Core-Mark Annual Shareholder Meeting (2009)

I attended Core-Mark's (CORE) annual shareholder meeting on June 2, 2009. The meeting was held in a small conference room at the Hyatt Regency San Francisco Hotel. The only refreshment offered was Starbucks coffee. I was a little disappointed, because food-related companies sometimes display their own products. I did not get a chance to try Java Street items or other Core-Mark products.

Around eight people sat in the audience. Core-Mark's executive team, except for the CFO, sat in the front. Other than my friend and I, everyone attending the meeting had a business or employment relationship with Core-Mark. The Chairman of the Board handled the formal part of the meeting.

Core-Mark started out as a tobacco storefront in San Francisco. It grew into a major supplier of consumer goods to various retailers and became known as Fleming Companies. In 2003, Fleming Cos filed for Ch 11 bankruptcy/reorganization. In 2004, Core-Mark emerged from the ashes of Fleming Cos. For more information on Core-Mark's history, click on the following link:

http://en.wikipedia.org/wiki/Fleming_Companies,_Inc

Cigarettes and other tobacco products accounted for 74.9% of Core-Mark's net sales in 2008; however, cigarette sales accounted for only 29.2% of Core-Mark's total gross profit in 2008. (See 10K, page 3.) In short, while Core-Mark continues to sell cigarettes, it has revamped itself into a food/consumer kiosk company. Food and non-food (batteries, etc.) products accounted for 71.0% of Core-Mark's gross profit in 2008. (See 10K, page 4.)

Core-Mark supplies convenience stores, such as 7-Eleven, with refrigerated kiosks containing various products. These kiosks contain packaged salads, bakery items, drinks, sandwiches, juices, fruit, and other items. Core-Mark touts its ability to re-stock its kiosks several times a week, which allows customers to select fresh food. In other words, Core-Mark strives not to be like your grandmother's food kiosks, which tended to sell month-old sandwiches, cigarette packs, and stale candy.

I was the only person who asked questions at the meeting. CEO J. Michael Walsh graciously answered all my questions. I asked how the company would deal with declining cigarette sales and higher "sin"/SCHIP taxes. Mr. Walsh answered that cigarette consumption has been declining for a long time, and as a result, Core-Mark had consciously shifted to the new consumer trend, which was selling fresh food products. He said that Core-Mark wanted to become the leader in fresh food products.

Mr. Walsh also said that higher cigarette taxes actually helped Core-Mark's bottom line. He indicated that rising cigarette taxes allowed Core-Mark to get a higher return on its "working capital." This concept is a bit counter-intuitive, but I will explain it as best as I can.

According to the CEO, Core-Mark must buy "stamps" from states before it can purchase cigarette cartons. These state-issued stamps allow Core-Mark to purchase a certain number of cigarette cartons over a certain period of time. Different states levy different taxes per carton. In California, the current carton tax is $8.70; it is higher in New York.

The "stamp" process functions as a VAT, allowing states to ensure they are paid carton taxes up front rather than at the final point of sale. This process helps states keep track of cigarette sales and may reduce the black market for cigarettes. This system is not perfect. Some entrepreneurs buy cartons in states with lower carton taxes and then illegally re-sell them in nearby states that have higher carton taxes.

Higher carton taxes may help Core-Mark, because Core-Mark buys "stamps" at the beginning of the month; however, it does not have to actually pay for the stamps until later--sometimes up to 30 days later. In the meantime, it still receives its allotment of cigarette cartons and the cash from those carton sales/distributions. That regulatory quirk means Core-Mark sometimes gets a "free" money float of up to 30 days, which helps increase its liquidity. In short, the way states issue "stamps" may result in some companies receiving temporarily subsidized cash flow, which minimizes capital costs. (I hope I've explained this correctly--if not, feel free to correct me by adding a comment.)

Mr. Walsh also indicated that Core-Mark was in a position to consolidate deliveries and take market share from less efficient competitors.

