Performance Food Group Company

Hello and welcome to the Coremark first quarter 2020 investor call. My name is Michelle and I will be the operator for your conference. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. And during the question and answer session, if you have a question, please press star then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Mr. David Lawrence. Sir, you may begin.

Thank you and good morning, everyone. Today's call will be led by Scott McPherson, our President and Chief Executive Officer, and Chris Miller, our Chief Financial Officer. Before turning the call over to Scott, I will point out that Coremark intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act as noted in the earnings release we filed this morning. Please remember that our comments today may include forward-looking statements which are subject to risk and uncertainties and actual results may differ materially from those indicated or implied by such statements. Some of these risks are described in detail in the company's SEC filings, including our quarterly report on Form 10-Q. The company does not undertake any duty to update such forward-looking statements. Additionally, we will refer to certain non-GAAP financial measures during this call. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure and other related information, including a discussion of why we consider these measures useful to investors in our earnings release and our quarterly report on Form 10-Q. I'll now turn the call over to Scott.

Thanks, everyone, for joining us today on our first quarter call. Before I provide my comments on the quarter, I want to take a moment to reflect on how Cormark is maneuvering through the impact of COVID-19. From the day we assembled our COVID-19 task force in February, our mantra has been family and community. When referring to family, I'm talking about the amazing employees that make up the Cormark family. Ensuring their health and safety is our first priority and allows Cormark to maintain the integrity of our essential supply chain, servicing over 40,000 customers across North America. To that end, our vendor partners have done a great job fighting through the supply and demand challenges and our valued customers have been nothing short of spectacular as they provide essential goods and services to their communities daily. As we indicated on our April 14th press release regarding the impact of COVID-19, our company has certainly faced volume challenges with sales spikes in the first weeks of March, followed by significant sales declines in late March through the month of April. We also outline the steps we've taken to address these headwinds, including elimination of our 401 match, modifications to our vacation policy, and material headcount and work hour reductions in an effort to mitigate the impact of volume shortfalls. Despite the challenges, I am proud of how the organization has responded, making disciplined decisions to preserve the health of the Cormark family and the company. Circling back to the first quarter results, we performed solid and in line with our expectations. From a bottom line perspective, we grew EBITDA 19%, fueled by strong cigarette sales, continued growth in our non-cigarette categories, and cost leverage in our transportation and general expenses. Revenues for the quarter were driven by strong performance in carton sales, with year-over-year same-store cartons down approximately 2%. in January and February and up 6% in March. Non-cigarette sales also showed solid growth through the quarter despite the disruption caused by vape regulation and the late March impacts of COVID-19. Overall, gross profit margins finished slightly below prior year. Cigarette margins finished the quarter consistent with our expectation growing on a cents per carton basis. and non-cigarettes also improved, although below expectations due to mixed changes related to COVID-19. From an expense leverage standpoint, we saw strong performance in the quarter. Selling, general and administrative costs declined on a year-over-year basis. On the operations front, we saw solid progress in our transportation expenses with cubes per route increases throughout the quarter. Warehouse efficiency was impacted by the initial effects of COVID-19. including lower productivity, increased