Performance Food Group Company (PFGC) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the 2015 First Quarter Investor Call. My name is Cynthia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Miss Milton Draper. Miss Draper, you may begin.

Thank you, Cynthia, 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 projects. 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 today to review our first quarter results and to answer any questions you might have. If you have additional follow-up questions after the call, please call me at 6505899445. Joining me today is the Chief Executive Officer of Core-Mark, Thomas Perkins; and the 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 will briefly address a recent report published on us and then he will move on to discuss the state of our business and our strategy going forward. Stacy will then review the financial results for the fourth quarter - first quarter. We will then open up the call for your questions. Now, I would like to turn the call over to our CEO, tom Perkins.

Good morning everyone and thanks for attending our call. Unfortunately, I feel compelled to spend a minute addressing a few points covered in a recent research report recommending to sell or short sell on our stock prior to discussing the state of our business. I will be brief, first, our story, our management, our strategies, our growth, our performance, and our industry did not change on the day prior to the report being issued and we expect no changes in the future, which leads me to point two. Regarding our valuation, that is your job, our job is to perform. Lastly, I am sure everyone knows that cigarettes have been in a secular to the decline for a few decades and this category has always been highly regulated. While facing these obstacles, we continue to grow our carton sales through market share gains, and we continue to make a higher profit on each carton of cigarettes sold. Manufacturer price increases and our core strategies are the primary drivers to the increased cigarette profits and we expect this to continue. I am as proud and excited about this company as I have ever been and I also have confidence in our investors who take the time to understand the industry and the many opportunities that lie ahead. Since we were not contacted prior to the report being issued or privy to all the information contained in the report, please feel free to contact Milton, Stacy or myself with anything I did not address. Now, back to the important stuff. This is a \very bullish time for the c-store space. The National Association for Convenience Stores recently announced that 2014 recorded the highest in-store sales in the industry's history, growing 4.6% and now representing 30.8% of the total c-store sales. Certainly, we and others believe that the low fuel price is having a positive impact on those sales, but the overall growth trends for the industry continue to be positive. It is clear, convenience store consumers are rewarding the channel with their increased patronage and we expect that to continue. Some quick facts on the scope of the convenience store industry. Convenience stores represent almost 34% of all retail locations in the U.S. with nearly 153,000 stores, which is up 1% versus 2013. Compare that to drug stores with about 42,000 or Dollar Stores with about 27,000 or Starbucks with about 12,000, I think it is important to understand how vital this industry to the U.S. economy and how it affects the consumers' daily lives. The convenience store industry employed 2.4 million people last year, a 10.6% increase. The sales generated by the convenience stores in the U.S. last year were greater than the entire GDP of Switzerland and this industry is growing. Our job is to partner with the customers to help them become more relevant retailers make no mistake, our long-term view of this industry is very bullish. To provide some additional color, I recently attended the NACS CEO Summit, which brings together many CEOs, from large c-store retailers and major suppliers to the industry. During this summit, the retailers and suppliers shared their views for 2015 and future years. The mood of the summit was very optimistic. Many of the retailers were coming off a strong 2014 and were looking forward to continuing that momentum into 2015. Lower fuel costs, are definitely assisting in these results. All of the participants agreed that the c-store industry is constantly reinventing itself and is the reason why the industry is resilient and relative in today’s economy. There were many consistent themes shared by all the participants. The shopping habits of consumers are changing. At the core of these changes is a desire for convenience. This is one of the core strengths of the c-store industry. In addition, the consumer is requiring fresh, healthy and good for you foods. These categories are seeing a rapid growth in the industry and have tremendous growth potential in the future. Food service continues to grow with the industry reporting a 9.7% growth in 2014 and plays an ever increasing role in improving the profits of the c-store. Food service provides the retailer with a way to attract more shoppers to their stores and increase their profits. This is even more important as the industry continues to face headwinds such as the flattening out of fuel consumption and the decline in cigarette carton consumption. Finally, retailers are focused on controlling their in-store costs. The retailers cost are being driven higher due to various rules and regulations that governmental agencies are implementing, so a need to increased efficiencies, and productivity is necessary to offset the cost increases to their business. I came away from this meeting even more confident that our core strategies VCI, fresh, and FMI, are exactly what our customers need to meet the challenges they face to attract and serve the ever-changing needs of their consumers. Moving on, a quick update on our partnership with Rite Aid. We are making significant progress in our discussions to expand the