I then asked why cigarette companies wouldn't decide to sell directly to customers, thereby eliminating Core-Mark as a middleman. Mr. Walsh replied that doing so would cost cigarette manufacturers "more money." They would have to "build the infrastructure" first and deal with the "administrative burden" of handing 100,000+ billable accounts. In fact, Mr. Walsh said that some cigarette companies, such as Philip Morris (PM), were favoring third parties as distributors to cut costs. Mr. Walsh's explanation makes perfect sense. If Core-Mark has a highly efficient supply/distribution chain, then its advanced inventory management might act as a wide moat. Walmart, for example, is able to cut its costs by having superior inventory management, but its internal tracking system took years to develop.

I then asked about Core-Mark's pension plan, which is underfunded. (See 10K, page 11.) Under ERISA and other laws, different levels of pension underfunding trigger different corporate fiduciary duties. Companies typically indicate pension funding levels by referring to one of three funding categories: "80% and under"; "80% to 60%"; or "60% and under." When a pension plan falls in the "60% and under" category, it may be a sign that pension assets and investments are being poorly managed. Core-Mark's CFO indicated that the pension was at the 60% level.

I then asked about Core-Mark's executive team and board, which appeared to be non-diverse. More specifically, all Board members appeared to be older Caucasian men. I asked what Core-Mark was doing, if anything, to increase its executive team's diversity. Mr. Walsh pointed out that Core-Mark's CFO was obviously not a white male (she is a white female), and the company was open to diversity. He said that Core-Mark was always open to qualified candidates. Mr. Walsh also indicated that the Board was chosen by Core-Mark's unsecured creditors following Core-Mark's Chapter 11 filing. (In other words, the unsecured creditors were responsible for the Board's composition, and they might be the more relevant party to contact on this issue.)

For a company that was in bankruptcy court just five years ago, Core-Mark has done remarkably well. I especially enjoyed CEO J. Michael Walsh's demeanor and responsiveness. Unlike many CEOs, he answered every single question thoroughly. He had no trace of the arrogance so common in upper-level management. It was a pleasure to meet him.

I had only one issue with the meeting. The Chairman interrupted me once when I was in the middle of a question to ask me for my name, how I held my shares, and the number of shares I owned. He asked me these questions after I had already announced my name and shareholder status. I thought it was inappropriate to ask me how many shares I owned. A shareholder is a shareholder, period. Companies should welcome questions from all shareholders, not just major ones. To date, this is the only company I've seen that has requested this kind of information, i.e., the number of shares held. (There was another issue, but it was minor--a shareholder relations representative wanted me to fill out a name-tag and then complained that my handwriting was illegible. Note to all shareholder relations personnel: you get one day a year to make ordinary shareholders feel welcome. Use it wisely.)

I don't have an opinion on Core-Mark's stock. I haven't bought products from their kiosks, and I'm not a smoker, so I don't have sufficient personal knowledge to state an opinion. It does appear, however, that Core-Mark provides a valuable service to many convenience retailers.

Note: the picture above is of Mr. Walsh and myself.

Disclosure: I own an insignificant number of Core-Mark (CORE) shares.

Update on June 5, 2009: The more I think about the sin/stamp tax issue, the more I think I may have reversed the payment schedule. Perhaps CORE has to buy stamps first and then wait a month or more before receiving cartons to distribute. Otherwise, I am still unclear as to why CORE would make more money when the number of smokers decline. Any comments are appreciated.

More Wisdom from Charlie Munger

Charlie Munger on desire:

I had a considerable passion to get rich. Not because I wanted Ferraris - I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t where I got that notion from, but I had it.

More from Charlie Munger here.

McGovern on the Military

George McGovern had a great op-ed in the WSJ yesterday (June 1, 2009):

http://online.wsj.com/article/SB124381226265170437.html 

He makes a lot of good points. For example, I knew we were still spending billions of dollars per month in Iraq and Afghanistan, but $12 billion month? 

We now spend $12 billion a month on wars in Iraq and Afghanistan -- two mistaken invasions that have increased violence and terrorism in the Middle East... 

There is the terrorist danger, but this is not a military problem. Terrorism is a by-product of military weakness. The terrorist has no battleships, bombers, missiles, tanks, organized armies or heavy artillery. 

