6 months of the year -- first 6 months of the year, free cash flow was approximately $27 million compared to approximately $28 million last year. Both periods reflect some investment in excess cigarette inventory, which generated the cigarette inventory holding gains that has very attractive return characteristics. As an example, during the second quarter of this year, we built up our inventories in anticipation of a price increase that generated $3.9 million in holding gains. Our return on that incremental investment in inventory, net of carrying cost, was above 30%. As a reminder, we measure free cash flow as adjusted EBITDA, plus or minus changes in working capital, less CapEx, cash taxes and cash interest. In addition to our cigarette inventory speculation activities during the first half of the year, we carried slightly higher inventories to ensure high fill rates for our new customers. In addition, we used $3.8 million to repurchase shares, spent $2.2 million on dividend payments, and we recently announced our third quarter dividend of $0.19 payable on September 16 to shareholders of record on August 23. Through June, we spent approximately $7 million on capital projects, which is a bit lower than expected due in part to timing of certain payments and the delay of certain projects. We still expect not to exceed $30 million in CapEx for the year, and we'll monitor this number as the year progresses. Finally, net payments related to our income taxes were lower in 2012 due to some sizable refunds in the first half of 2012 that did not recur at the same pace in 2013. We're still forecasting free cash flow for the year to be between $55 million and $60 million, an increase of over 10% compared to 2012, depending, of course, on any unusual year-end activities. Our capital allocation decisions continue to support our key strategies and focus on ensuring we have sufficient capital to fund CapEx, inventory purchasing opportunities, acquisitions and market expansion, share repurchases and dividends. On these last 2 points, our board increased the authorization for our share repurchase program by $30 million at the end of May, and we continue to look to purchase shares opportunistically. Further, we anticipate continuing our dividend policy balancing our ability to increase dividends with alternate investment opportunities and cash flow availability. To summarize, we have a strong quarter building good momentum for the rest of the year, and we are on track with our guidance. With the additional lift in sales expected during the third and fourth quarters, operating expenses should leverage and additional cash flow will be generated. We are building a solid foundation for 2014. And with that, I would like to thank all of our employees, our vendors, our customers and our shareholders for your continued support. Operator, you can now open the line for questions.

[Operator Instructions] Our first question comes from Andrew Wolf. Andrew P. Wolf - BB&T Capital Markets, Research Division: Wanted -- do you have any theories on why there's no inflation in food or in the other categories or very little? Do you think it's more of the input cost and the sort of cyclicality of energy prices being down and Ag prices? Or do you think it's some kind of competition with the vendors, and they're just keeping the prices low and absorbing any -- factor costs into....

I think it's probably -- Andrew, I think it's a combination of all of the above. I think one of the things we have seen is we're, in particular with candy manufacturers, where they're actively reducing their pack size, but yet maybe keeping their cost at the same level. But I think one of the -- you could surmise that they're helping to offset their cost increases by doing that. But it is -- I think it's a combination of everything. We had anticipated with the drought last year and commodity prices increasing because of that, that we would see some inflation this year, but it just hasn't happened, and we're not hearing any rumbling from our manufacturing community out there about it happening in the near future. Andrew P. Wolf - BB&T Capital Markets, Research Division: The pack-size thing has been going on for a while.

I think that's the way that they can really offset any smaller incremental cost increases. I'm sure if there was big commodity increases that I don't think they would be able to do that through pack -- smaller pack sizes. Andrew P. Wolf - BB&T Capital Markets, Research Division: On the Rutter's farm pickup, is that related to a competitor kind of leaving the market, or is that more related to pure pickup on, on some of the other attributes?

They were with another distributor for many years, and they were looking for a new supplier to partner with them going into the future. And so that was basically being able to convince them, and by sharing with them how we go-to-market, what our strategies are, which aligned with their strategies. And so we're really excited that they chose Core-Mark. Andrew P. Wolf - BB&T Capital Markets, Research Division: I don't know how much you're willing to share this, and I can understand competitively, but would you say where price versus VCI and Fresh, and particularly, Fresh and factor -- the attributes Core-Mark brings that maybe others don't in a differentiated manner versus price, and not necessarily here, but just overall, how much, when you win a bid or maybe don't win a bid, how much that factors in?