categories of product that we deliver to their stores. Execution on the current items delivered has improved. We continue to sell chilled, fresh, frozen and bakery items in about 4200 Rite Aid stores. We firmly believe that we should be delivering more of the items that Rite Aid sells in their stores. Our partnership provides Rite Aid with a national distributor that can provide them a consistent production selection which they can leverage to drive food traffic and sales in their stores. Now on to Q1 results. I would leave most of the details in Stacy's capable hands but from my perspective, Core-Mark had a very good first quarter and we are encouraged by the momentum we are seeing in the business. Our sales were up a healthy 8.1% adjusted for foreign currency fluctuations. This was driven by both an increase in same-store sales and market share wins. Comparable same-store sales for non-cigarettes improved 5.5% in the first quarter as it did in the fourth quarter last year. This metric is one of the key statistics we use to measure how well we are serving our customers and indicates to us that our core strategies are resonating. I am reassured by the continued healthy growth of this metric. I was especially pleased to see the 18% growth in fresh products sold. This indicates that consumer tastes are continuing to move toward the fresh and good for you products. Same-store carton sales for the first quarter were up 2% which is the second quarter in a row showing growth in this statistic. We can’t know for certain, but we suspect that this was driven by a combination of lower fuel prices better employment levels and CVS’s exit from the tobacco business. Now, remember, CVS reported their tobacco sales were approximately $2 billion, this was a large share of the $3.7 billion of cigarettes sold in the U.S. drug channel in 2014. This is a fraction of the $52.5 billion of cigarettes sold in the c-store channel. I am encouraged by the continued growth we are seeing in our sales and gross profits, the latter of which grew 10.4% for the quarter. My confidence in the fundamentals of our company and the industry we service continues to strengthen due to the current opportunities we see. We did see operating leverage in the first quarter with both sales and gross profits growing at a faster rate than operating expenses, driving the improvement in our operating income. Warehouse and distribution expenses increased about 6% and decreased 3 basis points a percentage-of-sales basis versus the first quarter of last year. As we head into the summer, our focus is on ensuring we are properly staffed to handle the higher volumes and providing excellent service to our customers during this important season. Our transportation cost continue to improve. Our fuel expenses were 2.6 million less in the first quarter this year compared to the first quarter last year. This improvement was driven by a reduction in the prices we paid for diesel, growing use of the CNG fuel for the trucks we have converted, and the reduction in stem miles from the movement of customers into the Ohio division. Also on the transportation front, we expect that longer term, the driver pool across North America will continue to tighten, but we have seen some relief from the spikes we experienced last year. We believe that the reduction in fuel production in certain regions and the plans we have implemented addressing the hiring, training, and retention of drivers is causing those improvements. The bottom-line is our adjusted EBITDA increased 44% to $22.9 million in the first quarter. I am very pleased by these results and feel we are well-positioned for the rest of 2015. As a result, we have decided to tighten our guidance by increasing the bottom range of our revenues guidance previously $10.7 to $11 billion now $10.8 to $11 billion. We have also lifted our EBITDA guidance from $125 billion to $129 billion to $126.5 billion to $129 billion. Just to reiterate, our guidance does not include any big account wins or acquisitions. We had a good start with the execution of core strategies. We are targeting $100 million in incremental VCI and fresh sales for 2015. And these two programs contributed over $22 million in incremental sales to the quarter. Innovation continues to drive the results in these categories. You may have seen the recent announcement regarding our strategic partnership with Boyd's Coffee Company. Boyd’s is known as the premium coffee company in the c-store space and have been operating under a DSD model. This partnership should broaden and improve the coffee options and programs we bring to our customers and improve the overall quality and the service they offer to their customers. We are again targeting 3000 FMI surveys for the year. These surveys will be a combination of new stores redo, some stores surveyed several years ago, and potential new stores. We have gotten off to a strong start in the first quarter completing approximately 630 surveys. We continue to see our non-cigarette sales to these stores grow two to three times faster than un-surveyed stores and the customers' acceptance rate of a recommendations continues to be above 60%. In summary, business is good and the industry is healthy. I am very pleased with the first quarter results and feel good about where we are positioned as we head into the summer season. We will remain focused on the execution of our core strategies and business operations. We will continue to innovate in how we go to market to assist our retailers, to meet the ever-changing needs and demands of the consumers. We are also focused on investing in our people, technology, systems, and assets in order to support the future long-term growth of the company. It is my responsibility to make sure this organization has the tools and resources it needs to support our continued growth and to ensure we adequately leverage these investments to return value to you, our shareholders. 2015 is looking like we could have a very good year. With that, I will now turn things over to our CFO, Stacy Loretz-Congdon.