The only significant terrorist attack on the U.S., on Sept. 11, 2001, was carried out by 19 young men from Saudi Arabia and Egypt armed only with boxcutters. They used these devices to intimidate the crews of four airplanes into surrendering control of their planes. The terrorists then suicidally flew the planes into buildings. 

This event, which took place nearly a decade ago, dramatized the limitation of a huge military budget in assuring national security. Nonetheless, our military budget is higher than ever -- $515 billion annually, not including the cost of Iraq and Afghanistan. 

This figure is greater than the combined military budgets of the rest of the world. We could defend ourselves with an arms budget half that size. If we directed the $250 billion we could save annually into national health care, improved education, a better environment and restoring our infrastructure, the nation would be more secure, better employed and have a higher standard of life. Or the savings might be used for annual reductions in the national debt. 

McGovern and I seem to think similarly when it comes to this issue. I've voiced similar thoughts in the past:

http://willworkforjustice.blogspot.com/2009/05/susan-faludi-911-and-military.html

Anthony Bourdain Speaks in Cupertino, CA (Flint Center)

I'm an Anthony Bourdain fan. (I've written about him before here.) Bourdain's unique blend of intelligence and devil-may-care attitude leads to searing, funny commentary on everything from poverty to Cinnabons. Bay Area residents were treated to a 45 minute Bourdain speech--an extended rant, really--on May 28, 2009. 

Wearing jeans and a sports jacket, Bourdain showed up on stage to wild cheers. He stayed near the podium in the middle of the stage, but never behind it. He didn't have an outline--he spoke from the gut until he ran out of things to say, and then took questions from the audience. 

Bourdain started off by saying he's a good example of what not to do or say, but his two saving graces are his curiosity and his willingness to concede when he's wrong. After that disclaimer, we were off to the races. Bourdain began lambasting Alice Waters and Berkeley residents, both of whom are known for favoring organic food. His point was that Alice Waters and affluent Berkeley residents can afford to buy organic and local food, which is more expensive than non-organic food. He suggested that real organic food is homegrown, and if Alice Waters wanted to promote organic food for the masses, she should show people how to grow food in backyard gardens. At one point, he asked, "Do you think that the people lining up around Popeye's Chicken for 99 cent day are there because the stuff tastes good? No! They're there because it's cheap!" 

Bourdain then talked about how we're fetishizing our food by focusing on ingredients rather than the actual process of cooking. At one point, he joked that by the time a waiter gets done explaining the food on his plate and where it comes from, he's already finished eating the "damn thing." He compared our focus on ingredients to exotic Japanese porn, by which he probably meant that the actors aren't participating in the spirit of the moment, but are behaving in a detached, grotesque manner. 

Although Bourdain admitted to shopping at Whole Foods, he said that these days, organic generally means luxury, and that's not a good development for cooking. After all, real culinary innovation happens when someone takes the table scraps and makes something good out of it. Bourdain said that "cooking" was really the slaves' way of making something good from their masters' table scraps. He had many examples of poverty leading to innovation, mentioning famous chefs and their background. At one point, he asked, "Do you think a rich person looked at a slimy snail on the ground and thought, 'That looks really good to eat?' Of course not! Some poor person was hungry and probably thought, 'If I put enough butter and garlic on that thing, maybe I can manage to choke it down.'"

This is one reason I love Bourdain--he keeps his audience grounded. He believes that innovation comes from starvation, and he reminds us that more often than not, a poor, unknown person is responsible for the food on our plates. (Bourdain believes "The engine of gastronomy is poverty.") You might even say Bourdain's motif is bringing cooking back to the barrio, which explains why he hates celebrity chefs (he's famous for ranting against Rachel Ray). Bourdain did have kind words for Julia Child, though. He said she became famous by demystifying French food and showing people that with some effort, they, too, could make French food.

