Core-Mark Sees Net Income Growth of 59.4%

Net sales increased 11.2% to $4.2 billion.

Core-Mark Holding Co. Inc., one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America, announced financial results for the second quarter ended June 30, 2018.

“We closed out a solid second quarter led by strong sales growth, improved operational performance and bottom line results headed in the right direction. Our most significant contributions came from gains in non-cigarette sales, improved performance in our warehouses and new market share wins,” said Scott McPherson, president and CEO. “While we still have more work to do to return performance to the levels Core-Mark is capable of, we are making good progress toward our goals. We have entered the important summer season in a good position, giving us confidence in our financial guidance for 2018.”

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Second Quarter Results
Net sales increased 11.2% to $4.2 billion for the second quarter of 2018 compared to $3.8 billion for the same period in 2017. The net sales increase was due primarily to the contributions from the acquisition of Farner-Bocken Co., which was completed on July 10, 2017, the addition of Walmart Inc. and incremental non-cigarette sales to existing customers. Non-cigarette sales increased 22.0% as the Company gained additional net market share and increased its non-cigarette sales to existing customers. Non-cigarette sales expanded to 32.7% of total net sales for the second quarter of 2018 compared to 29.8% of total net sales for the same period in 2017.

Sales of the Candy category grew 30.3%, driven by Walmart Inc., while Health, Beauty & General sales increased 36.0%, benefiting from the increasing usage of alternative nicotine delivery products. In addition, sales in the Food and Fresh categories increased 17.5% and 18.4%, respectively, compared to the same period in 2017. Cigarette sales grew 6.6% and benefited from a 3.3% increase in the average sales price per carton, which was offset by a 4.0% decline in carton volume.

Gross profit in the second quarter of 2018 increased 16.6% to $216.9 million compared to $186.1 million for the same period in 2017. The increase in gross profit was driven primarily by net market share gains and an increase in sales to existing customers. Gross profit margin increased 23 basis points to 5.13% of total net sales during the second quarter of 2018 from 4.90% for the same period in 2017, driven primarily by the shift in sales mix toward higher margin non-cigarette items. Remaining gross profit, a non-GAAP financial measure, increased 16.8% to $220.3 million from $188.6 million.

The Company’s operating expenses for the second quarter of 2018 were $198.6 million compared to $174.0 million for the same period in 2017, with Farner-Bocken expenses accounting for $17.2 million of the $24.6 million increase. The remainder of the increase in operating expenses was due primarily to sales volume growth. Operating expenses as a percentage of net sales increased to 4.7% for the second quarter of 2018 compared to 4.6% for the second quarter of 2017 due primarily to the shift in sales mix to non-cigarette products, which have lower price points than cigarettes.

Net income was $11.0 million for the second quarter of 2018 compared to net income of $6.9 million for the same period in 2017, a 59.4% increase. Adjusted EBITDA, a non-GAAP financial measure, increased 40.9% to $42.4 million for the second quarter of 2018 compared to $30.1 million for the second quarter of 2017.

This improvement was driven by Farner-Bocken, increased non-cigarette sales to existing customers and operational improvements.

Diluted Earnings per Share (EPS) was $0.24 for the second quarter of 2018 compared to Diluted EPS of $0.15 for the second quarter of 2017. Diluted EPS excluding LIFO expense, a non-GAAP financial measure, was $0.35 for the second quarter of 2018 compared to $0.21 for the second quarter of 2017.

First Six Months of 2018
Net sales increased 10.0% to $8.0 billion for the first six months of 2018 compared to $7.3 billion for the same period in 2017. Non-cigarette sales increased 23.2% while cigarette sales increased 4.4%. Non-cigarette sales were 33.0% of total net sales for the first six months of 2018 compared to 29.5% of total net sales for the same period in 2017.

The increase in non-cigarette sales was driven primarily by net market share gains including Walmart Inc. and Farner-Bocken and incremental non-cigarette sales to existing customers. The addition of Walmart Inc. was the primary driver of the 42.3% increase in the Candy category. The Health, Beauty & General category sales increased 32.1%, benefiting from the increasing usage of alternative nicotine delivery products. In addition, sales in the Food and Fresh categories increased 17.2% and 16.1%, respectively, compared to the same period in 2017. The increase in cigarette sales was driven primarily by the addition of carton sales from Farner-Bocken and a 5.3% increase in the average sales price per carton, offset by an 8.3% carton sales decrease for the remaining business.

Gross profit in the first half of 2018 increased 15.7% to $416.7 million from $360.1 million for the same period in 2017. Gross profit margin increased 26 basis points to 5.19% for the six months ended June 30, 2018 from 4.93% for the same period in 2017, driven primarily by a shift towards non-cigarette products, which have higher margins. Remaining gross profit increased 16.3% from $360.2 million to $418.9 million for the six months ended June 30, 2018.

The Company’s operating expenses for the first six months of 2018 were $396.8 million compared to $345.8 million for the same period in 2017, with Farner-Bocken expenses accounting for $37.6 million of the $51.0 million increase. The remainder of the increase in operating expenses was due primarily to sales volume growth. Operating expenses as a percentage of net sales increased to 4.9% for the first half of 2018 compared to 4.7% for the first half of 2017 due to the shift in sales mix to non-cigarette products, which have lower price points than cigarettes.

Net income was $9.7 million for the first six months of 2018 compared to net income of $9.0 million for the same period in 2017, an 8% increase. Adjusted EBITDA, a non-GAAP financial measure, was $66.7 million for the first half of 2018 compared to $49.7 million for the first half of 2017, a 34% increase. Adjusted EBITDA benefited from the Farner-Bocken acquisition, the shift in sales mix and operational improvements.

Dividend
Core-Mark also announced today that its Board of Directors has approved a $0.10 cash dividend per common share. The dividend is payable on September 14, 2018 to stockholders of record as of the close of business on August 28, 2018.

Guidance for 2018
The Company reaffirms its guidance for the full year of 2018. Annual net sales for 2018 are expected to be between $16.6 billion and $16.8 billion. Diluted EPS for the year are estimated to be between $0.84 and $1.00 and Diluted EPS excluding LIFO expense are expected to be between $1.13 to $1.29. The Company expects Adjusted EBITDA to be between $157.0 million and $167.0 million. Key assumptions include $18 million in LIFO expense, a 25% tax rate and 46.4 million fully diluted shares outstanding. The Company’s projections include cigarette inventory holding gains, but do not include any other significant holding gains. Capital expenditures for 2018 are expected to be approximately $30 million.