In every bidding situation, we know we have to be competitive, right? Because this is just a competitive business. But secondly and probably more importantly is our flexibility and our strategies, which are really focused on increasing the customers' profitability. And that's really #1. And I think what pushes us over the edge, I believe if we're competitive from a pricing perspective, what pushes us over the edge when we win major accounts is because of that. The focus on the customers' profitability in partnering with them to deliver on their key strategies, but then also our flexibility to get it done. And I think that in our past wins, I think that's really what has driven those wins. Andrew P. Wolf - BB&T Capital Markets, Research Division: And just one last question, and I'll get back in the queue. Tom, you mentioned the variable contribution rate being about twice that. Is that -- when you talk about that, is that for the -- just for the Fresh, or is that for all of the non-cigarette? And I guess to some extent, you've [indiscernible], it looks like maybe this quarter didn't quite come through that way, and you're seeing a lot of that as mix and data your getting at Turkey Hill. But it also sounded from Stacy's presentation that while you had a lot of individually nonsignificant cost increases that maybe if you added them all up, it might have been a little more -- might have meant something. So if you could reflect on that, and that's it for me.

A couple of things. We talked about really our, the mid-variable contribution, 2x greater than our normal, it's really when we talk about our Fresh and our vendor consolidation items, in particular, dairy and bread and usually those other categories we take away from DSD suppliers. And that's 2x greater than our traditional C-store mixes. So I think as we continue to grow, as Stacy said, our Fresh categories grew 20% for the quarter, we'll continue to see the margin to increase now. It does happen when we do have a large win like a Turkey Hill and/or a new acquisition. We do see the pressure in our margins until we start to either develop the vendor consolidation and Fresh opportunities and/or in both the new account wins and also in our new acquisitions. As far as the cost, as we sell 6% more cubes, we definitely are going to incur higher costs. Now, the metric, I think, is important really from a warehouse and delivery is that cost per cube metric because I think that really tells us, are we leveraging those additional cubes through our system? And I think in the second quarter showed that. Secondly, at the end of the day is our goal is we have to grow our margins faster than our expenses. And I think as we saw the 9% growth in EBITDA, I think we're showing that we're doing that. So we definitely are moving in that direction. The other thing, too, is there is an investment in our sales force. And we definitely have spent more training, more development, more time with our territory managers because, again, this is an investment in the future, and it really is all about our independent retailers and making them relevant in the industry. And so we really need to take all of the things that our best-in-class retailers are doing and really get those into our independent retailers. And so definitely there is an investment we're spending in our sales force.

Our next question comes from Ben Brownlow. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: Tom, I think you said in your prepared comments that you were working on an acquisition for later 2013.

Yes, we always have activity going on. And as you know, Ben, it takes 2 people to tango, right? And so it's early stages, and hopefully, we'll have something. But it's just 1 of those things we could see until the final agreement is signed, nothing's for sure. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: And that is an acquisition of a broad-line distributor, it's not an account win.

That's correct. We always -- yes. Definitely, when we talk about acquisitions, we were speaking of a broad-line supplier, right? And that's not to say we don't have some account wins that we're working on also, because we always have a pipeline full of those. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: In the past, you said there's still holes, especially in the Midwest and kind of East of Mississippi to fill, is that still a fair statement?

Yes. I think if you look at our geography, I think that we definitely have offset some of the opportunities, the great opportunity lies. Because again, I think as I talked about, it's really, for instance, our acquisition of J.T. Davenport versus our new Carolina division. Really what that does for us is improves -- it will improve once we convert them on our systems -- our logistical -- from a logistics perspective. And so I think that's where the Midwest would really where we could get some great efficiencies from, if we had an acquisition in the Midwest. Benjamin Brownlow - Raymond James & Associates, Inc., Research Division: If you could just take a moment and kind of highlight what you've done with the Carolina division, under the major system conversion of this fall. But where are the expected cost, if you can break that out with the conversion, and how does it rank relative to the other divisions and just kind of highlight what the major milestones have done since that acquisition?

So, so far, today, everything is geared towards preparing them for the conversion from their systems onto our systems. And that means it's from inventory to invoicing to pricing to financial statements, right? So a lot of work is being -- a lot of preparation work is being done at the division to prepare them for that. In addition, the division is out in the marketplace, communicating with their customers. We had to go through a retagging process because we have different item numbers. So we have to prepare the customers from that perspective. On average, I would say when we do a conversion like this, it ranges from $1.25 million to $1.75 million, on average. And so that -- and again, keep in mind that we have to -- not only are we converting them to the system, but we have to then train all their employees on the new system. And so we definitely fly in a lot of our best warehouse people and our drivers, et cetera, to help them. The other area is marketing programs. Now they've been out in full force for the last 3 months, really incorporating and selling our marketing programs, including Arcadia Bay Coffee program, our SmartStock program, et cetera. So from that perspective, they're ahead of the ballgame, as well as to get the kind of local commissaries signed up, so they could start delivering fresh salads and sandwiches, et cetera.