sick time, and costs associated with cleaning and personal protective equipment. In aggregate, we saw solid leverage with total operating expenses down as a percentage of remaining gross profit by over 200 basis points. Moving off the quarter results and in the spirit of transparency around the impact of COVID-19, I would like to provide an update on our sales trends so far in the second quarter and additional color on our continued steps to mitigate the pandemic's impacts on the company. Consistent with our April 14th update, we have seen continued downward pressure on revenues and margins thus far in the second quarter. Cigarettes and non-cigarette sales for the month of April were down approximately 3% and 20% respectively on a year-over-year basis. Margins in April continue to be impacted by both higher cigarette mix relative to total margins and higher tobacco mix relative to non-cigarette margins. The combined impact has caused total margins to decline in the range of 40 basis points in April. From a labor perspective, Cormark reduced headcount by approximately 1,000 employees in response to volume declines due to COVID-19. These actions were taken beginning in early April with most of the headcount savings realized by early May. We are achieving further labor savings by minimizing overtime costs and reducing work hours of non-exempt employees to better align to the reduced volumes. And finally, we continue to preserve our liquidity position through our cost reduction efforts, discipline around inventory management, reduced capital expenditures, and a particular focus on accounts receivable, which pose a risk to every business operating in today's environment. Chris will provide additional color on our financial performance and liquidity. Under the heading of business as usual, our leadership team remains focused on moving the business forward despite the complexity of operating during the crisis. On the technology front, we have greatly advanced our utilization of Power BI across our business, leveraging the technology for real-time operational metrics, customer data analytics, and as the intelligence backbone for our business continuity plan related to COVID-19. From a sales and marketing perspective, we are prepared to relaunch our Smart Stock program, providing a wider range of service offerings and business growth opportunities for our customers and our vendors. We are temporarily converting our center of excellence into a virtual customer experience, leveraging the vast camera and video capabilities, allowing us to bring value to our retail partners remotely. And finally, we continue to make meaningful progress on increasing the productivity of our finance and sales organizations. From a growth perspective, we were pursuing independent retailers, a meaningful number of sizable chain opportunities, along with wholesaler acquisitions before COVID-19 struck. We have continued to maintain these dialogues and believe we have a robust pipeline in place once the business environment settles. We are working hard to move these and other business initiatives forward, positioning Cormark to assist our customers in optimizing their retail offering as volumes return and providing Cormark a springboard for growth. In closing, I want to again thank the entire Cormark family. It's your commitment to working safely and providing great service to our customers and communities that will ensure the success of this company far into the future. I want to thank our customers for working side by side with us every step of the way and proving what strong partnerships can accomplish. To our vendor partners who have fought to keep our channel in stock during a period with unprecedented supply and demand curves, I appreciate your efforts. And finally, based on our first quarter results, we were well positioned to deliver another solid year, but obviously we, like every company in North America, have had to fight through this unprecedented world health pandemic. While we cannot be certain of the duration or magnitude of this crisis and its impact on our business, I am confident that we have taken the right steps to preserve the health of the company and to position Cormark to emerge quickly and lead our industry. I will now turn the call over to Chris for additional color on the quarter.

