The analyses and conclusions of Broyhill Asset Management contained in this presentation are based on publicly available information. We recognize that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with our conclusions. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. The analyses provided may include certain statements, estimates, and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies, access to capital markets, and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Broyhill Asset Management concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections, or with respect to any other materials herein. Assets managed by Broyhill Asset Management and its affiliates have invested in common stock of Core-Mark Holding Company, Inc. (“CORE”). Broyhill Asset Management manages funds and separate accounts that are in the business of trading – buying and selling – securities and financial instruments. It is possible that there will be developments in the future that cause Broyhill Asset Management to change its position regarding CORE. Broyhill Asset Management may buy, sell, cover, or otherwise change the form of its investment in CORE for any reason. Broyhill Asset Management hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of and Broyhill Asset Management investment.
Core-Mark Holding Company
Core-Mark’s history originated in 1888 when Glaser Bros was founded in San Francisco One of the largest wholesale distributors to the convenience store industry Defensive product base Well capitalized business
Market Capitalization Enterprise Value: $302M Equity Market Value: 340M
Recent Valuation Share Price: $32 EV/EBITDA: 3.5 Price to Earnings: 7.5
Convenience is second fastest growing format
Fragmentation in industry is increasing
Opportunities for acquisition-driven growth
Top 10 states account for 50% of all US C-Stores
Source: Company Presentation
Hard CORE Bulls
Core-Mark services over 24,000 locations
Source: Company Presentation
Roughly half of CORE’s client base are national chains
C-Stores represent greater than 85% of revenues with Alimentation CoucheTard (Circle K) accounting for 7.5% of sales and the top ten customers accounting for 30% of revenues.
Source: Company Presentation
Strong national footprint with room for expansion
CORE’s distribution centers are here Majority of C-Stores are here!
Source: Company Presentation
Broad line distributors deliver only about of of in-store Broad line distributors deliver only about halfhalfin-store sales sales CORE is well positioned to take share from independents
Differentiationisis achieved through product offering pricing Differentiation achieved through product offering and and pricing CORE’s innovative sales and marketing combined with leading distribution and logistics to drive margin expansion
Highly fragmented industry concentrated in the eastern Highly fragmented industry concentrated in the eastern states states CORE’s strong balance sheet and western footprint make large eastern wholesalers attractive acquisition candidates for expansion into new markets
Vendor Consolidation and Fresh Merchandising trends accelerating Vendor Consolidation and Fresh Merchandising trends accelerating CORE’s VCI Program and Fresh Initiative represents significant upside potential to sales and profit growth
Sales fall into two categories: Cigarettes and Food/Non-Food Products Cigarettes Cigarettes represent 68% of total revenue Excise Taxes are a significant component of revenue 61% of purchases from 20 suppliers PM and RJR represent 27% and 14% of purchases 29% of Gross Profit Food/Non-Food Products Food comprised of fast-food, candy, beverages, snacks, groceries, etc. Non-Food includes other tobacco products and general merchandise Gross Profit is generated by “cost plus” 32% of Sales Drive 71% of Gross Profit
Secular decline in smokes
Estimates indicate total carton volume will decline 34% in next ten years.
Source: Company Presentation
Has been offset by price inflation
Marginal growth from other categories should easily overcome impact to margins.
Management is driving a three-pronged approach for continued growth Vendor Consolidation Initiative (VCI) Consolidating deliveries with CORE reduces operational costs for retailers, while improving Core-Mark margins
Fresh Food Offering Management has proactively positioned COREs distribution capabilities out in front of the “Fresh” movement.
Go Where the Stores Are CORE’s acquisition strategy is driven by its operational footprint . More recent acquisitions were located in PA and MA
“Fresh” sensitivity analysis
Incremental gross profit potential from CORE’s Food/NonFood segment is massive given:
Growth of “Fresh Foods” from a nearzero base Opportunity for margin enhancement from CORE’s Vendor Consolidation Initiative
2012 Food/Non-Food Gross Profit Potential 2008 CORE gross profit : $358M Upside potential to goals of $100M incremental Sales in VCI and Fresh Potential to double gross profit even assuming declining margins and incremental sales growth
“Stale” Gross Margins 12.75% 13.00% 13.25% 371 383 396 410 425 442 376 388 401 416 431 447 381 394 407 421 436 453
12.50% 25% “Fresh” CAGR 30% 35% 40% 45%` 50% 365 378 391 405 420 436
13.50% 387 399 412 426 442 458
Opportunities in minor product segments have the potential to drive substantial firm-wide gross profit growth.
Ownership of Core-Mark common stock
Name of Beneficial Owner
Wynnefield Capital Management, LLC Giovine Capital Group, LLC Dimensional Fund Advisors, LP Post Confirmation Trust of Fleming Companies, Inc J. Michael Walsh Stacy Loretz-Congdon Christopher L. Walsh Christopher M. Murray Thomas B. Perkins Robert A. Allen Stuart W. Booth Gary F. Colter L. William Krause Harvey L. Tepner Randolph I. Thornton All Directors and Executive Officers as a Group (14 Persons)
Shares of Common Owned
981,602 629,500 613,424 607,683 157,727 26,620 91,477 19,316 71,987 12,020 12,020 12,020 12,020 12,020 18,020 4.6%
Source: CORE Apr-09 Proxy
Historical stock chart
Source: Decision Point
Opportunity for multiple expansion
Core-Mark Nash Finch Spartan Stores Sysco United Natural Foods AMCON Distributing Industry Average
3.5 6.2 4.5 8.3 10.4 3.9 6.7
7.5 9.1 7.4 14.9 19.3 3.7 10.9
1.1 1.2 1.0 4.5 2.1 1.5 2.1
Core-Mark Price Potential at Peer Average Multiples:
CORE Valuation Matrix
Market Price = $32.96
Source: Applied Finance Group
Economics of convenience store industry Consolidation, direct distribution, and a weakening customer base are threats to the industry’s distributors
Macroeconomic trends and deflationary pressures Deflation would negatively impact profit margins as CORE sales are driven by “cost plus”
Declining cigarette sales Secular volume decline and potential changes in rebates or incentives would negatively impact earnings
High Quality Defensive Business Trading at substantial discount to intrinsic value With little financial leverage And HUGE potential for operating leverage
Strong Operational Culture With management growth initiatives driving margin expansion
Fragmented Industry Provides attractive expansion opportunities
Would you trust this face?
Berkshire owns McLane Co, the largest wholesaler in the industry. Core-Mark is a strong second. Warren’s got somewhat of a knack for identifying industries with attractive fundamentals.
Broyhill Asset Management
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