Thanks, Tom, and good morning, everyone. I'd like to start my comments with a brief discussion of our earnings per share for the quarter and full year guidance. Diluted EPS for the first quarter was $0.24 compared to $0.10 last year. For those of you that model EPS excluding LIFO expense, this translates to $0.30 for the quarter compared to $0.17 last year, up $0.13 or 76.5%. We tightened our 2015 annual EPS guidance following a solid quarter has strengthened our belief that we will deliver annual results towards the upper-end of our original guidance. For 2015, we are now expecting an EPS range between diluted EPS was $1.83 in 2014 compared to $1.79 for 2013. We had guided to a range of $1.87 and $1.91. Key assumptions remain unchanged and include $16 million for LIFO expense, $8 million for cigarette holding gains, a 38% tax rate, and 23.4 million dilutive shares outstanding. Excluding LIFO expense, we are now expecting an EPS range of $2.29 to $2.33. This compares to $2.26 in 2014 which included approximately $0.36 per share of candy holding gains and net OTP tax items which are not expected to recur at the same levels in 2015. We did received 900,000 in net OTP tax refunds for the first quarter of 2015 and it is possible we may receive additional refunds or assessments later this year. But these events are very difficult to predict. Moving on to our first quarter results. Sales increased 6.6% to $2.5 billion compared to $2.3 billion last year. Excluding the impact of foreign currency, sales increased 8.1%. The weakness in the Canadian dollar reduced Canada’s contribution to sales by about $34 million for the quarter. First quarter is generally our softest quarter and currently represents approximately 23% of the top-end of our sales guidance consistent with the past two years. Cigarette sales increased 6.3% to $1.6 billion compared to $1.5 billion last year, driven by a 4.4% increase in carton sales and a 1.8% increase in the average selling price per carton, which includes foreign exchange effects. It is interesting to note that same-store carton sales actually increased 2% during the first quarter, contributing to our strong 4.4% increase in carton sales. The remaining increase was attributable to the Karrys acquisition as well as other market share gains. Industry carton shipments were down a modest half a point. An increase in the same-store carton sales is fairly unusual for us and the modest decline in the industry is also unusual. Many reports are citing strong consumer spending fueled by lower gas prices. Longer-term, we would expect the industry consumption trends to more historical 3% to 4% declines. However, we have typically those trends. Our food/non-food category sales increased 7.2% in Q1 to $807 million compared to $753 million in the same period last year. This increase was led by food in particular which was up 9.4% compared to prior year. Rite Aid fresh refrigerated and frozen sales contributed meaningfully to our success in this category. Remaining increases in food were led by our snack category, which increased about 14% driven by alternate snacks including meat snacks and our nuts, seeds, and dried fruit categories. The industry overall is showing strength in these categories benefiting from strong unit growth as well as some inflation. All in, our fresh categories which include dairy, bread, fresh products, and meat increased nearly 18% during Q1 benefiting from the Rite Aid contract and the execution of our core strategies. Gross profit increased $12.9 million to $137.3 million, an increase of 10.4% for the first quarter of 2015. We recorded $0.9 million in net OTP tax items of $0.5 million and incremental cigarette holding gains while LIFO expense was $0.4 million less than prior year. Remaining gross profit which excludes the aforementioned items increased $11.1 million or 8.8% to $137.8 million. Remaining gross profit margin increased about 11 basis points for the quarter, or 17 basis points if you adjust for the 6 basis point compressing effect of the cigarette manufacturer price increases. Cigarette remaining gross profit increased 4.3% to $36.4 million, benefiting primarily from the 4.4% increase in carton sales. For the quarter remaining gross profit per carton was essentially flat or slightly up excluding foreign exchange impacts. Non-cigarette remaining gross profit increased $9.6 million or 10.5% to $101.4 million for the first quarter of 2015. Remaining gross profit margins for non-cigarettes increased 37 basis points. Our strategy is focused on improving the non-cigarette margins by 20 basis points per year, excluding any compressing events which we normally call out. Our Q1 results were driven predominantly by shifting sales towards higher margin items. Moving on, operating expenses were $127.4 million in the first quarter of this year compared to $119.8 million for the same period last year, a 6.3% increase supporting a 6.6% increase in sales and a 10.4% increase in gross profit. Operating expense as a percent of sales were essentially flat, absorbing cost associated with our expansion activities including our new Ohio division and the Karry’s acquisition. Operating cost as a percentage of sales for the remaining business decreased 11 basis points. Warehouse and delivery expenses increased $4.2 million or approximately 5.6% to $79.5 million during the first