Thank you Scott and good morning everyone. I'll start off by covering a few details on our strong performance in the first quarter. and then provide an update on our balance sheet and actions we are taking to manage our cash flow and liquidity through the COVID-19 crisis. Net income for the first quarter increased to $4.3 million compared with $1.3 million last year. Excluding LIFO expense, net income increased 56% to $10 million for the quarter. Diluted earnings per share for the quarter was 9 cents, an increase of 6 cents per share over the first quarter last year. Excluding LIFO expense, diluted EPS increased $0.08 to $0.22 for the quarter. Total sales in the first quarter increased 4.9% to $3.94 billion. We started the quarter strong this year with cigarette sales up 1.5% and non-cigarette sales growth of nearly 6% through February year over year. In the first three weeks of March, we saw a significant increase in sales volume Thank you for joining us today. In short, the benefit of the strong growth in cigarette sales in early March helped to lift overall cigarette sales for the quarter, while the benefit of non-cigarette sales growth in early March was offset by the late March decline. It is worth noting that our non-cigarette sales for the quarter were impacted by approximately $19 million in customer returns of flavored e-cigarette merchandise following the flavor ban. From a remaining gross profit margin perspective, cigarette margins were in line with our expectations with a profit per carton increase of 1.6%, which offset approximately half of the negative margin impact caused by price inflation. Non-cigarette remaining gross profit margin finished at 12.34%, slightly above prior year, but below our 10 to 20 basis point growth expectations, driven by the material mix change related to COVID-19. Adjusting for that change in mix or non-cigarette margins would have been 15 basis points higher than prior year. As Scott mentioned, we saw good leverage in operating expenses as a percentage of remaining gross profit in the quarter. SG&A expenses improved to 29.4% of remaining gross profit compared to 32% last year driven mainly by a reduction in salaries and other general expenses, including bad debt and bonus expense. Warehouse and distribution expenses as a percentage of remaining gross profit increased by 60 basis points for the quarter. Leverage and distribution expenses in the quarter, driven by higher fleet utilization, was more than offset by higher warehousing expenses resulting from a decrease in productivity and other impacts related to COVID-19. Now turning to the balance sheet. We ended the first quarter with $313 million drawn on our credit facility and $408 million available to borrow. The availability at the end of March was impacted by a strategic decision to build incremental inventory in March during the initial surge in cigarette sales at the onset of the crisis and the temporary closure of an Altria manufacturing facility. Our $750 million credit facility does not mature until March of 2022 and we have only a fixed charge covenant of one times that springs into place if our availability falls below 10% of the total capacity under the facility. We are substantially above the one times level and the 10% threshold given the significant excess availability under our facility. As of May 1st, availability under the credit facility was $280 million, which was reduced by a short-term incremental build of cigarette inventory of approximately $150 million in anticipation of manufacturer price increases sometime in the second quarter. We are vigilantly monitoring our working capital and actively engaging with customers and vendors to minimize our cash conversion cycle. While the majority of our customers are convenience retailers that continue to operate as essential businesses, a small percentage of our customers have had to temporarily shut down or otherwise have been more significantly impacted by the crisis. We are working closely with this customer group to mitigate exposure. Thus far, we have not seen a material deterioration in the quality of our accounts receivable portfolio. However, this does represent a potential risk for us going forward. In terms of inventory, we've reduced our non-cigarette inventory levels to align with the reduced sales volume we're experiencing in the second quarter. However, we're taking a more balanced approach with cigarette inventory. While our cigarette sales have been impacted in April by the COVID-19 crisis, As I mentioned earlier, we expect to see further price increases this year from the major cigarette manufacturers and thus want to ensure we are in a good position to capitalize. Our cigarette holding gains for the first quarter were $9.1 million, up slightly from the first quarter last year on a price increase of 80 cents per carton in February. In spite of a smaller price increase than what we saw in the first quarter last year, We were able to realize slightly higher gains through strategic inventory management. When it became clear we were facing a significant reduction in business, which would likely last for some time, we proactively began implementing initiatives to reduce expenses and conserve cash with the goal to balance short-term cash savings and being able to come out of the gate strong once the crisis subsides. In addition to the cost reduction Scott mentioned, we have also stopped all hiring and salary increases and eliminated or reduced nonessential expenses including travel, meetings, consulting, and other discretionary expenses. Overall, we have taken aggressive actions to align our operating costs to the reduction in volumes and are prepared to take additional steps to reduce costs to preserve profitability and liquidity if needed. From a capital standpoint, we spent $5.8 million of our $45 million capital budget in the first quarter. We've reassessed our capital plans for the remainder of the year and now expect our full-year capital expenditures will be closer to $30 million. This includes capital expenditures associated with the relocation of one of our distribution facilities discussed on our fourth quarter call. Also being mindful of our balance sheet, We announced in our press release on April 14th that we have suspended our share repurchase program after spending $5.4 million to buy back approximately 235,000 shares in the first quarter. That said, we remain committed to continuing our cash dividend, which has been approved by our board at a rate of 12 cents per share, payable on June 19th, 2020. While it's difficult to forecast the future from a cash and liquidity perspective, We've modeled several scenarios varying in depth and duration of volume loss and the related impacts, including erosion in our cash conversion cycle. While we believe we currently have sufficient liquidity, we have and will continue to evaluate various capital alternatives to ensure we have adequate liquidity in the event conditions worsen and to capitalize on growth opportunities. In summary, we have a strong balance sheet and the flexibility to manage through the duration of this crisis. While we've had to make very difficult decisions to reduce our workforce and other expenses in recent weeks, we believe we've taken the right steps for Coremark to emerge from this crisis, well positioned to maintain our role as an industry leader, and continue to drive growth in sales, market share, and profitability. Operator, you may now open the line for questions.

