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Core-Mark Holding (NASDAQ:CORE)
Q1 2020 Earnings Call
May 07, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, and welcome to the Core-Mark first-quarter 2020 investor call. My name is Michelle, and I will be the operator for your conference. [Operator instructions] I will now turn the call over to Mr. David Lawrence.

Sir, you may begin.

David Lawrence -- Vice President of Treasury and Investor Relations

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 Core-Mark 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 risks 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.

Scott McPherson -- President and Chief Executive Officer

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 Core-Mark 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 Core-Mark family.

Ensuring their health and safety is our first priority and allows Core-Mark 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 value customers have been nothing short of spectacular as they provide essential goods and services to their communities daily. As we indicated on our April 14 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 outlined the steps we've taken to address these headwinds including elimination of our 401(k) match, modifications to our vacation policy and material head count 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 Core-Mark 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 mix 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 14 update, we have seen continued downward pressure on revenues and margins thus far in the second quarter. Cigarette 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, Core-Mark reduced head count 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 head count savings realized by early May.

We are achieving further labor savings by minimizing overtime cost and reducing work hours of nonexempt 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 SmartStock 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 Core-Mark to assist our customers in optimizing their retail offering as volumes return and providing Core-Mark a springboard for growth. In closing, I want to again thank the entire Core-Mark 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 Core-Mark to emerge quickly and lead our industry. I will now turn the call over to Chris for additional color on the quarter.

Chris Miller -- Chief Financial Officer

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 $0.09, an increase of $0.06 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 firstthree weeks of March, we saw a significant increase in sales volume propelled by cigarettes with sales up over 6% and non-cigarette sales trending better than the first two months of the year. In late March, we saw a slowdown in cigarette sales growth and a high single-digit decline in non-cigarette sales. Excluding the benefit of one extra sales day in the first quarter this year, cigarette sales were up about 3% and non-cigarette sales were up about 4% for the quarter. In short, the benefit of a 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, our 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 1, 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're 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 $0.80 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 14 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 $0.12 per share payable on June 19, 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 Core-Mark 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.

Questions & Answers:


Operator

[Operator instructions] The first question in the queue comes from Ben with Stephens Inc. Your line is open. Please proceed.

Unknown speaker

Hey good morning everyone.

Scott McPherson -- President and Chief Executive Officer

Good morning Ben.

Unknown speaker

I want to ask first, 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.

Scott McPherson -- President and Chief Executive Officer

Yeah. Ben I think I would say, from a large chain standpoint, 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 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, 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.

Unknown speaker

OK. 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 faced financial duress and perhaps don't have the same access to liquidity that you all might to weather the storm?

Scott McPherson -- President and Chief Executive Officer

I definitely think that there is going to be a lot of pressure on 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 weathered it fairly well. But definitely, in the East and West Coast and some of the other hotspots across the country, I think you're going to see pressure on independent wholesalers absolutely.

Unknown speaker

OK. 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? And how much control do you all have to tamp down what would have been growth in those line items?

Scott McPherson -- President and Chief Executive Officer

Sure. I think, Ben, we were trying to be as transparent as possible with the information we provided. I mean, clearly, we've made significant head count 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 nonessential spend around travel and entertainment.

The one thing I will say though is we have done a great job of, I'd say, rightsizing the organization to the current workload. And in the last couple of 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, it's 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.

Unknown speaker

OK. Thanks and good luck navigating the rest of the year.

Scott McPherson -- President and Chief Executive Officer

Thanks Ben.

Operator

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

Chris Mandeville -- Jefferies -- Analyst

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, you cited you were down basically 12% to start the month.

Now obviously you closed out the whole month at down 8%, so there was some element of progression to the upside there. But it looks 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.

Scott McPherson -- President and Chief Executive Officer

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 bans 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 -- like I said, I -- 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.

Chris Mandeville -- Jefferies -- Analyst

OK. And then 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?

Scott McPherson -- President and Chief Executive Officer

Really, I'd say, Easter for us is -- we don't sell a ton of seasonal candy. So it's different than the grocery industry. It doesn't have an overly material impact on candy for us. And we saw our candy fairly consistent throughout April.

So I don't see Easter as being a big holiday in our space anyway.

Chris Mandeville -- Jefferies -- Analyst

OK. 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.

Scott McPherson -- President and Chief Executive Officer

Sure. So like we called out, 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 -- and it represents about 10% of our overall store base, stores that were affected by being nonessential primarily casinos, schools and airport locations that were -- their volume was off significantly.

So those clearly affected that volume being down, but 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. And it was really schools, airports, casinos were the big driver there.

Chris Mandeville -- Jefferies -- Analyst

OK. 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?

Chris Miller -- Chief Financial Officer

Yeah. So it will be higher, I think we're -- 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.