quarter 2015. Almost half of this increase was due to Ohio and Karry’s. The remaining cost increased 2.9% supporting a comparable 6% increase in cubic feet handled 7% increase in miles and almost 10% increase in deliveries. Favorable fuel cost contributed to our leverage compared to last year to the tune of $2.6 million. As a percent to sales, this benefit was partially offset by the shifting sales to food non-food categories increasing warehouse and delivery operating cost by about 4 basis points. SG&A expenses increased $3.4 million or 7.7% during the first quarter excluding expansion cost related to Ohio and Karry’s comparable SG&A increased approximately 5.2% and as a percentage of sales decreased modestly. Bonus and stock comp accruals were $1 million higher than prior year due to better Q1 performance. We mentioned on our last call that our annual guidance includes approximately $6 million to $7 million of investment spend affecting SG&A in 2015. This investment is focused on people, technology and infrastructure and we’ll ramp up as the year progresses with a focus towards the back half of the year. So leveraging this line item may become a little bit more difficult later this year. These investments support longer-term value creation and are necessary to maintain our continued growth. In Q1, we spend less than $1 million with those dollars contributing to a facility consolidation and system improvements that will increase productivity and efficiencies in the future. Moving to cash flows, cash generated from operations before working capital changes was $18.8 million for the quarter compared to $14 million for the first quarter of 2014. Changes in working capital which measures two single points in time resulted in a generation of $63.3 million compared to $63.6 million for the first quarter last year. The largest contributor to working capital in both periods was the cash generated from flushing inventory levels down to more normal levels compared to a year-end position. As we have said in the past, our peak inventory levels are generally at the end of the second quarter before the July 4 holiday and December 31, when we are building inventories to preserve our LIFO position. Free cash flow, which we measure as adjusted EBITDA plus or minus changes in working capital, less CapEx, cash taxes and cash interest, was over $77 million for the quarter compared to almost $66 million for the same period last year. First quarter is always robust due to significant swing in inventory levels from year end, a better gauge is our annual forecast for free cash flow that we still believe will be between $65 and $70 million for 2015. CapEx got off to a slow start that we are still guiding to $35 million for the year. Average debt for the year was $30.4 million compared to $13.6 million in 2014. The purchase of Karry’s in late February a slightly slower flush of inventory levels fro year end drove average debt levels up. We spent $3 million on share repurchases in Q1 and continue to support the stock so far in Q2 subject to 10-b51 limits. We also paid $3 million in cash dividends in Q1 and have announced our second dividend in our press release this morning. As we move towards, the fourth quarter, we anticipate our free cash flow will support another increase in our dividend as has been our historical practice. We did use about $8 million of cash to acquire Karry Brothers in Canada and a large portion of this will be self-funding as we build and stabilize related accounts payable and tobacco taxes payable levels. Our capital allocation decisions support our core strategies and focus on ensuring we have sufficient capital to support our initiatives that will ultimately return value to you our shareholders. Our investments in CapEx and related infrastructure and our acquisition and expansion activities are all focused on long-term value creation. Opportunistic inventory buys may be shorter term but are an integral part of our wholesalers business and help us maximize free cash flow that allows us to fund our dividend and shore repurchase programs. To summarize, we had a very good first quarter and are very optimistic about the year. Nothing has changed in our fundamentals or our strategy. We operate in a robust and growing industry with great momentum to continue our growth trajectory and we believe we are on track to deliver yet another record year. 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 line for questions.

[Operator Instructions] And our first question comes from Mark Wiltamuth with Jefferies. You may begin.

And our next question comes from Andrew Wolf with BB&T Capital Markets. You may begin.

And our next question comes from Ben Brownlow with Raymond James. You may begin.

And our next question comes from John Lawrence with Stephens. You may begin.

And our next question comes from Chris McGinnis with Sidoti & Company. You may begin.

[Operator Instructions] And we are standing by for audio questions.

Okay, thank you for your participation in our conference call and for your interest in Core-Mark. We are very pleased with the first quarter results and believe the momentum we have in our business is very encouraging. We believe 2015 will be another record year for Core-Mark. If you have any additional questions, please feel free to call me Milton Draper at 650-589-9445. Thanks operator.