Our next question comes from John Lawrence.

Tom, would you discuss a little bit the flow of the quarter? I mean a little softer first quarter, picked up in the second quarter. Talk about that sort of geographically and what happened in the regions and when you saw that real pickup start to happen?

I think one of the things we saw in the first quarter, in particular, was we saw a very weak cigarette cartons across the board. And I think even the manufacturers indicated that also in their public communication. And then as we entered into March, we really saw the cartons get back more in line to what the anticipation was, so that was good. That was 1 of the key issues that we had in the first quarter. Secondly is we just -- there wasn't a lot of foot traffic at the convenience stores. And I think for a variety of reasons, people talked about the weather, they talked about gas prices. They talked about the tax that went to -- the employee tax that went into effect in the first quarter. And I think as people -- as the consumers really sort of absorbed all those, I think we really started to see some improvement in March, and then it just continued on into April. And it continued to grow as we went through May and June. And of course, adding Turkey Hill in the middle of May and then having the full month of June also assisted us.

And was there any particular part of the country was that deviation was wider?

I think that, definitely, versus -- if you look at it versus last year, I think definitely, the Northeast suffered more than the Northeast this year versus last year because I think last year, I think if I remember right, really they didn't really have a winter. And this year they did. And so it's taken them a little longer to get out of those doldrums than probably the rest of the country.

And secondly, on the -- when you talk about VCI, and I guess, you got the number right. $26 million in the quarter, $36 million year-to-date, is that right?

That's correct.

So did that $26 million just -- was June the strongest month of that? I mean is sequentially just on a weekly basis getting better?

Yes, it is getting better. And it's interesting because as we go forward throughout the year is Hostess, which was a huge DSD vendor, right, within the C-Store channel. Well, I think they -- unfortunately, it was a failed business model, and that's why they filed bankruptcy. And so now, they realized that the way to get their product into a larger share of the market is through the wholesale suppliers. And so we started selling Hostess in July. And as they get their production correct, I think we'll continue to see that growth in that area, which will just help us -- which will help that VCI and Fresh number grow.

Great. And then last question, you touched on acquisitions a little bit. Can you -- you have any comments regarding the channel blurring we've discussed and you've talked about publicly? Any -- do you see anything there that, that trend over the last weeks and months have gotten any stronger, the desire on these players to want to move that direction continues increase?

I think that indications are -- and I think they want to move that way. I just think that, again, it's like that big oil tanker on the ocean, right? I mean if you want to make a 5-degree turn, you've got to start a week ahead of time just to turn the ship. And I think when they're -- and it is a risk, right? So it's probably the right thing to do. So I think it takes time to develop and then make sure that it's the right decision. So yes, I would love to have it quicker, but unfortunately, it isn't.

But those discussions continue?

Those discussions do continue.

Our next question comes from Chris McGinnis. Christopher McGinnis - Sidoti & Company, LLC: Just a question, Tom, I think you referenced the black box that your -- this new kind of data that you're bringing customer base. Can you just maybe expand on that? It sounds like you were maybe a little disappointed with the growth of the VCI, or maybe it's -- some of it's not working? How does that, how is that helping that 1,000 store base that you've already [indiscernible]?

I liken it to our focus marketing issue with FMI. So when we rolled out FMI, it's a culture and behavior change, for not only our sales force, right, but also for our customers, especially independent customers. Because the independent customer tends to be 1 close with the vest with information. They also tend to be skeptical and as to really, are you helping me? And thirdly, especially when it comes to consolidation is -- sometimes the DSD vendors do provide a lot of in-store labor for their stores. And so as we take in this concept in this program out to the market with their territory managers, as you can imagine, there's a lot of obstacles and barriers to overcome. And so we're seeing stores that we're getting DSDs consolidated under our trucks, but not at the level that we need to or we would expect to. And I think it's because there's some tentativeness on our independence. And to say, well, let's see how this works first before I give you any more DSD vendor information. And so it's definitely a work in progress, it's very early. We've been after this probably a little over 6 months in the field. And so just like anything is everyday we learn something new, we come up with a different tactic, a different selling strategy for it. And I expect and am optimistic that, that we'll continue to grow with that, and we'll continue to add volume from DSDs on to our trucks that are delivering to the DSD -- to the independent retailers. Christopher McGinnis - Sidoti & Company, LLC: And I guess with your prior experience of -- its been pretty successful obviously, with the rollout. Were they just early adopters that maybe was it the larger chains, and then -- it's just a little bit slow to adopt it?