Chris Mandeville -- Jefferies -- Analyst

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

Scott McPherson -- President and Chief Executive Officer

Thanks Chris.

Operator

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

Alessandra Jimenez -- Raymond James -- Analyst

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 weighting in certain regions?

Scott McPherson -- President and Chief Executive Officer

So our business is broken out inthree 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 leading toward where we were impacted the most, clearly, it was on the coastlines, California and our markets around New York were the areas that had the biggest impact.

Alessandra Jimenez -- Raymond James -- Analyst

OK. That's helpful. And then what percentage of your costs are fixed versus variable? Could you quantify some of the impact from some of your cost savings actions?

Scott McPherson -- President and Chief Executive Officer

So we've given our 401(k) and our vacation savings were -- we provided that at $8 million. I also gave you our head count 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 expenses 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 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 cost.

But definitely, we have ratcheted down our costs around our discretionary spend.

Alessandra Jimenez -- Raymond James -- Analyst

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

Scott McPherson -- President and Chief Executive Officer

Thank you very much.

Chris Miller -- Chief Financial Officer

Thank you.

Operator

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

Kelly Bania -- BMO Capital Markets -- Analyst

Hi. Good morning. Thanks for taking my questions. I wanted to ask about -- I think you mentioned a 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.

Scott McPherson -- President and Chief Executive Officer

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. 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 that pipeline will pick back up fairly quickly with convenience store customers as we emerge. So we're pretty optimistic about that.

Kelly Bania -- BMO Capital Markets -- Analyst

And in terms of your foodservice 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?

Scott McPherson -- President and Chief Executive Officer

No. It'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 foodservice.

I think the self-service aspects of foodservice, 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 foodservice items. And the other thing we're focused on is just packaging options. So people could -- stores could prepare and then provide to-go containers.

So we think there's a really viable path to continue to see foodservice growth in 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, the whole sanitization situation where we're going to be able to sell sanitizer, hand wipes, masks, gloves, 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 probably primarily in grocery but we saw big growth as well in, just traditional baking and grocery items. So the yeast, the flour, and I think that will continue for some period of time. And I think convenience can -- has an opportunity to expand those sets as well and capitalize on that trend.

Kelly Bania -- BMO Capital Markets -- Analyst

OK. 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?

Scott McPherson -- President and Chief Executive Officer

Yes, 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 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 to up slightly. And I think that's still my outlook at this point in time. But the one thing we have seen in the first quarter is, I think you've seen some shift -- 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. So -- but we look forward at this point to be flat for the year.

Kelly Bania -- BMO Capital Markets -- Analyst

OK. 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.

Scott McPherson -- President and Chief Executive Officer

Sure. I mean, Kelly, clearly, we made a head count 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 I think we've been pretty transparent as much as we could at this point.

I mean, clearly, it's very fluid, the volumes. 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.

Kelly Bania -- BMO Capital Markets -- Analyst

OK. Thanks.

Scott McPherson -- President and Chief Executive Officer

Thanks Kelly.

Operator

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

Chris Mandeville -- Jefferies -- Analyst

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 it seems now -- we're now starting to see signs of life in the first 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 the 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.

Scott McPherson -- President and Chief Executive Officer

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 mix changes within the non-cigarette category.

But if you look at the 40 basis points as it sits today, about half of that is about -- is cigarette mix versus non-cigarette mix changes. So obviously, the growth in cigarettes affected the margin. The other half is mix 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 -- snack, beverage, foodservice categories are probably the biggest categories we've seen headwinds in. So 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 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 foodservice in the short run. But that's as much color as I can give and kind of how we look at it today.

Chris Mandeville -- Jefferies -- Analyst

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

Scott McPherson -- President and Chief Executive Officer

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 quick spike in volume and then decline in volume. And so 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.

Chris Mandeville -- Jefferies -- Analyst

Right. OK. 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 was 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.

Scott McPherson -- President and Chief Executive Officer

Yeah. I would say this, I mean the key customer partners we have through this whole crisis have been awesome. They've been great to work with. I think it's really strengthened our partnership with all of our key customers.

And clearly, we are working on renegotiations on renewals with customers. And right now I feel really strong about those partnerships and very confident in our position.

Chris Mandeville -- Jefferies -- Analyst

OK. Thanks guys. Best of luck in Q2.

Scott McPherson -- President and Chief Executive Officer

Thanks Chris.

Chris Miller -- Chief Financial Officer

Thanks.

Operator

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

David Lawrence -- Vice President of Treasury and Investor Relations

Thank you all for joining us this morning. We appreciate your interest in Core-Mark. 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.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

David Lawrence -- Vice President of Treasury and Investor Relations

Scott McPherson -- President and Chief Executive Officer

Chris Miller -- Chief Financial Officer

Unknown speaker

Chris Mandeville -- Jefferies -- Analyst

Alessandra Jimenez -- Raymond James -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

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