Basically, to get on Bourdain's good side, you have to recognize the hard-working, innovative people who are responsible for much of our food. That's not to say that Bourdain praises poverty. He reminded us that poverty might look fun when we go on short vacations, but the people in those "bucolic" places want an SUV and satellite TV just like the rest of us. Bourdain didn't talk talk much about fixing poverty, but he wants us to remember who makes the food that goes on our tables. After all, it's not rich people who pick the tomatoes and slaughter the animals we end up eating. One of Bourdain's themes is to remind people that our food has a cost, and the cost is keeping lots of poor people in poverty so they can continue doing the dirty work for us. Bourdain then ranted against poor food choices, asking, "What the f*ck is a Cinnabon? It's got, like, a pound of sugar on it, and every time I'm in the airport, I have to deal with the smell overpowering all the other food choices." On a more serious note, Bourdain said we need to be more careful about what we're feeding our children. He said studies have shown if you put vegetables in a McDonald's wrapper, kids will eat it and say it tastes better than ordinary vegetables served on a plate. (Whoa.) He said he uses reverse psychology on his daughter, Ariane, bashing McDonald's every time he can, and telling his daughter that Ronald McDonald may be mentally-impaired. (Bourdain, being Bourdain, used different words.)

Bourdain also called vegetarians "rude." He said that food is the "purest expression of who we are," and when someone offers you something to eat, you shouldn't tell them, "That looks good, but can I have a spinach salad instead?"

Someone asked Bourdain to name his favorite food. Bourdain said his favorite comfort food is a Vietnamese pho bowl. (I agree!)

Another person asked which countries had the best culinary cultures. Bourdain mentioned Spain and had many kind words for the Spaniards. He also said if you were looking for a cheap, diverse selection of food, Singapore is where you want to be. (I agree! Singapore's food scene was one reason I fell in love with the country.)

Bourdain said he married into a North Italian family, and at home, his wife does much of the cooking. He said he married into the kind of family he always wanted--loud, boisterous, and open.

Bourdain says when he's at home, he's a stay-at-home dad; however, he travels 10 out of 12 months of the year.

Someone asked him about his worst travel experiences. Bourdain named Romania and Uzbekistan. He pilloried Romania's handling of his show, saying that the government did not allow him to go to the backroads to meet with the average residents. He started doing robot-like impersonations of the Romanian government officials on the trip while narrating, "Here is our version of classic Romanian culture..." Bourdain said that after he left, the Romanian papers started calling him a "KGB/Mossad" spy. (I can't wait to see that episode--Bourdain is hilarious when he's snarky.)

Speaking of bad experiences, Bourdain said that he knows his audience likes to see him miserable, but when he travels, he wants to have a good time. He doesn't want to speak badly of anyplace, so when he does become snarky, it's not something that's planned.

If you haven't seen Bourdain's show, "No Reservations" (on the Travel Channel), I highly recommend it. I still haven't read his book, Kitchen Confidential, but I hope to pick it up soon. (A friend loaned me McCarthy's Blood Meridian, but I'm not liking it, so I will probably dump it for Kitchen Confidential.)

All in all, I had a great time hearing Bourdain speak. His genuineness gives Bourdain many loyal fans. One of them even got up on stage to show Bourdain a large tattoo of what appeared to be Bourdain on his leg. Bourdain signed it and hugged him. Not too many celebrities inspire that kind of emotion. Bourdain is an original in a world full of copycats and sycophants. God bless him for being himself.

© Matthew Mehdi Rafat (2009) 

Note: I did the best I could to write down Bourdain's words verbatim, but Bourdain speaks quickly and the auditorium was dark, so some of his quotes may be paraphrased.

Basketball: Orlando and Cleveland

Stat of the Orlando-Cleveland series: Ben Wallace, 22 total rebounds in six games. Remember when that would be his nightly production? I'm not blaming any single player for the loss, but Cleveland needs to give LeBron bigger/taller teammates.

When I look at Cleveland's roster, I see no defensive presence. Wallace is only 6'9''. Gibson, Szczerbiak, and Mo' Williams aren't great defenders. In fact, on many teams, they would be sixth men. I've said it before, and I'll say it again: you can't win an NBA Championship without great defense. If you could, Steve Nash's Phoenix Suns would have three rings now.