It is, because I think when you're talking to a chain, whether it's a chain of 10 stores or 100 stores or 1,000 stores, you have decision-makers for all those stores. So basically, you're focused on selling the concept and strategy to that decision-maker who probably has a broader view of the world and what the opportunities are and what the synergies and the savings are. And so I think when you're talking one-on-one, it's the owner whose trying to run his cash register, et cetera, and trying to -- it's a concept that we're selling to this owner. And so it's a little bit difficult and it takes more time. Christopher McGinnis - Sidoti & Company, LLC: Just on Canada, can you just maybe talk about decline? Is that cigarette-related?

It is. I mean we did lose a couple of mid-sized chains last year, which are impacting that this year. In addition, we had some account issues that -- from 1 of our accounts up there from a bad debt perspective. But if you sort of normalize it for that base, they would have showed improvement versus last year in the quarter. We also have -- we've been investing in one -- some new business we brought on in the Western region, in the Western part of Canada. And also, we're investing in some infrastructure for some new business that we'll be bringing on board toward the latter part of the year. Christopher McGinnis - Sidoti & Company, LLC: And just one last question. I remember last year, I think in Q2 and then also it spilled into Q3, just over time, how is that? I know the summer, I think, has seemingly been a little bit -- or the weather's been a little bit, maybe favoring that. Just how did that play out, and has that issue creeped up at all --

It's creeped up some in July. But it's definitely better than it was last year. The one thing we do have is with the chain the size of Turkey Hill, when we bring that chain into our business, we do have incremental operating costs because we have, basically, 6 weeks to get that onboard, so we have higher, multiple number of employees in the warehouse in our delivery and transportation group, and your training them on the fly to get them ready to go. And so you tend to -- you definitely have a higher operating cost, which tend to leads into higher overtime in the divisions that handle that big volume. So definitely, we're better -- we were better in the second quarter than we were last year, and we're still better in July than we were last year. But that is just, that's 1 thing that, again, I focus on and consistently remind our Senior VPs and our Division Presidents and our corporate operations that we can't lose sight of that.

Our next question comes from Nelson Obus.

I had -- first, I wanted a clarification, then I had a quick question. In the conference call, you talked about a contract that put a little pressure on margins. And then later on in the conference call, you alluded to something that sounded very similar that you put Turkey Hill -- you tagged Turkey Hill. So are we talking about the same thing here?

Yes, yes. The Turkey Hill contract, that's correct. Because of the size of the customer.

And the second question is, so if I go into a Duane Reade and I see all this Fresh and everything else that's there -- at Walgreens actually, or any of that new initiative that you alluded to early in your comments. Who's doing the distribution at this point? Who do you have to supplant?

It depends on the chain you're talking about. For instance, I think in New York City, with Duane Reade, they have a third-party transport company that delivers the product from central commissaries. If you look at other chains, they're using a multitude of DSD vendors. So they have a dairy vendor, they have a fruit vendor, they have a sandwich vendor, et cetera. So again, they use a multitude of DSD vendors to deliver that product.

Is it the same value proposition that you would utilize in going after a convenience store, or is it slanted in a different manner?

It's the same concept because what it's about, it's about vendor consolidation and streamlining the supply chain. Because again, as we've seen in the convenience store industry is there are cost of goods savings, as well as in-stock level improvements and inventory level reductions, et cetera. So it's the same concept that works for these other alternative channels. It's all about vendor consolidation and really making the supply chain more efficient.

Got it. Just in a related area, I just -- I'm sure that the industry, the distribution industry has kept an eye on the decision that was probably made 1.5 years ago by Gatorade to get their own distribution. Have there been any sort of postmortems on that, essentially succeeded, in a sense that the company made an error in doing that? Because that was really sort of counterintuitive on their part.

I think that when they put Gatorade on their trucks -- I think if you talk to Pepsi, I think that they -- that was a success for them. But I am hearing rumblings that there are some of the other brands that were sort of consolidated onto the soft drink trucks are not doing as well. And because they're not the primary brand, they're off-ball [ph] brands. So I think again, I think Gatorade was -- I think Pepsi would say it probably is a win. And I'm not sure if their retailers have seen any detriment of that. But I do know there's rumblings of maybe not-so-good wins on other products that were consolidated in the soft drink trucks.

[Operator Instructions] At this time, we have no further questions.

Well, thank you for your participation in our conference call and for your interest in Core-Mark. The second quarter was very healthy and as expected. It's clearly back on track to reach our 2013 guidance. We continue to focus on the execution of our key strategies, which we believe will drive our growth and our market share over time. If you have additional questions, please feel free to call me at (650) 589-9445. Thanks, Chris.

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