Thank you, sir. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, you may press the pound sign or the hash key. Also, if you're using a speakerphone, you may need to pick up on your handset first before pressing the numbers. Once again, to ask a question, please press star 1 on your touchtone phone at this time. The first question in the queue comes from Ben with Stevens Incorporated. Your line is open. Please proceed.

Hey, good morning, everyone.

Morning, Ben.

I want to ask first in kind of parsing out across your customer set how independent stores are faring versus the larger chains and how, if at all, that has evolved as COVID has evolved.

Yeah, Ben, I think, you know, I would say from a large chain standpoint, you know, you probably were on Murphy's call. Murphy has performed exceptionally well. And I'd say overall, the large chains have probably outperformed a little bit, really driven by their volume. But our independents have done, you know, reasonably well. It's a little bit geographic in nature. I mean, there's areas, clearly the east and west coast were more affected than the central part of the country. but overall our independents have held on pretty well and I'd say overall the convenience store customer has remained reasonably healthy because all of them have benefited from healthy fuel margins which I think is, you know, despite declines in in-store sales similar to what we've experienced, I think their fuel margins have definitely propped them up throughout this whole period.

Okay, that makes sense. Maybe kind of the same sort of question as it relates to your competitors, if you have insight into that. Do you think that we could see market share up for grabs if regional or smaller distributors face financial duress and perhaps don't have the same access to liquidity that you all might to weather this storm?

I definitely think that there is going to be a lot of pressure on distributors independent wholesalers. Again, I think some of that is geographical. I've talked to a couple of our peers in the industry who are in regions that they've weathered it fairly well, but definitely in the east and west coast and some of the other hot spots across the country, I think you're going to see pressure on independent wholesalers, absolutely.

Okay, great. And then my last question, to the extent that you can offer any color How should we be thinking about warehouse and distribution expenses and SG&A expenses on a dollar basis this year? How much control do you all have to tamp down what would have been growth in those line items?

Sure. I think, you know, Ben, we were trying to be as transparent as possible with the information we provided. I mean, clearly we've made significant headcount reductions, and I think you can kind of anticipate What that represents from an expense standpoint. And we've clearly ratcheted down all of our non-essential spend around travel and entertainment. The one thing I will say, though, is we have done a great job of, I'd say, right-sizing the organization to the current workload. And in the last couple weeks, we have seen productivity rebound to levels consistent with where we were last year. both in warehouse and in cubes per load, which is when you have that much variation in volume over a five-week period is a pretty amazing feat. So I feel pretty good about controlling SG&A warehouse and transportation, maintaining the productivity, but clearly for us to be successful, we need the volume to rebound as well.

Okay. Thanks, and good luck navigating the rest of the year. Thanks, Ben. Thanks.

Thank you, sir. The next question in the queue comes from Chris Mendeville with Jefferies. Your line is open. Please proceed.

Hey, good morning, guys. Scott, maybe we could start off just with the April trends here. So as I look at your pre-announcement a few weeks back, decided you were down basically 12% to start the month. Now, obviously, you closed out the whole month down 8%. So there was some element of progression to the upside there. But it looked like it strictly came out of cigarettes. So I guess I was hoping maybe you could parse out the carton performance versus any benefit from pricing. And then if you're able, I'd be particularly interested in what type of exit rate you saw in the month from non-cigarettes.

Sure. You're right, Chris. Clearly, cigarettes was what kind of accelerated through the end of the month and helped sales improve through the month of April. We were pretty consistent in non-cigarettes being down in the 20% range really for the duration of the month. That said, as we've started to see some of the shelter-in-place Bands Lift. We've seen volume pick up in the first week of May in those areas. And really overall as a company, we saw some improvement in the first week of May. So we're encouraged by that as we've seen some of the restrictions lift. So I think, you know, like I said, really it was predominantly cigarettes that helped us through the month, but we've seen some positive trends in the first part of this month.

Okay. And I guess maybe I'm curious, I would imagine Easter wasn't a particularly great holiday for you guys. So just in thinking about that holiday's impact within the candy category for April, is there any way of parsing that out and maybe tying that to the negative 20% non-cigarette sales declines as well as the 40 basis points of gross margin compression that you've noted?

You know, really I'd say, you know, Easter for us is, you know, we don't sell a ton of seasonal candy. So it's different than the grocery industry. You know, it doesn't have an overly material impact on candy for us. And we saw our candy, you know, fairly consistent, you know, throughout April. So, you know, I don't see Easter as being a big holiday in our space anyway.

Okay. And then similar to a question Ben had asked, but just a little bit different here. I'm curious if you could parse out the performance of your C-Store business relative to your non-C-Store business, which I think now represents close to a third of sales. So maybe you can confirm that and then just give us some color there with respect to how those two segments were performing.

Sure. So like we call that, we've got 42,000 customers. About two-thirds of those are traditional convenience stores. And then if you take that other third, it's a wide array of retail formats. I mean, clearly we have Walmart in there. We have Rite Aid in there. Both of those performed reasonably well. But we also have, you know, and it represents about 10% of our overall store base, stores that were affected by You know, being non-essential. Primarily casinos, schools, and airport locations that were, you know, their volume was off, you know, significantly. So those, you know, clearly affected that volume being down. But, you know, that's kind of our breakout. That third of business is a wide array of different retail formats. But the ones that were affected were less than 10% of the customer count. It was really schools. Airports, casinos were the big driver there.