My prediction? Orlando in 7 against the Lakers. Orlando's success should not be surprising to fans who followed R. Lewis's career in Seattle. He was putting up 20 points a night regularly. With Turkoglu, Lewis, and Alston, Orlando is always a threat to make a three-pointer, which opens the paint for Howard. As we've seen, that inside-outside threat is difficult to handle. Also, between Pietrus and Howard, Orlando brings enough toughness on defense to win the championship. Pietrus's three-point shooting has been a nice surprise, and if he keeps shooting a high percentage, Orlando will always be in the game.

As for the Lakers, they have Gasol, but he's no Howard. Bynum isn't developed yet to make much of an impact (he scored a whopping 2 points in his most recent game). When you really look at the Lakers' roster, they've got Kobe and Gasol, with the occasional trey from "The Machine." That won't be enough to beat Orlando.

In fact, the only way I see the Lakers winning the championship is if the referees hand them the game. I give Orlando seven games to close out the Lakers, not because I think the talent level is close, but because I think the referees help the Lakers. Orlando is still a young team looking for respect, which hurts them when it comes to getting calls.

For example, did you see the ref call a taunting technical on Howard? On church-going, gospel-listening Dwight Howard?! Meanwhile, Kobe has become much better at handling the referees. Did you see him get Artest tossed? Hands in the air, a look of displeasure on his face, as if to say, "I can't believe I'm in the same room as you." And he still got Artest thrown out. If I'm Stan Van Gundy, I tell my team, "No technicals. I don't care how p*ssed you get. No technicals. We get the ball back and score. Forget the refs. If anyone gets tossed, it'll be me, not you."

Orlando in 7 or fewer.

Sotomayor a Yankees Fan?

The Boston Globe's Ellen Goodman has a great article (May 29, 2009) on Judge Sotomayor:

http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2009/05/29/a_wise_person_for_the_court/

Apparently, Ms. Sotomayor is a Yankees fan. I'm no BoSox fan, but how can she be accused of being pro-underdog when she's cheering on the Yankees? She should have had the good sense to root for the Mets instead, like Julia Stiles.

Best line in the article? Someone describes Justice Roberts as a "relentless champion of the overdog." Hilarious.

Ellen Goodman makes another good point. She reminds us that Justice "O'Connor...praised her successor, John Roberts, saying, 'He's good in every way, except he's not a woman.'"

I talked about Sotomayor before in this post.

Weekend Recap: Book and Film Rec

Last weekend, I saw a great movie and read a good book.

1. The movie, Sin Nombre, is about two immigrants. One is trying to cross the border to get to New Jersey, while the other is trying to escape being killed by his own gang members. The story is about redemption, loss, and perseverance. Catch this one if you can. A review is here.

2. Mohsin Hamid's book, The Reluctant Fundamentalist, is about an immigrant named Changez ("Changez" is Urdu for "Genghis" Khan, the Mongol invader who attacked the Muslim world). Although this story is about a legal immigrant, one wonders if Changez's troubles aren't as woe-inspiring as the two characters in Sin Nombre.

Changez, a Pakistani immigrant, attends Princeton and falls in love with a woman, who, at first glance, appears to be a beautiful "lioness." After 9/11, she changes, trying to burrow herself in the past, which prevents the relationship from moving forward. By this time, she has become an unexcisable part of Changez. In fact, he has willingly given up part of himself to ensure her happiness and acceptance. Despite gaining the trappings of wealth and prestige (and an American Express expense account), Changez eventually returns to his homeland, a fact we are told upfront.

The story begins with Changez telling his story to an American in a cafe in Lahore, Pakistan. Both men are tense and wary of each other, and while Changez tries to reassure his visitor, it is clear the visitor is on guard. Changez is also on guard, something we see as he provides clues about his visitor. For example, he wonders out loud whether a bulge in the visitor's pocket is a gun or a hidden fanny pack commonly used by theft-wary tourists. We do not know who the American is, but the story builds tension bit by bit and leaves us with an ending that will be interpreted by each reader differently. The Reluctant Fundamentalist can be called a foreign policy Rorschach test. Depending on how you interpret the ending, you will know your view of America, the world, and how they interact.

An interview with the author is here.