Okay, and just a really quick one on the modeling front. Chris, just as we think about interest expense for the full year, is there any guidance you can offer?

Yeah, so it will be higher. I don't have an exact number. It kind of depends a little bit, Chris, on the cigarette timing of the Price increases, but I'd say it'd be comparable to last year around that level.

All right. I'll leave it there. Thanks, guys.

Thanks, Chris.

Thank you. The next question in the queue comes from Bobby Griffin with Raymond James. Your line is open, Mr. Griffin. Please proceed.

Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our question.

First, could you remind us of your geographic exposure?

Do you have more waiting in certain regions?

So our business is broke out in three regions. We have an eastern region, a western region. They're about the same in volume size. And they kind of break kind of in Texas. And then we have a northern region, which is Canada and some of our northern states. And I would say if you're, you know, if you're leading towards where we were impacted the most, clearly it was on the coastlines, you know, California and our markets around New York were the areas that had the biggest impact.

Okay, that's helpful. And then what percentage of your costs are fixed versus variable? Could you quantify some of the impacts from some of your cost savings actions?

So we've given our 401K and our vacation savings, we provided that at $8 million. I also gave you our headcount reduction, which is 1,000 employees. So you can look at our average wages and kind of estimate the impact there. When I think about fixed versus variable, about 70% of our expense are salaries. When I think about SG&A, I think about the variable portion of those salaries being in the 10 to 20% range. When I think about warehouse and delivery, I think about it more being in the 60 to 70% variable range. And then when you look at all other expenses, I mean, clearly we are reducing, you know, travel and some of those budgets, but The all other expense category is largely fixed. It's a lot of that is building rent and facility costs, but definitely we have ratcheted down our costs around in our discretionary spend.

All right, that's helpful. Thank you and best of luck moving forward.

Thank you very much. Thank you.

We have one more question in the queue and that call comes from Kelly Banya with BMO Capital. Please proceed.

Hi, good morning. Thanks for taking my questions. I wanted to ask about, I think you mentioned, you know, robust pipeline kind of pre-COVID. And I was wondering if you could just talk about what are you seeing as the driving force behind maybe some of those potential business wins and how you would expect this crisis to impact the pipeline going forward?

Sure, I think, Kelly, most of those wins were in the convenience store space. And like I said, I think overall, the health of the convenience store customer has been largely preserved because of their fuel margins. You know, clearly, when COVID-19 hit, those conversations kind of hit the pause button to some extent. We've continued to have dialogues. And I do think that, you know, that pipeline will pick back up fairly quickly with convenience store customers. as we emerge. So we're pretty optimistic about that.

In terms of your food service programs, can you just talk a little bit more in detail about what kind of changes you're having to make and help your customers make in terms of what's right for the current environment?

No, that's a great question, Kelly. We've really been kind of focused in on what we think the impacts are going to be as we emerge from this. I think clearly the first place we think about is food service. I think the self-service aspects of food service, when you think about roller grill and you think about things that are open to the public, are going to be challenged. We have a vast array of prepackaged food service items. And the other thing we're focused on is just packaging options. So people could, you know, stores could prepare and then provide to-go containers. So we think there's a really viable path to continue to see food service growth and convenience, but I definitely think there's going to be a change in consumer behavior. The other thing I'd say is we've seen an opportunity that we believe exists around emerging categories. I think that clearly, you know, the whole sanitization situation where we're going to be able to sell sanitizer, hand wipes, masks, gloves, you know, creates a category into itself that really didn't exist very strongly in convenience. And I think our channel is the optimal channel for that supply chain. So I think that's an area we're really focused on. and the other one that we saw emerge, you know, probably primarily in grocery, but we saw a big growth as well in, you know, just traditional baking and grocery items. So, you know, the yeast, the flour, and I think that will continue for some period of time, and I think convenience has an opportunity to expand those sets as well and capitalize on that trend.

Okay, that's interesting. And can you talk just about, and if I missed it, I apologize, just about e-cigarette trends and how that has trended through this period and what you're still, I guess, expecting, if anything, you could say going forward?

Yeah, Kelly, I mean, clearly the first quarter had a lot of disruption. We were down in the first quarter on overall e-cigarettes, but that was largely driven by the fact that we had $19 million in returns of flavored product to manufacturers. So without that, we were actually up in the quarter. And clearly, I don't see it being, you know, a big growth category this year. I think we called out early or late last year, early this year, that we thought it was going to be generally flat, up slightly. And I think that's still my outlook at this point in time. But the one thing we have seen, you know, in the first quarter is I think you've seen some shift, you know, cigarettes, combustibles have performed pretty well. And I think you've Through that confusion of e-cig regulation and elimination of flavors, you may have seen some transition back to combustibles too. But we look forward at this point to be flat for the year.

Okay, that's helpful. And maybe just to kind of go back to the cost reductions, I mean, can you help us think about that a little more clearly and what we should maybe expect at least for Q2. And then as volume seems like it's already improving and maybe ramps back up in coming months, just how to think about the flex of those expenses coming back.

Sure. I mean, Kelly, clearly we made a headcount reduction of 1,000 people, and clearly part of that is volume-driven. Some of that was in our fixed infrastructure. So I think there's going to be clearly some variable taper back up as volume returns. But we feel like, as I said, we've got our productivity in line. We've got our cubes per route in line right now. So I think we'll do a good job managing expenses as a percentage of revenues going forward. But, you know, I think we've been pretty transparent as much as we could at this point. I mean, clearly it's very fluid. The volumes, you know, I don't have a great crystal ball on what's going to transpire in volumes through the quarter. So it's hard for me to really anticipate how expenses look as well at this point. So we tried to be as transparent as we could and give you as much information as we could. Okay, thanks. Thanks, Kelly. Thanks.

I do have one more question in the queue, and it comes from Chris Mendeville from Jefferies. Your line is open.

Hey, guys. Sorry, I couldn't help myself. Scott, just back on the gross margins here, so down 40 basis points in April. I guess seeing as how we're now starting to see signs of life in the few days of May as the economy reopens here on a state-by-state basis, I hope it's a fair assumption that 40 is probably the worst that we'll see. So maybe that's a first question, but then secondarily, I was looking to get maybe some color surrounding mix within select categories, for example, packaged beverage as well as maybe even in cigarettes and what you're seeing in terms of trade-down dynamics in the latter.

Yeah, I think your second question answers the first question, Chris, is I don't know if that's going to be the worst. It's hard to anticipate at this point. We've clearly seen, primarily in non-cigarettes, some mixed changes within the non-cigarette category. But if you look at the 40 basis points as it sits today, about half of that is cigarette mix versus non-cigarette mix changes. So obviously the growth in cigarettes affected the margin. The other half is mixed within the non-cigarette category. Clearly, we've seen growth actually in our tobacco and cigar categories. And we've seen headwinds in our snack and, you know, snack, beverage, food service categories are probably the biggest categories we've seen headwinds in. So, you know, to answer your question on margin, I'd have to have a little clearer picture on how those things will rebound. I do think they will. I mean, I clearly think that part of that is, you know, some pantry loading around tobacco and nicotine. So I don't see a reason why they wouldn't rebound. Other than I called out, I think you'll see some headwinds in food service in the short run. But that's, you know, that's as much color as I can give and kind of how we look at it today.

Sorry, but are you seeing trade down in terms of the cigarette category to more discount brands?

Yeah, Altria called out on their call that they've definitely seen a little bit of a run on trade down. So far, we haven't seen a real material impact on margins. And historically, in recessionary periods, we have seen some trade down. It's hard to tell. I mean, this has been such a You know, a quick spike in volume and then decline in volume. And so it's just there's a lot of noise there. But we haven't seen a material impact on margins yet. But if there is trade down, as you know, we make our margin on cigarettes is on a cents per carton basis. And we tend to make a little bit less on generics. Obviously, the carrying cost is a little bit less, too. But we tend to make a little bit less per carton on the generic products.

Right. Okay. And then just the last one, realizing that you can hold off on M&A discussions, but you can't necessarily on contract renegotiations. So we're just curious if there was any update with respect to some of those more notable customers that you have coming up in the next 12 months.

Yeah, I would say this. The key customer partners we have through this whole Thanks, Chris. Thanks.

Sir, we have no further questions at this time, so I'll turn the call back over to Mr. Lawrence for closing remarks.

Thank you all for joining us this morning. We appreciate your interest in Coremark. If you have any follow-up questions, don't hesitate to reach out to me, David Lawrence. My contact information is available on the Investor Relations page of our website. Thank you all for joining.

Thank you ladies and gentlemen. This will conclude today's teleconference. Thank you for participating. You may now disconnect.